<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1996
REGISTRATION NO. 333-05241
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
OBJECT DESIGN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7372 02-0424252
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
25 MALL ROAD
BURLINGTON, MASSACHUSETTS 01803
(617) 674-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT N. GOLDMAN
PRESIDENT
OBJECT DESIGN, INC.
25 MALL ROAD
BURLINGTON, MASSACHUSETTS 01803
(617) 674-5000
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN D. PATTERSON, JR., ESQ. MARK J. MACENKA, ESQ.
ROBERT W. SWEET, JR., ESQ. TESTA, HURWITZ & THIBEAULT, LLP
FOLEY, HOAG & ELIOT LLP HIGH STREET TOWER
ONE POST OFFICE SQUARE 125 HIGH STREET
BOSTON, MASSACHUSETTS 02109 BOSTON, MASSACHUSETTS 02110
(617) 832-1000 (617) 248-7000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. // ____________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
OBJECT DESIGN, INC.
------------------------
<TABLE>
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM S-1
<CAPTION>
FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
-------------------------------- ----------------------
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Prospectus Summary; Use of Proceeds;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations
5. Determination of Offering Price............ Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution................................... Dilution
7. Selling Security Holders................... Principal Stockholders
8. Plan of Distribution....................... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be Description of Capital Stock
Registered.................................
10. Interests of Named Experts and Counsel..... Legal Matters; Experts
11. Information with Respect to the Registrant:
(a) Description of Business.............. Summary; Risk Factors; Business
(b) Description of Property.............. Business -- Facilities
(c) Legal Proceedings.................... Business -- Legal Proceedings
(d) Market Price of and Dividends on the
Registrant's Common Equity and
Related Stockholders Matters......... Outside Front Cover Page of Prospectus;
Dividend Policy; Management -- Executive
Compensation; Description of Capital
Stock; Shares Eligible for Future Sale
(e) Financial Statements................. Summary; Capitalization; Consolidated
Financial Statements
(f) Selected Financial Data.............. Selected Financial Data
(g) Supplementary Financial
Information.......................... Not Applicable
(h) Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... Management's Discussion and Analysis of
Financial Condition and Results of
Operations
(i) Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure................. Not Applicable
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
-------------------------------- ----------------------
<S> <C>
(j) Directors, Executive Officers,
Promoters and Control Persons........ Management -- Directors and Executive
Officers; Certain Transactions
(k) Executive Compensation............... Management -- Executive Compensation
(l) Security Ownership of Certain
Beneficial Owners and Management..... Principal Stockholders
(m) Certain Relationships and Related
Transactions......................... Certain Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ Not Applicable
</TABLE>
<PAGE> 4
PROSPECTUS
3,000,000 SHARES
[LOGO]
COMMON STOCK
All of the 3,000,000 shares of Common Stock offered hereby are being sold
by Object Design, Inc. ("Object Design" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
See "Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The Common Stock has been approved for listing on
the Nasdaq National Market under the symbol "ODIS."
------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 6.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Per Share....................................... $7.00 $.49 $6.51
- ------------------------------------------------------------------------------------------------
Total(3)........................................ $21,000,000 $1,470,000 $19,530,000
================================================================================================
<FN>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $1,000,000.
(3) Certain stockholders of the Company (the "Selling Stockholders") have
granted to the Underwriters a 30-day option to purchase up to 450,000
additional shares of Common Stock solely to cover over-allotments, if any.
If all such shares are purchased, the total Price to Public and Underwriting
Discount will be $24,150,000 and $1,690,500, respectively, and the Selling
Stockholders will receive proceeds of $2,929,500. See "Underwriting."
</TABLE>
------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about July 26, 1996 at the office of the agent of Hambrecht &
Quist LLC in New York, New York.
HAMBRECHT & QUIST
ALEX. BROWN & SONS
INCORPORATED
WESSELS, ARNOLD & HENDERSON
July 23, 1996
<PAGE> 5
DESCRIPTION OF GRAPHICS
1) Company logo in upper left corner, accompanied by text:
"The Database for the Web."
2) Color art: four screen shots of World Wide Web home pages of several
customers of the Company, who are using the Company's products to build
Web applications.
Text accompanying screen shots:
"The World Wide Web is changing the way leading corporations do
business. . .
. . . "Object Design is changing the way Web Developers build business
applications."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SUCH TRANSACTIONS
MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET,
OR OTHERWISE.
2
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus.
THE COMPANY
Object Design develops, markets and supports the ObjectStore database
management system and related tools, used to build and deploy Internet, Intranet
and other applications. The Company's database products are designed to handle
the data types and data relationships found on the rapidly expanding World Wide
Web. ObjectStore provides support for extended data types such as image, free
text, video, audio, HTML, and Java software objects, as well as for the extended
relationships among data exemplified by the non-tabular unstructured data found
on the Internet.
Over time, new types of database management systems have been adopted as
new computing platforms have emerged. The Company believes that the computer
industry is presently undergoing such a fundamental platform shift with the
rapid adoption of the Internet and the World Wide Web. This latest platform
shift is creating a new set of requirements for database management systems. As
the World Wide Web expands, developers are increasingly building applications
that include multimedia content, require the ability to rapidly search and
browse diverse types of data and provide greater interactivity and more dynamic
context-sensitive and user-sensitive behavior.
The Company's ObjectStore database, Internet Solution Suite, and related
tools provide a powerful data management solution for building Internet
applications. ObjectStore, in conjunction with the Internet Solution Suite,
provides native support for extended data types and is readily extensible to
accommodate new data types. Unlike relational and extended-relational database
management systems, ObjectStore provides the ability both to store these new
data types and to encapsulate the functions that define their behavior. In
addition, ObjectStore allows customers to directly model the complex and
extended data relationships common to emerging Internet applications, which
provides a performance advantage over relational and object-relational systems.
ObjectStore natively supports object oriented programming languages, allowing
JAVA, C++, and other programming language objects to be stored in the database
exactly as they are represented in programs, eliminating the time and effort
needed to convert the objects to relational tables for storage.
Customers that have recently built Internet applications using the
Company's products include Southwest Airlines and GTE Directories Corporation.
Southwest Airlines recently introduced a Web-based electronic ticketing system
using ObjectStore. GTE used ObjectStore and the Internet Solution Suite to
deploy its Superpages(SM) application, a listing of over ten million businesses
nationwide that can be rapidly searched over the Web.
The Company has yet to recognize material revenues from its new Internet
products, which were introduced in March 1996. However, since 1993 the Company
has licensed over 20,000 copies of its software and has provided products and
services to approximately 1000 customers. The Company's customers have used
ObjectStore to build high-performance applications in a variety of challenging
computing environments where relational databases were unable to provide
adequate functionality.
The open architecture of the Company's products provides compatibility with
a wide range of third party applications, tools and programming languages. The
Company's products operate on standard industry hardware platforms and operating
systems such as Windows 95, Windows NT and UNIX.
The Company employs a multi-channel sales and marketing strategy, using
direct sales, systems integrators, independent software vendors, distributors
and other channel partners to address its global market.
3
<PAGE> 7
<TABLE>
THE OFFERING
<S> <C>
Common Stock offered by the Company........................ 3,000,000 shares
Common Stock to be outstanding after the offering.......... 26,280,201 shares(1)
Use of proceeds............................................ Working capital and other general
corporate purposes, including
repayment of debt
Nasdaq National Market Symbol.............................. ODIS
</TABLE>
<TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software................ $ 3,322 $ 8,607 $ 8,688 $ 15,706 $ 18,700 $ 4,972 $5,612
Services................ 706 1,989 4,155 6,731 10,928 2,647 2,369
Related party software
and services.......... -- -- 11,807 3,052 3,078 402 1,015
------- ------- ------- -------- --------- ------- ------
Total revenues........ 4,028 10,596 24,650 25,489 32,706 8,021 8,996
Gross profit............... 2,815 8,511 19,333 18,513 23,786 5,857 6,589
Operating income
(loss)(2)............... (3,856) (2,262) 565 (12,387) (10,406) (2,116) 191
Net income (loss)(2)....... (3,868) (2,342) 627 (12,021) (10,282) (1,996) 145
Pro forma net income (loss)
per common and common
equivalent share(3)..... $ (0.40) $ 0.01
Pro forma weighted average
common and common
equivalent shares
outstanding(3).......... 25,837 26,427
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA(3) ADJUSTED(3)(4)
-------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 3,382 $3,382 $ 21,044
Marketable securities, current.................. 4,949 4,949 4,949
Working capital................................. 4,274 4,274 22,460
Total assets.................................... 21,805 21,805 39,467
Long-term obligations........................... 344 344 --
Redeemable convertible preferred stock.......... 41,232 -- --
Total stockholders' equity (deficit)............ (32,835) 8,397 26,927
</TABLE>
4
<PAGE> 8
- ---------------
(1) Based on shares outstanding at June 30, 1996. Includes 2,899,702 shares of
Common Stock issued upon the exercise of stock options between March 31,
1996 and June 30, 1996. Assumes the issuance of 46,286 shares of Common
Stock upon the cashless exercise of an outstanding warrant to purchase
57,858 shares of Common Stock at an exercise price of $1.40 per share (the
"Warrant"). The holder of the Warrant has notified the Company of its
intention to exercise the Warrant at the closing of this offering. Excludes
(i) 3,546,559 shares of Common Stock issuable upon exercise of outstanding
options outstanding at June 30, 1996, at a weighted average exercise price
of $1.20 per share, (ii) 2,589,000 shares of Common Stock reserved for
issuance upon exercise of stock options that may be granted after June 30,
1996 under the Company's 1996 Incentive and Nonqualified Stock Option Plan
(the "1996 Stock Option Plan") and 300,000 shares reserved for issuance
under the Company's 1996 Employee Stock Purchase Plan (the "Stock Purchase
Plan"). See "Management -- Stock Option Plans" and "-- Employee Stock
Purchase Plan" and "Description of Capital Stock -- Warrant."
(2) The Company's results of operations for 1995 include restructuring charges
of approximately $2.7 million, consisting principally of severance costs and
expenses related to consolidation of the Company's facilities in connection
with a strategic realignment of the Company's business undertaken during the
second half of 1995.
(3) Pro forma information reflects the conversion to Common Stock at the closing
of this offering of all outstanding preferred stock of the Company. See Note
B of Notes to Consolidated Financial Statements.
(4) As adjusted, reflects the sale of the 3,000,000 shares offered hereby at the
initial public offering price of $7.00 per share and the application of the
estimated net proceeds therefrom. See "Use of Proceeds."
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors." Except as otherwise specified, all information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option and has been
adjusted to give effect to (i) the conversion upon the closing of this offering
of all outstanding shares of the preferred stock, $0.01 par value, of the
Company ("Preferred Stock") into an aggregate of 17,891,654 shares of Common
Stock and (ii) the amendment of the Company's Certificate of Incorporation on or
before the closing of this offering to, among other things, increase the number
of authorized shares of Common Stock to 200,000,000 and create a class of
5,000,000 shares of undesignated preferred stock. See "Description of Capital
Stock" and "Underwriting."
5
<PAGE> 9
THE COMPANY
The Company was incorporated under the laws of Delaware in 1988. The
Company's principal executive offices are located at 25 Mall Road, Burlington,
Massachusetts 01803 and its telephone number is (617) 674-5000. As used in this
Prospectus, "Object Design" or the "Company" refer to Object Design, Inc. and
its wholly-owned subsidiaries, unless the context otherwise requires.
Object Design and ObjectStore are registered trademarks of the Company.
Internet Solution Suite, Object Forms, Webconnect, ObjectForms Engine, Image
Object Manager, Text Object Manager, Video Object Manager, Audio Object Manager,
HTML Object Manager, Java Object Manager, ObjectStore Inspector, ObjectStore
Performance Expert, ObjectStore OpenAccess and DBconnect are trademarks of the
Company. This Prospectus also includes trademarks of companies other than the
Company.
RISK FACTORS
The following factors should be considered carefully before purchasing the
Common Stock offered hereby:
History of Losses; Strategic Realignment. Despite increasing revenues in
every year since its inception, the Company has incurred substantial losses and
negative cash flow, and at March 31, 1996 had an accumulated deficit of $33.9
million. The Company had net income of $627,000 in 1993. However, it incurred
losses of $12.0 million and $10.3 million in 1994 and 1995, respectively.
In late 1995, the Company appointed a new Chief Executive Officer and Chief
Operating Officer and replaced several other members of its senior management
team, and in April 1996 appointed a new Chief Financial Officer. In the second
half of 1995, the Company also embarked upon a Company-wide program of expense
reduction, including layoffs, and commenced a fundamental realignment of the
Company's business strategy. Historically, the Company had marketed its
ObjectStore database management system primarily to customers in certain
industries, such as telecommunications, finance and engineering design and
analysis, that required specialized database management capabilities unavailable
from relational database management systems. In early 1996, the Company shifted
its strategy to focus on providing database management solutions for the
emerging Internet and Intranet computing market.
In March 1996 the Company released the Internet Solution Suite, its first
group of products designed specifically to address the Internet and Intranet
computing market. Although the Company had net income of $145,000 in the three
months ended March 31, 1996, the Company had yet to recognize material revenues
from its new Internet and Intranet products. There can be no assurance that the
Company's strategic realignment to focus on the Internet and Intranet computing
market will be successful or result in sustained profitability.
As a result of the Company's strategic realignment and reallocation of its
research and development, sales and marketing and technical support resources,
it is likely that the Company's revenues from its historical business base will
experience a lower rate of growth, or will decline. Also, the Company in the
past has derived a substantial portion of its revenue from fee-based consulting
services. Recently the Company has reduced its emphasis on consulting services
as a source of revenue in favor of concentrating its technical support staff on
its recently implemented key account management program and other non-billable
activities designed to ensure customer satisfaction and success in deployment of
applications based on ObjectStore. A reduction in the rate of growth of, or
decline in, the Company's revenues from its historical business base, if not
offset by revenue from sales of the Company's products for Internet and Intranet
applications, would have a material adverse effect on the business, results of
operations and financial condition of the Company. There can be no assurance
that the Company's revenues will not decline in the short or long term, or that
the Company will be able to achieve or sustain profitability or positive cash
flow at any time in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
6
<PAGE> 10
Fluctuations in Operating Results. The Company's quarterly operating
results have varied significantly and are expected to vary significantly in the
future. These fluctuations may be caused by many factors, including, among
others, the size and timing of individual orders; customer order deferrals in
anticipation of new products; timing of introduction or enhancement of products
by the Company or its competitors; market acceptance of new products;
technological changes in database management, networking or communications
technology; competitive pricing pressures; changes in the Company's operating
expenses; personnel changes; foreign currency exchange rates; mix of products
sold; quality control of products sold; and general economic conditions.
Sales cycles for the Company's customers have historically been up to six
months or longer. Although the Company believes that its sales cycles will grow
shorter as a result of its strategic realignment, there can be no assurance that
this will be the case. In addition, like many software companies, the Company
has generally recognized a substantial portion of its revenues in the last month
of each quarter, with these revenues concentrated in the last weeks of the
quarter. To the extent this trend continues, the failure to achieve such
revenues in the last weeks of a given quarter may have a material adverse effect
on the Company's financial results for that quarter. Accordingly, the
cancellation or deferral of even a small number of purchases of the Company's
products could have a material adverse effect on the Company's business, results
of operations and financial condition in any particular quarter. To the extent
that significant sales occur earlier than expected, operating results for
subsequent quarters may fail to keep pace or even decline.
Because the Company generally ships software products within a short period
after receipt of an order, the Company has not typically had a material backlog
of unfilled orders, and revenues in any quarter have been substantially
dependent on orders booked in that quarter. Product revenues are also difficult
to forecast because the market for database management solutions for the
Internet is uncertain and evolving. The Company's expense levels are based, in
part, on its expectations as to future revenues and to a large extent are fixed.
Therefore, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Any significant shortfall of
demand in relation to the Company's expectations or any material delay of
customer orders would have an almost immediate adverse affect on the Company's
results of operations and on the Company's ability to achieve or sustain
profitability.
As a result of the foregoing and other factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Fluctuations in operating results may also result in volatility in the price of
the shares of the Company's Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results
of Operations."
Dependence on the Internet. The Company's future success will depend to a
substantial degree on continued expansion of use of the Internet and the World
Wide Web, and on increased adoption by businesses and organizations of
Intranets. Although currently new users and Web sites are proliferating rapidly
on the Internet, there can be no assurance that the Internet will develop as a
viable medium for business communications and activity in the long term. Failure
of the Internet to develop as such a medium could result from, among other
things, inadequate development of the infrastructure, such as the reliable
network backbone necessary to support increased volumes of traffic, delayed
development of complementary products and technologies such as high speed modems
and security procedures for financial transactions, delays in the development or
adoption of new standards and protocols or other factors that could inhibit the
Internet's ability to handle increased levels of activity. There can be no
assurance that the infrastructure, complementary products or protocols necessary
to make the Internet a viable medium for business communications and activity
will develop, and, if they do not, demand for the Company's products could be
materially adversely affected. Moreover, critical issues concerning the
commercial use of, distribution of information on, and government regulation of
the Internet (including security, cost, ease of use and access, property
ownership and other legal liability issues) remain unresolved and may affect
both the growth of the Internet and the Company's business, results of
operations and financial condition.
7
<PAGE> 11
Developing Market; Unproven Acceptance of the Company's Products. The
Company has recently changed its strategic focus to concentrate on the Internet
and Intranet market. In March 1996, the Company introduced the Internet Solution
Suite, its first group of products developed specifically for use in developing
and deploying Internet and Intranet applications. The market for database
management systems and tools designed specifically for the Internet has only
recently begun to develop, is rapidly evolving, and is characterized by an
increasing number of market entrants offering solutions based on a variety of
technologies. Database management systems in general, including object oriented
database management systems such as ObjectStore, have not commonly been used as
the basis for developing and deploying Web applications, and only a limited
number of the Company's customers have used ObjectStore to build and deploy such
applications. As is typical in the case of a new and evolving industry, demand
for and market acceptance of newly introduced products are subject to a high
degree of uncertainty. There can be no assurance that the Company's Internet-
related products and services will achieve market acceptance.
Management of Transition and Growth. The Company is experiencing a period
of transition. The Company's Chief Executive Officer, Robert N. Goldman, its
Executive Vice President and Chief Operating Officer, Justin J. Perreault, its
Chief Financial Officer, Lacey P. Brandt, and other members of the Company's
senior management team have been employed by the Company for less than one year.
The Company's recent strategic realignment and new product introductions have
placed, and will continue to place, a significant strain on its resources and
personnel. In order for the Company's new strategy to succeed, the Company must
continue to extend its core database management technology to develop new
product offerings for the Internet and Intranet market, and must redirect its
research and development, sales and marketing and technical support staffs to
focus on this market. Between the commencement of the Company's expense
reduction program in August 1995, and May 31, 1996, the Company's workforce was
reduced by layoffs and attrition by approximately 23%. Continuity of personnel
is an important factor in the success of the Company's product development and
sales and marketing activities. The Company believes that its ability to attract
and retain qualified individuals at all levels in the Company will be essential
to its success, and there can be no assurance that the Company will be
successful in attracting and retaining the necessary personnel. If Company
management is unable to effectively manage its planned transition or any
subsequent growth, identify opportunities in a timely fashion, and evaluate and
manage the Company's business, the Company's business, results of operations and
financial condition will be materially and adversely affected.
To manage any future growth, the Company must continue to implement and
improve its operational and financial systems and to expand, train and manage
its employee base. Although the Company believes that it has made adequate
allowances for the costs and risks associated with this expansion, there can be
no assurance that the Company's systems, procedures or controls will be adequate
to support the Company's operations or that Company management will be able to
carry out the rapid execution necessary to fully exploit the market for the
Company's products and services. The Company's future operating results will
also depend on its ability to expand its sales and marketing organizations,
establish distribution channels to address the Internet and Intranet computing
market and expand its support organization commensurately with the increasing
base of its installed products. If the Company is unable to manage its growth
effectively, the Company's business, results of operations and financial
condition will be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Business -- Products," "-- Services" and "-- Employees".
Recent Change in Relationship with IBM. In April 1993, International
Business Machines Corporation ("IBM") purchased shares of the Company's
Preferred Stock convertible into an aggregate of 3,750,695 shares of Common
Stock, which will represent approximately 14.3% of the Company's issued and
outstanding Common Stock immediately following this offering. (If the
Underwriters' over-allotment option is exercised in full, IBM will sell an
aggregate of 426,949 shares of Common Stock, reducing its holdings to 12.6% of
the Company's issued and outstanding Common Stock.) In 1993, the Company and IBM
entered into certain business agreements (the "IBM Agreements") under which
8
<PAGE> 12
IBM is entitled to develop and market products in which the Company's
ObjectStore database management system is embedded, and the parties undertook
certain joint product development and marketing activities. During 1993, 1994,
1995 and the three months ended March 31, 1996, revenues attributable to IBM
were $9.9 million, $1.7 million, $3.1 million and $980,000, and constituted
40.2%, 6.9%, 9.4% and 10.9% of the Company's total revenues for such periods,
respectively. Under the IBM Agreements, either party has the option (the
"Break-Up Option") of terminating certain of the IBM Agreements and modifying
the terms of certain others, upon nine months' advance notice. In March 1996,
the Company exercised the Break-Up Option by giving written notice to IBM, to
become effective in January 1997. As a result of its exercise of the Break-Up
Option, the Company's revenues from IBM are likely to decline, and the Company's
joint product development and marketing efforts with IBM may be curtailed or
eliminated. There can be no assurance that the change in the Company's
relationship with IBM, and any related loss of revenue, will not have a material
adverse effect on the business, results of operations and financial condition of
the Company. See "Certain Transactions -- Relationship with International
Business Machines Corporation."
International Operations. A significant portion of the Company's revenues
are derived from sales by its international subsidiaries and to distributors
outside the United States. Revenues from foreign sales accounted for 9.3%,
28.8%, 36.9% and 44.5% of total revenues in 1993, 1994 and 1995 and in the three
months ended March 31, 1996, respectively. The Company anticipates that
international revenues will continue to account for a significant portion of
total revenues in the foreseeable future. International operations are subject
to various risks, including fluctuations in currency exchange rates, political
and economic instability, unexpected changes in regulatory requirements,
including export regulations, import and export duties and restrictions, tariffs
and other trade barriers, difficulties in managing distributors or
representatives, difficulties in staffing and managing foreign subsidiary
operations, potentially adverse tax consequences, long payment cycles,
uncertainties in connection with collecting accounts receivable, and logistical
difficulties in managing multinational operations. There can be no assurance
that any of these factors will not have a material adverse effect on the
Company's business, results of operations and financial condition. The Company
does not hedge any of its transactions denominated in foreign currencies. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Sales and Marketing."
Competition. The market in which the Company competes is intensely
competitive, highly fragmented, and characterized by rapidly changing technology
and standards. The Company's current and prospective competitors offer a variety
of database solutions, including: object databases available from Computer
Associates, GemStone, Objectivity, Poet, O2 and Versant; relational databases
available from Computer Associates, IBM, Informix, Microsoft, Oracle and Sybase;
extended-relational and object-relational databases available from IBM,
Informix, Oracle and UniSQL; and other specialized databases such as on-line
analytical processing databases. The Company has experienced and expects to
continue to experience increased competition from current and potential
competitors, many of which have significantly greater financial, technical,
marketing, and other resources than the Company, and many of which have well
established relationships with current and potential customers of the Company.
In the future, the Company expects to experience increased competition from
established vendors of relational database systems that may seek to offer
extended-relational, object-relational or object oriented database solutions. It
is also possible that alliances among competitors may emerge and rapidly acquire
significant market share. The Company also believes that competition will
increase as a result of software industry consolidation. Increased competition
may result in price reductions, reduced gross margins, and loss of market share,
any of which would materially adversely affect the Company's business, results
of operations and financial condition. There can be no assurance the Company
will be able to compete effectively against current and future competitors. See
"Business -- Competition."
Risks Associated with Product Development and Introduction. The computer
software industry is subject to rapid technological change, changing customer
requirements, frequent new product introductions and evolving industry standards
that may render existing products and services obsolete.
9
<PAGE> 13
As a result, the Company's position in its existing markets or other markets
that it may enter could be eroded rapidly by product advancements by
competitors. The life cycles of the Company's products are difficult to
estimate. The Company's future success will depend, in part, upon its ability to
enhance existing products and to develop new products on a timely basis. In
addition, its products must keep pace with technological developments and
conform to evolving industry standards, including new extended data types, new
electronic publishing formats and new client/server and Internet communication
protocols. 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, or that new products and product
enhancements will meet the requirements of the marketplace or achieve market
acceptance. If the Company is unable to develop and introduce products in a
timely manner in response to changing market conditions or customer
requirements, the Company's business, results of operations and financial
condition would be materially and adversely affected. In addition, the Company
or its competitors may announce enhancements to existing products or services,
or new products or services embodying new technologies, industry standards or
customer requirements that have the potential to supplant or provide lower cost
alternatives to the Company's existing products and services. The introduction
of such enhancements or new products and services could render the Company's
existing products and services obsolete and unmarketable. There can be no
assurance that the announcement or introduction of new products or services by
the Company or its competitors or any change in industry standards will not
cause customers to defer or cancel purchases of existing products or services,
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company has from time to time experienced delays in introducing new
products and product enhancements and 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 or product enhancements.
In addition, there can be no assurance that such new products or product
enhancements will meet the requirements of the marketplace and achieve market
acceptance. Any such failure could have a material adverse effect on the
Company's business, results of operations and financial condition. Furthermore,
software products as complex as those offered by the Company may contain errors
or bugs that may be detected at any point in the products' life cycles. The
Company has in the past discovered software errors in certain of its products
and has experienced delays in shipment of products during the period required to
correct these errors. There can be no assurance that, despite testing and
quality assurance efforts by the Company and by current and potential customers,
errors will not be found, or product shipment delays will not occur, resulting
in loss of or delay in market acceptance and sales, diversion of development
resources, injury to the Company's reputation or increased service and warranty
costs, any of which could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "Business -- Research, Development and Quality
Assurance."
Reliance on Proprietary Technology. The Company relies on a combination of
trademark, copyright, trade secret laws, employee and third-party non-disclosure
agreements, confidentiality procedures and contractual provisions to protect its
proprietary technology. The Company seeks to protect its software,
documentation, and other written materials under trade secret and copyright
laws, which offer limited protection. The Company currently has one United
States patent. There can be no assurance that the Company's patent will not be
invalidated, circumvented, or challenged, that the rights granted thereunder
will provide competitive advantage to the Company or that any future patent
applications will be issued with the scope of the claims sought by the Company.
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 technologies. There can also be no assurance that the measures taken
by the Company to protect its proprietary rights will be adequate to prevent
misappropriation of the technology or independent development of similar
technology by others. Certain of the Company's software products are licensed to
customers under "shrink wrap" licenses included as part of the product
packaging. Although in larger sales the Company's shrink wrap licenses
10
<PAGE> 14
are generally accompanied by specifically negotiated agreements signed by the
licensee, in many cases its shrink wrap licenses are not negotiated with or
signed by individual licensees. Certain provisions of the Company's shrink wrap
licenses, including provisions protecting against unauthorized use, copying,
transfer and disclosure of the licensed program, may be unenforceable under the
laws of certain jurisdictions. In addition, the laws of various countries in
which the Company's products may be sold may not protect the Company's products
and intellectual property rights to the same degree 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 aware of any patent infringement charge
or any violation of other proprietary rights claimed by any third party relating
to the Company or to the Company's products. However, the computer software
industry is characterized by frequent and substantial intellectual property
litigation. Intellectual property litigation is complex and expensive, and the
outcome of such litigation is difficult to predict. The Company believes that,
due to the rapid pace of technological innovation for database software
products, the Company's ability to establish and maintain a position of
technology leadership in the industry is dependent more upon the skills of its
development personnel than upon the legal protections afforded its existing
technology. See "Business -- Proprietary Technology."
Reliance on Third-Party Software. The Company relies upon certain software
that it licenses from third parties, including software that is integrated with
the Company's internally developed software and used to perform key functions
such as the relational database engine licensed from Dharma Systems and
incorporated in the Company's DBconnect and OpenAccess products. Certain of
these licenses are for limited terms, can be renewed only by mutual consent and
may be terminated if the Company breaches the terms of the license and fails to
cure the breach within a specified period of time. There can be no assurance
that such licenses will continue to be available to the Company on commercially
reasonable terms, if at all. The loss of or inability to maintain any of these
licenses could result in the discontinuation of, or delays or reductions in,
product shipments unless and until equivalent technology is identified, licensed
and integrated with the Company's software. Any such discontinuation, delay or
reduction would have a material adverse effect on the Company's business,
results of operations and financial condition. Most of the Company's third-party
licenses are non-exclusive, and there can be no assurance that the Company's
competitors will not obtain licenses to and utilize such technology in
competition with the Company. There can be no assurance that the vendors of
technology utilized in the Company's products will continue to support such
technology in its current form, nor can there be any assurance that the Company
will be able to modify its own products to adapt to changes in such technology.
In addition, there can be no assurance that financial or other difficulties that
may be experienced by such third-party vendors will not have a material adverse
effect upon the technologies incorporated in the Company's products, or that, if
such technologies become unavailable, the Company will be able to find suitable
alternatives. The loss of, or inability to maintain, any such software licenses
could result in shipment delays or reductions until equivalent software could be
developed, identified, licensed and integrated, and could materially adversely
affect the Company's business, results of operations and financial condition.
See "Business -- Proprietary Technology."
Dependence on Key Personnel. The Company's future success depends to a
significant extent on its executive officers and certain technical, managerial
and marketing personnel. The loss of the services of any of these individuals or
groups of individuals could have a material adverse effect on the Company's
business, results of operations and financial condition. None of the Company's
current executive officers, other than Robert N. Goldman and Justin J.
Perreault, the Company's Chief Executive Officer and Executive Vice President
and Chief Operating Officer, respectively, has entered into an employment
agreement with the Company. The Company believes that its future success also
will depend significantly upon its ability to attract, motivate and retain
additional highly skilled technical, managerial and marketing personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting, assimilating and retaining the
11
<PAGE> 15
personnel it requires. See "Management -- Executive Officers and Directors" and
"Business -- Employees."
Concentration of Stock Ownership. Upon completion of this offering, the
Company's officers and directors and entities with which they are affiliated and
six other entities which hold 5% or more of the Company's outstanding securities
will beneficially own 72.6% of the Company's outstanding Common Stock. These
stockholders, if acting together, will be in a position to elect the Company's
directors and control other corporate actions requiring stockholder approval.
See "Management" and "Principal Stockholders."
Antitakeover Considerations; Effect of Charter Provisions, By-Laws and
Delaware Law. The Company's Amended and Restated Certificate of Incorporation
(the "Restated Certificate of Incorporation") and Amended and Restated By-laws
(the "Restated By-laws") will require that any action required or permitted to
be taken by stockholders of the Company must be effected at a duly called annual
or special meeting of stockholders and may not be effected by consent in
writing. The Restated By-laws will also require specified advance notice by a
stockholder of a proposal or director nomination which such stockholder desires
to present at any annual or special meeting of stockholders. Special meetings of
stockholders may be called only by the Chairman of the Board, the Chief
Executive Officer or, if none, the President of the Company or by the Board of
Directors. The Restated By-laws will provide for a classified Board of
Directors, and members of the Board of Directors may be removed by the
stockholders only upon the affirmative vote of holders of a least two-thirds of
the shares of capital stock of the Company entitled to vote. The affirmative
vote of the holders of 75% of the shares of capital stock of the Company issued
and outstanding and entitled to vote is required to amend or repeal these
provisions. In addition, under the Company's Amended and Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") the Board of
Directors will have the authority, without further action by the stockholders,
to fix the rights and preferences of, and issue shares of, preferred stock. In
addition, following this offering the Company will become subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law,
which will prohibit the Company from engaging in a "business combination" with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 also could have the effect of delaying or preventing a change of
control of the Company and may limit the ability of stockholders to approve a
transaction that they may deem to be in their best interests. The foregoing and
other provisions of the Restated Certificate of Incorporation and the Restated
By-laws and the application of Section 203 of the Delaware General Corporation
Law could have the effect of deterring certain takeovers or delaying or
preventing certain changes in control or management of the Company, including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices. See "Management," "Description of
Capital Stock -- Preferred Stock" and "-- Delaware Law and Certain Provisions of
the Company's Certificate of Incorporation and By-Laws."
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering there has been no public market for the Company's Common Stock, and
there can be no assurance that an active public market for the Common Stock will
develop or be sustained after the offering. The initial public offering price
was determined by negotiation between the Company and the representatives of the
Underwriters based upon several factors and may not be indicative of future
market prices. The market price of the Company's Common Stock could be subject
to wide fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company or its
competitors, trends in, usage of and regulatory actions affecting the Internet,
and other events or factors. In addition, the stock market has experienced
extreme price and volume fluctuations that have particularly affected the market
prices for many high technology companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. See
"Underwriting."
Significant Unallocated Proceeds As of the date of this Prospectus, the
Company has no specific plans as to the use of the net proceeds from this
offering and management will have broad discretion in
12
<PAGE> 16
the application of the proceeds. Pending such application, the Company intends
to invest such net proceeds in short-term, investment-grade, interest-bearing
securities. The Investment Company Act of 1940 ("1940 Act") requires
registration of, and imposes substantial restrictions on, certain companies that
engage, or propose to engage, primarily in the business of investing,
reinvesting or trading in securities, or that fail certain statistical tests
concerning a company's asset composition and sources of income and that are not
primarily engaged in businesses other than investing, reinvesting, owning,
holding or trading in securities. The Company believes that it is, and intends
to remain, primarily engaged in businesses other than investing, reinvesting,
owning, holding or trading in securities. Pending their use for other specific
business purposes, the proceeds of this offering will be invested primarily in
government securities or cash items so as to avoid subjecting the Company to the
registration requirements of the 1940 Act. Such investment is likely to result
in the Company obtaining lower yields on the funds than might be available in
the securities markets generally. If the Company were required to register as an
investment company under the 1940 Act, it would become subject to substantive
regulations which could have a material adverse impact on its business. See "Use
of Proceeds."
Shares Eligible for Future Sale. Sales of substantial amounts of shares in
the public market or the prospect of such sales could adversely affect the
market price of the Company's Common Stock. Upon completion of this offering,
the Company will have outstanding 26,280,201 shares of Common Stock, of which
the 3,000,000 shares offered hereby will be freely tradeable. A total of
22,936,345 other outstanding shares are subject to lock-up agreements under
which the holders of such shares have agreed not to sell or otherwise dispose of
any of their shares for a period of 180 days after the date of this Prospectus
without the prior written consent of Hambrecht & Quist LLC. In its sole
discretion and at any time without notice, Hambrecht & Quist LLC may release all
or any portion of the shares subject to lock-up agreements. Immediately
following the close of this offering, 79,550 shares of Common Stock will become
eligible for sale without restriction under Rule 144(k), and an additional
241,806 shares of Common Stock will become eligible for sale subject to the
restrictions of Rule 144 or, in some cases, Rule 701 under the Securities Act.
In addition, following this offering, the holders of 18,290,960 shares of Common
Stock have certain rights with respect to the registration of such shares of
Common Stock for sale to the public. If such holders, by exercising their
registration rights, cause a large number of shares to be sold in the public
market, such sales could have an adverse effect on the market price for the
Company's Common Stock. In addition, if the Company is required to include such
shares in Company-initiated registration statements, this could have an adverse
effect on the Company's ability to raise needed capital. Further, the Company
may use stock for acquisitions, which may have a dilutive effect. See "Shares
Eligible for Future Sale" and "Underwriting." At June 30, 1996 there were
outstanding options and the Warrant to purchase a total of 3,546,559 and 57,858
shares of Common Stock, respectively. Approximately 90 days following this
offering, the Company intends to file a registration statement on Form S-8 under
the Securities Act of 1933, as amended (the "Securities Act"), covering the sale
of an aggregate of 6,435,559 shares reserved for issuance pursuant to options
that are outstanding or may hereafter be granted under the Company's stock
option plans and its employee stock purchase plan. See "Management -- Stock
Option Plans" and " -- Employee Stock Purchase Plan."
Dilution. Investors purchasing shares of Common Stock in this offering
will incur immediate and substantial dilution in the net tangible book value of
the Common Stock from the initial public offering price and will incur
additional dilution upon the exercise of outstanding stock options. See
"Dilution."
13
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of 3,000,000 shares of Common
Stock offered hereby, after deducting underwriting discounts and estimated
offering expenses payable by the Company, are estimated to be approximately
$18.5 million, at the initial public offering price of $7.00 per share. The
Company will not receive any proceeds from the exercise, if any, of the
Underwriters' over-allotment option.
The primary purposes of this offering are to increase the Company's equity
capital and to create a public market for the Common Stock. The Company intends
to use the net proceeds of this offering for working capital and other general
corporate purposes, including repayment of debt. The debt to be repaid out of
the proceeds of the offering consists of installment notes payable to a bank in
the aggregate principal amount of $868,000 at March 31, 1996. The installment
notes are due on various dates through May 1, 1998 and bear interest at floating
rates of interest equal to the bank's prime rate per annum plus 0.75% to 1.0%
(9.0% to 9.25% at March 31, 1996). The installment notes are collateralized by
substantially all the assets of the Company. See "Management's Discussion and
Analysis of Results of Operation and Financial Condition -- Liquidity and
Capital Resources" and Note E of Notes to Consolidated Financial Statements.
The Company may also use a portion of the net proceeds of this offering to
acquire businesses, products or technologies complementary to the Company's
business. Although the Company has from time to time engaged in discussions with
respect to possible acquisitions, it has no present understandings, commitments
or agreements, nor is it currently engaged in any negotiations, with respect to
any such transaction. Pending such uses, the Company intends to invest the net
proceeds from this offering in short-term, investment-grade, interest-bearing
securities. The Company has no other specific uses for the proceeds of this
offering, and the exact use of such proceeds will be subject to the discretion
of management.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain its earnings to fund its business and
therefore does not anticipate paying cash dividends in the foreseeable future.
In addition, the terms of the Company's existing borrowing arrangements with its
bank prohibit the payment of cash dividends on the Common Stock before the
payment in full of all outstanding indebtedness to the bank. In the future, the
terms of the Company's line of credit are likely to prohibit the payment of cash
dividends on the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
14
<PAGE> 18
CAPITALIZATION
<TABLE>
The following table sets forth the capitalization of the Company as of
March 31, 1996, on a pro forma basis giving effect to the conversion to Common
Stock of all outstanding Preferred Stock, and pro forma as adjusted to reflect
the receipt of net proceeds from the sale by the Company of 3,000,000 shares of
Common Stock pursuant to this offering at the initial public offering price of
$7.00 per share, after deducting underwriting discounts and estimated offering
expenses payable by the Company, and the application of the estimated net
proceeds therefrom:
<CAPTION>
MARCH 31, 1996
----------------------------------
PRO FORMA
PRO FORMA(1) AS ADJUSTED(1)(2)
------------ -----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Current portion of long-term obligations...................... $ 645 121
Long-term obligations......................................... 344 --
-------- -------
Stockholders' equity:
Preferred stock, par value $0.01 per share, 5,000,000 shares
authorized; no shares issued and outstanding............. -- --
Common stock, par value $0.001 per share, 200,000,000 shares
authorized; 20,353,113 shares issued, pro forma and
23,353,113 shares issued, pro forma as adjusted(1)(3).... 20 23
Additional paid-in capital.................................. 42,592 61,119
Accumulated deficit......................................... (33,908) (33,908)
Net unrealized holding loss on marketable securities........ (29) (29)
Cumulative translation adjustment........................... 36 36
Treasury stock of 18,900 shares, at cost.................... 0 0
Advances to shareholders.................................... (200) (200)
Unearned compensation....................................... (114) (114)
-------- -------
Total stockholders' equity.................................... 8,397 26,927
-------- -------
Total capitalization..................................... $ 9,386 $27,048
======== =======
<FN>
- ---------------
(1) Assumes (i) the conversion to Common Stock of all outstanding shares of
Preferred Stock at the closing of this offering and (ii) the amendment of
the Restated Certificate of Incorporation of the Company to authorize the
issuance of up to 200,000,000 shares of Common Stock and up to 5,000,000
shares of undesignated preferred stock.
(2) As adjusted to give effect to the receipt of net proceeds from the sale by
the Company of 3,000,000 shares of Common Stock pursuant to this offering,
after deducting underwriting discounts and estimated offering expenses
payable by the Company, and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
(3) Excludes (i) 2,899,702 shares of Common Stock issued upon the exercise of
stock options between March 31, 1996 and June 30, 1996, (ii) 46,286 shares
of Common Stock issuable upon the cashless exercise of the Warrant, (iii)
3,546,559 shares of Common Stock issuable upon exercise of options
outstanding at June 30, 1996 at a weighted average exercise price of $1.20
per share and (iv) 2,589,000 and 300,000 shares of Common Stock reserved for
issuance upon exercise of stock options that may be granted after June 30,
1996 under the 1996 Stock Option Plan and the Stock Purchase Plan,
respectively. See "Management -- Stock Option Plans" and "-- Employee Stock
Purchase Plan" and "Description of Capital Stock -- Warrant."
</TABLE>
15
<PAGE> 19
DILUTION
The pro forma net tangible book value of the Common Stock as of March 31,
1996, was $8.2 million or approximately $0.40 per share. Pro forma net tangible
book value per share represents the amount of the Company's pro forma
stockholders' equity, less intangible assets, divided by 20,353,113 shares of
Common Stock outstanding at March 31, 1996 after giving effect to the conversion
to Common Stock of all then outstanding shares of Preferred Stock.
<TABLE>
Net tangible book value dilution per share represents the difference
between the amount per share paid by purchasers of shares of Common Stock in the
offering made hereby and the pro forma as adjusted net tangible book value per
share of Common Stock immediately after completion of this offering. After
giving effect to the sale of 3,000,000 shares of Common Stock in this offering
at the initial public offering price of $7.00 per share and the application of
the estimated net proceeds therefrom, the pro forma as adjusted net tangible
book value of the Company as of March 31, 1996 would have been $26.7 million or
$1.14 per share. This represents an immediate increase in net tangible book
value of $0.74 per share to existing stockholders and an immediate dilution in
net tangible book value of $5.86 per share to purchasers of Common Stock in this
offering, as illustrated in the following table:
<S> <C> <C>
Public offering price per share............................................. $ 7.00
Pro forma net tangible book value per share at March 31, 1996............. $0.40
Increase per share attributable to new investors.......................... 0.74
-----
Pro forma as adjusted net tangible book value per share after the
offering.................................................................. 1.14
-----
Net tangible book value dilution per share to new investors................. $ 5.86
=====
</TABLE>
<TABLE>
The following table sets forth on a pro forma basis as of March 31, 1996
the difference between the existing stockholders and the purchasers of shares in
this offering (at the initial public offering price of $7.00 per share) with
respect to the number of shares purchased from the Company, the total
consideration paid and the average price per share paid:
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 20,353,113 87.2% $41,137,386 66.2% $2.02
New investors.................... 3,000,000 12.8 21,000,000 33.8 $7.00
---------- ----- ----------- -----
Total.......................... 23,353,113 100.0% $62,137,386 100.0%
========== ===== =========== =====
</TABLE>
The foregoing computations assume no exercise of the Warrant and do not
give effect to the issuance of an aggregate of 2,899,702 shares of Common Stock
issued upon exercise of options between March 31, 1996 and June 30, 1996
resulting in aggregate proceeds to the Company of $742,482 (of which $687,000
was received in the form of promissory notes and has been excluded from the
computations below). The pro forma net tangible book value per share as of March
31, 1996 giving effect to the exercise of these options and the issuance of
46,286 shares of Common Stock upon the cashless exercise of the Warrant would
have been $0.35 per share, and the pro forma as adjusted net tangible book value
after the offering would have been $1.02, resulting in an immediate increase per
share attributable to new investors of $0.67 and net tangible book value
dilution per share to new investors of $5.98. Giving effect to such exercises,
the average price per share paid by existing stockholders for the shares
purchased by them from the Company on a pro forma basis as of March 31, 1996
would have been $1.77.
The foregoing computations also assume no exercise of (i) the Underwriters'
over-allotment option, or (ii) options to purchase an aggregate of 3,546,559
shares of Common Stock at a weighted average exercise price of $1.20 per share
outstanding at June 30, 1996. To the extent that any of these options or
warrants are exercised, new investors will experience further dilution. See
"Capitalization," "Management -- Stock Option Plans" and "Description of Capital
Stock -- Warrant."
16
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated balance sheet data as of December 31, 1994 and
1995 and the selected consolidated statement of operations data for the years
ended December 31, 1993, 1994 and 1995 have been derived from the Company's
consolidated financial statements, which have been audited by Coopers & Lybrand
L.L.P., independent accountants, and which are included elsewhere in this
Prospectus. The selected consolidated balance sheet data as of December 31,
1991, 1992 and 1993 and the selected consolidated statement of operations data
for the years ended December 31, 1991 and 1992 have been derived from the
Company's consolidated financial statements, which have been audited by Coopers
& Lybrand L.L.P., independent accountants, and which are not included in this
Prospectus. The selected consolidated balance sheet data as of March 31, 1996
and the selected consolidated statement of operations data for the three months
ended March 31, 1995 and 1996 have been derived from the Company's unaudited
consolidated financial statements, which have been prepared on a basis
substantially consistent with the audited consolidated financial statements and
which, in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments and accruals, necessary for a fair presentation of
the financial position and results of operations for these periods. The results
of operations for the three months ended March 31, 1996 are not necessarily
indicative of future results. The following selected consolidated financial data
are qualified in their entirety by the more detailed information in the
Company's consolidated financial statements, including the notes thereto,
included elsewhere in this Prospectus, and should be read in conjunction with
such financial statements and notes and the discussion under "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software....................................... $ 3,322 $ 8,607 $ 8,688 $ 15,706 $ 18,700 $ 4,972 $ 5,612
Services....................................... 706 1,989 4,155 6,731 10,928 2,647 2,369
Related party software and services............ -- -- 11,807 3,052 3,078 402 1,015
------- ------- ------- -------- -------- ------- -------
Total revenues............................ 4,028 10,596 24,650 25,489 32,706 8,021 8,996
Cost of revenues:
Cost of software............................... 166 243 430 1,533 1,088 343 499
Cost of services............................... 1,047 1,842 4,297 4,267 6,928 1,657 1,698
Cost of related party software and services.... -- -- 590 1,176 904 164 210
------- ------- ------- -------- -------- ------- -------
Total cost of revenues.................... 1,213 2,085 5,317 6,976 8,920 2,164 2,407
Gross profit..................................... 2,815 8,511 19,333 18,513 23,786 5,857 6,589
Operating expenses:
Selling and marketing.......................... 3,801 6,214 11,632 18,245 19,596 4,831 3,683
Research and development....................... 1,957 2,966 4,727 9,514 8,298 2,223 1,804
General and administrative..................... 913 1,593 2,409 3,141 3,589 919 911
Restructuring charges(1)....................... -- -- -- -- 2,709 -- --
------- ------- ------- -------- -------- ------- -------
Total operating expenses.................. 6,671 10,773 18,768 30,900 34,192 7,973 6,398
Operating income (loss).......................... (3,856) (2,262) 565 (12,387) (10,406) (2,116) 191
Other income (expense):
Interest income................................ -- 86 263 516 278 126 57
Interest expense............................... (12) (90) (99) (121) (136) (39) (36)
Other expense, net............................. -- (76) (72) (11) (20) 33 (43)
------- ------- ------- -------- -------- ------- -------
Total other income (expense).............. (12) (80) 92 384 122 120 22
------- ------- ------- -------- -------- ------- -------
Income (loss) before provision for income
taxes.......................................... (3,868) (2,342) 657 (12,003) (10,284) (1,996) 169
Provision (benefit) for income taxes............. -- -- 30 18 (2) -- 24
------- ------- ------- -------- -------- ------- -------
Net income (loss)................................ $(3,868) $(2,342) $ 627 $(12,021) $(10,282) $(1,996) $ 145
======= ======= ======= ======== ======== ======= =======
Pro forma net income (loss) per common and common
equivalent share(2)............................ $ (0.40) $ 0.01
Pro forma weighted average number of common and
common equivalent shares outstanding(2)........ 25,837 26,427
</TABLE>
17
<PAGE> 21
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------------------------------------------- MARCH 31, MARCH 31,
1991 1992 1993 1994 1995 1996 1996(2)
------- ------- -------- -------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 930 $ 3,422 $ 2,643 $ 3,225 $ 2,465 $ 3,382 $ 3,382
Marketable securities, current.............. -- -- 3,617 1,924 1,488 4,949 4,949
Working capital (deficit)................... 1,361 2,868 8,503 790 (991) 4,274 4,274
Total assets................................ 4,253 8,248 25,484 25,429 17,154 21,805 21,805
Long-term obligations....................... 508 549 708 858 476 344 344
Redeemable convertible preferred stock...... 11,912 16,377 29,041 35,982 35,982 41,232 --
Total stockholders' equity (deficit)........ (10,033) (12,371) (11,698) (24,314) (32,756) (32,835 ) 8,397
</TABLE>
- ---------------
(1) Restructuring charges consist principally of severance costs and expenses
related to consolidation of the Company's facilities in connection with a
strategic realignment of the Company's business undertaken in 1995.
(2) Pro forma data assume the conversion to Common Stock of all outstanding
Preferred Stock. See Note B of Notes to Consolidated Financial Statements.
18
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was founded in 1988, and first shipped its ObjectStore database
management system in 1990. Initially, the Company concentrated on marketing its
products for use in computer assisted design and other engineering design and
analysis applications. The Company subsequently expanded its customer base to
include customers in telecommunications, finance and other industries that
required specialized database management capabilities not readily available from
conventional relational database management systems. Despite increasing revenues
in every year since its inception, the Company incurred substantial losses and
negative cash flow, and at March 31, 1996 had an accumulated deficit of $33.9
million. The Company had net income of $627,000 in 1993. However, it incurred
losses of $12.0 million and $10.3 million in 1994 and 1995, respectively.
In late 1995, the Company elected Robert N. Goldman as its new Chief
Executive Officer and Justin J. Perreault as its Chief Operating Officer and
replaced several other members of its senior management team. In April 1996,
Lacey P. Brandt joined the Company as its Chief Financial Officer.
In late 1995, the Company also commenced a fundamental reappraisal of its
business strategy of concentrating on a limited number of vertical industry
markets, and in early 1996 shifted its strategy to focus on providing database
management solutions for the emerging Internet and Intranet computing market. In
March 1996, the Company released the Internet Solution Suite, its first group of
products designed specifically to address the Internet and Intranet computing
market.
In connection with its strategic realignment, the Company also embarked
upon a Company-wide restructuring program, which included layoffs and other
expense reduction measures. Restructuring charges in the aggregate amount of
approximately $2.7 million, consisting principally of severance costs and
expenses related to consolidation of the Company's facilities, were recorded in
the second and third quarters of 1995.
As a result of the Company's strategic realignment and reallocation of its
research and development, sales and marketing and technical support resources to
focus on the Internet market, it is likely that the Company's revenues from its
historical business base will experience a lower rate of growth, or will
decline. Also, the Company historically derived a substantial portion of its
revenue from fee-based consulting services. In connection with its strategic
realignment, the Company has reduced its emphasis on consulting services as a
source of revenue in favor of concentrating the efforts of its technical support
staff on a key account management program and other non-billable activities
designed to ensure customer satisfaction and success in deployment of Internet
and Intranet applications based on ObjectStore.
In April 1993, the Company entered into a relationship with IBM. At that
time IBM purchased shares of the Company's Preferred Stock convertible into an
aggregate of 3,750,695 shares of Common Stock, which will represent 14.3% of the
Company's outstanding Common Stock immediately following this offering. (If the
Underwriters' over-allotment option is exercised in full, IBM will sell 426,949
shares of Common Stock in the offering, reducing its holdings to 12.6% of the
Company's issued and outstanding Common Stock.) The Company and IBM also signed
certain business agreements (the "IBM Agreements") under which IBM would be
entitled to develop and market products in which the Company's ObjectStore
database management system would be embedded, and the parties would undertake
certain joint product development and marketing activities. Under the IBM
Agreements, either party has the option (the "Break-Up Option") of terminating
certain of the IBM Agreements and modifying the terms of certain others, upon
nine months' advance notice. In March 1996, the Company exercised the Break-Up
Option by giving written notice to IBM, effective in January 1997. As a result
of its exercise of the Break-Up Option, the Company's revenues from IBM are
likely to decline. See "Certain Transactions -- Relationship with International
Business Machines Corporation," "Principal Stockholders" and Note K of Notes to
Consolidated Financial Statements. During 1993, 1994, 1995 and the three months
ended March 31, 1996 revenues attributable to IBM were $9.9 million,
19
<PAGE> 23
$1.7 million, $3.1 million and $980,000, and constituted 40.2%, 6.9%, 9.4% and
10.9% of the Company's total revenues for such periods, respectively.
Revenues and accounts receivable from IBM are included in related party
software and services, accounts receivable -- related party in the Company's
consolidated financial statements for such periods. Related party revenues and
accounts receivable also include amounts attributable to AT&T, Intel, Kodak,
Olivetti and Zuken, each of which is also a stockholder of the Company. However,
no customer other than IBM has accounted for more than 10% of the Company's
revenues in any of the foregoing periods.
The Company's revenues are derived from two sources, software license fees
and fees for services complementary to its software products, including software
maintenance, consulting and training. The Company recognizes revenue in
accordance with American Institute of Certified Public Accountants Statement of
Position No. 91-1, "Software Revenue Recognition." Software license revenue is
recognized upon execution of a contract or purchase order and shipment of the
software, provided that no significant obligations on the part of the Company
remain outstanding and collection of the related receivable is deemed probable
by management. Revenues from development contracts are recorded using the
percentage of completion method based on contract milestones. Maintenance fees,
which are generally payable in advance and non-refundable, are recognized
ratably over the period of the maintenance contract, typically twelve months.
Revenues from training and consulting services are recognized as the services
are provided. Software license fees, consulting fees and training fees that have
been prepaid or invoiced but that do not yet qualify for recognition as revenue
under the Company's policy, and prepaid maintenance fees not yet recognized as
revenue, are reflected as deferred revenue in the Company's Consolidated
Financial Statements. See Note B of Notes to Consolidated Financial Statements.
Research and development expenditures are charged to operations as
incurred. In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company considers that technological feasibility has been
established once a working model of a product has been produced and tested. To
date, the Company has not capitalized software development costs after
technological feasibility has been established since costs incurred subsequent
to the establishment of technological feasibility have not been material. See
Note B of Notes to Consolidated Financial Statements.
At December 31, 1995, the Company had federal net operating loss
carryforwards ("NOLs") and research and experimentation credit carryforwards
("R&E credits") of approximately $28.5 million and $1.4 million and foreign NOLs
of approximately $1.9 million, respectively, available to offset future federal
income tax liabilities, expiring at various dates through 2010. The utilization
of federal NOLs and R&E credits is subject to limitation under Section 382 in
the event of a "change in ownership" of the Company as defined in Section 382.
The 1993 purchases of Preferred Stock by IBM, in combination with certain other
transactions, constituted a change in ownership of the Company. As a result, the
Company's utilization of NOLs and R&E credits in the aggregate amount of
approximately $10.0 million that were available at the time of such change will
be limited to a maximum of $2.3 million per year through 2008. No change of
ownership within the meaning of Section 382 has occurred since 1993, and the
Company does not expect the offering made hereby to result in such a change of
ownership. Accordingly, federal NOLs and R&E credits in the aggregate amount of
approximately $18.5 million at December 31, 1995 that have arisen since the 1993
change in ownership may be utilized by the Company through 2010 without
limitation under Section 382. See Note I of Notes to Consolidated Financial
Statements. As a result of these carryforwards, the Company's tax provision for
the quarter ended March 31, 1996 as well as during 1993, 1994 and 1995, consists
solely of state and foreign income taxes, and federal alternative minimum taxes.
As required by Statement of Financial Accounting Standards No. 109,
management of the Company has evaluated the positive and negative evidence
bearing upon the realizability of the Company's deferred tax assets, which
consist principally of net operating loss and tax credit carryforwards.
Management has considered the Company's history of losses and its short recent
period of income and concluded that as of December 31, 1995 and March 31, 1996,
it is more likely than not
20
<PAGE> 24
that the Company will not generate future taxable income prior to the expiration
of the net operating losses and tax credits in 2010. Accordingly, the Company's
deferred tax assets have been fully reserved. Management re-evaluates the
positive and negative evidence on a quarterly basis. See Note I of Notes to
Consolidated Financial Statements.
This Prospectus, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors" above.
RESULTS OF OPERATIONS
The following table sets forth certain revenue and cost data as a
percentage of the Company's total revenues for each period presented:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Software......................................... 35.2% 61.6% 57.2% 62.0% 62.4%
Services......................................... 16.9 26.4 33.4 33.0 26.3
Related party software and services.............. 47.9 12.0 9.4 5.0 11.3
---- ---- ---- ---- ----
Total revenues................................ 100.0 100.0 100.0 100.0 100.0
---- ---- ---- ---- ----
Cost of revenues:
Cost of software................................. 1.7 6.0 3.3 4.3 5.5
Cost of services................................. 17.4 16.8 21.2 20.7 18.9
Cost of related party software and services...... 2.4 4.6 2.8 2.0 2.4
---- ---- ---- ---- ----
Total cost of revenues........................ 21.5 27.4 27.3 27.0 26.8
---- ---- ---- ---- ----
Gross profit....................................... 78.5 72.6 72.7 73.0 73.2
Operating expenses:
Selling and marketing............................ 47.2 71.6 59.9 60.2 40.9
Research and development......................... 19.2 37.3 25.4 27.7 20.1
General and administrative....................... 9.8 12.3 10.9 11.5 10.1
Restructuring charges............................ -- -- 8.3 -- --
---- ---- ---- ---- ----
Total operating expenses...................... 76.2 121.2 104.5 99.4 71.1
---- ---- ---- ---- ----
Operating income (loss)............................ 2.3 (48.6) (31.8) (26.4) 2.1
---- ---- ---- ---- ----
Other income (expense):
Interest income.................................. 1.0 2.0 0.9 1.6 0.6
Interest expense................................. (0.4) (0.5) (0.4) (0.5) (0.4)
Other expense, net............................... (0.3) (0.0) (0.1) 0.4 (0.4)
---- ---- ---- ---- ----
Total other income (expense).................. 0.3 1.5 0.4 1.5 (0.2)
---- ---- ---- ---- ----
Income (loss) before provision for income taxes.... 2.6 (47.1) (31.4) (24.9) 1.9
Provision (benefit) for income taxes............... 0.1 0.1 (0.0) (0.0) 0.3
---- ---- ---- ---- ----
Net income (loss).................................. 2.5% (47.2)% (31.4)% (24.9)% 1.6%
==== ==== ==== ==== ====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Software Revenue. Software revenue increased 12.9%, to $5.6 million for
the three months ended March 31, 1996 compared with $5.0 million for the
corresponding period in 1995. The increase resulted
21
<PAGE> 25
primarily from growth in volume of licenses of ObjectStore sold to customers in
the Company's historical markets. Software revenue for the first quarter of 1995
included a single large order for $1.1 million for use in an engineering design
application, while no order of that magnitude was received in the corresponding
period of 1996. During the first quarter of 1996, the Company recognized no
revenue from licenses of its Internet Solution Suite, which was released in
March 1996. The Company expects that as a result of its strategic realignment,
revenues from its historical business base will experience a lower rate of
growth, or will decline.
Services Revenue. Services revenue decreased 10.5%, to $2.4 million for
the three months ended March 31, 1996 compared with $2.6 million for the
corresponding period in 1995. The decrease was due to a reduction in billable
consulting activity as a result of the Company's realignment of the focus of its
technical support staff.
Related Party Software and Services Revenue. Related party software and
services revenue increased 152.6%, to $1.0 million for the three months ended
March 31, 1996 compared with $402,000 for the corresponding period in 1995. The
increase was due primarily to recognition in the first quarter of 1996 of
$650,000 in revenue from IBM attributable to the discontinuation of a
significant joint product development project with IBM, which was being
accounted for by the percentage of completion method. The Company anticipates
that a final $750,000 of revenue related to this discontinued project will be
recognized by the Company in the second quarter of 1996. These amounts, which
were prepaid by IBM, had been recorded as deferred revenue-related party. As a
result of the Company's exercise of the Break-Up Option, the Company expects
revenues from IBM to decline both in dollar amount and as a percentage of its
total revenues in future periods.
Revenues and Income from International Operations. Revenues from
international operations increased as a percentage of the Company's total
revenues to 44.5% for the three months ended March 31, 1996 compared with 36.2%
in the corresponding period of 1995. The increase resulted primarily from a more
established direct sales presence in certain markets in Europe and Asia. The
Company expects that revenue from foreign operations will continue to be
significant in future periods. Income from international operations for the
period was $152,000 compared to a loss of $447,000 for the corresponding period
in 1995. This increase reflects growth in sales of ObjectStore in the Asia
Pacific market and expense reductions resulting from a consolidation of
facilities in the Asia Pacific region.
Cost of Software. Cost of software consists primarily of costs of product
media, manuals, packaging materials, duplication and shipping, as well as
royalties relating to third-party software included in the Company's products.
Cost of software increased 45.3%, to $499,000 for the three months ended March
31, 1996 compared with $343,000 for the corresponding period in 1995, and
represented 8.9% and 6.9% of software revenue for such periods, respectively.
The increase in dollar amount was attributable primarily to increases in direct
costs related to increased sales volume, as well as to an increase in royalties
related to third-party software acquired in the first quarter of 1996. The
increase as a percentage of software revenue was attributable primarily to
increased sales of products containing royalty-bearing third-party software. The
Company intends to continue its strategy of enhancing its product line through
the incorporation of third-party software and, as a result, the cost of software
as a percentage of software revenue may continue to fluctuate.
Cost of Services. Cost of services consists primarily of personnel-related
costs incurred in providing software maintenance and technical support,
consulting, and training services, as well as maintenance fees payable by the
Company associated with third-party software included in the Company's products.
Cost of services was $1.7 million in each of the three month periods ended March
31, 1995 and 1996. Cost of services as a percentage of services revenue
increased to 71.7% for the three month period ended March 31, 1996 compared with
62.6% for the corresponding period in 1995. The increase as a percentage of
services revenue is primarily due to the Company's reduced emphasis on fee-based
consulting and the increased focus of the Company's technical support staff on
the Company's key account management program and other non-billable activities
designed to ensure
22
<PAGE> 26
customer satisfaction and successful deployment of Internet and Intranet
applications based on ObjectStore.
Cost of Related Party Software and Services. Cost of related party
software and services consists of the cost of software and the cost of services
licensed or provided to related parties. Cost of related party software and
services increased 27.8% to $210,000 in the three months ended March 31, 1996
compared with $164,000 in the corresponding period of 1995, and represented
20.7% and 40.9% of related party software and services revenue for such periods,
respectively. The decrease as a percentage of related party software and
services revenue is attributable to the recognition in the first quarter of 1996
of $650,000 in deferred software revenue from IBM for which there was little
corresponding expense, and to a shift in the mix of related party revenues from
lower-margin consulting services revenue to higher-margin software revenue.
Selling and Marketing Expense. Selling and marketing expense, consisting
primarily of costs associated with personnel involved in the sales and marketing
process, sales commissions, seminars, sales facilities expense, trade shows,
advertising and promotional materials, decreased 23.8% to $3.7 million for the
three months ended March 31, 1996 compared with $4.8 million for the
corresponding period in 1995, and decreased as a percentage of total revenues to
40.9% from 60.2% for such periods, respectively. The decrease in dollar amount
and as a percentage of revenues reflects the effects of the Company's
restructuring in the second half of 1995 and related headcount reductions in
marketing, telesales and IBM sales, as well as the sale of the Company's
Australian subsidiary to its employees. The Company intends to expand its direct
sales force and significantly increase its expenditures on marketing focused
specifically on the Internet opportunity throughout 1996.
Research and Development Expense. Research and development expense,
consisting primarily of costs of personnel, equipment and facilities, decreased
18.8%, to $1.8 million for the three months ended March 31, 1996 compared with
$2.2 million for the corresponding period in 1995, and decreased as a percentage
of total revenues to 20.1% from 27.7% in the corresponding periods of 1996 and
1995, respectively. The decreases reflect the effects of the Company's
restructuring and headcount reductions, which included the disbanding of a
separate product development group based in California. The Company expects that
research and development expenses will increase in dollar amount in future
periods as the Company continues to enhance its existing products and introduce
new products.
General and Administrative Expense. General and administrative expense
consisting of expenses of the Company's administrative, finance and general
management activities, including legal, accounting and other professional fees,
decreased 0.9%, to $911,000 for the three months ended March 31, 1996 compared
with $919,000 for the corresponding period in 1995, and decreased as a
percentage of the Company's total revenues to 10.1% from 11.5% for such periods,
respectively. The decrease as a percentage of total revenues is attributable to
effects of the Company's expense reduction program in the second half of 1995,
which were offset in part by increased consulting fees and some temporary
duplication in personnel costs associated with the Company's strategic
realignment and transition in senior management in late 1995 and early 1996.
Total Other Income (Expense). Total other income (expense) consists
primarily of interest income related to the Company's invested cash and interest
expense related to bank term loans. The Company invests cash not required for
operations in short-term investment grade interest-bearing securities. Interest
income fluctuates based on the amount of funds available for investment and
prevailing interest rates. Total other income (expense) changed to a net expense
of $22,000 for the three months ended March 31, 1996 compared with net income of
$120,000 for the corresponding period of 1995. This decrease was primarily a
result of lower interest income related to the decline in invested cash balances
in the March 31, 1996 quarter.
Provision (Benefit) for Income Taxes. The Company's effective tax rate of
14.2% in the three months ended March 31, 1996 primarily reflected foreign taxes
for which no NOLs were available.
The Company believes that its operating expenses for the three months ended
March 31, 1996, which generally reflect the effects of its strategic realignment
and its restructuring efforts during 1995,
23
<PAGE> 27
are likely to be more indicative of future levels of such expenses, as a
percentage of total revenues, than are its operating expenses in 1995 and prior
periods.
1995 COMPARED TO 1994
Software Revenue. Software revenue increased 19.1% to $18.7 million in
1995 compared with $15.7 million in 1994. The increase was due to growth in
volume of sales of ObjectStore as the Company continued to expand its customer
base from the engineering industry to customers in the telecommunications, data
communications, finance and other industries.
Services Revenue. Services revenue increased 62.4% to $10.9 million in
1995 compared with $6.7 million in 1994. The increase was due primarily to an
increase in consulting revenues and to an increase in maintenance revenues
attributable to growth of the Company's installed base.
Related Party Software and Services Revenue. Related party software and
services revenue, primarily consisting of revenue from IBM, was $3.1 million in
each of 1995 and 1994.
Revenues and Income from International Operations. Revenues from
international operations increased as a percentage of the Company's total
revenues to 36.9% in 1995 compared with 28.8% in 1994. The increase resulted
primarily from a more established direct sales presence in certain markets in
Europe and Asia. As a result of costs related to its continued investment in
Europe and Asia Pacific subsidiaries, the Company recorded a loss of $1,531,000
from international operations in 1995, compared to a loss of $2,075,000 in 1994.
The larger loss in 1994 was attributable to start-up costs associated with the
Company's establishment of a direct presence in Europe and the Asia Pacific
region.
Cost of Software. Cost of software decreased 29.0%, to $1.1 million for
1995 compared with $1.5 million for 1994, and decreased as a percentage of
software revenue to 5.8% from 9.8% for such periods, respectively. The decrease
in dollar amount and as a percentage of total revenues was primarily
attributable to successful efforts by management to reduce the costs of media,
manuals, packaging materials and duplication.
Cost of Services. Cost of services increased 62.4%, to $6.9 million in
1995 compared with $4.3 million in 1994, and represented 63.4% of services
revenue in each period. The increase in dollar amount was attributable to growth
in the size of the Company's consulting staff in the first half of 1995.
Cost of Related Party Software and Services. Cost of related party
software and services decreased 23.1%, to $904,000 for 1995 compared with $1.2
million for 1994, and represented 29.4% and 38.5% of related party software and
services revenue for such periods, respectively. The reduction as a percentage
of revenue was attributable to a shift in the mix of revenues toward higher
margin software revenue in 1995 from lower margin consulting revenue in 1994.
Selling and Marketing Expense. Selling and marketing expense increased
7.4%, to $19.6 million in 1995 compared with $18.2 million in 1994, but
decreased as a percentage of the Company's total revenues to 59.9% from 71.6%
for such periods, respectively. The increase in dollar amount reflected
expansion of the Company's direct sales force during the first half of 1995 and
higher commission expense associated with increased software license revenues,
which were partially offset by the effects of the Company's restructuring and
related reductions in headcount and marketing expense in late 1995. The decrease
as a percentage of revenue was attributable to higher productivity of the
Company's sales force in 1995.
Research and Development Expense. Research and development expense
decreased 12.8%, to $8.3 million in 1995 compared with $9.5 million in 1994, and
represented 25.4% and 37.3% of total revenues for such periods respectively. The
decrease in dollar amount and as a percentage of total revenues was due
primarily to the Company's restructuring in late 1995 and the related reduction
in research and development headcount, as well as to the Company's suspension of
certain non-strategic product development efforts.
General and Administrative Expense. General and administrative expense
increased 14.2%, to $3.6 million in 1995 compared with $3.1 million in 1994, but
decreased as a percentage of the
24
<PAGE> 28
Company's total revenues to 10.9% from 12.3% for such periods, respectively. The
increase in dollar amount was attributable primarily to increased headcount to
support the Company's expanding domestic and international operations.
Restructuring Charges. Restructuring charges in 1995 consist primarily of
severance payments and costs related to consolidation of the Company's
facilities in connection with its restructuring and strategic realignment in the
second and third quarters of 1995. See Note M of Notes to Consolidated Financial
Statements.
Total Other Income (Expense). Total other income (expense) decreased by
68.2% to net income of $122,000 in 1995 compared with net income of $384,000 in
1994. This decrease was largely the result of decreased interest income related
to lower cash balances during 1995 as compared to 1994.
Provision (Benefit) for Income Taxes. Differences between the Company's
effective tax rates in 1995 and 1994 are attributable to the effect of foreign
taxes.
1994 COMPARED TO 1993
Software Revenue. Software revenue increased 80.8%, to $15.7 million in
1994 compared with $8.7 million in 1993. The increase was due to growth in
volume of sales of ObjectStore as the Company expanded its customer base from
the engineering industry to customers in the telecommunications, data
communications, finance and other industries.
Services Revenue. Services revenue increased 62.0%, to $6.7 million in
1994 compared with $4.2 million in 1993. The increase was due primarily to an
increase in consulting revenues and to an increase in maintenance revenues
attributable to growth of the Company's installed base.
Related Party Software and Services Revenue. Related party software and
services revenue, primarily consisting of revenue from IBM, decreased 74.2%, to
$3.1 million in 1994 compared with $11.8 million in 1993. In 1993, the Company
and IBM entered into the business relationship which was reflected in the IBM
Agreements entered into in April 1993, which resulted in the recognition by the
Company of substantial revenue from IBM during 1993.
Revenues and Income from International Operations. Revenues from
international operations increased as a percentage of the Company's total
revenues to 28.8% in 1994 compared with 9.3% in 1993, as a result of the
expansion of the Company's international sales and marketing presence. The
Company recorded a loss from international operations of $2,075,000 in 1994,
compared to a loss of $361,000 in 1993. The larger loss in 1994 was attributable
to start-up costs associated with the Company's establishment of a direct
presence in Europe and the Asia Pacific region.
Cost of Software. Cost of software increased 256.4%, to $1.5 million for
1994 compared with $430,000 for 1993, and increased as a percentage of software
revenue to 9.8% from 4.9% for such periods, respectively. The dollar increase
and increase as a percentage of software revenue in 1994 was attributable to
increases in software license sales and increases in production and inventory
management costs for the Company's expanding product line.
Cost of Services. Cost of services was $4.3 million in each of 1994 and
1993, but represented 63.4% and 103.4% of services revenue in such periods,
respectively. The decrease as a percentage of services revenue was attributable
to the growth in the Company's consulting and maintenance revenues in 1994,
resulting in higher utilization and productivity of personnel.
Cost of Related Party Software and Services. Cost of related party
software and services increased 99.3%, to $1.2 million for 1994 compared with
$590,000 for 1993, and represented 38.5% and 5.0% of related party software and
services revenue for such periods, respectively. The increase in dollar amount
and as a percentage of related party software and services revenue was
attributable to an increased percentage of lower margin consulting revenues in
1994, as well as to the Company's recognition in 1993 of approximately $9.9
million of fully paid software license fees from IBM, with which relatively
little incremental cost was associated.
Selling and Marketing Expense. Selling and marketing expense increased
56.9%, to $18.2 million in 1994 compared with $11.6 million in 1993, and
increased as a percentage of the Company's total
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<PAGE> 29
revenues to 71.6% from 47.2% for such periods, respectively. The increase in
dollar amount reflected expansion of the Company's direct sales force and
substantially increased marketing expense in anticipation of future growth, as
well as higher commission expense associated with increased software license
revenues.
Research and Development Expense. Research and development expense
increased 101.3%, to $9.5 million in 1994 compared with $4.7 million in 1993,
and represented 37.3% and 19.2% of total revenues for such periods,
respectively. The increase in dollar amount and as a percentage of total
revenues was attributable to growth of the Company's research and development
staff to support the continued development and enhancement of ObjectStore and
related tools.
General and Administrative Expense. General and administrative expense
increased 30.4%, to $3.1 million in 1994 compared with $2.4 million in 1993, and
increased as a percentage of the Company's total revenues to 12.3% from 9.8% for
such periods, respectively. The increase in dollar amount and as a percentage of
total revenues was attributable primarily to increased headcount to support the
expected growth of Company's domestic and international operations and its
business relationship with IBM.
Total Other Income (Expense). Total other income (expense) increased by
318.7% to net income of $384,000 in 1994 compared with net income of $92,000 in
1993. This increase was the result of higher invested cash balances during 1994
compared with 1993.
Provision (Benefit) for Income Taxes. The difference between the Company's
effective tax rates in 1994 and 1993 is attributable to the effects of foreign
taxes as well as of federal alternative minimum taxes in 1993.
RECENT OPERATING RESULTS
The following information summarizes the Company's results of operations
for the three months ended June 30, 1996. This information is based upon the
Company's preliminary analysis of its results of operations for the period and
is unaudited, but reflects, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments and accruals) necessary for a
fair presentation of the Company's results of operations for the period.
Revenues. Total revenues increased 29.8%, to $9.2 million for the three
months ended June 30, 1996 compared to $7.1 million for the corresponding period
in 1995. The increase resulted primarily from growth in software revenue, which
increased 36.2% to $5.7 million for the second quarter, compared to $4.2 million
in the corresponding period in 1995. Services revenue was $2.6 million for the
second quarter and was unchanged from the corresponding period in 1995.
Gross Profit. Gross profit was $7.2 million or 78.4% of revenue for the
three months ended June 30, 1996, compared to $4.9 million or 69.1% of revenue
for the corresponding period in 1995. The increase was due primarily to the
increase in software revenue as a percentage of total revenues, and also to the
recognition of $750,000 in deferred revenue from IBM (related to the joint
development project with IBM that was discontinued in the first quarter of 1996)
for which there was little corresponding cost.
Operating Expenses. Total operating expenses decreased 28.6%, to $7.0
million for the three months ended June 30, 1996, compared with $9.5 million for
the corresponding period in 1995. The decrease was primarily a result of the
Company's restructuring and expense reduction efforts in late 1995. Also,
operating expense for the three months ended June 30, 1995 included a
restructuring charge of $1.2 million.
Net Income. Net income for the three months ended June 30, 1996 was
$283,000, compared with a net loss of $4.6 million for the second quarter of
1995. Pro forma net income per common and common equivalent share for the three
months ended June 30, 1996 was $0.01 per share, compared with a pro forma net
loss per common and common equivalent share of $0.18 for the corresponding
period of 1995.
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<PAGE> 30
<TABLE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial data
for the five quarters ended March 31, 1996 in dollar amounts and as a percentage
of total revenues. In the opinion of management, this information has been
presented on the same basis as the audited Consolidated Financial Statements
appearing elsewhere in this Prospectus, and includes all adjustments, consisting
only of normal recurring adjustments and accruals, that the Company considers
necessary for a fair presentation. Such quarterly results are not necessarily
indicative of future results of operations and should be read in conjunction
with the audited Consolidated Financial Statements and Notes thereto.
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------
MARCH 31, JUNE 30, SEP. 30, DEC. 31, MARCH 31,
1995 1995 1995 1995 1996
--------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Software.............................. $ 4,972 $ 4,198 $ 4,421 $5,109 $5,612
Services.............................. 2,647 2,571 2,745 2,965 2,369
Related party software and services... 402 317 1,190 1,169 1,015
------- ------- ------- ------ ------
Total revenues..................... 8,021 7,086 8,356 9,243 8,996
Cost of revenues:
Cost of software...................... 343 263 127 355 499
Cost of services...................... 1,657 1,747 1,970 1,554 1,698
Cost of related party software and
services........................... 164 182 274 284 210
------- ------- ------- ------ ------
Total cost of revenues............. 2,164 2,192 2,371 2,193 2,407
Gross profit............................ 5,857 4,894 5,985 7,050 6,589
Operating expenses:
Selling and marketing................. 4,831 4,998 5,475 4,292 3,683
Research and development.............. 2,223 2,218 1,971 1,886 1,804
General and administrative............ 919 1,077 785 808 911
Restructuring charges................. -- 1,239 1,470 -- --
------- ------- ------- ------ ------
Total operating expenses........... 7,973 9,532 9,701 6,986 6,398
Operating income (loss)................. (2,116) (4,638) (3,716) 64 191
Other income (expense):
Interest income....................... 126 81 42 29 57
Interest expense...................... (39) (38) (30) (29) (36)
Other expense, net.................... 33 (25) (4) (24) (43)
------- ------- ------- ------ ------
Total other income (expense)....... 120 18 8 (24) (22)
Income (loss) before provision for
income taxes.......................... (1,996) (4,620) (3,708) 40 169
Provision (benefit) for income taxes.... -- -- -- (2) 24
------- ------- ------- ------ ------
Net income (loss)....................... $(1,996) $(4,620) $(3,708) $ 42 $ 145
======= ======= ======= ====== ======
</TABLE>
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<PAGE> 31
<TABLE>
<S> <C> <C> <C> <C> <C>
Revenues:
Software............................... 62.0% 59.3% 52.9% 55.3% 62.4%
Services............................... 33.0 36.3 32.9 32.1 26.3
Related party software and services.... 5.0 4.4 14.2 12.6 11.3
----- ----- ----- ----- -----
Total revenues...................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of software....................... 4.3 3.7 1.5 3.8 5.5
Cost of services....................... 20.7 24.7 23.6 16.8 18.9
Cost of related party software and
services............................ 2.0 2.6 3.3 3.1 2.4
----- ----- ----- ----- -----
Total cost of revenues.............. 27.0 31.0 28.4 23.7 26.8
Gross profit............................. 73.0 69.0 71.6 76.3 73.2
Operating expenses:
Selling and marketing.................. 60.2 70.5 65.5 46.5 40.9
Research and development............... 27.7 31.2 23.6 20.4 20.1
General and administrative............. 11.5 15.2 9.4 8.7 10.1
Restructuring charges.................. -- 17.5 17.6 -- --
----- ----- ----- ----- -----
Total operating expenses............ 99.4 134.4 116.1 75.6 71.1
Operating income (loss).................. (26.4) (65.4) (44.5) 0.7 2.1
Other income (expense):
Interest income........................ 1.6 1.1 0.5 0.3 0.6
Interest expense....................... (0.5) (0.5) (0.4) (0.3) (0.4)
Other expense, net..................... 0.4 (0.4) 0.0 (0.2) (0.4)
----- ----- ----- ----- -----
Total other income (expense)........... 1.5 0.2 0.1 (0.2) (0.2)
Income (loss) before provision for
income taxes........................... (24.9) (65.2) (44.4) 0.5 1.9
Provision (benefit) for income taxes... -- -- -- (0.0) 0.3
----- ----- ----- ----- -----
Net income (loss)........................ (24.9)% (65.2)% (44.4)% 0.5% 1.6%
===== ===== ===== ===== =====
</TABLE>
The Company's quarterly operating results have varied significantly and are
expected to vary significantly in the future. These fluctuations may be caused
by many factors, including, among others, the size and timing of individual
orders; customer order deferrals in anticipation of new products; timing of
introduction or enhancement of products by the Company or its competitors;
market acceptance of new products; technological changes in database management,
networking, or communications technology; competitive pricing pressures; changes
in the Company's operating expenses; personnel changes; foreign currency
exchange rates; mix of products sold; quality control of products sold; and
general economic conditions.
For example, software revenue in the three months ended March 31, 1995 was
high in comparison to the two succeeding quarters, as a result of a $1.1 million
order from a single customer received in the first quarter. Related party
software and service revenues in the third and fourth quarter of 1995 include an
aggregate of $1.6 million in revenue attributable to a single license agreement
with IBM, and in the first quarter of 1996 include $650,000 attributable to the
recognition of deferred revenue related to a joint development project with IBM,
being accounted for by the percentage of completion method, which was
discontinued in the first quarter of 1996. Cost of software as a percentage of
software revenues fluctuated during 1995 and the first quarter of 1996 as a
result of costs associated with introduction of new versions of ObjectStore
during 1995 and of several new products, including the Internet Solution Suite,
in the last quarter of 1995 and the first quarter of 1996. Operating expenses
also fluctuated as a result of the Company's restructuring and related
reductions in personnel and facilities expenses in the second and third quarters
of 1995.
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Sales cycles for the Company's customers have historically been up to six
months or longer. In addition, like many software companies, the Company has
generally recognized a substantial portion of its revenues in the last month of
each quarter, with these revenues concentrated in the last weeks of the quarter.
Although the Company believes that its sales cycles will grow shorter as a
result of its strategic realignment, there can be no assurance that this will be
the case. Accordingly, the cancellation or deferral of even a small number of
purchases of the Company's products could have a material adverse effect on the
Company's business, results of operations and financial condition in any
particular quarter. To the extent that significant sales occur earlier than
expected, results of operations for subsequent quarters may fail to keep pace or
even decline.
Because the Company generally ships software products within a short period
after receipt of an order, the Company has not typically had a material backlog
of unfilled orders, and revenues in any quarter have been substantially
dependent on orders booked in that quarter. Product revenues are also difficult
to forecast because the market for database management solutions for the
Internet is uncertain and evolving. The Company's expense levels are based, in
part, on its expectations as to future revenues and to a large extent are fixed.
Therefore, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Any significant shortfall of
demand in relation to the Company's expectations or any material delay of
customer orders would have an almost immediate adverse affect on the Company's
results of operations and on the Company's ability to achieve profitability.
As a result of the foregoing and other factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Fluctuations in operating results may also result in volatility in the price of
the shares of the Company's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through a
combination of sales of Preferred Stock, bank lines of credit and capital and
operating leases. At March 31, 1996, the Company had cash, cash equivalents and
marketable securities of $9.1 million and working capital of $4.3 million.
The Company's operating activities used cash of $2.0 million, $4.3 million,
$6.2 million, and $205,000 in 1993, 1994, 1995, and the quarter ending March 31,
1996, respectively. Cash used in operations during 1993 was primarily due to an
increase in accounts receivable as a result of increased sales. Cash used in
operations in 1994 and 1995 was primarily the result of the Company's net
losses. Cash used in operations during the quarter ending March 31, 1996 was
primarily the result of increases in accounts receivable and decreases in
accrued expenses.
Cash used in investing activities was $11.8 million and $2.4 million in
1993 and 1994, respectively, and due primarily to purchases of marketable
securities and capital expenditures, offset in part in 1994 by sales of
marketable securities. Cash provided by investing activities was $5.9 million in
1995, primarily from sales of marketable securities, offset in part by capital
expenditures. Cash used by investing activities was $3.7 million in the quarter
ending March 31, 1996 and was attributable to purchases of marketable
securities.
Cash provided by financing activities was $13.0 million and $7.3 million in
1993 and 1994, respectively, due primarily to proceeds from issuance of
Preferred Stock and long-term borrowings, offset in part by principal payments
on long-term borrowings and capital leases. Cash used by financing activities
was $486,000 in 1995, primarily due to principal payments on long-term
borrowings and capital leases. Cash provided by financing activities was $4.7
million in the quarter ending March 31, 1996, primarily due to proceeds from
issuance of Preferred Stock.
Capital expenditures, including capital leases, were approximately $2.0
million, $2.7 million, $1.2 million, and $175,000 in 1993, 1994, 1995, and the
quarter ending March 31, 1996, respectively. These expenditures consisted
principally of purchases of property and equipment, primarily computer hardware
and software.
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<PAGE> 33
The Company's revolving credit agreement with Fleet Bank expired in April
1995. At March 31, 1996, the Company had no outstanding borrowings under the
revolving credit line. However, letters of credit in the aggregate amount of
$813,000 issued for the account of the Company under the revolving credit line
were outstanding at that date. Additionally, installment notes in the aggregate
principal amount of $868,000, payable to Fleet Bank at various dates through May
1998 and bearing interest at the Bank's prime rate of interest plus 0.75% to
1.0%, were outstanding at March 31, 1996. The Company intends to repay these
installment notes in full out of the net proceeds of this offering. The letters
of credit and installment notes are collateralized by substantially all the
assets of the Company. The Company's agreements with the Bank contain various
covenants, including financial covenants tested on a quarterly basis, that
require maintenance of a specified quick ratio, leverage ratio and minimum
capital base and prohibit losses in excess of a specified maximum. Upon the
occurrence of an event of default under the Bank agreements that is not waived
by the Bank or cured, the Bank is entitled to, among other things, demand
payment of all outstanding amounts and terminate the letters of credit. The
Company's noncompliance with certain of these covenants during 1995 was waived
by the Bank. At March 31, 1996, the Company was in compliance with the Bank's
covenants.
The Company is in discussions with The First National Bank of Boston with
respect to a new $2.0 million revolving credit facility. There can be no
assurance, however, that the Company will enter into such a new credit facility.
As of March 31, 1996, the Company's primary source of liquidity was its
cash, cash equivalents and marketable securities of $9.1 million. The Company
believes that the net proceeds from this offering, together with current cash,
cash equivalents and marketable securities, its capital leases and funds
generated from operations, if any, will provide adequate liquidity to meet the
Company's capital and operating requirements through at least 1997. Thereafter,
or if the Company's spending plans change, the Company may find it necessary to
seek additional sources of financing to support its capital needs. There can be
no assurance that such financing will be available on commercially reasonable
terms, or at all. See "Risk Factors -- Fluctuations in Operating Results."
ACCOUNTING FOR STOCK OPTIONS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options and other
equity instruments to employees. Although expense recognition for employee
stock-based compensation is not mandatory, SFAS No. 123 requires companies that
choose not to adopt fair value accounting to disclose pro forma net income and
earnings per share under that method. This accounting principle will be
effective for the Company's financial statements for the full year ending
December 31, 1996. The Company believes that adoption of SFAS No. 123 will not
have a material impact on its financial condition or results of operations, as
the Company will not use the fair value method of accounting for stock options,
but will instead comply with the pro forma disclosure requirements.
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<PAGE> 34
BUSINESS
OVERVIEW
Object Design develops, markets, and supports the ObjectStore database
management system and related tools, used to build and deploy Internet, Intranet
and other applications. The Company's database products are designed to handle
the data types and data relationships found on the rapidly expanding World Wide
Web. ObjectStore supports extended data types such as image, free text, video,
audio, HTML and Java software objects, as well as the extended relationships
among data exemplified by the non-tabular, unstructured data found on the
Internet.
The Company's products include the ObjectStore database management system,
Internet Solution Suite, DBconnect and related development and administration
tools. ObjectStore has been designed to provide native support for extended data
types and extended data relationships. As a result, the Company's products
enable its customers to build applications that would be difficult or impossible
to implement with conventional relational, extended-relational or
object-relational database management systems, as well as to reduce development
costs and shorten the time required to develop and deploy applications. The
Company believes that the object oriented architecture, performance, reliability
and extensibility of ObjectStore provide a powerful solution for the rapidly
evolving data management needs of developers of emerging World Wide Web
applications. Among the Company's customers for its new Internet products are
Southwest Airlines and GTE Directories Corporation, each of which has recently
deployed a World Wide Web application based on ObjectStore.
Since its introduction in 1990, ObjectStore has become the market leader in
object databases. ObjectStore has been widely deployed in telecommunications,
finance and engineering design and analysis applications, where rigorous
requirements for high performance, reliability, concurrency and scalability must
be met and where conventional relational databases, due to their limited ability
to accommodate complex, non-tabular data and multi-dimensional data
relationships, have been unable to meet user requirements.
INDUSTRY BACKGROUND
Businesses are continually expanding their use of information technology to
manage their operations and deliver new goods and services to customers. This
expansion has been driven by the need to increase efficiency and responsiveness
in order to compete more effectively and by the rapid pace of innovation and
reduction in cost of computer hardware and software. As a result, information
systems are being used to manage more complex types of data and more varied
types of interrelationships among data. Over time, these trends have resulted in
a need for increasingly powerful and flexible database management systems.
New types of database management systems have emerged as customer needs
have evolved and new computing platforms have been adopted. In the 1970s,
terminal-based on-line processing replaced batch-processing as the dominant mode
of computing. As advances in technology made it feasible for multiple users to
have concurrent access to the same data, database management systems such as
Cullinet's IDMS, which provided data integrity and transaction management
capabilities not available from the simple flat file systems used in
batch-processing applications, achieved widespread acceptance. The minicomputer
revolution in the early 1980s, which made departmental-level computing possible,
created demand for easier access to data, and relational database systems
providing ad hoc query and reporting capabilities proliferated. The shift to the
client/server model of computing created the need for new relational database
management systems optimized for access by desktop clients over heterogeneous
networks. Each of these major shifts in computing platform has driven the
adoption of new database technology which better matches the requirements of new
applications or computing platforms. The Company believes that the computer
industry is undergoing another fundamental platform shift, as the emergence of
the Internet and World Wide Web has once again created the need for a new
generation of database management systems.
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The Internet and the World Wide Web
The Internet is a global collection of thousands of computer networks
interconnected to enable organizations and individuals to communicate, share
information and conduct business electronically. Much of the recent growth of
the Internet has been driven by the development of the World Wide Web. The Web
is a subset of the Internet that takes advantage of graphical user interfaces
and is rich in multimedia content and interactivity.
As the World Wide Web expands, developers are building increasingly
sophisticated and complex applications for Web sites. Early Web sites consisted
of static pages of text and graphics whose main function was to convey the same
information to all users. Now, however, Web site developers are rapidly
enhancing their sites to provide more varied and dynamic experiences to users
visiting the site. In order to attract users to their sites and encourage them
to explore their content, as well as to more effectively convey information, Web
site developers are adding multimedia content in the form of extended data types
such as video and audio. These applications also require the rapid assembly of
data of diverse types from a variety of sources in order to tailor the content
"on the fly." Applications are now being deployed on the Web to enable
electronic commerce, sophisticated data search and retrieval, on-line banking,
electronic publishing and information delivery and other innovative services.
Businesses and organizations are also taking advantage of the capabilities
of the Web to create private networks or "Intranets" that connect employees and
business partners through one or more internal Web sites. Intranet applications
can be deployed rapidly and inexpensively using industry standard Web browsers
and Internet communications protocols. Also, Intranets can link geographically
diverse personnel at communication costs that are largely independent of time
and distance. As a result, Intranet applications are proliferating rapidly
within businesses and organizations.
As a result of these and other trends, the Internet, Intranets and the
World Wide Web are rapidly emerging as a new and fundamentally different type of
computing platform. As access to the Internet becomes easier and less expensive
and as powerful Web browsers that can act as a "universal client" have become
available, applications can be rapidly and cost-effectively built and deployed
over the Web to end users anywhere in the world. The Company believes that the
rapid adoption of the Internet and the Web as a new computing platform is
defining a new set of requirements for database management systems.
Implications of the Internet for Database Management Systems
The key requirements of a database management system to be used in creating
and deploying Internet and Intranet applications include the ability to support
extended data types, the ability to manage extended data relationships, and
support for object oriented programming methodologies.
- SUPPORT FOR EXTENDED DATA TYPES. Internet databases must support
extended data types that go beyond the simple character, numeric, and
date information typically used in traditional business applications and
databases. Extended data types include multimedia data such as audio,
video and image data as well as data types such as spatial data
(geographic or mapping data) and time series data that are not easily
handled by conventional database systems. Each extended data type has
behavior that is particular to its content. For example, image data
stored in various file formats is compressed, converted, rendered and
processed in different ways. For more effective use of multimedia and
other extended data types on the Internet, a database should permit the
functions that define the behavior of the data to be stored and
maintained together with the data. Also, the Web is evolving rapidly and
unpredictably, and new extended data types, such as Java applets and
three-dimensional "virtual reality" data types, continue to emerge.
Consequently, the ability to quickly add support for new data types is a
key requirement for database management systems used with Internet
applications. Relational databases developed to store and manipulate
numerical and text data arranged in tabular form were not designed to
efficiently manage extended data. Also, due to their architectural
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<PAGE> 36
limitations, relational, extended-relational and object-relational
database management systems typically cannot provide support for new data
types without a substantial, time-consuming development effort.
- SUPPORT FOR EXTENDED DATA RELATIONSHIPS. Internet applications often
require support for modeling extended data relationships. These
applications are characterized by complex, dynamic and multi-dimensional
relationships among sets of data that cannot be easily represented, if at
all, in relational tables. To interact with a Web page containing diverse
multimedia content typically requires rapid navigation, search and
retrieval of numerous hierarchically structured collections of data, in
which data elements are linked by multi-dimensional networks of logical
relationships. Relational databases are optimized to perform ad hoc
queries, not browsing and searching, which are the typical modes of
interaction with the Internet. Relational databases are not optimized to
manage the extended relationships of Internet applications, and as a
result may deliver unsatisfactory performance and limited scalability.
- SUPPORT FOR OBJECT ORIENTED PROGRAMMING METHODOLOGIES. Internet
applications increasingly are being built using object oriented languages
such as C++ and Java, which utilize nested, hierarchically organized
structures of reusable software "objects" as basic building blocks. With
these languages, the fundamental unit of data representation is the
software object. When using object oriented programming languages with a
relational database, a tedious translation step is generally required to
map software objects into a two-dimensional tabular relational model. In
using object oriented languages to develop an application for use with a
relational database, much of the application code and development time
must be devoted to solving the mapping problem. In contrast, a database
that natively stores the software objects in the database without
requiring translation results in faster development cycles, fewer lines
of application code and better application performance.
THE OBJECT DESIGN SOLUTION
The Company's ObjectStore database, Internet Solution Suite, DBconnect and
related development and database administration tools provide a powerful data
management solution for building Internet and Intranet applications. ObjectStore
provides native support for extended data types and extended data relationships,
is extensible to accommodate new data types, and enables customers to take full
advantage of object oriented programming languages and methodologies. Since its
introduction in 1990, the Company's customers have used ObjectStore to build
high-performance applications in a variety of challenging production
environments where relational databases were unable to provide adequate
functionality.
Object Design's ObjectStore database was designed to provide native support
for extended data types such as image, audio, video, software objects (e.g.,
Java applets), unstructured text, HTML and others now being used for the
development of Internet and Intranet applications. The Company's Internet
Solution Suite provides advanced capabilities for the storage and manipulation
of extended data types and for the encapsulation of their related behavior
logic, relieving the developer of the need to separately provide for these
routines in the application and improving the performance of the application.
ObjectStore has also been designed to be quickly and easily extensible by the
Company or its customers to add support for new data types. Consequently,
customers can build applications that are adaptable to the rapidly changing
Internet environment. ObjectStore also provides customers with the capability to
model the more complex and extended relationships common to emerging Internet
applications, and to manage such relationships without the performance penalties
often experienced with relational databases.
Because data is represented in the ObjectStore database exactly as it is
used by the object oriented programming languages increasingly being used to
build Internet applications, no data translation is necessary. As a result, the
Company believes that Internet applications can be developed more rapidly and
perform better than if they were developed to run on a relational database. The
open
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architecture of the Company's products provides compatibility with a wide range
of third party applications, tools and programming languages. The Company's
products operate on standard industry hardware platforms and operating systems,
such as Windows 95, Windows NT and UNIX.
STRATEGY
The Company's objective is to be the premier supplier of data management
solutions for Internet applications and other applications that require the
management of extended data types and extended data relationships. Key elements
of the Company's strategy include the following:
- TARGET THE INTERNET COMPUTING MARKET. The Company's primary focus is on
providing data management solutions for the emerging category of
Internet/Intranet computing applications. The Company believes that
growing demand for content-rich Web applications is creating
opportunities for the Company in a broad range of industries, and is
concentrating its product development and sales and marketing resources
on promoting the Company's Internet solutions.
- MAINTAIN AND EXTEND TECHNOLOGY LEADERSHIP. The Company intends to
maintain its technology leadership by focusing its development efforts on
enhancing the performance and scalability of its ObjectStore database and
on providing support for additional extended data types and programming
languages. In addition, the Company intends to continue to enhance its
developer and end-user tools and data access products, to make it easier
to build, deploy and use applications based on ObjectStore.
- FOSTER STRATEGIC RELATIONSHIPS. To accelerate the development and
acceptance of its products, the Company has entered into a variety of
strategic relationships with developers of third-party software, original
equipment manufacturers ("OEMs") and marketing partners. The Company
intends to continue its strategy of incorporating "best of breed"
functionality in its products through relationships such as those under
which it has licensed visual search engine technology from Virage, text
search engine technology from Verity and HTML development tools from
net.Genesis. Additionally, the Company intends to enter joint marketing
partnerships with vendors of complementary products, such as its existing
relationships with Iona Technologies, the developer of the Orbix object
request broker, and Rogue Wave, a provider of third-party class
libraries.
- PROVIDE SUPPORT FOR INDUSTRY STANDARD PLATFORMS AND ENVIRONMENTS. The
Company's products are designed to work with a variety of standard
programming environments and third-party tools and to permit applications
built with ObjectStore to be interfaced, where appropriate, with existing
information systems. The Company intends to continue to pursue this open
systems approach, which allows customers to rapidly deploy applications
using the Company's database products and take advantage of their
existing investments in hardware, software, and network infrastructures.
- EXPAND GLOBAL SALES AND DISTRIBUTION. The Company intends to expand its
global sales capabilities by increasing the size of its direct sales
force and by expanding the number of its systems integrators, independent
software vendors and distributors. In addition, the Company intends to
expand its indirect sales channel by recruiting additional reseller
organizations that specifically target Internet/Intranet application
market opportunities.
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<PAGE> 38
PRODUCTS
The Company's ObjectStore database management system, Internet Solution
Suite, DBconnect and related development and database administration tools
provide a powerful data management solution for customers building Internet and
Intranet applications and other high-performance applications requiring the
management of extended data types and extended data relationships. The following
comprise the Company's product family:
OBJECTSTORE. ObjectStore is an object oriented database management system
that provides native support for both extended data types and extended data
relationships. Since its introduction in 1990, ObjectStore has been successfully
deployed in telecommunications, finance and engineering design and analysis
applications where high performance, reliability, concurrency, and scalability
are core requirements. The ObjectStore database delivers the following key
benefits:
- Provides native storage and management of extended data types such as
multimedia data and software objects without requiring the programmer to
write application code to map extended data types into relational tables.
Storage and handling of extended data types with the related behavior
logic as a single object permits rapid access and processing and
eliminates the requirement to separately provide that behavior logic in
the application. Native storage of extended data types and encapsulation
of behavior logic make possible functions such as content searching on
image data -- for example, to locate an image by shape, color or
texture -- that would be difficult or impossible to implement with a
relational database.
- Is easily extensible to permit the Company or customers to add support
for new data types or add more powerful functions to manipulate existing
data types. Through creation or modification of the class libraries that
describe the data structure and behavior of extended data types,
ObjectStore enables the rapid incorporation of new data types and
additional functions.
- Provides for direct modeling of extended relationships among sets of
data, allowing customers to create applications optimized to navigate and
manipulate complex data structures. Because extended relationships are
stored as direct links in the database, ObjectStore enables an Internet
application to dynamically construct a Web page on demand in response to
user input by rapidly locating and assembling content from a variety of
disparate data sources.
- Provides full support for object oriented programming methodologies.
Because data is stored in the same object oriented format in which it
will be used by the application code, ObjectStore accelerates the
development process and improves application performance by eliminating
the need to map to relational tables. ObjectStore offers customers
several programming language interfaces to the database, including C++,
HTML, SmallTalk, and SQL, with support for OLE/Visual Basic, currently in
beta testing, and a Java programming language interface expected to be
introduced during the second half of 1996.
Prices for all the Company's products vary, based on hardware platform,
configuration, machine class, quantity ordered and other factors. Run-time
licenses for the Company's products are generally priced separately.
The list price of a single-user development license for ObjectStore starts
at approximately $5,000. The list price of a single-user run-time license for
ObjectStore starts at approximately $375.
INTERNET SOLUTION SUITE. This group of products was introduced in March
1996 to enhance the functionality and ease of use of ObjectStore for customers
building Internet and Intranet applications. The Internet Solution Suite
consists of the following components:
ObjectForms. ObjectForms provides connectivity between the
ObjectStore database and standard Web server software through its
Webconnect module. Webconnect allows customers to connect directly through
higher-speed proprietary vendor interfaces such as Netscape's NSAPI or
Microsoft's ISAPI, as well as through the standard Common Gateway Interface
("CGI"). Webconnect also provides automated dispatching capabilities that
permit customers to build and deploy
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<PAGE> 39
high-volume Web sites using the ObjectStore database. ObjectForms includes
the ObjectForms Engine, an HTML development tool designed to automate
database access through HTML extensions and to allow customers to interface
their HTML applications to the ObjectStore database. The ObjectForms
Engine, which is compatible with major HTML authoring tools, increases
developer productivity by automatically formatting information extracted
from the ObjectStore database for presentation within an HTML application.
Extended Object Management Suite. The Extended Object Management
Suite is a set of modules that enables extended data types to be stored and
manipulated as objects by the ObjectStore database. Used individually or in
combination with each other, Extended Object Managers provide storage
management and built-in functions to operate on extended data types. The
Company intends to continue to introduce new Extended Object Managers and
increase the capabilities of existing Extended Object Managers. The
Extended Object Managers currently available are:
Image Object Manager. The Image Object Manager is designed to help
customers build image-rich Internet and multimedia applications. The
Image Object Manager stores, retrieves, indexes and catalogs images, and
also provides functions to translate between common image formats (such
as .GIF, .JPG and .BMP formats). It also provides a powerful
query-by-content capability that permits users to search and retrieve
images from a database based on characteristics of a sample image such
as color or composition. The Company's Image Object Manager includes
visual search engine technology licensed from Virage.
Text Object Manager. The Text Object Manager allows users to store
and retrieve unstructured text in native text formats such as word
processor formats and also includes a built-in capability to perform
free text indexing, search and retrieval. The Text Object Manager
includes text search engine technology licensed from Verity.
Video Object Manager. The Video Object Manager allows users to
manage video clips in common file formats such as MPEG or QuickTime
directly in the database. The Video Object Manager can be used to back
up, archive and index video clips, and to search clips by author, date,
copyright and other identifying information.
Audio Object Manager. The Audio Object Manager allows users to
manage audio clips in common file formats such as MIDI or .AU format
directly in the database. Like the Video Object Manager, the Audio
Object Manager facilitates the back-up, archiving, indexing and
searching of audio clips.
HTML Object Manager. The HTML Object Manager allows users to store
and retrieve HTML text, including words, phrases, paragraphs or entire
HTML pages, as HTML objects. The HTML Object Manager provides users with
the ability to track, manage, globally update and reuse HTML text in Web
applications, and eliminates the cumbersome task of managing HTML data
through file directory structures and complex naming conventions.
Java Object Manager. The Java Object Manager allows users to store
Java applets directly as objects in the ObjectStore database. The Java
Object Manager permits users to index, store, retrieve, back up, and
archive Java software objects natively. The Java Object Manager can
deliver Java applets dynamically to a Web application without the
performance degradation that results from the need to access a file
system or assemble the Java applet into its native object form from a
tabular relational storage format.
The single-quantity list prices of the individual components of the Internet
Solution Suite range from approximately $395 to $19,500.
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<PAGE> 40
DBCONNECT. DBconnect, introduced in December 1995, is a powerful
connectivity tool that allows applications built with the ObjectStore database
to access data stored in existing relational databases. DBconnect provides the
following key benefits:
- Provides automatic conversion capabilities that reduce the need for
developers to write mapping code to translate between object oriented
data types and tabular relational data. For example, in Internet
applications, data from relational databases inside the corporate
security firewall can be accessed via DBconnect and combined with
extended data types stored in an ObjectStore database on a Web server
that hosts a customer's external Web site.
- Provides heterogeneous database access by allowing customers to access
multiple relational databases (such as Oracle, Sybase, and DB2)
simultaneously from within the same application.
- Provides automatic synchronization of data between ObjectStore and
relational databases, allowing application programmers to provide for the
updating of relational databases without having to write complex SQL
commands.
The single-quantity list price for the minimum configuration of DBconnect,
including a development license and ten single-user run-time licenses, is
approximately $30,000.
DEVELOPMENT AND END-USER TOOLS. Object Design provides customers with
tools designed to enhance the ability of developers and end users to build and
deploy applications with the Company's products and to easily access information
stored within the ObjectStore database. The tools currently offered by Company
are:
ObjectStore Inspector. ObjectStore Inspector, introduced in January
1996, is a graphical browser, editor and query tool for the ObjectStore
database. The Inspector product allows developers, database administrators,
and end users to access the ObjectStore database to test and verify
databases, edit data, and perform ad hoc data mining and analysis, using an
intuitive "point-and-click" query tool.
ObjectStore Performance Expert. ObjectStore Performance Expert,
introduced in January 1996, is a graphical, interactive analysis and
monitoring tool designed to provide developers and database administrators
with information necessary to optimize the scalability and concurrency and
tune the performance of ObjectStore-based applications. ObjectStore
Performance Expert organizes and presents large quantities of complex
information to the user through a graphical user interface, enabling rapid
optimization of application performance and increased productivity.
ObjectStore OpenAccess. ObjectStore Open Access, introduced in
February 1996, is a query and reporting interface tool for the ObjectStore
database, implemented through the Microsoft Open Database Connectivity
("ODBC") protocol, that allows customers to use any ANSI or ODBC-compliant
query tool or report generator to extract information from the ObjectStore
database. Customers using OpenAccess can leverage their investment in
third-party tools such as Microsoft Access, Powersoft's PowerBuilder or
Borland's ReportSmith, to perform querying and reporting tasks using
ObjectStore data.
The single-quantity list price of the Company's developer and end user tools
ranges from $995 to $10,000.
SERVICES
The Company believes that providing high-quality services is critical to
ensure customer success and satisfaction, and, accordingly, supplements all of
its product offerings with training, consulting, and technical support services.
The Company has implemented a key account management program in which technical
support personnel are assigned to provide customers with assistance in project
and deployment planning with the objective of more successful implementation of
applications and greater customer satisfaction. The Company also offers
fee-based training, consulting and maintenance and support services.
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<PAGE> 41
Training and Consulting. Training courses are held at various Company
locations around the world or at customers' sites, at fees ranging from $400 to
$2,000 per day. The Company currently offers a schedule of eleven different
training courses covering subjects ranging from introductory object oriented
programming techniques to advanced topics such as database performance tuning
and Internet application design concepts incorporating the Company's Internet
Solution Suite. The Company also provides fee-based consulting services to its
customers in the form of on-site services designed to provide high-leverage
assistance at key points in the customers' product development cycle.
Maintenance and Support Services. Maintenance and support contracts are
offered with the initial software license and typically are renewable annually.
Maintenance and support fees are set at a fixed percentage, generally 15%, of
the current list price of the product. Support services include the maintenance
of the Company's software products in accordance with specifications contained
in the user's guide for such products and access to technical support personnel.
Customers who are under an active software support contract are entitled to
product upgrades and enhancements when released by the Company. Certain of the
Company's distributors and channel partners also provide telephone and initial
support to end users.
CUSTOMERS
The Company has recently changed its product development and marketing
strategy to focus on the Internet and Intranet computing markets. In March 1996,
the Company introduced its Internet Solution Suite of products, specifically
designed to address this market.
The following examples illustrate the ways in which organizations have used
the Company's products to build leading-edge Internet applications for their
businesses:
Southwest Airlines. Southwest Airlines, one of the most innovative and
successful companies in the highly competitive airline industry, has recently
deployed an on-line electronic ticketing application (http://www.iflyswa.com)
using ObjectStore. With Southwest's Internet ticketing system, fare and flight
information is continually updated and is available on the Web at the same time
as through the airline's toll-free number. Customers can use a Web browser to
review flight information, purchase tickets, and print an itinerary and
confirmation number. Because airline reservation information is a
multi-dimensional matrix of cities, departure and arrival times, fares and seat
availabilities, the data model for the application consists of complex, extended
relationships. Southwest Airlines chose ObjectStore because of its support for
extended relationships and resulting superior performance in navigating and
retrieving flight information. By using extended relationships instead of
relational joins to traverse the web of reservation information, ObjectStore is
able to execute complex searches and quickly return flight schedules and fares
to customers, making the reservation system faster and more convenient for
Southwest Airline's Internet commerce customers.
GTE Directories Corporation. GTE Directories, a unit of GTE Corporation
and one of the world's largest telephone directory companies, selected
ObjectStore and components of the Company's Internet Solution Suite to build and
deploy an innovative on-line Internet business directory called GTE
SuperPages(SM) (http://superpages.gte.net). With over ten million listings,
GTE's SuperPages(SM) enables users to search for business information based on
category, name, location, telephone number, and other parameters. The
SuperPages(SM) application also allows businesses to include advertisements and
links to other Web sites with their listings. GTE's SuperPages(SM) Web site
earned a "Top Five Percent of the Web" ranking from Point Communications, which
provides independent evaluations of Web sites. GTE selected ObjectStore because
of its ability to support extended data types which will enable GTE to rapidly
add new features and capabilities and its support for extended relationships,
which is necessary to meet the SuperPages(SM) Web site's high-volume traffic
requirements. ObjectStore's native support for the object oriented programming
language which was being used to develop the SuperPages(SM) Web application was
another important factor in GTE's choice.
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The Company's Internet Solution Suite was introduced only in March 1996,
and to date only a limited number of the Company's customers have used
ObjectStore to build and deploy Web applications. As a result, there can be no
assurance that the Company's Internet-related products and services will achieve
market acceptance, or that customers will not experience difficulties or
unfavorable results in using the Company's products to build and deploy Web
applications.
Although the Company's revenues from licensing of its new Internet products
have not been material to date, since 1993 the Company has licensed over 20,000
copies of its software and has provided products and services to approximately
1000 customers. Although the Company's installed base includes customers in a
wide variety of industries, the Company's historical market penetration has
predominantly been in the telecommunications and network management, finance and
engineering design and analysis industries, where rigorous requirements for high
performance, reliability, concurrency and scalability must be met and where
conventional relational database systems have been unable to meet the challenge
of managing extended data types and extended data relationships while providing
acceptable performance. The following is a representative list of the Company's
customers that have licensed ObjectStore, each of which has accounted for at
least $100,000 of revenue since January 1, 1994.
<TABLE>
<S> <C>
AT&T Lehman Brothers
Abbott Laboratories Long-Term Credit Bank of Japan
Apertus Loral
Bankers Trust Manugistics
BayNetworks MCI
Bell Northern Research Mead Data Central
BellSouth NASA
British Telecom New York Stock Exchange (SIAC)
Cabletron Nomura
Cellnet Data Systems Northern Telecom
Credit Suisse Pitney Bowes
Fidelity Management and Research Platinum Technology
Ford Motor Company Sandia National Laboratory
GPT Schlumberger
Hewlett-Packard Sterling Software
Hughes Information Systems Sun Microsystems
IDD Information Services Telecom Australia
Intergraph Universal Oil Products
</TABLE>
Other than IBM, a principal stockholder of the Company, which accounted for
40.2% and 10.9% of the Company's total revenue in 1993 and in the three months
ended March 31, 1996, respectively, no customer accounted for more than 10% of
the Company's total revenue in 1993, 1994, 1995 or the three months ended March
31, 1996.
SALES AND MARKETING
The Company employs a multi-channel sales and marketing strategy, using
direct sales, systems integrators, independent software vendors, distributors
and other channel partners to address its global market.
DIRECT SALES. The Company has historically relied principally on direct
sales of its products. The Company has structured its direct sales force in
teams consisting of a field sales representative and a technical sales support
representative. As of May 31, 1996, the Company's direct sales force consisted
of 60 employees. In addition to its Burlington, Massachusetts headquarters, the
Company has domestic sales locations in Atlanta, Chicago, Cincinnati, Dallas,
Los Angeles, Melbourne, FL, New York, San Mateo, CA and Washington, DC, and
international direct sales locations in Brussels, London, Paris,
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<PAGE> 43
Tokyo and Weisbaden. The Company intends to hire additional sales and support
personnel to broaden its direct selling effort and distribution capabilities.
CHANNEL PARTNER PROGRAMS. The Company conducts programs aimed at
attracting systems integrators, independent software vendors and resellers to
complement its direct sales force and broaden the worldwide penetration of the
Company's products. The Company's systems integration partners include Alta
Software, Andersen Consulting, GlobalWeb, Indus, SAIC and TASC. The Company
intends to continue to expand its channel partner programs to attract additional
channel partners that have specifically targeted Internet and Intranet
applications.
INTERNATIONAL DISTRIBUTORS. In certain international markets, the Company
uses third party distributors and resellers that are supported by the Company's
sales organization. Approximately 2.6%, 8.5%, 12.9% and 11.6% of the Company's
total revenues were derived from sales to international distributors in 1993,
1994, 1995 and the three months ended March 31, 1996, respectively. The Company
intends to increase the number of its international distributors.
In support of its sales efforts, the Company conducts sales training
courses, targeted marketing programs including direct mail, trade shows, public
relations, advertising, seminars, and ongoing customer and third party
communications programs. The Company also seeks to stimulate interest in its
products and services through speaking engagements, white papers, technical
notes and other publications. The Company has also established a home page on
the World Wide Web where potential customers can obtain information about the
Company's products.
RESEARCH, DEVELOPMENT, AND QUALITY ASSURANCE
The Company believes that its future success will depend in large part on
its ability to maintain and enhance its leadership in object oriented database
technology and develop new products that meet an expanding range of customer
requirements, particularly those customer requirements associated with the
Company's focus on Internet and Intranet applications. The Company's research
and development organization is divided into teams consisting of development
engineers, quality assurance, testing, and porting engineers, and technical
writers. Product definition is based on a consolidation of requirements from
existing and prospective customers and from the Company's technical support,
product management, and engineering groups.
The Company's research and development is focused on development of new
products and enhancement of the functionality of the Company's existing
products. The Company currently plans to release enhancements of its existing
products and several new products, including a programming language interface
for OLE/Visual Basic, currently in beta testing, and a Java programming language
interface expected to be introduced during the second half of 1996. The
Company's scheduled release dates for products and product enhancements are
forward-looking statements, and the actual release dates for such products and
enhancements could differ materially from those stated as a result of a variety
of factors, including the ability of the Company's engineers to solve technical
problems and test products as well as other factors, including factors outside
the Company's control. As of May 31, 1996, there were 51 employees on the
Company's research and development staff. The Company's research and development
expenditures during 1993, 1994, 1995, and the three months ending March 31,
1996, were $4.7 million, $9.5 million, $8.3 and $1.8 million, respectively, and
represented 19.2%, 37.3%, 25.4%, and 20.1% of total revenues, respectively. The
Company expects it will continue to commit substantial resources to product
development in the future.
The computer software industry is subject to rapid technological change,
changing customer requirements, frequent new product introductions, and evolving
industry standards that may render existing products and services obsolete. As a
result, the Company's position in its existing markets or other markets that it
may enter could be eroded rapidly by product advancements by its competitors.
The life cycles of the Company's products are difficult to estimate. The
Company's future successes will depend, in part, on its ability to enhance
existing products and develop new products on a timely basis. In addition, its
products must keep pace with technological developments and conform to
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evolving industry standards including new extended data types, new electronic
publishing formats and new client/server and Internet communication and security
protocols. 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, or that new products and product
enhancements will meet the requirements of the marketplace or achieve market
acceptance. If the Company is unable to develop and introduce products in a
timely manner in response to changing market conditions or customer
requirements, the Company's business, results of operations and financial
condition would be materially and adversely affected.
Software products as complex as those offered by the Company may contain
errors that may be detected at any point in the products' life cycles. The
Company has in the past discovered software errors in certain of its products
and has experienced delays in shipments of products during the period required
to correct these errors. There can be no assurance that, despite testing and
quality assurance efforts by the Company and by current and potential customers,
errors will not be found, or product shipment delays will not occur, resulting
in loss of or delay in market acceptance and sales, diversion of development
resources, injury to the Company's reputation or increased service and warranty
costs, any of which could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Risk
Factors -- Risks Associated with Product Development and Introduction."
COMPETITION
The market in which the Company competes is intensely competitive, highly
fragmented, and characterized by rapidly changing technology and standards. The
Company's current and prospective competitors offer a variety of database
solutions, including: object databases available from Computer Associates,
GemStone, Objectivity, O2, Poet and Versant; relational databases available from
Computer Associates, IBM, Informix, Microsoft, Oracle and Sybase;
extended-relational and object-relational databases available from IBM,
Informix, Oracle and UniSQL; and other specialized databases such as on-line
analytical processing databases. The Company has experienced and expects to
continue to experience increased competition from current and potential
competitors, many of which have significantly greater financial, technical,
marketing, and other resources than the Company, and many of which have well
established relationships with current and potential customers of the Company.
In the future, the Company expects to experience increased competition from
established vendors of relational database systems that may seek to offer
extended-relational, object-relational or object oriented database management
systems. It is also possible that alliances among competitors may emerge and
rapidly acquire significant market share. The Company also believes that
competition will increase as a result of software industry consolidation.
Increased competition may result in price reductions, reduced gross margins, and
loss of market share, any of which would materially adversely affect the
Company's business, results of operations and financial condition. The can be no
assurance the Company will be able to compete effectively against current and
future competitors. See "Risk Factors -- Competition."
The Company believes that the principal competitive factors affecting its
market include product features and functionality, ease of use, quality,
performance, price, customer service and support, effectiveness of sales and
marketing efforts and company reputation and financial viability. Although the
Company believes that it currently competes effectively with respect to such
factors, there can be no assurance that the Company will be able to maintain its
competitive position with respect to these and other important competitive
factors.
PROPRIETARY TECHNOLOGY
The Company relies on a combination of trademark, copyright, trade secret
laws, employee and third-party non-disclosure agreements, confidentiality
procedures and contractual provisions to protect its proprietary technology. The
Company seeks to protect its software, documentation, and other written
materials under trade secret and copyright laws, which offer limited protection.
The Company
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currently has one United States patent, covering certain virtual memory mapping
architecture used in its ObjectStore database management system. There can be no
assurance that the Company's patent will not be invalidated, circumvented, or
challenged, that the rights granted thereunder will provide competitive
advantage to the Company or that any future patent applications will be issued
with the scope of the claims sought by the Company. 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 technologies. There
can also be no assurance that the measures taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of the
technology or independent development of similar technology by others. Certain
of the Company's software products are licensed to customers under "shrink wrap"
licenses included as part of the product packaging. Although in larger sales the
Company's shrink wrap licenses are generally accompanied by specifically
negotiated agreements signed by the licensee, in many cases its shrink wrap
licenses are not negotiated with or signed by individual licensees. Certain
provisions of the Company's shrink wrap licenses, including provisions
protecting against unauthorized use, copying, transfer and disclosure of the
licensed program, may be unenforceable under the laws of certain jurisdictions.
In addition, the laws of various countries in which the Company's products may
be sold may not protect the Company's products and intellectual property rights
to the same degree 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. If infringement
is alleged, the Company could be required to discontinue the use of certain
software or to cease the use and sale of infringing products, to incur
significant litigation costs and expenses and to develop non-infringing
technology or to obtain licenses to the alleged infringing technology. There can
be no assurance that the Company would be able to develop alternative
technologies or to obtain such licenses or, if a license were obtainable, that
the terms would be commercially acceptable to the Company. The Company is not
aware of any patent infringement charge or any violation of other proprietary
rights claimed by any third party relating to the Company or to the Company's
products. However, the computer software market is characterized by frequent and
substantial intellectual property litigation. Intellectual property litigation
is complex and expensive, and the outcome of such litigation is difficult to
predict. The Company believes that, due to the rapid pace of technological
innovation for database software products, the Company's ability to establish
and maintain a position of technology leadership in the industry is dependent
more upon the skills of its development personnel than upon the legal
protections afforded its existing technology. See "Risk Factors -- Reliance on
Proprietary Technology."
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used to perform key functions such as the relational
database engine licensed from Dharma Systems and incorporated in the Company's
DBconnect and OpenAccess products, visual and text search engine technology
licensed from Virage and Verity and HTML development tools licensed from
net.Genesis. In addition, the Company has licensed technology from IBM for use
in its ObjectStore Performance Expert product and technology from ViVi Software,
for use in its ObjectStore Inspector product. The agreement with net.Genesis
conveys a fully paid license to use the net.Genesis technology in the Company's
products. The other licensing agreements require the Company to pay royalties to
the licensors upon sale of the Company's products containing the licensed
technology. The Company believes these licensing agreements contain commercially
reasonable terms for such agreements. As of the date of this Prospectus, all
minimum royalties due to the licensing parties have been paid by the Company.
However, there can be no assurance that these third-party software licenses will
continue to be available to the Company on commercially reasonable terms, if at
all. The loss of, or inability to maintain, any such software licenses could
result in shipment delays or reductions until equivalent software could be
developed, identified, licensed and integrated, and could materially adversely
affect the Company's business, operating results, and financial condition. See
"Risk Factors -- Reliance on Third-Party Software."
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EMPLOYEES
As of May 31, 1996 the Company employed 204 persons, including 51 in
research and development, 69 in sales and marketing, 55 in customer support, and
29 in finance and administration. None of the Company's employees is represented
by a labor union and the Company considers its employee relations to be good.
FACILITIES
The Company's corporate headquarters are located in Burlington,
Massachusetts, in a leased facility consisting of approximately 34,000 square
feet of office space occupied under a lease expiring in November 2001. The
Company also leases space for sales offices in fourteen additional locations
worldwide. The Company believes that its existing facilities and offices and
additional space available to it are adequate to meet its requirements over the
next twelve months.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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MANAGEMENT
<TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert N. Goldman.............. 47 President, Chief Executive Officer and Director
Justin J. Perreault............ 33 Executive Vice President and Chief Operating
Officer
Robert J. Potter............... 42 Senior Vice President, Sales
Brian W. Otis.................. 37 Vice President, Professional Services
Melissa Webster................ 45 Vice President, Marketing
Gregory A. Baryza.............. 49 Vice President, Product Development
Lacey P. Brandt................ 38 Chief Financial Officer
Gerald B. Bay(1)............... 56 Director
Arthur J. Marks(2)............. 51 Director
Tim R. Palmer(1)............... 38 Director
Scott Sperling(2).............. 38 Director
Steven C. Walske............... 44 Director
<FN>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
</TABLE>
Mr. Goldman was elected President and Chief Executive Officer of the
Company in November 1995. He has been a director of Object Design since August
1995. Prior to joining the Company, Mr. Goldman was Chairman of Trinzic
Corporation, a supplier of client/server development software, from 1992 to
1995. Trinzic was formed by the merger of AICorp and AION Corporation in 1992.
From 1986 to 1992, Mr. Goldman served as President and Chief Executive Officer
of AICorp, a supplier of artificial intelligence software. From 1983 to 1986,
Mr. Goldman served as President and Chief Operating Officer of Cullinet
Software, a supplier of database management software. Mr. Goldman is a member of
the board of directors of Citrix Systems, Inc., Intersolv Inc., Parametric
Technology Corporation and Systemsoft Corporation.
Mr. Perreault joined the Company as Executive Vice President and Chief
Operating Officer in November 1995. From 1992 to 1995, Mr. Perreault was a Vice
President with the Harvard Private Capital Group, Inc., which manages the direct
investment portfolio of the Harvard University endowment fund and is a
wholly-owned subsidiary of the President and Fellows of Harvard College. From
May 1995 to December 1995 he served on the Board of Directors of the Company as
the representative of the Harvard Private Capital Group, Inc. From 1990 to 1992,
Mr. Perreault was a management consultant with McKinsey & Co., Inc. Mr.
Perreault is a member of the board of directors of Kentek Information Systems,
Inc.
Mr. Potter joined the Company as Vice President of Sales in 1990, and was
appointed Senior Vice President of Sales in 1994. From 1988 to 1989, Mr. Potter
was Vice President of Marketing of Concentra, Inc., a mechanical engineering
design software company.
Mr. Otis joined Object Design as Consulting Manager, Eastern Region in 1993
and was promoted to Vice President, Professional Services in June 1995. From
1987 to 1993, Mr. Otis was a management consultant with Coopers & Lybrand L.L.P.
Ms. Webster joined Object Design as Vice President, Marketing in April
1996. From 1993 to December 1995, Ms. Webster was employed by UniSQL, a
developer of database management software, most recently as Vice President of
Marketing. From 1978 to 1993, Ms. Webster held a variety
44
<PAGE> 48
of positions at Information Builders, Inc., a developer of software languages
and tools, including Vice President and General Manager, Digital Division.
Mr. Baryza joined Object Design as Director of Engineering Operations in
1993 and was promoted to Vice President, Product Development in August 1995.
From 1988 to 1993, Mr. Baryza was employed in various management and technical
positions at Stratus Computer, Inc., a computer manufacturer.
Ms. Brandt joined Object Design as Chief Financial Officer in April 1996.
From September 1995 to April 1996, Ms. Brandt served as Director of Finance,
Controller and Treasurer of International Integration Inc., a systems
integration company. From 1993 to September 1995, Ms. Brandt was Director of
Investor Relations at Proteon, Inc., a data networking company. From 1991 to
1992, Ms. Brandt was Finance Manager at AICorp.
Mr. Bay has been a director of the Company since 1988. Since 1980, Mr. Bay
has been a Managing Partner of The Vista Group, a venture capital firm. Mr. Bay
served as interim President of the Company from August to November 1995.
Mr. Marks has been a director of the Company since 1990. Since 1984, Mr.
Marks has been a General Partner of New Enterprise Associates, a venture capital
firm. Mr. Marks is a director of AMISYS Managed Care Systems, Inc., Platinum
Software, Inc., NETRIX Corporation, and Progress Software Corporation.
Mr. Palmer has been a director of the Company since February 1996. Mr.
Palmer is a Managing Director of Harvard Private Capital Group, Inc., which
manages the private equity portfolio of the Harvard University endowment fund.
Prior to joining Harvard Private Capital in 1990, Mr. Palmer was Manager,
Business Development at The Field Corporation and an attorney with Sidley &
Austin. Mr. Palmer serves on the board of directors of PriCellular Corporation
and NHP Incorporated.
Mr. Sperling has been a director of the Company since 1988. Since 1994, Mr.
Sperling has been a Managing Director of the Thomas H. Lee Company, a private
equity investment firm, and a General Partner of its affiliated equity funds.
From 1984 to 1994, he was a Managing Partner of Harvard Private Capital Group,
Inc. Mr. Sperling is a director of Beacon Properties Corp., Softkey
International and Livent, Inc.
Mr. Walske has been a director of the Company since 1994. Since 1994, Mr.
Walske has been Chairman of the Board and Chief Executive Officer of Parametric
Technology Corporation, a mechanical design automation software firm. From 1986
to 1994 Mr. Walske was President and Chief Executive Officer of Parametric
Technology Corporation. Mr. Walske is a director of Synopsys, Inc., VideoServer,
Inc. and Cascade Communications, Inc.
Upon the closing of this offering, the Board of Directors will be divided
into three classes. One class of directors will be elected each year at the
annual meeting of stockholders for a term of office expiring after three years.
Messrs. Bay and Palmer will serve in the class whose term expires in 1997;
Messrs. Marks and Walske will serve in the class whose term expires in 1998; and
Messrs. Goldman and Sperling will serve in the class whose term expires in 1999.
Each director serves until the expiration of his or her term and thereafter
until his or her successor is duly elected and qualified. Executive officers of
the Company are elected annually by the Board of Directors and serve at its
discretion or until their successors are duly elected and qualified.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee, which makes
recommendations concerning salaries and incentive compensation for employees of
and consultants to the Company and administers the Company's stock option plans,
its Stock Purchase Plan and the 401(k) Plan. The members of the Compensation
Committee currently are Messrs. Marks and Sperling. The Board of Directors also
has an Audit Committee, which reviews the results and scope of the audit and
other
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<PAGE> 49
services provided by the Company's independent accountants. The members of the
Audit Committee currently are Messrs. Bay and Palmer.
BOARD COMPENSATION
Each non-employee director of the Company serves without compensation but
is reimbursed, upon request, for expenses incurred in attending meetings of the
Board of Directors. Directors who are employees of the Company are not paid any
separate fees for serving as directors. In March 1994, Mr. Walske was granted a
nonqualified stock option to purchase 12,000 shares of Common Stock at an
exercise price of $3.50 per share. In November 1995, Messrs. Bay, Sperling and
Walske were granted nonqualified stock options to purchase 100,000 shares,
50,000 shares and 50,000 shares of Common Stock, respectively, in each case at
an exercise price of $0.50 per share. In November 1995, Mr. Bay, who had been
serving without compensation as interim President of the Company since August
1995, was also granted a nonqualified option to purchase an additional 75,000
shares of Common Stock, at an exercise price of $0.01 per share. The Company
recognized non-cash compensation expense in the amount of $36,750 in the fourth
quarter of 1995 in connection with the grant of this option to Mr. Bay.
Under the Company's 1996 Incentive and Nonqualified Stock Option Plan
adopted by the Board of Directors in May 1996, non-employee directors of the
Company are eligible to receive automatic formula grants of nonqualified
options. See "-- Stock Option Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995, the entire Board of Directors performed the functions of the
Compensation Committee. Of the members of the Board of Directors who served
during 1995, Robert N. Goldman, Gerald B. Bay, Justin J. Perreault, Thomas
Atwood and Kenneth Marshall also were executive officers or employees of the
Company during 1995. Except as set forth below, no executive officer of the
Company served during 1995 on the Board of Directors or compensation committee
of any entity, one of whose executive officers also served on the Board of
Directors or Compensation Committee of the Company. During 1995, Robert N.
Goldman, the Company's Chairman of the Board, President and Chief Executive
Officer, served as a director of Parametric Technology Corporation, of which
Steven C. Walske, a director of the Company, is Chairman of the Board and Chief
Executive Officer. Mr. Goldman also served as a member of the compensation
committee of Parametric Technology Corporation during 1995.
46
<PAGE> 50
EXECUTIVE COMPENSATION
<TABLE>
SUMMARY OF CASH AND OTHER COMPENSATION
The following table provides certain summary information concerning
compensation earned in the year ended December 31, 1995 by the Company's
President and Chief Executive Officer, by each other person who served in the
capacity of Chief Executive Officer at any time during the year, by the
Company's other executive officers in office at December 31, 1995 who earned in
excess of $100,000 during 1995, by the Company's two most highly compensated
executive officers not in office on December 31, 1995 who earned in excess of
$100,000 during 1995, and by the Company's Executive Vice President and Chief
Operating Officer (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
----------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS (#) COMPENSATION($)(2)
- --------------------------- --------- -------- ------------------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
Robert N. Goldman.......... $ 47,726 -- -- 2,300,000 $ 484
President and Chief
Executive Officer(3)
Justin J. Perreault........ 22,759 -- -- 460,000 421
Executive Vice President
and Chief
Operating Officer(4)
Robert J. Potter........... 95,475 $173,617 -- 80,000 583
Senior Vice President,
Sales(5)
Gregory A. Baryza.......... 114,885 -- -- 65,000 284
Vice President, Product
Development
Brian W. Otis.............. 90,852 73,656 -- 54,000 228
Vice President,
Services(6)
David Stryker.............. 137,500 -- -- 56,000 27,752
Former Vice President,
Technology(7)
Kenneth E. Marshall........ 183,333 -- -- 389,625 1,335
Former President,
Chairman, Chief
Executive Officer
and Treasurer(8)
Gerald B. Bay.............. -- -- -- 175,000 --
Former President(9)
Thomas Atwood.............. 147,500 -- -- 35,000 390
Former Chairman(10)
<FN>
- ---------------
(1) Other annual compensation in the form of perquisites and other personal
benefits has been omitted because the aggregate amount of such perquisites
and other personal benefits constituted less than $50,000 or 10% of each
executive's total annual salary.
(2) Except in the case of Mr. Stryker, consists solely of premiums paid on
behalf of named executives for excess life insurance coverage.
(3) Mr. Goldman's annual compensation includes $20,700 paid to him for his
services as a consultant to the Company prior to his becoming an employee
of the Company in November 1995. Mr. Goldman's 1995 salary was $176,700 on
an annualized basis.
</TABLE>
47
<PAGE> 51
(4) Mr. Perreault joined the Company as an employee in November 1995. Mr.
Perreault's 1995 salary was $148,800 on an annualized basis.
(5) Mr. Potter's annual compensation in 1995 included a $6,000 automobile
allowance. The amount shown as bonus represents sales-based commissions.
(6) Mr. Otis's annual compensation in 1995 included a $6,000 automobile
allowance. The amount shown as bonus represents sales-based commissions.
(7) Mr. Stryker left the Company in November 1995. "All Other Compensation" to
Mr. Stryker includes a $390 life insurance premium payment, a $12,500
severance payment and a $14,862 payment in lieu of accrued vacation.
(8) Mr. Marshall resigned as President, Chief Executive Officer and Treasurer
of the Company in May 1995 and as Chairman of the Board of the Company in
August 1995. Mr. Marshall's annual compensation includes $83,333 paid to
him for his services as a consultant to the Company during 1995.
(9) Mr. Bay, a long-serving Director, served as interim President of the
Company without cash compensation while leading the Company's efforts to
recruit a new President and Chief Executive Officer.
(10) Mr. Atwood resigned as Chairman of the Board in June 1995. He remains an
employee of the Company through September 1996 pursuant to a severance
arrangement. See "--Severance Agreements."
STOCK OPTION PLANS
The Board of Directors adopted on May 23, 1996, and the stockholders of the
Company approved by written consent in July 1996, the Company's 1996 Incentive
and Nonqualified Stock Option Plan of the Company (the "1996 Stock Option
Plan").
The 1996 Stock Option Plan authorizes (i) the grant of options to purchase
Common Stock intended to qualify as incentive stock options ("Incentive
Options"), as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") and (ii) the grant of options that do not so qualify
("Nonqualified Options"). Options to purchase up to 2,700,000 shares of Common
Stock may be granted under the 1996 Stock Option Plan, provided that prior to
May 23, 1997, options to purchase no more than 1,200,000 shares of Common Stock
may be issued under the Plan, with such number increasing by 300,000 on each of
the first five anniversaries of the adoption of the Plan by the Board of
Directors, up to a maximum of 2,700,000 shares.
The Company's 1989 Incentive and Nonqualified Stock Option Plan (the "1989
Plan") was adopted by the Board of Directors and approved by the stockholders of
the Company in June 1989. The Company's 1995 Nonqualified Stock Option Plan (the
"1995 Plan") was adopted by the Board of Directors in June 1995 and approved by
the stockholders of the Company in August 1995. The 1989 Plan and the 1995 Plan
are hereinafter sometimes referred to collectively as the "Original Stock Option
Plans," and the Original Stock Option Plans and the 1996 Stock Option Plan are
hereinafter sometimes referred to as the "Stock Option Plans." As of June 30,
1996, options to purchase an aggregate of 3,546,559 shares having a weighted
average exercise price of $1.20 per share were outstanding under the Stock
Option Plans and options for 3,577,161 shares had been exercised. No further
options may be granted under either of the Original Stock Option Plans.
The Stock Option Plans are administered by a committee of the Board of
Directors (the "Committee") consisting of the non-employee directors of the
Company, currently Messrs. Marks and Sperling. All members of the Committee are
intended to be "disinterested persons" as that term is defined under rules
promulgated by the Securities and Exchange Commission. The Committee selects the
individuals to whom options will be granted and determines the option exercise
price and other terms of each option, subject to the provisions of the Stock
Option Plans.
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<PAGE> 52
Incentive Options may be granted under the 1996 Stock Option Plan to
employees and officers of the Company or a subsidiary, including members of the
Board of Directors who are also employees of the Company or a subsidiary.
Nonqualified Options may be granted under the Stock Option Plans to officers or
other employees of the Company or a subsidiary, to members of the Board of
Directors or the board of directors of a subsidiary, whether or not employees of
the Company or a subsidiary, and to consultants and other individuals providing
services to the Company or a subsidiary.
The 1996 Stock Option Plan also provides for automatic formula grants of
Nonqualified Options to non-employee directors of the Company ("Outside
Directors"). Each Outside Director (i) who is in office immediately after the
closing of this offering who holds no outstanding stock option granted to him in
his capacity as a director (a "Prior Option") or (ii) who is elected to the
Board after the closing of this offering will automatically be granted,
immediately after the closing of this offering or upon his or her initial
election, as the case may be, a Nonqualified Option (an "Initial Option") to
purchase 25,000 shares of Common Stock of the Company, vesting in equal
installments on the first three anniversaries of the date of grant (provided
that the optionee then remains a director of the Company). In addition,
immediately following each annual meeting of stockholders of the Company or
special meeting in lieu thereof, there will automatically be granted to each
Outside Director reelected at or remaining in office after such meeting a
fully-vested Nonqualified Option to purchase 3,500 shares of Common Stock (an
"Additional Option"), provided that no such Additional Option will be granted to
any Outside Director who at the time of the meeting holds any outstanding
Initial Option or Prior Option that is not fully vested, unless at least two
annual meetings of stockholders of the Company or special meetings in lieu
thereof have intervened between the closing of the Company's initial public
offering (or, if later, the date of the initial election of such Outside
Director) and the meeting following which such automatic grant would occur. Each
Nonqualified Option granted to an Outside Director pursuant to this provision of
the 1996 Stock Option Plan will expire on the tenth anniversary of the date of
grant. The exercise price of each such Nonqualified Option will be equal to the
fair market value of the Common Stock on the date the Nonqualified Option is
granted.
No options may extend for more than ten years from the date of grant (five
years in the case of employees or officers holding ten percent or more of the
total combined voting power of all classes of stock of the Company or any
subsidiary or parent ("greater-than-ten-percent-stockholders")). The exercise
price for all options may not be less than the fair market value of the Common
Stock on the date of grant (110% of fair market value in the case of an
Incentive Option granted to a greater-than-ten-percent-stockholder). The
aggregate fair market value (determined at the time of grant) of shares issuable
pursuant to Incentive Options which first become exercisable by an employee or
officer in any calendar year may not exceed $100,000. Any option granted in
excess of the foregoing limitation shall be specifically designated as a
Nonqualified Option.
Options are non-transferable except by will or by the laws of descent or
distribution. Generally, options granted under the Stock Option Plans terminate
upon the earliest of (i) the expiration date of the option, (ii) the date of
termination of the optionee's employment with or performance of services for the
Company by the Company for cause or by the optionee for any reason other than
death or permanent and total disability, (iii) thirty days after the termination
of the optionee's employment with or performance of services for the Company by
the Company without cause other than for death or permanent and total disability
and (iv) one year after the date of termination of the optionee's employment
with or performance of services for the Company as a result of the permanent and
total disability of the optionee. If an option may be exercised during any
period after the termination of the optionee's employment with or performance of
services for the Company, such option may be exercised only to the extent that
the optionee was entitled to exercise such option at the time of such
termination of employment or performance of services.
Payment of the exercise price for shares subject to options may be made (i)
in cash or by check, bank draft or money order payable to the order of the
Company, (ii) through the delivery of shares of Common Stock (which, in the case
of shares acquired from the Company upon exercise of an option, have been
outstanding for at least six months) having a fair market value equal to the
purchase price,
49
<PAGE> 53
(iii) by delivery of an unconditional and irrevocable undertaking by a broker to
deliver promptly to the Company sufficient funds to pay the exercise price, (iv)
by delivery of a promissory note, or (v) by any combination of these permissible
forms of payment. In the event that payment of the exercise price is made under
(ii) above, the 1996 Stock Option Plan permits the grant of an automatic reload
option covering the number of shares surrendered at an exercise price equal to
the fair market value of the Common Stock on the date of such surrender.
<TABLE>
OPTION GRANTS DURING 1995
During 1995, the Company granted options under the Original Stock Option
Plans to purchase an aggregate of 5,615,400 shares of Common Stock at a weighted
average exercise price of $0.57 per share. The following table sets forth for
each of the Named Executive Officers information concerning stock options
granted under the Original Stock Option Plans during the year ended December 31,
1995:
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT
------------------------------------------------------- ASSUMED ANNUAL RATE OF
% OF TOTAL STOCK PRICE APPRECIATION FOR
OPTIONS OPTIONS GRANTED EXERCISE OR OPTION TERM(1)
GRANTED TO EMPLOYEES IN BASE PRICE EXPIRATION ----------------------------------
NAME (#)(2) FISCAL YEAR ($/SHARE)(3) DATE 0% 5% 10%
---- --------- --------------- ------------ ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert N. Goldman(4)........... 2,300,000 41.0% $0.25 12/20/05 -- $ 361,614 $ 916,402
Justin J. Perreault(4)......... 460,000 8.19 0.25 12/20/05 -- 72,323 183,280
Robert J. Potter............... 15,000 0.27 0.50 8/31/05 -- 4,716 11,953
15,000 0.27 0.50 8/31/05 -- 4,716 11,953
50,000 0.89 0.01 11/30/05 -- 19,861 31,922
Gregory A. Baryza.............. 10,000 0.18 3.50 12/31/04 -- 22,011 55,781
5,000 0.09 0.50 8/20/05 -- 1,572 3,984
25,000 0.45 0.50 8/31/05 -- 7,861 19,922
10,000 0.18 0.50 12/31/04 -- 3,144 7,969
25,000 0.45 0.01 11/30/05 $ 6,000 9,931 15,961
Brian W. Otis.................. 25,000 0.45 3.50 7/17/05 -- 55,028 139,452
4,000 0.07 0.50 8/31/05 -- 1,258 3,187
3,500 0.06 0.50 8/31/05 -- 1,101 2,789
1,500 0.03 0.50 8/31/05 -- 472 1,195
25,000 0.45 0.50 7/17/05 -- 7,861 19,922
David Stryker.................. 56,000 1.00 0.50 8/31/05 -- 17,609 44,625
Kenneth E. Marshall(5)......... 290,250 5.17 0.10 6/30/00 986,850 1,267,518 1,607,052
15,000 0.27 0.20 6/30/00 49,500 64,005 81,522
23,375 0.42 0.25 6/30/00 75,969 98,572 125,916
21,000 0.37 0.75 6/30/00 57,750 78,057 102,622
25,000 0.45 3.00 6/30/00 12,500 36,675 65,920
15,000 0.27 6.00 6/30/00 -- -- --
Gerald B. Bay.................. 75,000 1.34 0.01 9/20/05 36,750 60,334 96,515
100,000 1.78 0.50 9/20/05 -- 31,445 79,687
Thomas Atwood.................. 35,000 0.62 0.50 8/31/05 -- 11,006 27,890
<FN>
- ---------------
(1) Amounts reported in this column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration of
their term, assuming the specified compounded rates of appreciation of the
Company's Common Stock, based on the original exercise price of each option,
over the term of the options. These numbers are calculated based on rules
promulgated by the Securities and Exchange Commission and do not represent
the Company's estimate of future stock price growth. Actual gains, if any,
on stock option exercises and Common Stock holdings are dependent on the
timing of such exercise and the future performance of the Company's Common
Stock. There can be no assurance that the rates of appreciation assumed in
this table can be achieved or that the amounts reflected will be received by
the individuals. This table does not take into account any appreciation in
the price of the Common Stock from the date of grant to the current date.
The values shown are net of the option exercise price, but do not include
deductions for taxes or other expenses associated with the exercise.
</TABLE>
50
<PAGE> 54
(2) Except as specified below, all options granted to Named Executive Officers
provide for vesting of 20% of the total number of shares one year after
their date of grant, with an additional 5% of the total number of shares
vesting at the end of each three-month period thereafter until the options
are fully vested. The option granted to Mr. Atwood, the option for 10,000
shares at an exercise price of $0.50 granted to Mr. Baryza and the option
for 25,000 shares at an exercise price of $0.50 granted to Mr. Otis vest for
15% of the total number of shares six months after their date of grant, 15%
nine months after their date of grant, 20% one year after their date of
grant and an additional 4.16% at the end of each three-month period
thereafter until the options are fully vested. The options granted to Mr.
Marshall were fully vested as of December 31, 1995. The options granted to
Mr. Bay vest in full upon the earlier of (i) December 1, 1997 and (ii) a
qualified change of control (as defined therein) of the Company.
(3) Except for those options with an exercise price of $0.01, all options were
granted at fair market value as determined by the Board of Directors of the
Company on the date of grant. The Board of Directors determined the market
value of the Common Stock based on various factors, including the illiquid
nature of an investment in the Company's Common Stock, the preference given
to preferred stock upon the liquidation or sale of the Company, other recent
transactions involving the Company's capital stock, the Company's historical
financial performance and the Company's future prospects. The Company
recorded non-cash compensation expense in the aggregate amount of $122,000
in connection with the grant of options at an exercise price of $0.01.
(4) The vesting of the options granted to Mr. Perreault and Mr. Goldman was
accelerated so that these options were fully exercisable as of April 1,
1996, and the options were exercised in full by Messrs. Goldman and
Perreault on that date. The shares received upon the exercise of these
options are subject to Stock Restriction and Repurchase Agreements which
permit the Company to repurchase, at their original purchase price, the
unvested shares upon termination of the executive's employment (for any
reason) with the Company. The vesting schedule of the Stock Restriction and
Repurchase Agreements duplicated the original vesting schedule of the
options that were exercised. The shares vest at a quarterly rate of 6.25%
from November 1995 through November 1997, with the remaining 50.0% of the
shares vesting on December 21, 2000. Upon a qualified change of control of
the Company or the initial public offering of Common Stock, all of the
shares will become fully vested.
(5) In connection with the termination of his employment with the Company, Mr.
Marshall was granted these nonqualified options in exchange for
previously-granted vested incentive stock options in the same amounts and
with the same exercise prices. Those incentive stock options would have been
forfeited by their terms if not exercised upon Mr. Marshall's termination of
employment and had been granted at fair market value as determined by the
Board of Directors of the Company on the date of grant. See
"Management -- Severance Agreements."
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<PAGE> 55
<TABLE>
The following table sets forth information with respect to (i) options
exercised during 1995 by the Named Executive Officers (ii) the number of
unexercised options held by the Named Executive Officers as of December 31, 1995
and (iii) the value of unexercised in-the-money options (options for which the
fair market value of the Common Stock exceeds the exercise price) as of December
31, 1995.
OPTION EXERCISES IN 1995 AND YEAR END OPTION VALUES
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, 1995(#) DECEMBER 31, 1995($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED($)(1) UNEXERCISABLE UNEXERCISABLE(1)
- ---- ----------- -------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Robert N. Goldman(2)........... -- -- 0/2,300,000 $0/$15,525,000
Justin J. Perreault(2)......... -- -- 0/460,000 0/3,105,000
Robert J. Potter............... -- -- 74,250/90,750 505,938/614,813
Gregory A. Baryza.............. -- -- 0/65,000 0/434,750
Brian W. Otis.................. -- -- 0/54,000 0/360,800
Kenneth E. Marshall............ 5,000 $ 34,500 389,625/0 2,508,756/0
David Stryker.................. -- -- 0/0 0/0
Gerald B. Bay.................. -- -- 0/175,000 0/1,174,250
Thomas Atwood.................. -- -- 0/35,000 0/227,500
<FN>
- ---------------
(1) There was no public trading market for the Common Stock at any time during
1995. Solely for purposes of this table, the values have been calculated on
the basis of the initial public offering price of $7.00, less the aggregate
exercise price of the options.
(2) The options held by Messrs. Goldman and Perreault at December 31, 1995 were
exercised in full in April 1996.
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
On May 23, 1996, the Board of Directors adopted, and the stockholders of
the Company approved by written consent in July 1996, an Employee Stock Purchase
Plan (the "Stock Purchase Plan"), under which options to purchase up to 300,000
shares of Common Stock may be granted to employees of the Company. Under the
Stock Purchase Plan, participating employees will be entitled to purchase shares
through payroll deductions.
During each six month offering period under the Stock Purchase Plan, all
employees of the Company, including directors of the Company who are employees,
and all employees of any participating subsidiaries, (i) whose customary
employment is more than 20 hours per week and for more than five months in any
calendar year, (ii) who have been employed by the Company or a subsidiary for at
least six months prior to enrolling in the Stock Purchase Plan, and (iii) who
are employees on the first day of the designated payroll deduction period (the
"Offering Period"), are eligible to participate in the Stock Purchase Plan.
Employees who would immediately after the grant own 5% or more of the total
combined voting power or value of the stock of the Company or any subsidiary are
not eligible to participate.
The maximum number of shares which may be purchased by an employee under
the Stock Purchase Plan will be determined on the first day of the offering
period pursuant to a formula under which the employee's projected payroll
deductions over the Offering Period are divided by 85% of the market value of
one share of Common Stock on the first day of the Offering Period, and the
quotient is multiplied by two. During each Offering Period, the price at which
the employee will be able to purchase the Common Stock will be 85% of the last
reported sale price of the Common Stock on the Nasdaq National Market on the
first or last day of the Offering Period, whichever is lower.
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<PAGE> 56
If an employee is not a participant on the last day of the Offering Period,
the employee is not entitled to exercise any option, and the amount of such
employee's accumulated payroll deductions will be refunded. An employee's rights
under the Stock Purchase Plan terminate upon voluntary withdrawal from the Stock
Purchase Plan at any time, or when the employment of such participant ceases for
any reason, excluding death. Upon the death of a participant, the participant's
beneficiary will have the right to elect either (i) to withdraw all of the
payroll deductions credited to the participant's account under the Stock
Purchase Plan or (ii) to exercise the participant's option for the purchase of
stock on the last day of the Offering Period next following the date of the
participant's death for the purchase of the number of full shares which the
accumulated payroll deductions in the participant's account at the date of the
participant's death will purchase at the applicable option price, and any excess
in such account will be returned to the beneficiary.
The Stock Purchase Plan will be administered by the Compensation Committee.
The Compensation Committee has not determined when the first Offering Period
under the Stock Purchase Plan will commence.
EMPLOYMENT AGREEMENTS
In November 1995, the Company executed employment agreements with Messrs.
Goldman and Perreault. The Company agreed to employ Messrs. Goldman and
Perreault as President and Chief Executive Officer of the Company and Executive
Vice President and Chief Operating Officer of the Company, respectively, at
annual salaries of $190,000 and $160,000, respectively. In connection with the
Company's expense reduction program in late 1995, the salaries of its executive
officers, including Messrs. Goldman and Perreault, were voluntarily reduced.
Messrs. Goldman and Perreault are currently receiving salaries at the rate of
$176,700 and $148,800 per year, respectively. Each of the employment agreements
is terminable at will by either party to them. If the employment of the officer
is terminated by the Company for any reason other than just cause, death or
permanent disability, the agreements require the Company to continue to pay the
officer's salary for a period of twelve months, in the case of Mr. Goldman, or
six months, in the case of Mr. Perreault, after such termination, offset by any
amounts received by the officer from subsequent employment during such period.
In connection with their employment, these officers and all other executive
officers of the Company have also executed the Company's standard
Non-Competition, Non-Disclosure and Developments Agreement (the "Non-Competition
Agreement"). This agreement contains covenants prohibiting the improper
disclosure of confidential information at any time, as well as provisions
assigning to the Company all inventions made or conceived by the officer during
his employment with the Company. Each officer agreed with the Company that, with
certain exceptions, until one year after the termination of his employment with
the Company, he would not participate in any capacity in any business activities
competitive with those of the Company. Each officer further agreed not to
participate in any capacity in soliciting the business of any customers or the
services of any employees of the Company during such one-year period.
SEVERANCE AGREEMENTS
In connection with the resignation of Thomas M. Atwood as a director of the
Company effective April 1, 1996 and as an employee of the Company effective
September 30, 1996, the Company and Mr. Atwood entered into an agreement dated
March 1, 1996 (the "Atwood Agreement"). Pursuant to the Atwood Agreement, Mr.
Atwood was relieved of day-to-day operating responsibilities effective March 31,
1996 but agreed to provide such services as might be required through September
30, 1996 to assist in the transition of his responsibilities to other employees.
Mr. Atwood will continue to receive amounts in lieu of his present salary at the
rate in effect on March 1, 1996 through September 30, 1996 and will be paid for
any vacation he had accrued as of March 1, 1996. Mr. Atwood was also permitted
to participate in the health and dental plans of the Company through September
30, 1996, with certain restrictions. In connection with the Atwood Agreement,
Mr. Atwood executed a general release of the
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<PAGE> 57
Company. The Atwood Agreement also confirmed Mr. Atwood's obligations under his
Non-Competition Agreement.
In connection with the resignation of Kenneth E. Marshall as President and
Chief Executive Officer of the Company, effective May 24, 1995, the Company and
Mr. Marshall entered into an agreement dated May 24, 1995 (the "Marshall
Agreement"). Pursuant to the Marshall Agreement, Mr. Marshall ceased day-to-day
operating responsibilities but agreed to provide such services as might be
required through June 30, 1995 to help the Company complete pending transactions
with customers and prospects and otherwise assist in the transition period. From
July 1995 through June 1996 (the "Consulting Period"), Mr. Marshall agreed to
act as a consultant for the Company. During the Consulting Period, the Company
agreed to pay Mr. Marshall amounts in lieu of salary at the rate of $200,000 per
year; provided, however, that such amounts would be reduced by any amounts he
received with respect to employment elsewhere (except that director fees would
not reduce such fees and only 50% of any consulting fees earned by Mr. Marshall
during the Consulting Period would be deducted from his payments from the
Company). The Company also agreed to provide Mr. Marshall and his family with
health and dental benefits during such period, to provide Mr. Marshall with life
insurance during such period and to pay Mr. Marshall up to a maximum of $5,000
for outplacement services. The Marshall Agreement also confirmed Mr. Marshall's
obligations under his Non-Competition Agreement. The Company may elect to extend
these non-competition obligations until June 30, 1997 in exchange for a
fully-vested five-year nonqualified stock option to purchase an aggregate of up
to 30,125 shares at prices ranging from $0.25 to $6.00 per share. Pursuant to
the terms of the Marshall Agreement, Mr. Marshall's incentive stock options
ceased to vest on June 30, 1995, though the vesting of such options was
accelerated by one year. In exchange for his unexercised vested incentive stock
options, on June 30, 1995 the Company also issued to Mr. Marshall nonqualified
options to purchase an aggregate of up to 389,625 shares of common stock at
prices ranging from $0.10 per share to $6.00 per share. In connection with the
Marshall Agreement, Mr. Marshall executed a general release of the Company and
the Company executed a release regarding claims arising out of Mr. Marshall's
employment.
In connection with the resignation of David Stryker as an employee and
Chief Technical Officer of the Company effective November 30, 1995, the Company
and Mr. Stryker entered into an agreement dated November 28, 1995 (the "Stryker
Agreement"). Pursuant to the Stryker Agreement, from December 1, 1995 through
April 30, 1996, the Company was obligated to pay Mr. Stryker amounts in lieu of
salary at the rate in effect on November 1, 1995, provided that such amounts
would be reduced by any amounts he received with respect to employment
elsewhere. The Company also agreed to pay the premiums of Mr. Stryker's group
health insurance coverage during the period from December 1, 1995 through April
30, 1996, if Mr. Stryker elected to continue such coverage pursuant to COBRA
law. The Stryker Agreement also confirmed Mr. Stryker's obligations under his
Non-Competition Agreement. In connection with the Stryker Agreement, Mr. Stryker
executed a general release of the Company.
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<PAGE> 58
CERTAIN TRANSACTIONS
RELATIONSHIP WITH INTERNATIONAL BUSINESS MACHINES CORPORATION
In April 1993, IBM purchased 2,601,877 shares of Series E Convertible
Preferred Stock and 1,148,818 shares of Series F Convertible Preferred Stock of
the Company. Under agreements entered into in connection with this purchase of
Preferred Stock, IBM was entitled to appoint an observer to attend meetings of
the Company's Board of Directors so long as IBM continued to hold shares
representing at least 10% of the voting power of the stockholders of the
Company, and was entitled to certain registration rights with respect to
securities of the Company held by it. Under these agreements, IBM was also
entitled to certain rights of first refusal with respect to future issuances of
the Company's securities and a limited right to require repurchase by the
Company of the Preferred Stock held by IBM. The Company also has a limited right
to require IBM to sell the Preferred Stock held by IBM to the Company at a
formula price. These rights of first refusal and rights and obligations with
respect to repurchase of the Preferred Stock held by IBM will terminate upon the
closing of this Offering. Immediately following the closing of this Offering,
(after giving effect to the conversion to Common Stock of all outstanding
Preferred Stock), IBM will beneficially own 3,750,695 shares of Common Stock,
representing 14.3% of the Common Stock then issued and outstanding. (If the
Underwriters' over-allotment option is exercised in full, IBM will sell 426,949
shares of Common Stock in this offering, reducing its holdings to 12.6% of the
Company's issued and outstanding Common Stock.)
In April 1993, the Company also entered into certain business agreements
with IBM (the "IBM Agreements"). The IBM Agreements permit IBM to develop and
market products in which the Company's ObjectStore database is embedded in
return for the payment by IBM of royalties at a rate lower than that customarily
imposed by the Company. The IBM Agreements also impose mutual obligations of
confidentiality on the Company and IBM, and include a source code escrow
agreement under which IBM, in certain circumstances, may receive a copy of the
source code for certain of the Company's products. The IBM Agreements also
provide a framework for the parties to perform joint development projects from
time to time through individually-negotiated agreements regarding the
development of new or derivative products, specifying the work to be performed
by each party, payments to be made in connection with such work and the
ownership of the completed product. During 1993, 1994, 1995 and during the three
months ended March 31, 1996, the Company's revenues attributable to IBM were
$9.9 million, $1.7 million, $3.1 million and $980,000 and constituted 40.2%,
6.9%, 9.4% and 10.9% of the Company's total revenues, respectively. Revenues and
related accounts receivable from IBM are included in related party software and
service revenue, accounts receivable-related party and deferred revenue-related
party in the Consolidated Financial Statements included in this Prospectus.
Under the terms of the IBM Agreements, either party has the option (the
"Break-Up Option") of terminating certain of the IBM Agreements and modifying
the terms of certain others upon nine months' advance notice. On March 5, 1996,
the Company exercised the Break-Up Option by giving written notice to IBM. Upon
the effectiveness of the Break-Up Option, the rate of royalties paid to the
Company by IBM for ObjectStore-based products will be substantially increased,
IBM will no longer be entitled to a discount on training and consulting services
provided by the Company and the Company's joint development and joint marketing
efforts with IBM may be curtailed or eliminated. IBM has also permanently
relinquished its Board observation rights, and no representative of IBM
currently attends meetings of the Board of Directors of the Company.
At any time up to one month prior to the effective date of the Break-Up
Option, IBM may elect to obtain a copy of the source code for the Company's
ObjectStore product and a limited license to use such source code (the "Source
Code Option"). In exchange for delivery of this source code, IBM must, without
receiving any further consideration, surrender to the Company all of the shares
of capital stock of the Company held by IBM. The license that would be granted
to IBM in the event that it exercises the Source Code Option would permit IBM to
use the ObjectStore source code solely in the
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<PAGE> 59
development, marketing and support of existing applications in which ObjectStore
is embedded and would not permit it to market ObjectStore as a stand-alone
product.
LOANS TO EXECUTIVE OFFICERS
In 1994, the Company loaned to Robert J. Potter, the Senior Vice President,
Sales, of the Company, an aggregate of $200,000 pursuant to two $100,000 full
recourse promissory notes dated April and November 1994 and bearing interest at
rates of 5.88% and 7.45% per annum. The notes are due in April and November
1998, respectively, and will bear interest at 18.0% per annum or, if lower, the
highest legal rate of interest, if not paid when due. The notes are
collateralized by the pledge to the Company of an aggregate of 50,000 shares of
Common Stock owned by Mr. Potter. Upon any sale of all or part of these shares,
any amount realized by Mr. Potter in excess of his selling and tax expenses in
connection with the sale must be paid to the Company and applied to this
indebtedness.
In April 1996, in connection with the exercise by Robert N. Goldman, the
President and Chief Executive Officer of the Company and by Justin Perreault,
the Executive Vice President and Chief Operating Officer of the Company, of
stock options granted to them under the Company's 1995 Nonqualified Stock Option
Plan, to purchase 2,300,000 and 460,000 shares of Common Stock, respectively,
the Company loaned to Mr. Goldman and to Mr. Perreault $572,700 and $114,540,
respectively. The loan to each executive was at an interest rate of 7.0% per
annum and was pursuant to a promissory note with full recourse due upon the
earlier of (i) April 1, 2001 and (ii) the date the executive's employment with
the Company terminates for any reason. Each loan is secured by a pledge to the
Company of the shares of Common Stock acquired upon exercise of the option.
These shares are also subject to Stock Restriction and Repurchase Agreements
which permit the Company to repurchase, at their original purchase price, the
unvested shares of an executive upon termination of that executive's employment
(for any reason) with the Company. The vesting schedule of the Stock Restriction
and Repurchase Agreements duplicates the original vesting schedule of the
options that were exercised. The shares vest at a quarterly rate of 6.25% from
November 1995 through November 1997, with the remaining 50.0% of the shares
vesting on December 21, 2000. Upon a qualified change of control of the Company
or the initial public offering of Common Stock, all of the executives' shares
will become fully vested.
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<PAGE> 60
PRINCIPAL STOCKHOLDERS
<TABLE>
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 30, 1996, and as adjusted to
reflect the sale of shares offered hereby, by (i) each person or entity known to
the Company to own beneficially five percent or more of the Company's Common
Stock, (ii) each of the Company's directors, (iii) the Named Executive Officers
and (iv) all directors and executive officers of the Company as a group. The
information as to each person has been furnished by such person, and each person
has sole voting power and sole investment power with respect to all shares
beneficially owned by such person except as otherwise indicated.
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES
BENEFICIALLY OWNED
------------------------------
NUMBER OF SHARES BEFORE AFTER
NAME BENEFICIALLY OWNED(1) OFFERING(2) OFFERING(3)
- -------------------------------------- ------------------------ -------------- -----------
<S> <C> <C> <C>
DIRECTORS, OFFICERS AND 5%
STOCKHOLDERS:
Aeneas Venture Corporation(4)......... 4,373,303 18.8% 16.6%
c/o Harvard Management Company
600 Atlantic Avenue, 26th Floor
Boston, Massachusetts 02210
International Business Machines
Corporation......................... 3,750,695 16.1 14.3
Old Orchard Road
Armonk, New York 10504
Vista III, L.P.(5).................... 2,442,184 10.5 9.3
c/o Palmeri Fund Administrators
16-00 Route 208 South
Fairlawn, New Jersey 07410
Robert N. Goldman..................... 2,300,000 9.9 8.8
New Enterprise Associates V, Limited
Partnership......................... 1,806,356 7.8 6.9
1119 St. Paul Street
Baltimore, MD 21202
Orien I, L.P.......................... 1,420,492 6.1 5.4
315 Post Road West
Westport, CT 06880
Olivetti Holding N.V.................. 1,241,261 5.3 4.7
c/o Caribbean Management Company
14 John B. Gorsiraweg
Curacao, Netherlands Antilles
Thomas Atwood(6)...................... 510,500 2.2 1.9
Justin J. Perreault................... 460,000 2.0 1.8
Kenneth Marshall(7)................... 440,625 1.9 1.7
David Stryker......................... 250,000 1.1 *
Robert J. Potter(8)................... 138,500 * *
Gregory A. Baryza(9).................. 11,500 * *
Brian W. Otis(10)..................... 10,200 * *
Gerald B. Bay(11)..................... 4,518,721 19.4 17.2
Steven C. Walske(12).................. 9,000 * *
Arthur J. Marks(13)................... 1,861,970 8.0 7.1
Tim R. Palmer(14)..................... 4,373,303 18.8 16.6
Scott Sperling........................ -- -- --
All directors and executive officers
as a group
(12 persons)........................ 13,683,194 58.5 51.8
<FN>
- ---------------
* Less than 1%.
(1) The persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and subject to the
information contained in the footnotes to this table.
</TABLE>
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<PAGE> 61
Amounts shown for each stockholder include all shares obtainable upon
conversion of Preferred Stock, and all shares subject to stock options
exercisable within 60 days of June 30, 1996.
(2) The number of shares of Common Stock deemed outstanding prior to this
offering includes (i) 5,388,547 shares of Common Stock, including 2,899,702
shares of Common Stock issued upon exercise of options between March 31,
1996 and June 30, 1996 and 46,286 shares of Common Stock issuable upon the
cashless exercise of the Warrant, and (ii) 17,891,654 shares of Common
Stock issuable upon the conversion of all outstanding shares of Preferred
Stock.
<TABLE>
(3) Gives effect to the issuance by the Company of 3,000,000 shares of Common
Stock in this offering. Assumes no exercise of the Underwriters'
over-allotment option. Certain Selling Stockholders have agreed to sell to
the several Underwriters an aggregate of 450,000 shares of Common Stock
owned by them in the event that the Underwriters exercise their
over-allotment option. If the over-allotment option is exercised in full,
the number of shares to be sold by such Selling Stockholders and their
respective beneficial ownership of Common Stock before and after the
offering will be as follows.
<CAPTION>
BENEFICIAL
OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE OFFERING AFTER OFFERING
------------------- SHARES TO ---------------------
SELLING STOCKHOLDERS SHARES PERCENT BE SOLD SHARES PERCENT
-------------------------------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
International Business Machines
Corporation............................... 3,750,695 16.1% 426,949 3,323,746 12.6%
Zuken Incorporated.......................... 160,457 * 11,383 149,074 *
Thomas Atwood............................... 510,500 2.2% 11,383 499,117 1.9%
David Maier................................. 12,500 * 285 12,215 *
</TABLE>
(4) Does not include 500,000 shares held by Cooper, Raburn & Kniffin Limited
Partnership, of which Phemus Corporation, an affiliate of Aeneas Venture
Corporation, is a limited partner. Aeneas Venture Corporation disclaims
beneficial ownership of the shares held by Cooper, Raburn & Kniffin Limited
Partnership, except to the extent of its pecuniary interest therein.
(5) Does not include 500,000 shares held by Cooper, Raburn & Kniffin Limited
Partnership, of which Vista III, L.P. is a limited partner. Vista III, L.P.
disclaims beneficial ownership of the shares held by Cooper, Raburn &
Kniffin Limited Partnership, except to the extent of its pecuniary interest
therein.
(6) Includes 10,500 shares subject to stock options exercisable within 60 days
of June 30, 1996. Does not include 24,500 shares subject to stock options
not exercisable within 60 days of June 30, 1996.
(7) Includes 30,000 shares held in trust for members of Mr. Marshall's family.
(8) Includes 88,500 shares subject to stock options exercisable within 60 days
of June 30, 1996. Does not include 206,500 shares subject to stock options
not exercisable within 60 days of June 30, 1996.
(9) Includes 11,500 shares subject to stock options exercisable within 60 days
of June 30, 1996. Does not include 118,500 shares subject to stock options
not exercisable within 60 days of June 30, 1996.
(10) Includes 10,200 shares subject to stock options exercisable within 60 days
of June 30, 1996. Does not include 143,800 shares subject to stock options
not exercisable within 60 days of June 30, 1996.
(11) Represents shares held by Orien I, L.P., Philips Venture Fund I, L.P. and
Vista III, L.P. Does not include 500,000 shares held by Cooper, Raburn &
Kniffin Limited Partnership. Mr. Bay is a limited partner in Orien
Partners, L.P., the general partner of Orien I, L.P.; a general partner of
Vista Ventures Partners II, the general partner of Philips Venture Fund I,
L.P.; and a general partner of Vista III Partners, L.P., the general
partner of Vista III, L.P. Vista III, L.P. is a limited partner in Cooper,
Raburn & Kniffin Limited Partnership. Mr. Bay disclaims beneficial
ownership of the shares held by these entities, except to the extent of his
pecuniary interest therein.
(12) Includes 9,000 shares subject to stock options exercisable within 60 days
of June 30, 1996. Does not include 53,000 shares subject to stock options
not exercisable within 60 days of June 30, 1996.
(13) Represents shares held by New Enterprise Associates V, Limited Partnership
and The Silverado Fund I, Limited Partnership. Mr. Marks is a general
partner of NEA Partners V, Limited Partnership, the general partner of New
Enterprise Associates V, Limited Partnership and a general partner of NEA
Silverado Partners I, Limited Partnership, the general partner of The
Silverado Fund I, Limited Partnership. Mr. Marks disclaims beneficial
ownership of the shares held by these entities, except to the extent of his
pecuniary interest therein.
(14) Represents shares held by Aeneas Venture Corporation. Mr. Palmer is a
Managing Director of Harvard Private Capital Group, Inc., an affiliate of
Aeneas Venture Corporation. Mr. Palmer disclaims beneficial ownership of
these shares, except to the extent of his pecuniary interest therein.
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<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering and after giving effect to the
amendment and restatement of the Certificate of Incorporation of the Company,
the authorized capital stock of the Company will consist of 200,000,000 shares
of Common Stock, par value $0.001 per share and 5,000,000 shares of undesignated
preferred stock, par value $0.01 per share.
COMMON STOCK
As of June 30, 1996, there were outstanding 5,342,261 shares of Common
Stock held of record by 200 persons. Upon the closing of this offering, there
will be outstanding 26,280,201 shares of Common Stock, after giving effect to
the conversion into shares of Common Stock of all outstanding shares of
Preferred Stock and assuming the issuance of 46,286 shares of Common Stock upon
the cashless exercise of the Warrant, but assuming no exercise of outstanding
options to purchase an aggregate of 3,546,559 shares of Common Stock outstanding
at June 30, 1996.
Holders of Common Stock are entitled to one vote per share held of record
on all matters submitted to a vote by the stockholders of the Company. Subject
to preferences that may be applicable to the holders of outstanding shares of
preferred stock, if any, the holders of Common Stock are entitled to receive
such dividends when and as declared by the Board of Directors out of funds
legally available therefor. In the event of any liquidation, dissolution or
winding up of the affairs of the Company, and subject to the rights of the
holders of outstanding shares of preferred stock, if any, the remaining assets
of the Company available to stockholders shall be distributed equally per share
to the holders of shares of Common Stock. Holders of shares of Common Stock have
no cumulative voting rights nor any preemptive, subscription, redemption or
conversion rights. There are no redemption or sinking fund provisions applicable
to the Common Stock. All outstanding shares of Common Stock are validly issued,
fully paid and nonassessable, and the shares of Common Stock offered hereby will
be, when issued and paid for, validly issued, fully paid and nonassessable. The
rights, preferences and privileges of holders of Common Stock are subject to,
and may be adversely affected by, the rights of holders of shares of preferred
stock which the Company may designate and issue in the future.
PREFERRED STOCK
As of June 30, 1996, there were outstanding 2,750,000 shares of Series A
Convertible Preferred Stock held of record by three holders, 4,517,857 shares of
Series B Convertible Preferred Stock held of record by eight holders, 2,857,143
shares of Series C Convertible Preferred Stock held of record by seven holders,
1,111,111 shares of Series D Convertible Preferred Stock held of record by eight
holders, 2,601,877 shares of Series E Convertible Preferred Stock held of record
by one holder, 1,148,818 shares of Series F Convertible Preferred Stock held of
record by one holder, 250,000 shares of Series G Convertible Preferred Stock
held of record by one holder, no shares of Series H Convertible Preferred Stock,
999,848 shares of Series I Convertible Preferred Stock held of record by eleven
holders and 1,655,000 shares of Series J Convertible Preferred Stock held of
record by eleven holders.
The terms of the Preferred Stock provide that, upon the closing of this
offering, the outstanding shares of the Series A through Series J Convertible
Preferred Stock will automatically convert into 17,891,654 shares of Common
Stock. Upon the closing of this offering and the conversion of the Series A
through Series J Preferred Stock, the Company intends to amend and restate its
Certificate of Incorporation to eliminate all references to the Series A through
Series J Preferred Stock.
On or before the closing of this offering, the Company's Certificate of
Incorporation will be amended to create a class of 5,000,000 shares of
undesignated preferred stock, par value $0.01 per share. The Board of Directors
will be authorized, subject to any limitations prescribed by Delaware law, to
issue shares of preferred stock in one or more series, to establish from time to
time the number of shares to be included in each such series, to establish or
alter the voting powers, designations, preferences and relative, participating,
optional or other rights, or the qualifications, limitations or restrictions
thereof, and to increase (but not above the total number of authorized shares of
the class)
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<PAGE> 63
or decrease (but not below the number of shares of such series then outstanding)
the number of shares of any such series without any further vote or action by
the stockholders. The Board of Directors will be authorized to issue preferred
stock with voting, conversion and other rights and preferences that could
adversely affect the voting power or other rights of the holders of Common
Stock. Although the Company has no current plans to issue any such shares, the
issuance of preferred stock or of rights to purchase preferred stock could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, a majority of the
outstanding voting stock of the Company. See "Risk Factors -- Antitakeover
Considerations; Effect of Charter Provisions, By-laws and Delaware Law."
WARRANT
In connection with a Master Lease and Warrant Agreement dated October 1,
1990 between the Company and PacifiCorp Credit, Inc. ("PacifiCorp"), the Company
issued to PacifiCorp a ten-year warrant (the "Warrant") to purchase 57,858
shares of Series B Convertible Preferred Stock at an exercise price of $1.40 per
share. Upon the automatic conversion of outstanding Preferred Stock in
connection with the closing of this offering, the Warrant will be exercisable
for the purchase of 57,858 shares of Common Stock at an exercise price of $1.40
per share. The Warrant will expire upon the closing of this offering if not
exercised prior to that date. PacifiCorp has notified the Company that it
intends to effect a cashless exercise of the Warrant at the closing of the
offering. Assuming the price of the Common Stock on the date of the closing is
equal to the initial public offering price of $7.00 per share, the cashless
exercise of the Warrant would result in the issuance of 46,286 shares of Common
Stock. PacifiCorp also has certain registration rights with respect to the
shares of Common Stock issuable upon exercise of the Warrant. See
"-- Registration Rights."
REGISTRATION RIGHTS
In connection with prior issuances of Preferred Stock, the Company has
granted certain rights with respect to the registration under the Securities Act
of an aggregate of 18,290,960 shares of Common Stock, consisting of (i) 353,020
shares of Common Stock, (ii) 17,891,654 shares of Common Stock issuable upon
conversion of outstanding Preferred Stock and (iii) 46,286 shares of Common
Stock issuable upon the cashless exercise of the Warrant (collectively, the
"Registrable Securities"). The holders of at least 40% of the Registrable
Securities then outstanding are entitled, at any time after the earlier of June
29, 1998 or six months after the closing of an initial public offering, to
request that the Company file a registration statement under the Securities Act
covering the sale of some or all of the Registrable Securities owned by such
holders, subject to certain conditions. The Company is required to effect no
more than two such registrations and generally not more than one during any
180-day period. The Company may defer any requests for registration for up to 90
days in any 24-month period, if there exists at the time material non-public
information of the Company which, in the reasonable opinion of the Company,
should not be disclosed. The Company is not required to effect any such
registration unless shares of Common Stock representing at least 20% of the
Registrable Securities originally issued are proposed to be offered or unless
the anticipated aggregate public offering price of the shares of Common Stock
proposed to be registered is more than $2,000,000. In addition, in the event
that the Company proposes to register any of its securities under the Securities
Act (other than registrations relating solely to employee benefit plans or
pursuant to Rule 145 or on a form which does not permit secondary sales), either
for its own account or for the account of other security holders, holders of
Registrable Securities may require the Company to use its best efforts to
include all or a portion of their Registrable Securities in the registration and
in any underwriting involved therein, provided, among other conditions, that the
managing underwriter (if any) of any such offering has the right, subject to
certain conditions, to limit the number of Registrable Securities included in
the registration. Further, once the Company is qualified to use Form S-3 to
register securities under the Securities Act, the holders of Registrable
Securities shall have the right to request up to two registrations on Form S-3
during any twelve-month period to register all or a portion of such shares under
the Securities Act, provided that the anticipated aggregate public offering
price of such
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<PAGE> 64
shares is more than $500,000 and subject to certain conditions. In general, all
fees, costs and expenses of such registrations (other than underwriting
discounts and selling commissions applicable to sales of the Registrable
Securities) will be borne by the Company. The holders of Registrable Securities
have waived the foregoing registration rights with respect to this offering.
The Company and the holders of Registrable Securities have agreed to
indemnify each other from certain liabilities relating to any registration in
which any Registrable Securities are included, including liabilities arising
under the Securities Act.
DELAWARE LAW AND CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BY-LAWS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The Board of Directors of the Company adopted in May 1996 and the
stockholders of the Company approved by written consent in July 1996 an Amended
and Restated Certificate of Incorporation (the "Restated Certificate of
Incorporation") and Amended and Restated By-laws ("Restated By-laws"), each of
which will become effective immediately following the closing of this offering.
The following description assumes the effectiveness of the Restated Certificate
of Incorporation and Restated By-laws. The Restated By-laws provide for the
division of the Board of Directors into three classes as nearly equal in size as
possible with staggered three-year terms. See "Management." The classification
of the Board of Directors could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring,
control of the Company.
The Company's Restated Certificate of Incorporation and Restated By-laws
provide that any action required or permitted to be taken by the stockholders of
the Company at an annual meeting or special meeting of stockholders may only be
taken if it is properly brought before such meeting and may not be taken by
written action in lieu of a meeting. The Restated By-laws further provide that a
special meeting of the stockholders may only be called by the Chairman of the
Board of Directors, the Chief Executive Officer, or if none, the President of
the Company or by the Board of Directors. Under the Company's Restated By-laws,
in order for any matter to be considered "properly brought" before a meeting, a
stockholder must comply with certain requirements regarding advance notice to
the Company. The foregoing provisions could have the effect of delaying until
the next stockholders meeting stockholder actions which are favored by the
holders of a majority of the outstanding voting securities of the Company. These
provisions may also discourage another person or entity from making a tender
offer for the Company's Common Stock, because such person or entity, even if it
acquired a majority of the outstanding voting securities of the Company, would
be able to take action as a stockholder (such as electing new directors or
approving a merger) only at a duly called stockholders meeting, and not by
written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's Certificate of Incorporation or By-laws,
unless a corporation's Certificate of Incorporation or By-Laws, as the case may
be, requires a greater percentage. The Restated Certificate of Incorporation and
Restated By-laws require the affirmative vote of the holders of at least 75% of
the shares of capital stock of the Company issued and outstanding and entitled
to vote to amend or repeal the provisions described in the prior paragraph.
The Restated Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain circumstances
involving
61
<PAGE> 65
wrongful acts, such as the breach of a director's duty of loyalty or acts or
omissions which involve intentional misconduct or a knowing violation of law.
Further, the Restated Certificate of Incorporation and the Restated By-laws
contain provisions to indemnify the Company's directors and officers to the
fullest extent permitted by the General Corporation Law of Delaware. The Company
believes that these provisions will assist the Company in attracting and
retaining qualified individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is Boston
Equiserve Limited Partnership.
62
<PAGE> 66
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, there will be 26,280,201 shares of
Common Stock outstanding, after giving effect to the conversion of all
outstanding shares of Preferred Stock into shares of Common Stock and assuming
the exercise of the Warrant, but assuming no exercise of options to purchase
3,546,559 shares of Common Stock outstanding as of June 30, 1996. Of the
outstanding shares of Common Stock, the 3,000,000 shares registered in this
offering (3,450,000 shares if the over-allotment option is exercised in full)
will be freely tradeable without restriction under the Securities Act, unless
they are purchased by "affiliates" of the Company as that term is used under the
Securities Act. The remaining 23,280,201 shares will be "restricted securities"
as defined in Rule 144 under the Securities Act (the "Restricted Shares").
The directors, officers and certain stockholders of the Company including
the Selling Stockholders, holding an aggregate of 22,936,345 Restricted Shares,
have agreed that they will not, without the prior written consent of Hambrecht &
Quist LLC, sell, offer, contract to sell or grant any option to sell or
otherwise dispose of any shares of Common Stock, or securities exchangeable or
exercisable for or convertible into shares of Common Stock owned by them during
the 180-day period following the date of this Prospectus. Immediately following
the closing of this offering, 79,550 Restricted Shares will become eligible for
sale without restriction under Rule 144(k), and an additional 241,806 Restricted
Shares will become eligible for sale subject to the restrictions of Rule 144 or,
in some cases, Rule 701 under the Securities Act. Upon the expiration of the
foregoing 180-day lock-up period (or earlier with the consent of Hambrecht &
Quist LLC), an additional 4,149,309 Restricted Shares will become eligible for
sale without restriction under Rule 144(k) and an additional 17,154,536
Restricted Shares will become eligible for sale subject to the restrictions of
Rule 144 or in some cases Rule 701.
In general, under Rule 144, as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned any Restricted Shares
for at least two years is entitled to sell, within any three-month period, a
number of such securities that does not exceed the greater of 1% of the then
outstanding shares of Common Stock (approximately 262,802 shares immediately
after this offering) or the average weekly trading volume during the four
calendar weeks preceding the date on which notice of such sale was filed under
Rule 144, provided certain requirements concerning the availability of public
information, manner of sale and notice of sale are satisfied. A person who is
not an affiliate, has not been an affiliate within three months prior to the
sale and has beneficially owned Restricted Shares for at least three years is
entitled to sell such shares under Rule 144(k) without regard to any of the
limitations described above. In satisfying the two-year and three-year holding
periods described above, a holder of Restricted Shares may, in certain
circumstances, include the holding period of a prior owner.
The Securities and Exchange Commission has proposed certain amendments to
Rule 144 that would reduce by one year the holding periods required for shares
subject to Rule 144 to become eligible for resale in the public market. This
proposal, if adopted, would increase the number of shares of Common Stock
eligible for immediate resale following expiration of the lock-up agreements
described above. No assurance can be given concerning whether or when the
proposal will be adopted by the Securities and Exchange Commission.
Any director, officer or employee of or consultant to the Company who has
been granted options to purchase shares or who has purchased shares pursuant to
a written compensatory benefit plan or written contract relating to the
compensation of such person prior to the effective date of this offering
pursuant to Rule 701 will be entitled to rely on the resale provisions of Rule
701, which permits non-affiliates to sell their Rule 701 shares under Rule 144
without having to comply with the public information, holding-period,
volume-limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares under Rule 144 without having to comply with the Rule
144 holding period restrictions, in each case commencing 90 days after the date
of this Prospectus.
The Company intends to file, approximately 90 days after the date of this
Prospectus, a registration statement on Form S-8 under the Securities Act to
register approximately 6,135,559 shares of Common
63
<PAGE> 67
Stock reserved for issuance upon exercise of options that are now outstanding
under the Stock Option Plans or that may be granted hereafter under the 1996
Stock Option Plan and 300,000 shares of Common Stock reserved for issuance under
the Stock Purchase Plan (including, in some cases, shares for which an exemption
under Rule 144 or Rule 701 would also be available), thus permitting the resale
of shares issued under the Stock Option Plans and the Stock Purchase Plan by
non-affiliates in the public market without restriction under the Securities
Act, subject to vesting and, in certain cases, subject to the lock-up agreements
described above. Such registration statement is expected to become effective
immediately upon filing. At the date of this Prospectus, options to purchase an
aggregate of 3,435,559 shares of Common Stock are outstanding under the Original
Stock Option Plans and 111,000 shares are outstanding under the 1996 Stock
Option Plan or the Stock Purchase Plan. An additional 2,589,000 shares of Common
Stock are available for future grants under the 1996 Stock Option Plan. See
"Management -- Stock Option Plans" and "-- Employee Stock Purchase Plan."
Following this offering, the holders of 18,290,960 Restricted Shares will
have the right to cause the Company to register the sale of their shares under
the Securities Act. If such holders exercise their registration rights, they
will be able to sell their shares in the public market upon the effectiveness of
the registration statement covering such shares without any holding period or
sales volume limitation. See "Description of Capital Stock -- Registration
Rights."
Prior to this offering, there has been no public market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect the market price of the Common Stock. See
"Risk Factors -- Shares Eligible for Future Sale" and "-- No Prior Public
Market; Possible Volatility of Stock Price."
64
<PAGE> 68
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Hambrecht & Quist LLC, Alex. Brown & Sons Incorporated and Wessels, Arnold &
Henderson, L.L.C., have severally agreed to purchase from the Company and the
Selling Stockholders the following respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Hambrecht & Quist LLC..................................................... 660,000
Alex. Brown & Sons Incorporated........................................... 495,000
Wessels, Arnold & Henderson, L.L.C........................................ 495,000
Bear, Stearns & Co. Inc................................................... 150,000
Montgomery Securities..................................................... 150,000
Morgan Stanley & Co. Incorporated......................................... 150,000
Oppenheimer & Co., Inc.................................................... 150,000
Robertson, Stephens & Company LLC......................................... 150,000
Smith Barney Inc.......................................................... 150,000
Adams Harkness & Hill, Inc................................................ 50,000
Brean Murray, Foster Securities Inc....................................... 50,000
First Albany Corporation.................................................. 50,000
Gerard Klauer Mattison & Co............................................... 50,000
Punk, Zeigel & Knoell..................................................... 50,000
Raymond James & Associates, Inc........................................... 50,000
SoundView Financial Group, Inc............................................ 50,000
Tucker Anthony Incorporated............................................... 50,000
Van Kasper & Company...................................................... 50,000
---------
Total........................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and the Selling
Stockholders, their counsel and the Company's independent auditors. The nature
of the Underwriters' obligation is such that they are committed to purchase all
shares of Common Stock offered hereby if any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $.26 per share. The Underwriters may allow and such dealers may reallow a
concession not in excess of $.10 per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the Representatives of the Underwriters. The
Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority.
The Selling Stockholders have granted to the Underwriters an option,
exercisable not later than 30 days after the date of this Prospectus, to
purchase up to 450,000 additional shares of Common Stock at the initial public
offering price, less the underwriting discount, set forth on the cover page of
this Prospectus. To the extent that the Underwriters exercise this option, each
of the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof which the number of shares of Common Stock to be
purchased by it shown in the above table bears to the total number of shares of
Common Stock offered hereby. The Selling Stockholders will be obligated,
pursuant to the option, to sell shares to the Underwriters to the extent the
option is exercised. The Underwriters may
65
<PAGE> 69
exercise such option only to cover over-allotments made in connection with the
sale of the shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters and certain controlling persons against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the Underwriters may be required to make in respect thereof.
The directors, officers, and certain stockholders of the Company, including
the Selling Stockholders, holding an aggregate of 22,939,817 shares of Common
Stock upon the closing of the offering, have agreed that they will not, without
the prior written consent of Hambrecht & Quist LLC, sell, offer, contract to
sell or grant any option to sell or otherwise dispose of any shares of Common
Stock, or any securities exchangeable or exercisable for or convertible into
shares of Common Stock owned by them during the 180-day period following the
date of this Prospectus. Such agreements provide that Hambrecht & Quist LLC may,
in its sole discretion and at any time without notice, release all or a portion
of the shares subject to lock-up agreements. The Company has agreed that it will
not, without the prior written consent of Hambrecht & Quist LLC, sell, offer,
contract to sell or grant any option to purchase or otherwise dispose of any
shares of Common Stock or any securities exchangeable or exercisable for or
convertible into shares of Common Stock during the 180-day period following the
date of this Prospectus, except that the Company may issue securities under its
stock option plans and upon exercise of outstanding options. Sales of such
shares in the future could adversely affect the market price of the Common
Stock. See "Shares Eligible for Future Sale."
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined by
negotiation between the Company and the Representatives. Among the factors
considered in determining the initial public offering price were prevailing
market and economic conditions, revenues and earnings of the Company, market
valuations of other companies engaged in activities similar to those of the
Company, estimates of the business potential and prospects of the Company, the
present state of the Company's business operations, the management and other
factors deemed relevant.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Foley, Hoag & Eliot LLP Boston, Massachusetts. John D. Patterson,
Jr., Secretary of the Company, is a partner at Foley, Hoag & Eliot LLP. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Testa, Hurwitz & Thibeault, LLP.
EXPERTS
The consolidated balance sheets as of December 31, 1994 and December 31,
1995 and the consolidated statements of operations, stockholders' deficit and
cash flows for each of the three years in the period ended December 31, 1995,
included in this Prospectus, have been included herein in reliance on the report
of Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
66
<PAGE> 70
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules to the Registration Statement. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part of the Registration Statement. Statements contained in this
Prospectus concerning the contents of any contract or any other document
referred to are not necessarily complete; reference is made in each instance to
the copy of such contract or document filed as an exhibit to the Registration
Statement. Each such statement is qualified in all respects by such reference to
such exhibit. The Registration Statement, including exhibits and schedules
thereto, may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Regional Offices of the Commission at
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade
Center, Thirteenth Floor, New York, New York 10048. Copies also may be obtained
from the Public Reference Section of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. The
Commission maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. In addition, the Common Stock has
been approved for listing on the Nasdaq National Market, and the Registration
Statement, including exhibits thereto, and reports and other information
concerning the Company may be inspected and copied at the offices of the
National Association of Securities Dealers, Inc., 9513 Key West Avenue,
Rockville, Maryland 20850. As a result of this offering, the Company will become
subject to the information and reporting requirements of the Securities Exchange
Act of 1934, as amended, and in accordance therewith will file periodic reports,
proxy statements and other information with the Commission.
------------------------
The Company intends to furnish to its stockholders annual reports
containing consolidated financial statements audited by an independent public
accounting firm and quarterly reports containing unaudited consolidated
financial information for the first three quarters of each fiscal year.
67
<PAGE> 71
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Object Design, Inc.:
We have audited the accompanying consolidated balance sheets of Object
Design, Inc. as of December 31, 1994 and 1995, and the related consolidated
statements of operations, stockholders' deficit and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Object Design, Inc. as of December 31, 1994 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
May 23, 1996
F-1
<PAGE> 72
OBJECT DESIGN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1996
-------------------------- MARCH 31, PRO FORMA
1994 1995 1996 STOCKHOLDERS'
----------- ------------ ------------ EQUITY (NOTE B)
(UNAUDITED) ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 3,224,507 $ 2,465,432 $ 3,381,956
Marketable securities......................... 1,923,823 1,488,299 4,949,199
Accounts receivable, less allowances of
$399,842, $591,812 and $636,580 at December
31, 1994 and 1995 and March 31, 1996,
respectively................................ 7,329,442 7,631,045 8,401,041
Accounts receivable -- related parties........ 852,000 432,590 174,466
Prepaid expenses and other current assets..... 362,882 444,387 430,208
----------- ------------ ------------
Total current assets................... 13,692,654 12,461,753 17,336,870
Marketable securities........................... 7,091,112 748,350 737,325
Property and equipment, net..................... 4,221,446 3,569,335 3,317,018
Other assets.................................... 423,728 375,048 413,415
----------- ------------ ------------
Total assets....................... $25,428,940 $ 17,154,486 $ 21,804,628
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current portion of long-term obligations........ $ 878,722 $ 733,241 $ 645,076
Accounts payable................................ 1,731,515 1,622,490 1,354,137
Accrued expenses................................ 3,014,098 2,251,142 2,604,373
Accrued compensation............................ 1,903,601 1,805,693 1,610,531
Deferred revenue................................ 4,957,254 5,639,844 5,945,580
Deferred revenue -- related parties............. 417,012 1,400,000 903,520
----------- ------------ ------------
Total current liabilities.............. 12,902,202 13,452,410 13,063,217
Long-term obligations........................... 858,252 476,447 344,008
Redeemable convertible preferred stock, $0.01
par value; 16,837,521 shares authorized at
December 31, 1994 and 1995 and 19,004,188
shares authorized at March 31, 1996;
16,236,654 shares issued and outstanding at
December 31, 1994 and 1995, and 17,891,654
shares issued and outstanding at March 31,
1996 and no shares on a pro forma basis
(liquidation preference $36,400,430,
$36,400,430 and $51,295,430 at December 31,
1994 and 1995 and March 31, 1996,
respectively)................................. 35,982,012 35,982,012 41,232,010 $ --
Commitments and contingencies
Stockholders' deficit:
Common stock, $0.001 par value; 22,500,000
shares authorized at December 31, 1994 and
1995 and 30,166,667 shares authorized at
March 31, 1996; 2,097,724 and 2,373,786
shares issued at December 31, 1994 and 1995,
respectively and 2,461,459 shares issued at
March 31, 1996 (historical) and 20,353,113
at March 31, 1996 (pro forma)............... 2,098 2,374 2,461 20,353
Additional paid-in capital.................... 55,615 1,672,647 1,378,550 42,592,668
Accumulated deficit........................... (23,770,943) (34,053,312) (33,908,456) (33,908,456)
Net unrealized holding loss on marketable
securities.................................. (403,951) (12,882) (29,160) (29,160)
Cumulative translation adjustment............. 3,674 (43,325) 36,266 36,266
Treasury stock of 18,900 shares, at cost...... (19) (19) (19) (19)
Advances to stockholders...................... (200,000) (200,000) (200,000) (200,000)
Unearned compensation......................... -- (121,866) (114,249) (114,249)
----------- ------------ ------------ ------------
Total stockholders' equity (deficit)... (24,313,526) (32,756,383) (32,834,607) $ 8,397,403
============
----------- ------------ ------------
Total liabilities and stockholders'
deficit.......................... $25,428,940 $ 17,154,486 $ 21,804,628
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE> 73
OBJECT DESIGN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
Software.................... $8,687,889.. $ 15,705,980 $ 18,699,616 $ 4,971,899 $ 5,612,199
Services.................... 4,155,167.. 6,730,743 10,928,027 2,647,603 2,369,083
Related party software and
services................. 11,807,000.. 3,052,000 3,078,000 401,846 1,014,892
----------- ------------ ------------ ----------- -----------
Total revenues...... 24,650,056 25,488,723 32,705,643 8,021,348 8,996,174
Cost of revenues:
Cost of software............ 430,000 1,532,392 1,087,631 343,099 498,580
Cost of services............ 4,297,034 4,267,253 6,928,172 1,656,889 1,697,982
Cost of related party
software and services.... 590,000 1,175,934 903,793 164,370 210,000
----------- ------------ ------------ ----------- -----------
Total cost of
revenues.......... 5,317,034 6,975,579 8,919,596 2,164,358 2,406,562
Gross profit.................. 19,333,022 18,513,144 23,786,047 5,856,990 6,589,612
Operating expenses:
Selling and marketing....... 11,632,069 18,245,484 19,596,551 4,830,920 3,683,406
Research and development.... 4,727,080 9,513,518 8,298,146 2,222,895 1,804,361
General and
administrative........... 2,408,667 3,141,452 3,589,076 919,283 911,178
Restructuring charges....... -- -- 2,708,893 -- --
----------- ------------ ------------ ----------- -----------
Total operating
expenses.......... 18,767,816 30,900,454 34,192,666 7,973,098 6,398,945
Operating income (loss)....... 565,206 (12,387,310) (10,406,619) (2,116,108) 190,667
Other income (expense):
Interest income............. 262,579 516,434 278,382 126,618 57,469
Interest expense............ (98,711) (121,070) (136,174) (39,245) (36,128)
Other expense, net.......... (72,102) (11,180) (19,940) 33,035 (43,194)
----------- ------------ ------------ ----------- -----------
Total other income
(expense)......... 91,766 384,184 122,268 120,408 (21,853)
----------- ------------ ------------ ----------- -----------
Income (loss) before provision
for income taxes............ 656,972 (12,003,126) (10,284,351) (1,995,700) 168,814
Provision (benefit) for income
taxes....................... 30,000 18,000 (1,982) -- 23,958
----------- ------------ ------------ ----------- -----------
Net income (loss)............. $ 626,972 $(12,021,126) $(10,282,369) $(1,995,700) $ 144,856
========== =========== =========== ========== ==========
Net income (loss) available to
common shareholders --
historical basis (Note B)...
Pro forma net income (loss)
per common and common
equivalent share............ $ (0.40) $ 0.01
=========== ==========
Pro forma weighted average
number of common and common
equivalent shares
outstanding................. 25,837,307 26,427,258
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 74
OBJECT DESIGN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
for the years ended December 31, 1993, 1994, and 1995 and the three months ended
March 31, 1996
<TABLE>
<CAPTION>
NET
UNREALIZED
HOLDING
ADDITIONAL LOSS ON CUMULATIVE
COMMON PAID-IN ACCUMULATED MARKETABLE TRANSLATION
STOCK CAPITAL DEFICIT SECURITIES ADJUSTMENT
------ ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992................................ $1,803 $ 2,856 $(12,376,789) $ 1,235
------ ----------- ------------ ---------
Exercise of stock options................................. 227 30,738
Foreign currency translation adjustment................... 15,296
Net income................................................ 626,972
------ ---------- ------------ ---------
Balance at December 31, 1993................................ 2,030 33,594 (11,749,817) 16,531
------ ---------- ------------ ---------
Exercise of stock options................................. 68 22,021
Issuance of note to officer...............................
Net unrealized holding loss on securities available for
sale.................................................... $(403,951)
Foreign currency translation adjustment................... (12,857)
Net loss.................................................. (12,021,126)
----- ---------- ------------ --------- ---------
Balance at December 31, 1994................................ 2,098 55,615 (23,770,943) (403,951) 3,674
----- ---------- ------------ --------- ---------
Exercise of stock options................................. 276 141,397
Compensation on stock options for employees............... 1,353,769
Stock options granted to employees below fair value....... 121,866
Net unrealized holding gain on securities available for
sale.................................................... 391,069
Foreign currency translation adjustment................... (46,999)
Net loss.................................................. (10,282,369)
------ ---------- ------------ --------- ---------
Balance at December 31, 1995................................ 2,374 1,672,647 (34,053,312) (12,882) (43,325)
------ ---------- ------------ --------- ---------
Exercise of stock options................................. 87 38,903
Amortization of unearned compensation.....................
Net unrealized holding loss on securities available for
sale.................................................... (16,278)
Foreign currency translation adjustment................... 79,591
Accretion of preferred stock to redemption value.......... (333,000)
Net income................................................ 144,856
------- ---------- ------------ --------- ---------
Balance at March 31, 1996 (unaudited)....................... $ 2,461 $1,378,550 $(33,908,456) $(29,160) $ 6,266
======= ========== ============ ========= =========
<CAPTION>
TREASURY ADVANCES TO UNEARNED STOCKHOLDERS'
STOCK STOCKHOLDERS COMPENSATION DEFICIT
-------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992................................ $(19) $(12,370,914)
------ ------------
Exercise of stock options................................. 30,965
Foreign currency translation adjustment................... 15,296
Net income................................................ 626,972
------ -----------
Balance at December 31, 1993................................ (19) (11,697,681)
------ -----------
Exercise of stock options................................. 22,089
Issuance of note to officer............................... $(200,000) (200,000)
Net unrealized holding loss on securities available for
sale.................................................... (403,951)
Foreign currency translation adjustment................... (12,857)
Net loss.................................................. (12,021,126)
------ -----------
Balance at December 31, 1994................................ (19) (200,000) (24,313,526)
------ --------- -----------
Exercise of stock options................................. 141,673
Compensation on stock options for employees............... 1,353,769
Stock options granted to employees below fair value....... $ (121,866)
Net unrealized holding gain on securities available for
sale.................................................... 391,069
Foreign currency translation adjustment................... (46,999)
Net loss.................................................. (10,282,369)
------ --------- ---------- -----------
Balance at December 31, 1995................................ (19) (200,000) (121,866) (32,756,383)
------ --------- ---------- -----------
Exercise of stock options................................. 38,990
Amortization of unearned compensation..................... 7,617 7,617
Net unrealized holding loss on securities available for
sale.................................................... (16,278)
Foreign currency translation adjustment................... 79,591
Accretion of preferred stock to redemption value.......... (333,000)
Net income................................................ 144,856
-------- ---------- ---------- ------------
Balance at March 31, 1996 (unaudited)....................... $(19) $(200,000) $ (114,249) $(32,834,607)
======== ========== ========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 75
OBJECT DESIGN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------------------------ -------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $ 626,972 $(12,021,126) $(10,282,369) $(1,995,700) $ 144,856
Adjustments to reconcile net income (loss)
to net cash used for operating
activities:
Depreciation and amortization........... 861,683 1,493,102 1,818,045 433,094 426,863
Bad debt expense........................ 449,256 433,957 571,644 117,339 95,678
Restructuring charges................... -- -- 2,708,893 -- --
Non-cash compensation for stock options
to employee........................... -- -- 36,750 -- --
Other................................... (14,903) (19,725) (938) -- 7,617
Gross realized gain on sale of available
for sale marketable securities........ -- (2,637) (840)
Gross realized loss on sale of available
for sale marketable securities........ -- 3,362 31,339 -- --
Net changes in operating assets and
liabilities:
Accounts receivable................... (6,817,465) 785,488 (453,837) (259,331) (607,550)
Prepaids and other current assets..... (169,475) (87,984) (81,505) (150,388) 14,179
Other assets.......................... (203,688) (241,645) (6,244) (51,021) 14,633
Accounts payable...................... 183,937 586,064 (109,025) 785,660 (268,353)
Accrued expenses...................... 945,074 2,515,063 (2,068,467) (1,532,211) 158,069
Deferred revenue...................... 2,136,799 2,289,842 1,665,578 1,304,361 (190,744)
------------ ------------ ------------ ----------- -----------
Net cash used for operating
activities....................... (2,001,810) (4,266,239) (6,170,976) (1,348,197) (204,752)
------------ ------------ ------------ ----------- -----------
Investing activities:
Capital expenditures...................... (1,996,687) (2,712,389) (1,194,962) (471,174) (174,546)
Purchases of marketable securities........ (9,837,803) (11,412,750) (509,269) (509,269) (3,466,153)
Proceeds from maturity of available for
sale marketable securities.............. -- 5,877,610 150,000 902,510 --
Proceeds from sale of available for sale
marketable securities................... -- 7,958,152 7,499,063 -- --
Purchase of minority interest............. -- (112,526) -- -- (53,000)
------------ ------------ ------------ ----------- -----------
Net cash provided (used) for
investing activities............. (11,834,490) (2,401,903) 5,944,832 (77,933) (3,693,699)
------------ ------------ ------------ ----------- -----------
Financing activities:
Proceeds from issuance of redeemable
convertible preferred stock............. 12,663,871 6,941,207 -- -- 4,916,998
Proceeds from exercise of stock options.. 30,965...... 22,089 141,673 48,351 38,990
Proceeds from long-term borrowings........ 800,000 1,143,000 321,687 -- --
Principal payments on long-term
borrowings.............................. (211,947) (633,621) (863,476) (195,819) (207,762)
Principal payments on capital lease
obligations............................. (241,622) (209,679) (85,816) (12,245) (12,842)
------------ ------------ ------------ ----------- -----------
Net cash provided (used) for
financing activities............. 13,041,267 7,262,996 (485,932) (159,713) 4,735,384
Effect of exchange rate changes on cash..... 15,296 (12,857) (46,999) 189,869 79,591
------------ ------------ ------------ ----------- -----------
Net change in cash and cash equivalents..... (779,737) 581,997 (759,075) (1,395,974) 916,524
Cash and cash equivalents, beginning of
year...................................... 3,422,247 2,642,510 3,224,507 3,224,507 2,465,432
------------ ------------ ------------ ----------- -----------
Cash and cash equivalents, end of year...... $ 2,642,510 $ 3,224,507 $ 2,465,432 $ 1,828,533 $ 3,381,956
============ ============ ============ =========== ===========
Supplemental disclosure of cash flow
information:
Interest paid............................. $ 98,711 $ 121,070 $ 136,164 $ 39,245 $ 36,128
Supplemental disclosure of noncash
transactions:
Equipment purchased under capital
leases.................................. $ 101,582 $ -- $ 100,319 -- --
Equipment purchases accrued............... $ 199,960 $ 143,952 -- -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 76
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the three months ended March 31, 1996 and 1995 is unaudited)
A. NATURE OF BUSINESS:
Object Design, Inc. (the "Company") develops, produces, markets and
provides customer support services for an object-oriented database management
system and related development tools.
Historically, the Company had marketed its ObjectStore database management
system primarily to customers in certain industries, such as telecommunications,
finance and engineering design and analysis, that required specialized database
management capabilities unavailable from conventional relational database
management systems. In early 1996, the Company shifted its strategy to focus on
providing database management solutions for the emerging Internet and Intranet
computing market.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of the 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 the
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.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The consolidated financial statements of the Company as of March 31, 1996
and for the three months ended March 31, 1995 and 1996 and related footnote
information are unaudited. All adjustments, consisting only of normal recurring
adjustments, have been made which, in the opinion of management, are necessary
for a fair presentation of the interim financial information. Results of
operations for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for any future period.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Object Design Japan Co. Ltd., Object Design
Software GmbH, Object Design (UK) Ltd., Object Design Pty. Ltd., Object Design
S.A.R.L., and Object Design Securities Corp. In September 1995, the shares of
Object Design Pty. Ltd. were sold as part of the Company's restructuring (See
Note M). All intercompany accounts and transactions are eliminated in
consolidation.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The marketable securities of the Company have been classified as available
for sale. They are carried at their fair value, based on quoted market prices
with the unrealized gains and losses, net of tax, reported in a separate
component of stockholders' deficit. Realized gains and losses on disposition of
securities are determined on the specific identification method and are
reflected in the consolidated statements of operations. The Company considers
all highly liquid investments having a maturity, at date of acquisition, of
three months or less to be cash equivalents. Those instruments with original
maturities greater than three months and less than twelve months from the
balance sheet date are considered to be short-term marketable securities.
Instruments with scheduled maturities greater than one year from the balance
sheet date are considered to be long-term marketable securities.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and interest
are included in interest income.
F-6
<PAGE> 77
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1996 and 1995 is unaudited)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company provides for
depreciation and amortization using the straight-line method over the shorter of
the estimated useful lives of the assets, or remaining terms of leases, which
range from three to five years.
Repairs and maintenance are charged to expense as incurred. Significant
improvements are capitalized and depreciated. Upon retirement or sale, the cost
of the assets disposed of and the related accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in the results of
operations.
REVENUE RECOGNITION
Revenue from software license agreements is recognized upon execution of a
contract and shipment of the software, provided that no significant obligations
remain outstanding and collection of the related receivable is deemed probable
by management. Revenue from maintenance contracts is recognized ratably over the
life of the contract, generally one year. Revenue from training and consulting
is recognized as the services are provided. Revenues from contracts involving
nonrecurring engineering services are recorded using the
percentage-of-completion method of accounting based on contract milestones.
Estimates of costs to complete are reviewed periodically, and provisions for
anticipated losses are made in the period in which they first become
determinable. Amounts that have been billed before these criteria are met are
reflected as deferred revenues until such criteria are met.
The Company's software license agreements include a warranty period,
generally one year, that the Company does not consider to represent a
cancellation privilege. Anticipated costs associated with the warranty program
are accrued when revenue is recognized and are determined on the basis of
estimated future costs to fulfill the warranty commitment. Such costs in each
year during the three-year period ended December 31, 1995 and the three month
periods ended March 31, 1995 and 1996, respectively, have been immaterial.
The Company records an allowance for doubtful accounts based on individual
customer analyses. Write-offs of accounts receivable were $217,255, $428,475 and
$379,674 for the years ended December 31, 1993, 1994 and 1995, respectively.
FOREIGN CURRENCY
The financial statements of the Company's foreign subsidiaries, all of
whose functional currency is the local currency, are translated using exchange
rates in effect at the end of the year for assets and liabilities and average
exchange rates during the year for results of operations. Foreign currency
translation adjustments are recorded as a separate component of stockholders'
deficit. The Company also engages in transactions denominated in a foreign
currency, and gains and losses from these transactions, which have been
immaterial, are included in results of operations.
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash equivalents, marketable securities and
trade receivables.
The Company invests its excess cash primarily in deposits with commercial
banks, U.S. Government or agency issues and municipal obligations and any losses
recognized to date have been insignificant.
F-7
<PAGE> 78
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1996 and 1995 is unaudited)
The Company has no significant concentrations of credit risk with respect
to trade receivables due to the broad base of customers representing various
geographic locations and industries. The Company performs ongoing credit
evaluations of its customers but does not require collateral or other security
to support customer receivables and maintains reserves for potential credit
losses. Such losses have been within management's expectations.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development expenditures are charged to operations as
incurred. The Company considers that technological feasibility has been
established once a working model of a product has been produced and tested. To
date, the Company has not capitalized software development costs after
technological feasibility has been established since costs incurred subsequent
to the establishment of technological feasibility have not been material.
INCOME TAXES
The Company provides for income taxes under the liability method, which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Under this method a valuation allowance is
required against net deferred tax assets, if based upon the available evidence,
it is more likely than not that some or all of the deferred tax assets will not
be realized.
Management evaluates on a quarterly basis the recoverability of the
deferred tax assets and the level of the valuation allowance. At such time as it
is determined that it is more likely than not that deferred tax assets are
realizable, the valuation allowance will be appropriately reduced.
INTANGIBLES
The Company has classified as goodwill, and included in other assets, the
cost in excess of fair value of the net assets related to the 1994 purchase of
the remaining minority interest in Object Design Software GmbH as well as the
contingent payments made as defined in the purchase agreement (see Note F). The
Company provides for amortization of goodwill using the straight-line method
over a period of five years.
The Company has included in other assets the cost of licensing third party
software and is amortizing the cost over the terms of the agreements, generally
four years.
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
The unaudited pro forma net income (loss) per common share is computed
based upon the weighted average number of common shares and common equivalent
shares outstanding after certain adjustments described below. Common equivalent
shares comprise stock options and warrants using the treasury stock method.
Common equivalent shares from stock options and warrants are excluded from the
computation if their effect is antidilutive. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletin No. 83, common, common equivalent
shares, and other potentially dilutive securities issued at prices below the
estimated initial public offering price of $10.00 per share during the 12 months
immediately preceding the initial filing date of the registration statement have
been included in the calculation as if they were outstanding for all periods
presented (using the treasury stock method and the anticipated initial public
offering price for stock options). In addition,
F-8
<PAGE> 79
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1996 and 1995 is unaudited)
all outstanding shares of preferred stock to be converted into common stock upon
the closing of the initial public offering are treated as having been converted
into common stock at the date of original issuance.
Net income (loss) per common share on a historical basis is computed in the
same manner as pro forma net income (loss) per common share except that all
preferred stock is not considered to be a common stock equivalent based on its
terms and conditions.
Net income (loss) per common share on a historical basis is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ------------ ------------ ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss)...... $ 626,972 $(12,021,126) $(10,282,369) $(1,995,700) $ 144,856
============ ============ =========== ========
Accretion of preferred
stock to redemption
value................ -- -- -- -- (333,000)
------------ ------------ ----------- --------
Net income (loss)
available to common
shareholders......... $ 626,972 $(12,021,126) $(10,282,369) $(1,995,700) $(188,144)
============ ============ =========== ========
Net income (loss) per
common share......... $ 0.06 $ (1.28) $ (1.07) $ (0.21) $ (0.02)
============ ============ =========== ========
Weighted average number
of common and common
equivalent shares
outstanding.......... 10,689,064 9,417,873 9,600,653 9,531,638 9,751,447
============ ============ =========== ========
</TABLE>
Fully diluted net income (loss) per share is not presented as it is the
same as the amounts disclosed in historical net income (loss) per share for the
years ended December 31, 1993, 1994 and 1995, and for the three-month periods
ended March 31, 1995 and 1996.
PRO FORMA PRESENTATION (UNAUDITED)
Upon the closing of a public offering, such as the one contemplated in the
registration statement in which the accompanying financial statements have been
included, all of the outstanding series of redeemable convertible preferred
stock will automatically convert into an aggregate of 17,891,654 shares of
common stock, and the Company's existing series of redeemable convertible
preferred stock will be removed and a class of authorized but undesignated
preferred stock will be created. The unaudited pro forma presentation of the
March 31, 1996 stockholders' equity has been prepared assuming such conversion.
ACCOUNTING STANDARDS
SFAS No. 123, "Accounting for Stock-Based Compensation," must be adopted in
1996. This standard encourages, but does not require, recognition of
compensation expense based on the fair value of equity instruments granted to
employees. The Company does not plan to record compensation for equity
instruments granted to employees and, therefore, the adoption of this standard
will have no impact on its financial position or results of operations. The
Company will adopt the disclosure provision of SFAS No. 123 in 1996.
F-9
<PAGE> 80
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1996 and 1995 is unaudited)
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," must be adopted in 1996. The standard
requires that impairment losses be recognized when the carrying value of an
asset exceeds its fair value. The Company regularly assesses all of its
long-lived assets for impairment and, therefore, does not believe the adoption
of the standard will have a material effect on its financial position or results
of operations.
C. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1994 1995 1996
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer and computer-related equipment..... $ 4,774,408 $ 5,502,002 $ 5,648,200
Office equipment, furniture and purchased
computer software......................... 1,814,656 2,095,932 2,086,261
Leasehold improvements...................... 218,018 120,348 142,637
Automobiles................................. 107,454 226,012 220,220
------------ ----------- -----------
6,914,536 7,944,294 8,097,318
Less accumulated depreciation and
amortization.............................. (2,693,090 ) (4,374,959) (4,780,300)
------------ ----------- -----------
$ 4,221,446 $ 3,569,335 $ 3,317,018
========== ========== ==========
</TABLE>
The equipment under capital leases consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------- 1996
1994 1995 (UNAUDITED)
--------- -------- -----------
<S> <C> <C> <C>
Computer and computer-related equipment......... $368,919
Automobiles..................................... 107,454 $226,012 $ 220,220
--------- -------- -----------
476,373 226,012 220,220
Less accumulated depreciation................... (359,088) (95,580) (110,891)
--------- -------- -----------
$117,285 $130,432 $ 109,329
======== ======== =========
</TABLE>
Depreciation expense was $808,650, $1,444,711 and $1,763,121 for the years
ended December 31, 1993, 1994 and 1995, respectively and $419,363 and $426,863
for the three months ended March 31, 1995 and 1996, respectively.
F-10
<PAGE> 81
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1996 and 1995 is unaudited)
D. MARKETABLE SECURITIES:
At December 31, 1994, marketable securities can be summarized as follows:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST FAIR VALUE GAINS LOSSES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Marketable securities, current:
U.S. Government and its
agencies.................... $1,472,740 $1,440,698 $1,250 $ (33,292)
Municipal issues................. 499,752 483,125 -- (16,627)
---------- ---------- ---------- ----------
1,972,492 1,923,823 1,250 (49,919)
---------- ---------- ---------- ----------
Marketable securities,
noncurrent:
U.S. Government and its
agencies.................... 6,447,292 6,139,462 -- (307,830)
Municipal issues................. 999,102 951,650 -- (47,452)
---------- ---------- ---------- ----------
7,446,394 7,091,112 -- (355,282)
---------- ---------- ---------- ----------
$9,418,886 $9,014,935 $1,250 $ (405,201)
========= ========= ======== =========
</TABLE>
At December 31, 1995, marketable securities can be summarized as follows:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST FAIR VALUE GAINS LOSSES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Marketable securities, current:
U.S. Government and its agencies........ $1,499,531 $1,488,299 $(11,232)
Marketable securities, noncurrent:
U.S. Government and its agencies........ 750,000 748,350 -- (1,650)
---------- ---------- ---------- ----------
$2,249,531 $2,236,649 -- $(12,882)
========= ========= ======== ========
</TABLE>
At March 31, 1996, marketable securities can be summarized as follows:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST FAIR VALUE GAINS LOSSES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Marketable securities, current:
U.S. Government and its agencies........ $4,965,684 $4,949,199 $(16,485)
Marketable securities, noncurrent:
U.S. Government and its agencies........ 750,000 737,325 -- (12,675)
---------- ---------- ---------- ----------
$5,715,684 $5,686,524 -- $(29,160)
========= ========= ======== ========
</TABLE>
At December 31, 1995, the contractual maturities of the current marketable
securities available for sale range from 9 to 12 months and up to 24 months for
the noncurrent portfolios, respectively.
E. REVOLVING CREDIT AGREEMENT AND LONG-TERM OBLIGATIONS:
REVOLVING CREDIT AGREEMENT
The Company's previous revolving credit agreement with a bank expired in
1995. At December 31, 1994, 1995 and March 31, 1996, the Company had no
outstanding borrowings under the revolving credit line. At December 31, 1995 and
March 31, 1996, letters of credit in the aggregate amount of $812,948 issued for
the account of the Company under the revolving credit agreement in connection
with certain lease transactions were outstanding.
F-11
<PAGE> 82
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1996 and 1995 is unaudited)
LONG-TERM OBLIGATIONS
The Company's long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Installment notes payable, due in monthly principal
payments plus interest with the unpaid principal
balance payable on various dates through May 1, 1998,
bearing interest at prime plus 0.75% to 1.0% (9.25%
to 9.5% and 9.0% to 9.25% at December 31, 1995 and
March 31, 1996, respectively) per annum.............. $1,617,676 $1,075,887 $ 867,867
Capital lease obligations (Note F)..................... 119,298 133,801 121,217
---------- ---------- -----------
1,736,974 1,209,688 989,084
Amounts due within one year............................ 878,722 733,241 645,076
---------- ---------- -----------
Long-term portion...................................... $ 858,252 $ 476,447 $ 344,008
========= ========= =========
</TABLE>
Each installment note is collateralized by all assets of the Company and
contains certain covenants, including but not limited to the maintenance of a
quick ratio, leverage ratio, minimal capital base and minimal quarterly loss.
The Company did not meet the requirements of the quick ratio, leverage ratio,
minimal capital base and certain other covenants during the year ended December
31, 1995, for which the bank has waived noncompliance. The Company was in
compliance with these covenants as of March 31, 1996. Upon the occurrence of any
event of default as defined in the agreement with the bank, unless waived or
cured, the bank has the right to demand payment on all unpaid amounts, terminate
the financing arrangement, liquidate the collateral or use any deposit amounts
to offset the debt.
Based on borrowing rates currently available to the Company for installment
notes with similar terms and maturities, the fair value of long-term obligations
approximates their carrying values.
F. COMMITMENTS:
CAPITAL AND OPERATING LEASES
The Company leases certain equipment and automobiles under noncancelable
capital leases that mature at various dates through 1998.
In addition, the Company leases its primary office facility and several
sales offices under various noncancelable leases with terms that expire through
2004, with certain renewal terms. Total rent expense under operating leases was
approximately $960,000, $1,797,000 and $2,063,000 for the years ended December
31, 1993, 1994 and 1995, respectively, and $442,000 and $331,000 for the three
months ended March 31, 1995 and 1996, respectively.
F-12
<PAGE> 83
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1996 and 1995 is unaudited)
Future minimum lease payments under capital and operating leases are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1996........................................................... $ 86,653 $1,366,000
1997........................................................... 31,604 1,157,000
1998........................................................... 33,164 1,214,000
1999........................................................... 1,010,000
2000........................................................... 674,000
2001 to 2004................................................... -- 1,760,000
-------- ----------
Total future minimum lease payments............................ 151,421 $7,181,000
=========
Less amount representing interest.............................. 17,620
--------
Present value of net future minimum lease payments............. 133,801
Less current portion of capital lease obligations.............. 73,585
--------
Long-term portion of capital lease obligation.................. $ 60,216
========
</TABLE>
PURCHASE OF MINORITY INTEREST
In 1994, the Company purchased the remaining 24,000 shares in Object Design
Software GmbH from the minority shareholder. The purchase price, as defined by
the purchase agreement, is subject to adjustment based upon the financial
results of the subsidiary through December 31, 1997. The excess of the adjusted
purchase price over the fair value of the shares through December 31, 1994, 1995
and March 31, 1996 totaling $112,526, $112,526 and $165,526, respectively, has
been recorded as goodwill. Accumulated amortization totaled $9,376, $31,876 and
$37,501 at December 31, 1994 and 1995 and March 31, 1996, respectively. All
future contingent payments, to a maximum additional purchase price of DM 139,058
(approximately $97,000), will be recorded as an increase to goodwill.
G. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The authorized preferred stock of the Company at December 31, 1995 and
March 31, 1996 consists of Redeemable Convertible Preferred Stock (Series A
through J) (collectively the "Preferred Stock"). The following table presents
Preferred Stock activity for the three years ended December 31, 1995 and the
three months ended March 31, 1996:
<TABLE>
<CAPTION>
SHARES AMOUNT
------ ------
<S> <C> <C>
Balance at December 31, 1992 (Series A through D)................ 11,236,111 $16,376,934
Issuance of 2,601,877 and 1,148,818 shares of Series E and F,
respectively, on April 12, 1993 and 250,000 shares of Series
G Preferred Stock on May 14, 1993, net of issuance costs of
$162,623.................................................... 4,000,695 12,663,871
---------- -----------
Balance at December 31, 1993..................................... 15,236,806 29,040,805
Issuance of Series I Preferred Stock on March 31, 1994 net of
issuance costs of $57,729................................... 999,848 6,941,207
---------- -----------
Balance at December 31, 1994..................................... 16,236,654 35,982,012
---------- -----------
Balance at December 31, 1995..................................... 16,236,654 35,982,012
Issuance of Series J Preferred Stock on February 15, 1996 net
of issuance of costs of $48,002............................. 1,655,000 4,916,998
Accretion of Series J Preferred Stock to redemption value...... 333,000
---------- -----------
Balance at March 31, 1996........................................ 17,891,654 $41,232,010
========= ==========
</TABLE>
F-13
<PAGE> 84
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1996 and 1995 is unaudited)
No shares of Series H Preferred Stock have been issued.
The Preferred Stock is convertible, at the holder's option, into common
stock on a one-for-one basis subject to adjustment upon the occurrence of
certain events. The Preferred Stock is subject to mandatory conversion upon the
earlier to occur of: the issuance of two-thirds of the common stock issuable
upon conversion of the Preferred Stock or the closing of an underwritten public
offering in which the gross proceeds to the Company are at least $10,000,000 and
the net price per share is at least $3.50.
Each share of Preferred Stock has the same voting rights as a share of
common stock; however, certain corporate actions require the consent of the
holders of two-thirds of the outstanding Preferred Stock.
Shares of Series A, B, C, D, G, I and J Preferred Stock are redeemable at
the option of the holder if notification is made at least 180 days prior to
January 1, 2000. Shares of Series E and F Preferred Stock are redeemable at the
option of the holder if notification is made at least 90 days prior to January
1, 2003. Redemptions for each Series are made over three-year periods, and range
from January 1, 2000 through January 7, 2007.
The price per share to be paid by the Company will be the greater of the
respective redemption prices (as shown below) plus, if the Company has had any
year at the end of which it has had positive retained earnings, all accrued and
unpaid dividends (see schedule below of mandatory redemption) or the fair value,
as determined in accordance with the redemption agreement.
REDEMPTION PRICES
<TABLE>
<S> <C>
Series A: $1.00 Series F: $3.50
Series B: $1.40 Series G: $4.00
Series C: $1.75 Series I: $7.00
Series D: $2.25 Series J: $9.00
Series E: $3.00
</TABLE>
If the funds of the Company legally available for redemption are
insufficient to redeem all the Preferred Stock on any date for which payment
should be made: (a) the unpaid balance will bear interest at 12.0% per annum
compounded quarterly until sufficient funds are available, and (b) the holders
of the Series J Preferred Stock shall receive the applicable redemption amounts
prior to any other payments to other holders of Preferred Stock.
If all holders of Preferred Stock elected to require the redemption of all
shares of Preferred Stock held by them, the minimum redemption requirements for
the Preferred Stock, excluding any dividends, for the first five years and
thereafter would be as follows:
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1995 MARCH 31, 1996
----------------- --------------
<S> <C> <C>
2000................................................... $ 3,025,000 $ 7,990,000
2001................................................... 4,691,667 9,656,667
2002................................................... 5,525,000 10,490,000
2003................................................... 6,442,164 6,442,164
2004................................................... 1,673,620 1,673,620
Thereafter............................................. 15,042,979 15,042,979
----------------- --------------
Total........................................ $36,400,430 $ 51,295,430
============== ===========
</TABLE>
F-14
<PAGE> 85
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1996 and 1995 is unaudited)
Each share of Preferred Stock has a liquidation preference over the
Company's common stock equal to the respective redemption price for each series,
plus all accrued and unpaid dividends including any noncompliance dividends.
Alternatively, in the event that there is a surplus over the liquidation
preference, the preferred stockholder will receive such amount as would have
been payable had each such share been converted to common stock.
Each share of Preferred Stock is to accrue on a daily basis, cumulative
dividends at an annual rate of 10% of the redemption price (as specified above),
compounded at the rate of 10.0% per share per annum beginning on the date of
original issuance.
The Company is under no obligation to pay such dividends until declared by
the Board of Directors, and the Company's obligation to pay such dividends upon
redemption per the Redemption Agreement or upon liquidation accrues from the end
of the first year in which the Company has positive retained earnings.
Accordingly, no provision has been made for such dividends at December 31, 1994
and 1995 and March 31, 1996. If the Company is in noncompliance (as defined)
with the terms of the Certificate of Incorporation, the Preferred Stock will
accrue an additional noncompliance cumulative dividend, on a daily basis, for
the first 30 days that the Company is in noncompliance. The dividend rate will
increase by $0.01 per share for each successive 30-day period the Company
remains in noncompliance, up to a maximum annual rate. The annual rate of
noncompliance dividends range from $0.10 to $0.70 per share and the maximum
noncompliance dividends range from $0.16 to $1.12 per share.
PREFERRED STOCK WARRANT
In 1990, the Company issued a warrant to purchase 57,858 shares of Series B
Preferred Stock at an exercise price of $1.40 per share to a leasing company.
The warrant expires upon the earlier of October 1, 2000 or the closing of an
initial public offering. Upon the automatic conversion of the Preferred Stock in
connection with an initial public offering, the warrant will be exercisable for
the purchase of 57,858 shares of common stock at an exercise price of $1.40 per
share.
H. STOCKHOLDERS' DEFICIT:
COMMON STOCK
Each share of common stock has full voting rights.
The terms of the Company's existing borrowing arrangements with its bank
prohibit the payment of cash dividends on the common stock before the payment in
full of all outstanding indebtedness to the bank. The terms of the Company's
proposed 1996 line of credit prohibit the payment of cash dividends on the
common stock.
At December 31, 1995 and March 31, 1996, 24,283,726 and 25,853,428 shares,
respectively, of common stock were reserved for the potential conversion of
Preferred Stock, Preferred Stock warrants and stock options.
STOCK OPTION PLANS
The Company has two stock option plans, a 1989 Incentive and Nonqualified
Stock Option Plan and a 1995 Nonqualified Stock Option Plans (the "Plans"),
whereby options to purchase up to 8,582,000 shares of the Company's common stock
at a price not less than fair value (as determined by the Board of Directors)
may be granted to key employees and consultants. The options are exercisable at
various dates and expire ten years from the date of grant. Under the terms of
the Plans, the Company
F-15
<PAGE> 86
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1996 and 1995 is unaudited)
maintains the right of first refusal if any of the employees wish to sell the
shares received from exercise of such options, and the employees' rights to
exercise vest over a five or ten-year period.
Information related to activity under the Plans for the three years ended
December 31, 1995 and for the three months ended March 31, 1996 is as follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
---------- ---------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1992.......................... 1,377,464 $0.10 -- $0.75
Granted................................................... 1,029,200 0.75 -- 6.00
Exercised................................................. (227,186) 0.10 -- 0.75
Canceled.................................................. (78,650) 0.10 -- 1.75
----------
Outstanding at December 31, 1993.......................... 2,100,828 0.10 -- 6.00
Granted................................................... 526,475 3.00 -- 3.50
Exercised................................................. (67,788) 0.10 -- 2.00
Canceled.................................................. (113,425) 0.10 -- 3.50
----------
Outstanding at December 31, 1994.......................... 2,446,090 0.10 -- 6.00
Granted................................................... 5,615,400 0.01 -- 3.50
Exercised................................................. (276,062) 0.10 -- 3.50
Canceled.................................................. (2,187,350) 0.10 -- 6.00
----------
Outstanding at December 31, 1995.......................... 5,598,078 0.01 -- 6.00
Granted................................................... 868,550 0.25 -- 2.00
Exercised................................................. (87,673) 0.20 -- 3.50
Canceled.................................................. (175,910) 0.01 -- 6.00
----------
Outstanding at March 31, 1996............................. 6,203,045 0.01 -- 6.00
==========
</TABLE>
At December 31, 1995 and March 31, 1996, 881,226 and 937,849 options,
respectively, had vested under the Plans and 2,400,136 and 1,707,496,
respectively, were available for grant.
On April 1, 1996, options to purchase 2,760,000 shares of common stock
issued to two officers of the Company during December 1995 were accelerated, and
the officers exercised these options in exchange for cash of $2,760 and full
recourse promissory notes in the amount of $687,240. The promissory notes bear
interest at 7.0% and are due on the earlier of April 1, 2001 or upon termination
of employment. Pursuant to these agreements, the shares may be repurchased by
the Company at the amounts paid by the officers for the shares under certain
conditions such that, economically, the original vesting schedule for these
options remains in effect.
Except as set forth below, the exercise price for each of the above grants
was determined by the Board of Directors of the Company to be equal to the fair
value of the common stock on the date of grant. In reaching this determination
at the time of each such grant, the Board considered a broad range of factors
including the illiquid nature of an investment in the Company's common stock,
the Company's historical financial performance, the preferences (including
liquidation) of the Company's outstanding convertible preferred stock, and the
Company's future prospects.
In connection with the severance of certain key employees pursuant to the
Company's restructuring plan (see Note M), during 1995 the Company converted
465,311 incentive stock options to nonqualified stock options. Simultaneously,
the exercise period for these options was extended and consequently,
approximately $1,317,000 was charged to operations and included in restructuring
charges. This charge represented the differences between the aggregate fair
value of those options and the aggregate exercise amounts on the remeasurement
date.
In December 1995 and pursuant to the 1995 Nonqualified Stock Option Plan,
the Company, as authorized by the Board of the Directors, granted certain
employees non-qualified stock options to purchase 507,775 shares at an exercise
price of $0.01 per share, which was less than fair value at the
F-16
<PAGE> 87
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1996 and 1995 is unaudited)
date of grant. Unearned compensation related to these options amounting to
approximately $122,000 has been recorded in the Company's stockholders' deficit
and will be recognized as expense ratably over the vesting period of five years.
The Board of Directors adopted on May 23, 1996, and the stockholders of the
Company approved by written consent in July 1996, the 1996 Incentive and
Nonqualified Stock Option Plan of the Company (the "1996 Stock Option Plan").
The 1996 Stock Option Plan authorizes (i) the grant of options to purchase
Common Stock intended to qualify as incentive stock options ("Incentive
Options"), as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") and (ii) the grant of options that do not so qualify
("Nonqualified Options"). Options to purchase up to 2,700,000 shares of Common
Stock may be granted under the 1996 Stock Option Plan, provided that prior to
May 23, 1997, options to purchase no more than 1,200,000 shares of Common Stock
may be issued under the Plan, with such number increasing by 300,000 on each of
the first five anniversaries of the adoption of the Plan by the Board of
Directors, up to a maximum of 2,700,000 shares.
The terms of the options to be issued under the 1996 Stock Option Plan,
including exercise price, vesting and term, will be similar to the terms of the
1989 and 1995 Plans; however, the 1996 Stock Option Plan also provides for
certain automatic grants of nonqualified options to non-employee directors of
the Company.
EMPLOYEE STOCK PURCHASE PLAN
On May 23, 1996, the Board of Directors adopted, and the stockholders of
the Company approved by written consent in July 1996, an Employee Stock Purchase
Plan (the "Stock Purchase Plan"), under which options to purchase up to 300,000
shares of Common Stock may be granted to employees of the Company.
The maximum number of shares which may be purchased by an employee under
the Stock Purchase Plan will be determined on the first day of the offering
period pursuant to a formula under which the employee's projected payroll
deductions over the Offering Period are divided by 85% of the market value of
one share of Common Stock on the first day of the Offering Period, and the
quotient is multiplied by two. During each Offering Period, the price at which
the employee will be able to purchase the Common Stock will be 85% of the last
reported sale price of the Common Stock on the Nasdaq National Market on the
first or last day of the Offering Period, whichever is lower.
The Stock Purchase Plan will be administered by the Compensation Committee
of the Board of Directors. All employees who meet certain minimum criteria based
on hours worked per week and length of tenure with the Company will be eligible
to participate in the Stock Purchase Plan and no employee will be able to
purchase shares pursuant to the Stock Purchase Plan if after such purchase such
employee would own more than a specific percentage of the total combined voting
power or value of the stock of the Company.
In addition, effective upon the closing of such offering and after giving
effect to the amendment and restatement of the Certificate of Incorporation of
the Company, the authorized capital stock of the Company will consist of
200,000,000 shares of Common Stock, par value $0.001 per share and 5,000,000
shares of undesignated preferred stock, par value $0.01 per share. The Board of
Directors will be authorized, subject to any limitations prescribed by Delaware
law, to issue shares of preferred stock in one or more series, to establish from
time to time the number of shares to be included in each such series, to
establish or alter the voting powers, designations, preferences and relative,
participating, optional or other rights, or the qualifications, limitations or
restrictions thereof, and to increase (but
F-17
<PAGE> 88
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1996 and 1995 is unaudited)
not above the total number of authorized shares of the class) or decrease (but
not below the number of shares of such series then outstanding) the number of
shares of any such series without any further vote or action by the
stockholders. The Board of Directors will be authorized to issue preferred stock
with voting, conversion and other rights and preferences that could adversely
affect the voting power or other rights of the holders of Common Stock.
On May 23, 1996 the Board of Directors voted to retire the 18,900 treasury
shares.
I. INCOME TAXES:
Income (loss) before income taxes for domestic and foreign operations is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ------------------------
1993 1994 1995 1995 1996
--------- ------------ ------------ ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Domestic.......... $ 796,968 $(11,182,270) $ (8,716,140) $(1,451,337) $(10,464)
Foreign........... (139,996) (820,856) (1,568,211) (544,363) 179,278
--------- ------------ ------------ ----------- --------
$ 656,972 $(12,003,126) $(10,284,351) $(1,995,700) $168,814
========= ============ ============ =========== ========
</TABLE>
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Currently payable (refundable):
Foreign........................ -- $18,000 $(1,982) -- $23,958
Federal........................ $26,000 -- -- -- --
State.......................... 4,000 -- -- -- --
------- ------- ------- ------- -------
$30,000 $18,000 $(1,982) -- $23,958
======= ======= ======= ======= =======
</TABLE>
The following is a reconciliation between the U.S. federal statutory rate
and the effective tax rate:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- -------------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
U.S. federal statutory rate......... 34.0% (34.0)% (34.0)% (34.0)% 34.0%
State taxes, net of applicable
federal tax benefit............... 0.5 -- -- -- --
Foreign income and withholding
taxes............................. -- 0.2 -- -- 12.2
Losses not benefited................ -- 34.0 34.0 34.0 --
Net operating loss benefit.......... (34.0) -- -- -- (34.0)
Alternative minimum tax............. 4.0 -- -- -- 2.0
----- ----- ----- ----- -----
4.5% 0.2% -- -- 14.2%
===== ===== ===== ===== =====
</TABLE>
F-18
<PAGE> 89
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1996 and 1995 is unaudited)
The approximate tax effect of each type of temporary difference and
carryforward before allocation of the valuation allowance is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards
(domestic)............................. $ 8,543,000 $11,211,000 $11,152,000
Net operating loss carryforward
(foreign).............................. 440,000 848,000 838,000
Tax credit carryforwards.................. 1,783,000 1,819,000 1,819,000
Accounts receivable reserves.............. 160,000 173,000 173,000
Vacation and benefits reserves............ 231,000 241,000 241,000
Restructuring reserves.................... -- 132,000 46,000
Stock option compensation................. -- 530,000 530,000
Other..................................... 35,000 -- --
Deferred tax liabilities:
Depreciation and amortization............. (72,000) (123,000) (123,000)
----------- ----------- ----------
Net deferred tax assets..................... $11,120,000 $14,831,000 $14,676,000
=========== =========== ==========
</TABLE>
As of December 31, 1995, the Company had federal net operating loss ("NOL")
and research and experimentation credit carryforwards of approximately
$28,500,000 and $1,375,000, respectively, available to offset future federal
income tax liabilities, which expire at various dates through 2010. The
utilization of NOL and research and experimentation credit carryforwards is
subject to Section 382 of the Internal Revenue Code. This section established an
annual limitation, based on changes in the Company's ownership, on the amount of
income which may be offset by these tax attributes. The 1993 purchases of
Preferred Stock by IBM, in combination with certain other transactions,
constituted such a change in ownership of the Company. As a result, the
Company's utilization of NOLs and R&E credits in the aggregate amount of
approximately $10,000,000, that were available at the time of such change, will
be limited to a maximum of $2,300,000 per year through 2010. No change of
ownership has occurred since 1993, and the Company does not expect that the
offering contemplated by the registration statement is which these financial
statements are included will result in such a change of ownership. Accordingly,
NOLs and R&E credits in the aggregate amount of approximately $18,500,000 at
December 31, 1995 that have arisen since the 1993 change in ownership may be
utilized by the Company without limitation under Section 382.
As of December 31, 1995, the Company's foreign subsidiaries had NOL
carryforwards of approximately $1,900,000.
As required by Statement of Financial Accounting Standards No. 109,
management of the Company has evaluated the positive and negative evidence
bearing upon the realizability of the Company's deferred tax assets, which
consist principally of net operating loss and tax credit carryforwards.
Management has considered the Company's history of losses and its short recent
period of income and concluded that as of December 31, 1995 and March 31, 1996,
it is more likely than not that the Company will not generate future taxable
income prior to the expiration of the net operating losses and tax credits in
2010. Accordingly, the Company's deferred tax assets have been fully reserved.
Management re-evaluates the positive and negative evidence on a quarterly basis.
F-19
<PAGE> 90
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1996 and 1995 is unaudited)
J. 401(K) PLAN:
The Company sponsors a defined contribution employees' investment and
savings plan under Section 401(k) of the Internal Revenue Code. This plan covers
all eligible (as defined) employees of the Company. The Company made no matching
contributions to the plan during 1993, 1994 and 1995 or during the three months
ended March 31, 1996.
K. AGREEMENTS WITH RELATED PARTIES:
During 1993, 1994 and 1995 and the three months ended March 31, 1995 and
1996, the Company sold a total of $11,807,000, $3,052,000, $3,078,000 and
$402,000 and $1,015,000, respectively, in software and services, respectively,
to preferred stockholders of the Company.
During 1993, the Company entered into a series of agreements with IBM (a
related party) encompassing product licenses, customized development, consulting
and maintenance. The agreements cover a three-year period. During 1993, 1994,
1995 and the three months ended March 31, 1995 and 1996, the Company recognized
approximately $9,900,000, $1,745,000, $3,078,000, $402,000 and $980,000,
respectively, of revenue under the terms of these agreements comprising 40.2%,
6.9%, 9.4% , 5.0% and 10.9%, respectively, of the total revenues of the Company
for the respective periods. At December 31, 1994 and 1995, the Company had
approximately $742,000 and $359,000, respectively, in accounts receivable due
from IBM. During 1993 and concurrent with the aforementioned agreements, IBM
purchased 3,750,695 shares of the Company's Series E and F Preferred Stock for
approximately $11,800,000. IBM did not participate in the purchase and sale of
preferred shares of the Series J offering on February 15, 1996.
Deferred revenue at December 31, 1995 and March 31, 1996 includes
$1,400,000 and $750,000, respectively, collected from IBM pursuant to a
$1,800,000 development contract. IBM directed the Company to suspend development
efforts on this contract during the quarter ended March 31, 1996 and,
accordingly, the Company recognized $650,000 in revenues related to certain
contract milestones. On April 2, 1996, this contract was terminated and, in
accordance with the terms of the contract, the Company recognized the remaining
$750,000 of revenues. The Company has no further obligations under this
contract.
Under the terms of the IBM agreements, either party has the option (the
"Break-Up Option") of terminating certain of the IBM agreements and modifying
the terms of certain others upon nine months' advance notice. On March 5, 1996,
the Company exercised the Break-Up Option by giving written notice to IBM. Upon
the effectiveness of the Break-Up Option, the rate of royalties paid to the
Company by IBM for ObjectStore-based products will be substantially increased,
IBM will no longer be entitled to a discount on training and consulting services
provided by the Company and the Company's joint development and marketing
efforts with IBM may be curtailed or eliminated.
During 1993, the Company entered into a cooperative marketing agreement
with IBM pursuant to which the Company pays fees to IBM for marketing the
Company's products and services. In addition IBM charges the Company for certain
equipment rentals, maintenance and other expenses. Total charges from IBM during
the years ended December 31, 1993, 1994 and 1995 and three months ended March
31, 1995 and 1996 amounted to approximately $19,000, $166,000, $1,289,000,
$14,000 and $74,000, respectively.
F-20
<PAGE> 91
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1996 and 1995 is unaudited)
L. GEOGRAPHIC DATA:
The Company's operations consist of a single line of business comprised of
developing and marketing computer software and providing related maintenance and
consulting services.
The Company has sales and marketing operations located outside the United
States, in the United Kingdom, France, Germany, Japan, and, until September
1995, in Australia. Revenues are reflected in the geographic areas from which
the sales are made. Financial information for the Asia Pacific region for the
quarter ended March 31, 1996 reflects solely the Company's operations located in
Japan. Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
NORTH UNITED REST OF ASIA
AMERICA KINGDOM EUROPE PACIFIC ELIMINATIONS CONSOLIDATED
------------ ---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Revenues:
From unaffiliated customers............. $ 22,998,000 $ 512,000 $ 700,000 $ 440,000 $ -- $ 24,650,000
Intercompany transfers.................. 687,000 -- -- -- (687,000) --
------------ ----------- ----------- ------------ ------------
Total revenues...................... $ 23,685,000 $ 512,000 $ 700,000 $ 440,000 $ (687,000) $ 24,650,000
============ =========== =========== ============ ============
Income (loss) from operations............... $ 926,000 $ 5,000 $ 145,000 $ (511,000) $ -- 565,000
============ =========== =========== ============ ============
Identifiable assets......................... $ 35,571,000 $ 507,000 $ 678,000 $ 528,000 $(11,655,000) $ 25,629,000
============ =========== =========== ============ ============
Year ended December 31, 1994
Revenues:
From unaffiliated customers............. $ 20,319,000 $2,247,000 $2,085,000 $ 838,000 -- $ 25,489,000
Intercompany transfers.................. 1,738,000 -- -- -- $ (1,738,000) --
------------ ----------- ----------- ------------ ------------
Total revenues...................... $ 22,057,000 $2,247,000 $2,085,000 $ 838,000 $ (1,738,000) $ 25,489,000
============ =========== =========== ============ ============
Income (loss) from operations............. $(10,312,000) $ 69,000 $ (803,000) $(1,341,000) $ -- $(12,387,000)
============ =========== =========== ============ ============
Identifiable assets....................... $ 39,563,000 $1,528,000 $1,482,000 $ 2,263,000 $(19,407,000) $ 25,429,000
============ =========== =========== ============ ============
Year ended December 31, 1995
Revenues:
From unaffiliated customers............. $ 24,867,000 $2,681,000 $3,178,000 $ 1,980,000 -- $ 32,706,000
Intercompany transfers.................. 2,644,000 -- -- -- $ (2,644,000) --
------------ ----------- ----------- ------------ ------------
Total revenues...................... $ 27,511,000 $2,681,000 $3,178,000 $ 1,980,000 $ (2,644,000) $ 32,706,000
============ =========== =========== ============ ============
Loss from operations...................... $ (8,876,000) $ (54,000) $ (816,000) $ (661,000) $ -- $(10,407,000)
============ =========== =========== ============ ============
Identifiable assets....................... $ 18,666,000 $2,354,000 $1,936,000 $ 1,049,000 $ (6,851,000) $ 17,154,000
============ =========== =========== ============ ============
For the three months ended March 31, 1996:
Revenues:
From unaffiliated customers............. $ 5,790,000 $ 973,000 $ 852,000 $ 1,381,000 -- $ 8,996,000
Intercompany transfers.................. 1,047,000 -- -- -- $ (1,047,000) --
------------ ----------- ----------- ------------ ------------
Total............................... $ 6,837,000 $ 973,000 $ 852,000 $ 1,381,000 $ (1,047,000) $ 8,996,000
============ =========== =========== ============ ============
Income (loss) from operations............... $ 39,000 $ (206,000) $ (91,000) $ 449,000 -- $ 191,000
============ =========== =========== ============ ============
Identifiable assets......................... $ 22,667,000 $2,792,000 $1,813,000 $ 2,031,000 $ (7,498,000) $ 21,805,000
============ =========== =========== ============ ============
</TABLE>
Intercompany transfers primarily represent shipments of software to foreign
subsidiaries and are charged at fixed percentages of the net selling prices to
the ultimate customers. These transfers have been eliminated from consolidated
revenues.
F-21
<PAGE> 92
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1996 and 1995 is unaudited)
Export sales to unaffiliated customers by geographic area were
approximately as follows:
<TABLE>
<CAPTION>
ASIA
CANADA EUROPE PACIFIC TOTAL
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1993..................... -- -- $ 638,000 $ 638,000
Year ended December 31, 1994..................... -- $1,068,000 $1,109,000 $2,177,000
Year ended December 31, 1995..................... -- $1,964,000 $2,253,000 $4,217,000
Three months ended March 31, 1995................ -- $ 260,000 $ 996,000 $1,256,000
Three months ended March 31, 1996................ $317,000 $ 496,000 $ 228,000 $1,041,000
</TABLE>
M. RESTRUCTURING CHARGES:
During fiscal 1995, the Company recorded restructuring charges aggregating
approximately $2,709,000. The restructuring plan was developed to re-focus the
Company's product strategies and reduce the Company's cost structure and
included severance payments to 36 terminated employees (including the Company's
President and four Vice Presidents, all telesales personnel and certain
marketing personnel) totaling approximately $2,100,000 (including the extension
of exercise periods of certain stock options totaling approximately $1,317,000),
loss on the sale of the Company's Australian subsidiary amounting to
approximately $76,000 and losses on vacated office leases approximately
$533,000. The revenues and net operating losses of the Company's Australian
operation were not material. As of March 31, 1996, the restructuring plan was
substantially complete.
Activity related to the restructuring change and the related accrued
restructuring reserve (included in accrued expenses) is summarized as follows:
<TABLE>
<CAPTION>
RESERVE AT RESERVE AT
PROVISION DECEMBER 31, MARCH 31,
DURING 1995 PAYMENTS 1995 PAYMENTS 1996
----------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Employee severance.................... $ 783,000 $(691,000) $ 92,000 $ (92,000) --
Vacated office leases and related
costs............................... 408,000 (173,000) 235,000 (120,000) $ 115,000
----------- --------- ------------ --------- -----------
Total restructuring
reserve................... 1,191,000 $(864,000) $327,000 $(212,000) $ 115,000
========= ========== ========= ========
Stock option remeasurement............ 1,317,000
Abandoned leaseholds.................. 125,000
Loss on sale of subsidiary............ 76,000
-----------
Total restructuring
charges................... $ 2,709,000
=========
</TABLE>
F-22
<PAGE> 93
DESCRIPTION OF GRAPHICS
1) Text on top of page:
"OBJECT DESIGN offers a complete data management solution for Internet
and Intranet applications."
2) Graphic in middle of page:
A diagram of the Company's product line containing graphics. A
one-sentence description of each product is included as follows:
-- ObjectStore is a high-performance database that incorporates
support for extended data types and extended data
relationships.
-- Extended Object Managers offer built-in support for Text,
Audio, Image, Video, HTML, Java objects and other extended
data types.
-- ObjectForms dynamically generates HTML pages from ObjectStore
databases.
-- ObjectStore supports widely used development languages and
standards.
-- DBconnect provides access to relational data.
-- ObjectStore Performance Expert and ObjectStore Inspector
simplify performance tuning and database design.
3) Company logo in bottom right hand corner, accompanied by text:
"The Database for the Web"
<PAGE> 94
- ------------------------------------------------------------
- ------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY SELLING STOCKHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION TO BUY, ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO,
OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................ 3
The Company....................... 6
Risk Factors...................... 6
Use of Proceeds................... 14
Dividend Policy................... 14
Capitalization.................... 15
Dilution.......................... 16
Selected Consolidated Financial
Data............................ 17
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... 19
Business.......................... 31
Management........................ 44
Certain Transactions.............. 55
Principal Stockholders............ 57
Description of Capital Stock...... 59
Shares Eligible for Future Sale... 63
Underwriting...................... 65
Legal Matters..................... 66
Experts........................... 66
Additional Information............ 67
Consolidated Financial
Statements...................... F-1
</TABLE>
UNTIL AUGUST 17, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
3,000,000 SHARES
[LOGO]
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
HAMBRECHT & QUIST
ALEX. BROWN & SONS
INCORPORATED
WESSELS, ARNOLD & HENDERSON
JULY 23, 1996
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
issuance and distribution of the securities being registered, other than
underwriting discounts and commissions. All amounts shown are estimates except
the Securities and Exchange Commission registration fee and the National
Association of Securities Dealers, Inc. filing fee.
<TABLE>
<S> <C>
Registration fee (Securities and Exchange Commission).................. $ 13,087
Nasdaq listing fee..................................................... 50,000
NASD filing fee........................................................ 4,495
Printing and engraving expenses........................................ 125,000
Transfer agent fees.................................................... 5,000
Accounting fees and expenses........................................... 300,000
Legal fees and expenses................................................ 300,000
Blue Sky fees and expenses (including related legal fees).............. 20,000
D&O insurance premium.................................................. 150,000
Miscellaneous.......................................................... 32,418
--------
Total........................................................ $1,000,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article SEVENTH of the Company's Amended and Restated Certificate of
Incorporation, as amended to date (the "Certificate of Incorporation") provides
that the Company shall indemnify each of its directors and officers (and any
former director or officer) to the maximum extent permitted by the General
Corporation Law of the State of Delaware against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement incurred by him or her in
connection with any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, to which he or she is
threatened to be or is made a party, by reason of his or her being or having
been such a director or officer, or having served at the request of the Company
as a director, officer, employee, trustee or agent of another corporation,
partnership, trust or other enterprise.
Article NINTH of the Certificate of Incorporation provides that, to the
maximum extent permitted by the General Corporation Law of the State of
Delaware, no director of the Company shall be personally liable to the Company
or to any of its stockholders for monetary damages arising out of such
director's breach of fiduciary duty.
Article SEVENTH of the Certificate of Incorporation further provides that
the right of indemnification provided thereby shall not be exclusive of or
affect any other rights to which any director or officer may be entitled.
Articles SEVENTH and NINTH of the Certificate of Incorporation each provide that
no amendment or repeal of such Article shall deprive any person of the benefits
thereof with respect to any act or failure to act occurring prior to such
amendment or repeal.
Section 10 of the By-laws of the Company, as amended to date, provides that
the Company shall indemnify its officers and directors to the full extent the
Company is permitted or required to do so by the General Corporation Law of the
State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware
("Section 145") permits a corporation to indemnify its directors and officers in
the manner described by Article SEVENTH of the Certificate of Incorporation,
except with respect to any matter as to which a director or officer shall have
been adjudicated in any proceeding not to have acted in good faith in the
reasonable belief that his or her action was in the best interests of the
corporation. Such indemnification may include
II-1
<PAGE> 96
payment by the corporation of expenses incurred in defending or disposing of any
such action, suit or other proceeding, whether civil or criminal, in advance of
the final disposition or compromise of such action, suit or proceeding, upon
receipt of an undertaking by the person indemnified to repay such payment if he
or she shall be adjudicated to be not entitled to indemnification by the
corporation. No indemnification shall be provided in any particular matter
unless such indemnification shall be determined to be proper under Section 145
(a) by a majority of the disinterested then in office, even though less than a
quorum; (b) if there are no such directors, or if such directors so direct, then
by independent legal counsel in a written opinion; or (c) by the stockholders.
Section 145 also authorizes corporations to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against and
incurred by him or her in any such capacity, or arising out of his or her status
as such, whether or not the corporation would have the power to indemnify him or
her against such liability. The Company maintains a general liability insurance
policy which covers certain liabilities of directors and officers of the Company
arising out of claims based on acts or omissions in their capacities as
directors or officers.
Section 7 of the Underwriting Agreement provides that, under certain
circumstances, the Underwriters are obligated to indemnify the directors and
officers of the Company against certain liabilities, including liabilities under
the Securities Act. Reference is made to the form of Underwriting Agreement
filed as Exhibit 1.1 hereto.
The effect of these provisions would be to permit indemnification by the
Company for, among other liabilities, liabilities arising out of the Securities
Act of 1933 (the "Securities Act").
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information is furnished with regard to all securities sold
by the Company within the past three years which were not registered under the
Securities Act.
(a) From January 1, 1993 through June 30, 1996, the Company issued an
aggregate of 3,430,811 shares of Common Stock to 129 directors, officers,
employees and consultants of the Company upon the exercise of options
granted pursuant to the Company's Stock Option Plans at prices ranging from
$.01 to $3.50 per share for an aggregate consideration of $960,799.
(b) On April 12, 1993, the Company issued 2,601,877 shares of Series E
Convertible Preferred Stock for an aggregate consideration of $7,805,631
and 1,148,818 shares of Series F Convertible Preferred Stock for an
aggregate consideration of $4,020,863 to one investor.
(c) On May 14, 1993, the Company issued 250,000 shares of Series G
Convertible Preferred Stock for an aggregate consideration of $1,000,000 to
one investor.
(d) On March 31, 1994, the Company issued 999,848 shares of Series I
Convertible Preferred Stock for an aggregate consideration of $6,998,936 to
eleven investors.
(e) On February 15, 1996, the Company issued 1,655,000 shares of
Series J Convertible Preferred Stock for an aggregate consideration of
$4,965,000 to eleven investors.
The issuances described in this Item 15 were made in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act
relating to sales by an issuer not involving any public offering, and, in the
case of shares of Common Stock issued pursuant to the exercise of options
granted under the Stock Option Plans, in further reliance upon the exemption
from registration set forth in Rule 701 under the Securities Act. The foregoing
transactions did not involve a distribution or public offering. No underwriters
were engaged in connection with the foregoing issuances of securities, and no
commissions or discounts were paid.
II-2
<PAGE> 97
ITEM 16. EXHIBITS AND FINANCIAL SCHEDULES.
(a) EXHIBITS
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement
*3.1 Restated Certificate of Incorporation, as amended
*3.2 Form of Certificate of Amendment of Restated Certificate of Incorporation (to be
effective upon adoption by the stockholders of the Company)
*3.3 Form of Amended and Restated Certificate of Incorporation of the Company (to be
effective upon closing of the offering)
*3.4 By-Laws of the Company, as amended
*3.5 Form of Amended and Restated By-Laws of the Company (to be effective upon closing
of the offering)
*3.6 Revised Form of Amended and Restated Certificate of Incorporation of the Company
(to become effective upon closing of the offering)
*4.1 Specimen certificate for Common Stock of the Company
*5.1 Opinion of Foley, Hoag & Eliot LLP
*10.1 1989 Incentive and Nonqualified Stock Option Plan
*10.2 1995 Nonqualified Stock Option Plan
*10.3 1996 Incentive and Nonqualified Stock Option Plan
*10.4 1996 Employee Stock Purchase Plan
*10.5 Letter Agreement dated April 18, 1995 between the Company and Fleet Bank of
Massachusetts, N.A. ("Fleet")
*10.6 $1,500,000 Term Note I dated November 19, 1993 by the Company and payable to Fleet,
with Allonge to Note dated April 18, 1995
*10.7 $1,500,000 Term Note II dated June 24, 1994 by the Company and payable to Fleet,
with Allonge to Note dated April 18, 1995
*10.8 $5,000,000 Revolving Note dated April 18, 1995 by the Company payable to Fleet
*10.9 Security Agreement dated June 23, 1993 between the Company and Fleet
*10.10 Pledge Agreement dated August 20, 1993 between the Company and Fleet
*10.11 Loan Modification Agreement and Waiver dated January 17, 1996 between the Company
and Fleet
*10.12 Lease dated September 15, 1993 between the Company and 25 Mall Road Trust.
*10.13 First Amendment to Lease dated June 28, 1994 between the Company and 25 Mall Road
Trust
*10.14 Second Amendment to Lease dated March 1, 1996 between the Company and 25 Mall Road
Trust
*10.15 Employment Agreement dated December 21, 1995 between the Company and Robert N.
Goldman, as amended by Amendment to Employment Agreement dated May , 1996
*10.16 Employment Agreement dated December 21, 1995 between the Company and Justin J.
Perreault, as amended by Employment Agreement Amendment dated May , 1996
*10.17 Severance Agreement dated March 1, 1996 between the Company and Thomas M. Atwood
*10.18 Severance Agreement dated May 24, 1995 between the Company and Kenneth E. Marshall
*10.19 Severance Agreement dated November 28, 1995 between the Company and David Stryker
*10.20 Sixth Amended and Restated Stockholders' Agreement dated February 13, 1996 among
the Company and certain of its stockholders
*10.21 Amended and Restated IBM Stockholders' Agreement dated May 14, 1993 among the
Company, International Business Machines Corporation ("IBM") and certain other
stockholders of the Company, as amended by a Second Amendment dated March 31, 1994,
as further amended by a Third Amendment dated June 10, 1994 and as further amended
by a Fourth Amendment dated February 14, 1996
*10.22 Amended and Restated Registration Rights Agreement dated June 29, 1990 between the
Company and certain of its stockholders, as amended by Amendment No. 1 dated
October 1, 1990, as further amended by Amendment No. 2 dated July 29, 1991, as
further amended by Amendment No. 3 dated March 12, 1992, as further amended by
Amendment No. 4 dated April 12, 1993, as further amended by Amendment No. 5 dated
May 14, 1993, as further amended by Amendment No. 6 dated March 31, 1994 and as
further amended by Amendment No. 7 dated February 13, 1996
</TABLE>
II-3
<PAGE> 98
<TABLE>
<C> <S>
*10.23 Master Lease and Warrant Agreement dated October 1, 1990 between the Company and
PacifiCorp Credit, Inc. d/b/a Pacific Venture Finance, Inc. ("PacifiCorp")
*10.24 Preferred Stock Purchase Warrant dated October 1, 1990 between the Company and
PacifiCorp.
*10.25 Internal Use and Substrate Agreement dated April 10, 1993 between the Company and
IBM
*10.26 Break-Up Agreement dated April 10, 1993 between the Company and IBM
*10.27 Escrow Agreement dated April 10, 1993 between the Company and IBM
*10.28 Master Agreement dated April 10, 1993 between the Company and IBM
*10.29 First Amended and Restated Agreement Regarding Confidential Information dated
February 11, 1993 between the Company and IBM
*10.30 Master OEM Agreement dated between the Company and Verity, Inc.
*10.31 Limited Source Code License Agreement dated December 1, 1994 between the Company
and Dharma Systems, Inc., as amended March 21, 1995
*10.32 Software License and Distribution Agreement dated December 1, 1995 between the
Company and ViVi Software, S.r.1
*10.33 License Agreement dated February 23, 1996 between the Company and net.Genesis Corp.
*10.34 Object Design Licensing Agreement dated March 19, 1996 between the Company and
Virage, Inc. (Confidential treatment requested for certain portions pursuant to
Rule 406)
*11.1 Computation of Earnings per Share
*21.1 List of Subsidiaries of the Company
23.1 Consent of Coopers & Lybrand L.L.P.
*23.2 Consent of Foley, Hoag & Eliot LLP (included in Exhibit 5.1)
*24.1 Power of Attorney (included on the signature page of the registration statement)
<FN>
- ---------------
*Previously filed.
</TABLE>
(b) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the registrant pursuant to the provisions
contained in the Certificate of Incorporation and By-Laws of the registrant and
the laws of the Commonwealth of Massachusetts, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to
II-4
<PAGE> 99
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 100
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE COMPANY HAS
DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWN OF BURLINGTON,
MASSACHUSETTS ON JULY 23, 1996.
OBJECT DESIGN, INC.
By: /s/ ROBERT N. GOLDMAN
------------------------------------------
Robert N. Goldman
President and Chief Executive Officer
<TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT N. GOLDMAN President and Chief Executive July 23, 1996
- --------------------------------------------- Officer (Principal Executive
Robert N. Goldman Officer and Director)
* Chief Financial Officer July 23, 1996
- --------------------------------------------- (Principal Financial and
Lacey P. Brandt Accounting Officer)
* Director July 23, 1996
- ---------------------------------------------
Gerald B. Bay
* Director July 23, 1996
- ---------------------------------------------
Arthur J. Marks
* Director July 23, 1996
- ---------------------------------------------
Tim R. Palmer
* Director July 23, 1996
- ---------------------------------------------
Scott Sperling
* Director July 23, 1996
- ---------------------------------------------
Steven C. Walske
</TABLE>
*By: /s/ ROBERT N. GOLDMAN
------------------------------------------------------
Robert N. Goldman
Attorney-in-Fact
II-6
<PAGE> 101
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
*1.1 Form of Underwriting Agreement..........................................
*3.6 Revised Form of Amended and Restated Certificate of Incorporation of the
Company (to become effective upon closing of the offering)..............
*5.1 Opinion of Foley, Hoag & Eliot LLP......................................
23.1 Consent of Coopers & Lybrand L.L.P......................................
<FN>
- ---------------
* Previously filed.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated May 23, 1996, on our audits of the financial statements of
Object Design, Inc. We also consent to the references to our firm under the
captions "Selected Financial Data" and "Experts".
Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 23, 1996
