<PAGE>
As filed with the Securities and Exchange Commission on June 9, 2000
Registration No. 333-34040
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 2
to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
OPEN PORT TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Illinois (before 7372 36-3874234
reincorporation) (Primary Standard (I.R.S. Employer
Delaware (after Industrial Identification Number)
reincorporation) Classification Code Number)
(State or other jurisdiction
of
incorporation or
organization)
676 North St. Clair Street, Suite 900
Chicago, Illinois 60611
(312) 867-5000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Randy S. Storch
Chairman, President and Chief Executive Officer
Open Port Technology, Inc.
676 North St. Clair Street, Suite 900
Chicago, Illinois 60611
(312) 867-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
----------------
Mark L. Gordon, Esq. Linda Chaplik Harris, Esq. Erin Karzmer, Esq.
Janet Smerling LeVee, Mark L. Dosier, Esq. Testa, Hurwitz &
Esq. Sonnenschein Nath & Rosenthal Thibeault, LLP
Gordon & Glickson LLC 8000 Sears Tower 125 High Street
444 N. Michigan Avenue Chicago, Illinois 60606 Boston, Massachusetts
Chicago, Illinois 60611 (312) 876-8000 02110
(312) 321-1700 (617) 248-7000
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this 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, other than securities offered only in connection with dividend or
interest reinvestment plans, 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 to be a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
registration statement of the earlier effective registration statement for the
same offering. [_]
If this Form is a post-effective amendment pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act
registration statement number if the earlier effective registration statement
for the same offering. [_]
If the 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 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This Prospectus is not an +
+offer to sell these securities, and it is not soliciting an offer to buy +
+these securities, in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated June 9, 2000
[OPEN PORT(R) TECHNOLOGY LOGO]
--------------------------------------------------------------------------------
4,000,000 Shares
Common Stock
--------------------------------------------------------------------------------
This is the initial public offering of Open Port Technology, Inc. and we are
offering 4,000,000 shares of our common stock. We anticipate that the initial
public offering price will be between $10.00 and $12.00 per share. We have
applied to list our common stock on the Nasdaq National Market under the
symbol "OPRT."
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary
is a criminal offense.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Open Port
<S> <C> <C> <C>
Per Share $ $ $
Total $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to 600,000
additional shares to cover over-allotments.
Deutsche Banc Alex. Brown
Robertson Stephens
Dain Rauscher Wessels
The date of this prospectus is , 2000
<PAGE>
[Inside Front Cover]
[Over the graphical depiction are the words "BRIDGING IP-BASED, PSTN AND
WIRELESS NETWORKS."
Graphical depiction consists of a circle with the words "IP LaunchPad"
enclosed by a rectangular border with four circular button symbols situated
horizontally across the top of the rectangular border. A graphical
representation of a cloud, connected to the circle by a line, contains the
acronym "PSTN" and appears in the lower left quadrant. Beneath this cloud are
the words, placed horizontally from left to right, with double-headed arrows
leading to and from the cloud, "Voicemail*," "Fax" and "Phone*" below graphical
depictions of those devices. A footnote located on the bottom of this cover
page denotes asterisk as meaning "in development." A graphical representation
of a second cloud, connected to the circle by a line, contains the word
"Wireless*" and appears in the lower right quadrant. To the right of this cloud
are the words, placed vertically from top to bottom, with double-headed arrows
leading to and from the cloud, "Voicemail," "PDA," "Pager" and "Mobile" each
next to a graphical depiction of those devices. A graphical representation of a
third cloud, connected to the circle by a line, contains the acronym "IP" and
appears above the circle. To the left of this cloud are the words, placed
vertically from top to bottom, with double-headed arrows leading to and from
the cloud, "Web," "Email" and "Client" each next to a graphical depiction of
those devices.]
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all the information that you should
consider before investing in our common stock. You should carefully read the
entire prospectus, including "Risk Factors" and the financial statements,
before making an investment decision.
Open Port Technology, Inc.
We design, develop and distribute IP LaunchPad, a carrier-class software
platform that enables our customers to deliver enhanced communication services
over networks based on the Internet Protocol, or IP. Our customers are service
providers, including long distance telecommunication providers, regional Bell
operating companies, competitive local exchange carriers, public telephone and
telegraph companies, and Internet service providers. IP LaunchPad provides
software connections between IP networks and the public switched telephone
network, or PSTN, and wireless networks. These connections allow our customers
to offer enhanced IP services that connect to PSTN and wireless devices such as
fax machines, telephones, voicemail systems, cellular phones and pagers. The
types of enhanced IP services that we enable or intend to enable include
services such as delivering email messages to fax machines, voicemail messages
to email systems, and news alerts to mobile phones.
Our solution enables enhanced IP services to be deployed with the
accountability, tracking and reliability of services delivered over the PSTN,
while taking advantage of the more efficient use of bandwidth, increased
functionality, flexibility and reduced costs offered by IP networks. In
addition to bridging IP networks, the PSTN and wireless networks, our IP
LaunchPad solution addresses other key challenges limiting deployment of
enhanced IP services today.
. We integrate IP LaunchPad into a service provider's network
infrastructure. As a result, we and other application developers can
create applications that integrate with our platform rather than
directly with each service provider's environment. This one-time
integration makes it easier for service providers to offer their
subscribers new enhanced IP services.
. Our solution enables service providers to track and monitor the delivery
of enhanced IP services, allowing them to offer their subscribers a
variety of service level guarantees.
. Our solution enables subscribers to provide self-care through a web
browser interface. For example, a subscriber can sign up for a new
service, adjust user preferences and track the progress of sent
messages. This reduces the service provider's support costs.
. Our solution enables wholesale distribution of enhanced IP services,
such that each new service launched on IP LaunchPad can also be
distributed in a wholesale manner by one service provider to another.
Our objective is to become the leading provider of software that enables
service providers to deliver enhanced IP services. To achieve our objective, we
intend to license IP LaunchPad to service providers that can deploy our
solution over extensive networks. We believe that by achieving widespread
deployment early in the evolution of enhanced IP services, our solution can
become the preferred software for enhanced IP service delivery. We intend to
target these service providers by expanding our direct sales force and by
developing new and existing strategic relationships with technology leaders
such as Cisco Systems and Sun Microsystems. We also intend to extend our
technology leadership by investing significant resources in technology and
product development, and to introduce new enhanced IP services applications
incrementally, as market demand develops. Further, we expect to invest in our
professional service capabilities to enhance our customer relationships and
revenue opportunities.
Our executive offices are located in Chicago, Illinois, and we have regional
offices in San Francisco, California, Denver, Colorado, the Netherlands,
Belgium and France. As of the date of this prospectus, we had 130 full-time
employees, and had entered into license agreements with 18 customers, including
Bell Atlantic Data Solutions Group, Inc., Cable and Wireless Japan Ltd.,
Interpath Communications, Inc., Qwest Communications Corporation and Tele
Danmark A/S.
3
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by Open Port....... 4,000,000 shares
Common stock to be outstanding
after this offering.................... 19,281,847 shares
Use of proceeds......................... To repay existing indebtedness and
fund the growth and expansion of our
business, and for working capital and
other general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol.. OPRT
</TABLE>
The number of shares to be outstanding upon completion of this offering is
based on shares outstanding as of May 31, 2000. This number excludes an
aggregate of 2,579,331 shares of common stock issuable upon the exercise of
outstanding stock options and warrants and an aggregate of 2,526,800 shares of
common stock available for future grants under our employee benefit plans,
which also contain provisions which increase the number of shares available for
grants in future periods. See "Shares Eligible For Future Sale" and
"Management-Employee Benefit Plans."
----------------
We were incorporated in Illinois in January 1993 and will reincorporate in
Delaware upon the closing of this offering. Our principal executive office is
located at 676 North St. Clair Street, Suite 900, Chicago, Illinois 60611, and
our telephone number at that office is (312) 867-5000. Our Web site is located
at www.openport.com. Information contained on our Web site is not part of this
prospectus.
Open Port is a registered trademark in the United States, and Open Port
Technology, Open Port AFD, Open Port Harmony, Open Port Harmony and Design, and
the "Swoop Logo Design" are registered trademarks of Open Port. All other brand
names or trademarks appearing in this prospectus are the property of their
respective holders.
----------------
The information in this prospectus reflects a one-for-3.75 reverse split of
our common stock to be effected in June 2000. Unless otherwise indicated, the
information contained in this prospectus assumes:
. all outstanding shares of preferred stock will convert into an aggregate
of 11,831,282 shares of common stock upon the closing of this offering;
. we will reincorporate in Delaware upon the closing of this offering,
which will result in, among other things, our adoption of a new
certificate of incorporation and by-laws; and
. the underwriters will not exercise their over-allotment option to
purchase additional shares of common stock, and no other person will
exercise any other outstanding option or warrant.
4
<PAGE>
Summary Consolidated Financial Data
The following table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the consolidated financial statements, including the notes thereto, and
other financial information appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
--------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- -------- -------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Software products...... $ 1,218 $ 892 $ 5,048 $ 3,241 $ 907 $ 26 $ 773
Maintenance and
professional
services.............. 65 517 1,266 1,600 1,443 359 580
Hardware products...... 642 867 835 506 -- -- --
------- ------- ------- -------- -------- ------- --------
Total revenues....... 1,925 2,276 7,149 5,347 2,350 385 1,353
------- ------- ------- -------- -------- ------- --------
Costs of revenues:
Software products...... 52 131 135 579 667 129 167
Maintenance and
professional services
(1)................... 118 1,775 2,668 2,871 2,403 552 780
Hardware products...... 378 521 430 331 -- -- --
------- ------- ------- -------- -------- ------- --------
Total cost of
revenues............ 548 2,427 3,233 3,781 3,070 681 947
------- ------- ------- -------- -------- ------- --------
Gross profit (loss)..... 1,377 (151) 3,916 1,566 (720) (296) 406
Operating expenses:
Sales and marketing
(1)................... 762 3,310 4,249 5,029 6,728 1,606 1,557
General and
administrative (1).... 1,009 1,449 1,547 1,932 2,304 444 738
Research and
development (1)....... 744 2,780 4,058 3,730 4,761 1,158 1,661
Stock-based
compensation.......... -- -- -- -- -- -- 118
------- ------- ------- -------- -------- ------- --------
Total operating
expenses............ 2,515 7,539 9,854 10,691 13,793 3,208 4,074
------- ------- ------- -------- -------- ------- --------
Operating loss.......... (1,138) (7,690) (5,938) (9,125) (14,513) (3,504) (3,668)
Net loss................ (1,138) (7,609) (6,090) (9,455) (15,860) (3,768) (3,974)
Net loss applicable to
common stockholders.... $(1,205) $(8,184) $(7,320) $(11,271) $(20,714) $(4,252) $(38,994)
Basic and diluted net
loss per share (2)..... $ (0.38) $ (2.56) $ (2.29) $ (3.49) $ (6.15) $ (1.27) $ (11.39)
======= ======= ======= ======== ======== ======= ========
Shares used in
calculation of basic
and diluted net loss
per share (2).......... 3,200 3,200 3,200 3,230 3,370 3,342 3,423
======= ======= ======= ======== ======== ======= ========
Pro forma basic and
diluted net loss per
share (2).............. $ (2.23) $ (0.26)
======== ========
Shares used in
calculation of pro
forma basic and diluted
net loss per
share (2).............. 7,123 15,260
======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31, 2000
--------------------------------------
Pro Forma
Actual Pro Forma (3) As Adjusted (4)
-------- ------------- --------------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Working capital....................... $ 10,989 $10,989 $45,438
Total assets.......................... 19,269 19,269 53,718
Total liabilities..................... 9,015 9,015 4,451
Redeemable convertible preferred
stock................................ 99,541 -- --
Stockholders' equity (deficit)........ (89,287) 10,254 49,267
</TABLE>
------
(1) Excludes an aggregate of $118 of non-cash, stock-based compensation expense
for the three months ended March 31, 2000 as follows: maintenance and
professional services, $11; sales and marketing, $25; general and
administrative, $42; and research and development, $40.
(2) See note 1 of the Open Port consolidated financial statements for an
explanation of the methods used to determine the number of shares used in
computing net loss per share data.
(3) The pro forma amounts reflect the conversion of all outstanding shares of
preferred stock into common stock upon the closing of the offering.
(4) Adjusted to reflect the pro forma adjustments and the sale of the 4,000,000
shares of common stock offered hereby at an assumed initial public offering
price of $11.00 per share and the application of net proceeds by Open Port,
after deducting underwriting discounts and commissions and estimated
offering expenses.
5
<PAGE>
RISK FACTORS
You should carefully consider the following risks and other information in
this prospectus before you decide to buy our common stock. An investment in our
common stock involves a high degree of risk. Our business, operating results or
financial condition may suffer if any of the following risks is actually
realized. Additional risks and uncertainties not currently known to us may also
adversely affect our business, operating results or financial condition. If any
of these risks or uncertainties is realized, the trading price of our common
stock could decline.
Risks Related to our Business
If commercial use of IP network infrastructure does not grow as expected, our
future prospects and growth will be impaired.
Our future success depends heavily on IP networks being accepted and widely
used for commerce. If IP network commerce does not continue to grow or grows
more slowly than expected, our business, operating results and financial
condition would be materially adversely affected. Consumers and businesses may
reject IP networks as a viable commercial medium for a number of reasons,
including potentially inadequate network infrastructure, security concerns,
slow development of enabling technologies or insufficient commercial support.
The current IP network infrastructure may not be able to support the demands of
an increasing number of users or the bandwidth requirements of users. In
addition, the effectiveness of IP networks may decline due to delays in the
development or adoption of new standards and protocols designed to support
increased levels of activity and due to increased government regulation. Even
if the required infrastructure, standards, protocols or complementary products
or services necessary to support increasing commercial use of IP networks are
developed, we may incur substantial expenses adapting our solution to changing
or emerging technology.
Acceptance of our products in a new and rapidly changing market is uncertain
and risky.
Since the market for enhanced IP services is new and rapidly changing,
demand and market acceptance for our products are subject to a high level of
uncertainty and risk. Several factors have deterred businesses and consumers
from using enhanced IP services, including security concerns, inconsistent
service quality, increasing IP network traffic and incompatible software
products. The acceptance of enhanced IP services requires a broad acceptance of
new methods of conducting business and exchanging information. Businesses that
already have invested substantial resources in other messaging methods may be
reluctant to adopt a new strategy that may limit or compete with their existing
efforts. In addition, the continued growth in Internet traffic may result in
slower response times which may adversely affect the use and acceptance of
enhanced IP services. The development of enhanced IP services also depends
largely on resolving issues associated with the quality and reliability of
message delivery over IP networks. If the market for reliable enhanced IP
services fails to develop or develops more slowly than expected, it could have
a material adverse effect on our business, operating results and financial
condition.
If enhanced IP services are not commercially accepted by subscribers, our
prospects for growth will suffer.
We currently derive substantially all of our revenues from software that
permits service providers to offer enhanced IP services. As a result, we depend
upon the ability of service providers to establish viable businesses based on
offering enhanced IP services to their
6
<PAGE>
subscribers. Our success and the success of these businesses rely on the
commercial acceptance of enhanced IP services by subscribers. We first
delivered IP LaunchPad in September 1999 and to date, only a limited number of
customers have licensed IP LaunchPad. While enhanced IP services provide
features and functions that are not available over the PSTN, we cannot be
certain that subscribers will find enhanced IP services attractive. If
subscriber demand for enhanced IP services does not develop or develops more
slowly than anticipated, it would have a material adverse effect on our
business, operating results and financial condition.
If our service provider customers are not able to successfully market enhanced
IP services to their subscribers, our business could be seriously harmed.
We have limited marketing resources and depend upon the marketing efforts of
our service provider customers to establish a market with their subscribers for
enhanced IP services based on our solution. If subscribers demand enhanced IP
services, we expect service providers to license more products and applications
to support the increased traffic and functionality. Accordingly, our results
will depend in significant part on the efforts and success of our service
provider customers to deploy enhanced IP services based on our software.
Because we have a limited operating history in our current business, we are
facing new risks and uncertainties, which makes evaluating our prospects
difficult.
Although we began operating in January 1993, the increasing popularity and
use of IP networks and the Internet have occurred only recently and, as a
result, the focus of our business changed significantly. We did not begin to
deliver our IP LaunchPad platform until September 1999. As a result, the
operating history of our business in its current form is limited and we are
facing new risks and challenges. You should evaluate our prospects in light of
the risks and uncertainties encountered by companies in the early stages of
development, particularly companies in new and rapidly evolving markets. These
risks include:
. unpredictability of operating results and future revenues;
. unproven market acceptance of our products;
. customer concentration;
. dependence on IP networks, service providers, strategic relationships
and our IP LaunchPad solution;
. increased competition; and
. general economic and market conditions.
We may not be successful in addressing any or all of these risks. Our failure
to address these risks could have a material adverse effect on our business,
operating results and financial condition.
If IP LaunchPad is not successful, our future revenues and profits will be
impaired.
Our future revenues and profits substantially depend on the commercial
success of IP LaunchPad. Our sales growth strategy is to target service
providers early in the evolution of enhanced IP services. We cannot be certain
that service providers will choose to offer enhanced IP services over their IP
networks, but even if they do offer such services, the growth of such services
will be fueled by subscribers' demands. Even if enhanced IP services are
adopted by subscribers and service providers, IP LaunchPad may not be accepted
on a timely basis or at all. Failure of IP LaunchPad to achieve market
acceptance for these or any other reasons could have a material adverse effect
on our business, operating results and financial condition.
7
<PAGE>
We may not be able to achieve or sustain growth in our business if service
providers do not purchase additional applications.
Even if our IP LaunchPad and our IP LaunchPad Fax Suite, the first enhanced
IP services application offered as part of our solution, achieve market
acceptance, we cannot be certain that service providers will purchase
additional applications from us to support increased functionality, such as
voice messaging services. If subscriber demand for IP LaunchPad and IP
LaunchPad Fax Suite does not develop or develops more slowly than anticipated,
our ability to increase revenues from licensing additional applications to
support increased functionality will be limited and could have a material
adverse effect on our business, operating results and financial condition.
If we are unable to introduce new products successfully, our business prospects
will be impaired.
The successful implementation of our business model depends on our ability
to introduce certain new products and to introduce these new products on
schedule. We recently entered into an agreement with a service provider to
begin trials of certain applications included in our IP LaunchPad Voicemail
Suite. We also are currently developing and intend to introduce the other
applications included in our IP LaunchPad Voicemail Suite as well as our IP
LaunchPad Wireless Data Suite. We cannot assure you that we will be able to
introduce these products or our other products under development on schedule,
or at all. In addition, early releases of software often contain errors or
defects. We cannot assure you that, despite our extensive testing, errors will
not be found in our new product releases before or after commercial release,
which could result in product re-development costs and loss of, or delay in,
market acceptance. A failure by us to introduce planned products or to
introduce such products on schedule could have a material adverse effect on our
business prospects.
Because our customer base is highly concentrated, the loss of one or more of
our significant customers could cause our business to suffer.
Our customer base is highly concentrated. Our top five customers accounted
for 73% of our revenues for the year ended December 31, 1999. Two of our
customers collectively accounted for 51% of our revenues for the fiscal year
ended December 31, 1999. We do not expect either of these customers to account
for any revenues in the year ended December 31, 2000. However, other customers
may account for more than 10% of our revenues in the future and we expect that
a small number of our customers will continue to account for a substantial
portion of our revenues.
In addition, companies in the Internet service and telecommunications
industries have been consolidating, resulting in a limited number of service
providers controlling an increasing portion of IP network traffic. Therefore,
we believe that our revenues will be largely dependent upon product acceptance
by a small number of service providers. If our products and services are not
widely deployed, or if we were to lose any one major customer due to
consolidation or otherwise, our business, operating results and financial
condition could be materially adversely affected. Our ability to increase our
revenues in the future will also depend in part upon our ability to make sales
to new service provider customers. In the event that such sales do not occur,
or if one or more of our service provider customers elects to purchase and
market competing technologies or products, it could have a material adverse
effect on our business, operating results and financial condition.
We typically enter into perpetual license agreements with each of our
service provider customers. We seek to enter into agreements substantially on
the terms set forth in our form of software license agreement, but individual
customer contracts are negotiated and may
8
<PAGE>
include provisions which vary materially from our standard agreement. Our
customer agreements generally do not obligate our customers to license software
or purchase services or maintenance support from us in the future. As a result,
our customer contracts do not provide any assurance of future revenues.
Our failure to successfully compete in our highly competitive market could
seriously harm our business.
Our industry is intensely competitive, rapidly evolving and subject to rapid
technological change. We expect competition to intensify in the future. Several
organizations offer components that compete with certain components of our
solutions and may become increasingly competitive with us in the future. Many
companies that offer products or services that compete with one or more of our
products or services have greater financial, technical, product development,
marketing and other resources than we have. These organizations may be better
known and may have more customers than we have. We may be unable to compete
successfully against these organizations.
As our product and service offerings evolve and the markets in which we
compete develop, we may in the future face competition from several other types
of organizations. In addition we expect our competitors to continue to improve
the performance of their current products and introduce new products or new
technologies. Certain of our current and future competitors may have greater
brand name recognition that could give them an advantage over us in gaining
market share. Successful new product introductions or enhancements by current
or future competitors could reduce the sales or market acceptance of our
products and services, perpetuate intense price competition or make our
products obsolete.
To be competitive, we must continue to invest significant resources in
research and development, sales and marketing and customer support. We cannot
be sure that we will have sufficient resources to make these investments or
that we will be able to make the technological advances necessary to be
competitive. Increased competition may result in price reductions, reduced
gross margins and loss of market share. Our failure to compete successfully
against current or future competitors could seriously harm our business,
operating results and financial condition.
We experience long sales and deployment cycles causing us to incur expenditures
prior to recognizing related revenues.
We typically experience long sales and deployment cycles. The sales cycle
varies between customers and generally ranges from one to six months. Because
the licensing of our products generally involves a significant capital
expenditure by the customer, our sales process is subject to lengthy approval
processes and delays. We often devote significant time and resources to a
prospective customer, including costs associated with site visits, product
demonstrations and trials and feasibility studies, without any assurance that
the prospective customer will decide to license our products. We cannot be
certain that the sales cycle for our products will not lengthen in the future.
The deployment cycle also generally varies by customer from one to three
months. The time required to deploy our solution varies significantly depending
on a number of factors, including the needs and skill set of the customer, the
size of the deployment, the complexity of the customer's network environment,
the quantity and degree of hardware configuration necessary to deploy our
solution, the procurement of hardware and PSTN access, and the customer's
installation schedule. During the deployment phase, we continue to devote
significant time and resources to the customer to install and test the products
and train the
9
<PAGE>
customer. Our software is generally subject to acceptance testing once a
license agreement has been entered into, and we cannot assure you that these
tests will be successful or that our customers will be obligated to pay for
software under these agreements.
The emerging and evolving nature of the enhanced IP services market may
cause prospective customers to delay their purchase decisions as they evaluate
new technologies and develop and implement new systems. The sales and
deployment process generally becomes more complex as the order size increases,
which may lead to potential delays in receipt of these orders. As a result, our
long and unpredictable sales cycle contributes to the uncertainty of our future
operating results.
Because we depend on foreign revenues, we are exposed to currency fluctuations,
import barriers and other risks related to conducting foreign operations.
We derived approximately 20% of our net revenues from customers outside of
the United States for the year ended December 31, 1999. We expect this
percentage to increase in 2000, as one component of our growth strategy is to
expand our international presence by expanding our direct sales force in Europe
and Asia. We derived approximately 41% of our net revenues from customers
outside the United States in the three months ended March 31, 2000. Our
international business operations are and will be subject to a number of risks,
including:
. difficulties in managing foreign operations, enforcing agreements and
collecting receivables through foreign legal systems;
. burdens of complying with a wide variety of foreign laws, particularly
with respect to intellectual property and license requirements;
. import or export licensing and product certification requirements and
restrictions;
. tariffs, duties, price controls or other restrictions on foreign
currencies or trade barriers imposed by foreign countries;
. potential adverse tax consequences, including restrictions on
repatriation of earnings;
. fluctuations in currency exchange rates;
. impact of recessions in economies outside the United States, including
foreign currency devaluation, higher interest rates, spiraling
inflation, and increased government regulation or ownership of
traditional private businesses;
. longer payment cycles;
. fluctuations in the value of foreign currencies; and
. unexpected regulatory, economic or political changes in foreign markets.
The relationship between non-dollar denominated revenues and dollar
denominated expenses may subject us to significant foreign exchange risks. We
cannot be certain that these factors will not have a material adverse effect on
our business, operating results and financial condition.
Export regulations, either in their current form or as may be subsequently
enacted, may limit our ability to distribute our software outside the United
States. The unlawful export of our software could also harm our business.
Although we take precautions against unlawful export of our software, the
global nature of the Internet makes if difficult to effectively control the
distribution of software.
We currently have offices in Belgium, France, Hong Kong, the Netherlands and
the United States. We intend to expand the scope of our international
operations, which will require us to
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enhance our communications infrastructure and may include the establishment of
additional overseas operations. If we are unable to expand our international
operations effectively and quickly, we may be unable to successfully market,
sell, deliver and support our products internationally.
If we are not able to expand our direct sales force and our relationships with
resellers, our ability to execute our growth strategy will be seriously harmed.
In 1999, we licensed substantially all of our products through our direct
sales force. As of May 31, 2000, we had 16 direct sales representatives. In
addition, we entered into two agreements with resellers in the quarter ended
March 31, 2000, and intend to enter into additional agreements with resellers
in the future. Our future success depends on increasing the size and scope of
our direct sales force and our relationships with resellers. There is intense
competition for personnel, and we cannot guarantee that we will be able to
attract, assimilate or retain additional qualified sales personnel or
relationships with resellers on a timely basis. Failure to add additional sales
representatives and expand our relationships with resellers would have a
material adverse effect on our business, operating results and financial
condition.
We must establish and maintain strategic relationships in order to successfully
expand our business.
To be successful, we must establish and maintain strategic relationships
with leaders in a number of telephony and Internet industry segments. This is
critical to our success because we believe that these relationships will enable
us to:
. extend the reach of our products and services to a larger number of
service providers;
. develop and deploy new products;
. further enhance the Open Port brand; and
. generate additional revenues.
Entering into strategic relationships is complicated because some of our
current and future strategic allies may decide to compete with us in some or
all of our markets. In addition, we may not be able to establish relationships
with key participants in the telephony industry if we have relationships with
their competitors. Moreover, some potential strategic allies have resisted, and
may continue to resist, working with us until our products and services have
achieved widespread market acceptance. Our agreements with our strategic allies
typically are subject to termination on short notice.
Once we have established strategic relationships, we will depend on our
allies' ability to generate increased acceptance and use of our products and
services. To date, we have established only a limited number of strategic
relationships, and many of these relationships are in the early stages of
development. We have limited experience in establishing and maintaining
strategic relationships with telephony and Internet industry participants. If
we lose any of these strategic relationships or fail to establish additional
relationships, or if our strategic relationships fail to benefit us as
expected, we may not be able to execute our business plan, and our business
will suffer.
Because we have a history of losses and may continue to incur significant
expenses, we cannot be certain that we will achieve profitability.
We incurred net losses of $9.5 million for the year ended December 31, 1998,
$15.9 million for the year ended December 31, 1999, and $4.0 million for the
three months ended March 31, 2000. As of March 31, 2000, we had an accumulated
deficit of $90.4 million, $44.3 million of which was attributable to accretion
of redeemable preferred stock and warrants to acquire preferred stock and
preferred stock dividends. Our losses resulted from the significant costs
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<PAGE>
we incurred to develop our products and services and our limited revenues to
date. Because we expect to incur increased product development, sales and
marketing, and administrative expenses as we execute our business strategy, we
will need to generate significant revenues to achieve and maintain
profitability. We expect to continue to incur substantial operating losses for
the next several quarters. Our operating losses may continue to increase as we
invest in the growth of our business and the implementation of our business
strategy. If we are able to successfully implement our business strategy, we
believe that we will achieve profitability. However, because the market for
enhanced IP services is new and rapidly changing and implementation of our
business strategy depends on a variety of factors, many of which are beyond our
control, the timing of when we become profitable cannot be determined at this
time. We cannot be certain that we will ever achieve profitability. If we do
achieve profitability, we cannot be certain that we can sustain or increase
profitability on a quarterly or annual basis in the future. If we fail to
achieve profitability within the time frame expected by our investors, the
market price of our common stock will be adversely affected.
Our failure to meet significant capital requirements may seriously harm our
business and results of operations.
Our capital requirements in connection with our sales and marketing and
product development activities have been and will continue to be significant.
Our future capital requirements will depend on many factors, some of which are
not within our control. We may need to raise additional funds in the future in
order to fund more rapid expansion, to develop newer or enhanced products, or
to respond to competitive pressures. If additional funds are raised through the
issuance of equity or convertible debt securities, the percentage ownership of
our stockholders will be reduced, stockholders may experience additional
dilution and such securities may have rights, preferences or privileges senior
to those of the holders of our common stock. Our issuance of additional equity
securities could also result in further dilution to the per share value of our
common stock. If we raise funds by incurring debt, we may be forced to accept
terms that restrict our ability to make capital expenditures and incur
additional indebtedness, which may impede our ability to achieve the growth
rate expected under our business plan. We cannot assure you that additional
financing will be available on terms favorable to us, or at all.
Failure to alter our products to meet the demands of technological innovation
in the enhanced IP services industry could seriously harm our business.
Our future growth depends on our successful and timely introduction of new
products and services in a market that is new and rapidly evolving. The IP
network and enhanced IP services markets are characterized by rapid
technological change, frequent new product introductions embodying new
technologies, changes in customer demands and evolving industry standards that
could render our existing products obsolete and unmarketable. As a result, our
future operating results will depend upon our ability to address the
increasingly sophisticated and varied needs of our customers by developing and
introducing new products and enhancements to our existing software on a cost-
effective and timely basis that keep pace with technological developments and
emerging industry standards. We cannot be certain that we will be successful in
developing and marketing new products and enhancements to our software that
respond to technological change, evolving industry standards or customer needs,
that we will not experience difficulties that could delay or prevent the
successful development, introduction and sale of such products and enhancements
or that such products and enhancements will adequately meet the requirements of
the marketplace and achieve any significant degree of market acceptance. We
have in the past experienced delays in the release dates of new products and
enhancements. Any material delay in the release dates of future products or
enhancements or any failure of such future products or enhancements to achieve
market acceptance when released could have a material adverse effect on our
business, operating results and financial condition. In addition, we cannot be
certain that the introduction or announcement of new product offerings by us or
our competitors will not
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<PAGE>
cause customers to defer or forego purchases of current versions of our
software, which could have a material adverse effect on our business, operating
results and financial condition.
Governmental regulation of IP networks may seriously harm our business.
There are currently few laws and regulations directly applicable to access
to, or commerce over, IP networks. Due to the increasing popularity and use of
IP networks, several legislative and regulatory proposals are under
consideration by federal, state, local and foreign governmental organizations.
It is possible that a number of laws and regulations may be adopted with
respect to IP networks, covering issues such as content, privacy, pricing,
encryption standards, consumer protection, electronic commerce, taxation,
copyright infringement and other intellectual property issues. In addition,
while the Federal Communications Commission does not currently regulate service
providers which do not otherwise qualify as "telecommunications providers"
under the terms of the Telecommunications Act of 1996, the FCC recently stated
its intention to consider whether to regulate voice and fax telephony services
provided over IP networks as "telecommunications." The Federal Trade Commission
recently recommended that Congress take legislative action directed toward
further regulation of the collection and dissemination of information on the
Internet. Some members of Congress have announced that they intend to introduce
legislation that reflects the Federal Trade Commission's recommendations,
including provisions that authorize monetary sanctions. Additionally, the
European Union has recently adopted a directive regarding the collection and
transmission of data over IP networks. Member states of the European Union may
adopt laws to implement this directive which could impede the expected growth
of IP networks resulting in a material adverse effect on our business. We
cannot assure you that current or new government laws and regulations, or the
application of existing telecommunications and other laws and regulations will
not expose us or our customers to significant liabilities, significantly
decrease the use of IP networks or otherwise cause a material adverse effect on
our business, operating results or financial condition.
We have a limited ability to protect our intellectual property rights, and
others could infringe on or misappropriate our proprietary rights and
information.
Our success and ability to compete are substantially dependent upon our
internally developed technology. While we rely on patent, copyright, trade
secret and trademark law to protect our technology, we believe that factors
such as the technological and creative skills of our personnel, new product
developments, frequent product enhancements and reliable product maintenance
are essential to establishing and maintaining a technology leadership position.
We cannot assure you that our competitors will not develop technologies that
are similar or superior to our technology. We generally enter into agreements
regarding confidentiality and ownership of intellectual property with our
employees, consultants and strategic allies, and generally control access to
and distribution of our software, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. We have in the past and may in the future alert parties
of potential infringement claims. To date we have not commenced or defended any
litigation relating to the validity of our proprietary rights. Policing
unauthorized use of our products is difficult, and there can be no assurance
that the steps taken by us will prevent misappropriation or infringement of our
technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as the laws of the United States. The failure
to protect our intellectual property in a meaningful manner could have a
material adverse effect on our business, operating results and financial
condition. Substantial litigation regarding intellectual property rights exists
and is increasing in the software industry, and we expect that software
products may be increasingly subject to third-party infringement claims as the
number of competitors in our industry segments grows and the functionality of
products in different industry segments overlaps. Litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets, or to determine the validity and scope of the proprietary rights of
others.
Our products may infringe the intellectual property rights of others.
We cannot be certain that third parties will not claim that our technology
infringes their rights in products or enhancements to those products. We also
cannot be certain that third
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parties will not claim that our names or the logos associated with our products
or services infringe their trademark rights. Any such claims, with or without
merit, could be time -consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays, require us
to change our names or logos, or require us to develop non-infringing
technology or enter into royalty or licensing agreements to provide non-
infringing technology to our customers. A successful claim of infringement
against us could result in a judgment awarding substantial damages, as well as
injunctive or other equitable relief that could effectively block our ability
to provide products or services. In addition, we cannot assure you that royalty
or licensing agreements for any intellectual property of third parties that
might be required for our products or services will be available on
commercially reasonable terms, or at all.
Defects in our products could seriously harm our business.
Products as complex as those we offer frequently contain undetected defects
or failures that may occur at any point in the product's life. Despite testing
by us and our customers, defects or failures may occur in existing or new
products. These problems could result in lost or delayed market acceptance,
lost or delayed revenues, lost market share, diversion of development
resources, injury to our reputation or increased service and warranty costs,
any of which could have a material adverse effect on our business, operating
results and financial condition. We maintain product liability insurance that
we believe is sufficient for our business, and we review our insurance coverage
annually to determine whether we have adequate coverage. However, we cannot
assure you that we will be able to obtain continuing or additional coverage on
acceptable terms, at an acceptable price, or at all. A claim brought against us
that is under-insured or uninsured could materially harm our financial
condition.
Our reliance on third-party software may result in product defects or delays.
We rely on certain technology that is licensed from certain third parties.
There can be no assurance that the third-party software technology will
continue to be available to us on commercially reasonable terms or at all. The
loss or inability to maintain any of these software licenses could result in
delays or reductions in product shipments until equivalent software could be
identified and licensed or compiled, which could materially adversely affect
our business, operating results and financial condition. We also depend on
these third parties to deliver reliable products, support these products,
enhance their current products, develop new products on a timely and cost-
effective basis, and respond to emerging industry standards and other
technological changes. The failure of these third parties to meet these
criteria could seriously harm our business, financial condition and results of
operations. Additionally, our customers may sue us, and we may be liable, for
defects in the software developed by third parties that we incorporate into our
products. Typically, our agreements with third party software developers
require the developers to reimburse us for most losses resulting from defects.
However, we cannot assure you that we will be entitled to indemnification for
claims that we are liable for, that a court would enforce any such
reimbursement remedies or that the developers would have the financial ability
to satisfy any such requirements.
To remain competitive and expand our growth, we need to manage our growth and
expansion effectively.
We are currently experiencing a period of significant expansion. Our
historical growth has placed a significant strain on our managerial,
operational, financial and other resources. We have grown from 74 employees as
of December 31, 1997 to 130 employees as of May 31, 2000. We are required to
manage multiple relationships with various customers, strategic partners,
resellers, technology licensors, vendors and other third parties. Managing
these relationships will become more challenging in the event of future growth
or an increase in the number of third party relationships. In addition, we
cannot assure you that our systems, procedures or controls will be adequate to
support our operations or that our management
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<PAGE>
will be able to manage any growth effectively. To effectively manage our
growth, we must continue to improve our operational, financial and management
information systems and to expand, train and manage our employee base. If we
are not able to do so, it could have a material adverse effect on our business,
operating results and financial condition.
Loss of any of our key personnel could seriously harm our business.
Our future success depends to a significant extent on the performance of our
senior management team and other key employees, many of whom have worked
together for only a short period of time. In addition, because of the technical
nature of our business, our success will also depend on our ability to attract,
integrate, motivate and retain additional highly skilled technical, sales and
marketing personnel. Competition for senior management and technical, sales and
marketing personnel in technology-based businesses is intense. We cannot assure
you that we will be able to retain our senior management team and other key
employees. We do not intend to maintain key-person insurance on any of our
employees following completion of this offering. The loss of any member of our
senior management team or other key employees or our failure to attract,
integrate, motivate and retain additional key employees could have a material
adverse effect on our business, operating results and financial condition.
If we are unable to identify and successfully integrate acquisitions, our
ability to expand our product and service offerings and our customer base may
be limited.
We may seek to acquire complementary businesses or technologies.
Acquisitions involve numerous risks, including difficulties in the assimilation
of the operations, services, products and personnel of the acquired company,
the diversion of management's attention from other business concerns, entry
into markets in which we have little or no direct prior experience and the
potential loss of key employees of the acquired company. The successful
implementation of an acquisition strategy depends on our ability to identify
suitable acquisition candidates, acquire companies on acceptable terms and
integrate their operations and technology successfully with our own. We are
unable to predict whether or when any prospective acquisition candidate will
become available or the likelihood that any acquisition will be completed.
Moreover, in pursuing acquisition opportunities, we may compete for acquisition
targets with other companies with similar growth strategies which may be larger
and have greater financial and other resources than we have. Competition among
potential acquirors could result in increased prices for acquisition targets.
Future acquisitions may result in potentially dilutive issuances of equity
securities, the incurrence of additional debt, the assumption of known and
unknown liabilities, the writeoff of software development costs and the
amortization of expenses related to goodwill and other intangible assets, all
of which could have a material adverse effect on our business, financial
condition, operating results and prospects.
Risks Related to this Offering and our Stock
Because our common stock price is likely to be highly volatile, the market
price of our common stock could drop unexpectedly.
Prior to this offering, there has been no public market for our common
stock. We cannot guarantee that an active trading market will develop or be
sustained or that the market price of our common stock will not decline. Even
if an active trading market develops, the market price of our common stock is
likely to be highly volatile and could fluctuate significantly in response to
various factors, including:
. actual or anticipated variations in our quarterly operating results;
. announcements of technological innovations or new services or products
by us or our competitors;
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. timeliness of our introductions of new products;
. changes in financial estimates by securities analysts;
. conditions and trends in the enhanced IP service, wireless service,
Internet, e-commerce and telecommunications markets;
. announcements by us or our competitors of significant acquisitions,
strategic alliances or joint ventures; and
. changes in general market conditions and in the market valuations of
other telecommunications and Internet companies.
Many of these factors are beyond our control. In addition, the stock
markets, especially the Nasdaq National Market, have experienced extreme price
and volume fluctuations that have affected the market prices of equity
securities of many technology companies, and Internet-related companies in
particular. These fluctuations have often been unrelated or disproportionate to
operating performance. While the trading prices of many technology companies'
stocks were at or near historical highs in the first quarter of 2000, the
prices of many of these stocks have recently experienced significant decreases
and high volatility. We cannot assure you that the stock market valuations of
technology companies will ever again experience the significant and rapid
increases achieved in recent years, or that these valuations will not decrease
further from current trading levels. These broad market factors may materially
affect the trading price of our common stock. General economic, political and
market conditions like recessions and interest rate fluctuations may also have
an adverse effect on the market price of our common stock. In the past,
following periods of volatility in the market price for a company's securities,
stockholders have often initiated securities class action litigation. Any
securities class action litigation could result in substantial costs and the
diversion of management's attention and resources.
Our quarterly results are likely to be volatile.
Our limited operating history and the emerging nature of our marketplace
make prediction of future revenues difficult. We believe that our ability to
accurately forecast revenues from sales of our software is also limited because
of the lengthy sales cycle involved in selling our software and the
unpredictability of our customers' service deployment plans. This makes it
difficult to predict the quarter in which sales will occur. Our expense levels
are based, in part, on our expectations regarding future revenues, and our
expenses are generally fixed, particularly in the short term. We may be unable
to adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Any significant shortfall of revenues in relation to our
expectations could negatively affect our quarterly operating results.
Our operating results have varied on a quarterly basis during our limited
operating history and are likely to fluctuate significantly in the future. Our
operating results may be below the expectations of our investors as a result of
a variety of factors, many of which are outside our control. Factors that may
affect our quarterly operating results include:
. fluctuating demand for our products and services;
. size and timing of sales of our products and services;
. our customers' budget constraints and services deployment plans;
. changes in the growth rate of IP network usage;
. market acceptance of enhanced IP services in general and the IP
LaunchPad solution in particular;
. unexpected delays in new product introductions;
. our ability to control costs;
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. success in expanding our direct sales force;
. our ability to anticipate and adapt to rapidly changing technology;
. introduction of new products and services by us or our competitors;
. seasonal variations in purchasing by our customers (for example, we may
experience a decline in purchasing by European customers during the
summer months);
. changes in our pricing policies or those of our competitors; and
. general economic conditions and specific economic conditions in the
Internet and related industries.
Any one of these factors could cause our revenues and operating results to vary
significantly in the future. Accordingly, we believe that quarter-to-quarter
comparisons of our operating results are not necessarily meaningful. Investors
should not rely on the results of one quarter as an indication of our future
performance.
Because we will have broad discretion in using the net proceeds of this
offering, we may not use the proceeds to the satisfaction of investors.
Our management will have broad discretion over the allocation of the net
proceeds from this offering as well as over the timing of their expenditure
without stockholder approval. We intend to use the net proceeds from this
offering for the repayment of indebtedness, the growth and expansion of our
business, working capital and other general corporate purposes, including
possible acquisitions of complementary technologies or businesses. We have not
yet determined the amount of net proceeds to be used specifically for each of
the foregoing purposes. It is likely, however, that our spending patterns will
change following this offering. As a result, you will be relying upon
management's judgment with only limited information about our specific
intentions for the use of the net proceeds of this offering. Our failure to
apply these proceeds effectively could cause our business to suffer.
We may have substantial sales of our common stock after this offering.
After this offering, we will have 19,281,847 shares of common stock
outstanding. Sales of a substantial number of our shares of common stock in the
public market following this offering or the expectation of such sales could
cause the market price of our common stock to decline. All the shares sold in
this offering and 1,808 shares held by existing stockholders will be freely
tradable. The remaining shares of common stock outstanding after this offering
will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
Date of Availability for Sale Number of Shares
----------------------------- ----------------
<S> <C>
, 2000 (180 days after the date of this prospectus)..... 10,572,135
At various times thereafter upon registration under the
Securities Act or the expiration of one-year holding
periods................................................... 4,707,904
</TABLE>
Of the shares available for sale on , 2000, 4,250,861 shares are
subject to a limitation on the number of shares that can be sold in any three-
month period. Deutsche Bank Securities Inc. may, in its sole discretion and at
any time without notice, release all or any portion of the shares subject to
lock-up agreements. After this offering, the holders of approximately
13,804,625 shares of common stock and the holders of warrants to purchase
approximately 380,733 shares of common stock will be entitled to registration
rights with respect to these shares until the holders may sell the shares under
Rule 144(k) of the Securities Act. These include three demand registration
rights we granted to the holders of our Series E preferred stock, which will
convert into 4,707,904 shares of common stock upon completion of this offering,
which may first be exercised 120 days after this offering. We expect such
registration rights to be exercised, which would require us to use our best
commercial efforts to cause a registration statement under the Securities Act
to become effective on the 181st day
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after the effectiveness of this registration statement and to keep such
registration statement effective for 180 days. We also intend to file a
registration statement after consummation of this offering to register all
shares of common stock that we may issue under our employee benefit plans.
After these registration statements are effective, these shares will be
eligible for resale in the public market without restriction. For more
information, see "Shares Eligible for Future Sale."
We are subject to anti-takeover provisions which could affect the price of our
common stock.
We will be a Delaware corporation upon completion of this offering. Certain
provisions of Delaware law and of our certificate of incorporation and by-laws
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 control of us. For
example, our certificate of incorporation and by-laws will provide for a
classified board of directors, will limit who may call special meetings of
stockholders, and will allow us to issue preferred stock with rights senior to
those of the common stock without any further vote or action by the
stockholders. In addition, we will be subject to the anti-takeover provisions
of Section 203 of the Delaware General Corporation Law, which could have the
effect of delaying, deterring or preventing a change in control of us. These
provisions could deprive our stockholders of an opportunity to receive a
premium for their common stock as part of a sale of our company or may
otherwise discourage a potential acquiror from attempting to obtain control
from us, which in turn could have a material adverse effect on the market price
of our common stock.
Because our early investors paid substantially less than the initial public
offering price when they purchased their shares, new investors will incur
immediate and substantial dilution in their investment.
Investors purchasing shares in this offering will incur immediate and
substantial dilution in net tangible book value per share because the price
that investors pay will be substantially greater than the net tangible book
value per share of the shares acquired. This dilution is due in large part to
the fact that our earlier investors paid substantially less than the initial
public offering price when they purchased their shares. Based on the assumed
initial public offering price of $11.00 per share, existing Open Port
stockholders will, in the aggregate, own 15,281,847 shares of common stock and
have approximately $112.2 million of unrealized gains immediately following
completion of this offering. Investors purchasing common stock at the assumed
initial public offering price of $11.00 per share will incur immediate dilution
of approximately $8.44 in the book value per share of common stock from the
price paid. In addition, there were options and warrants for the purchase of
2,579,331 shares of common stock outstanding at May 31, 2000. To the extent
such options and warrants are exercised in the future, there will be further
dilution to new investors.
Our existing stockholders will have significant voting control over matters
requiring stockholder approval.
On completion of this offering, our officers, directors, and their
affiliates will beneficially own, in the aggregate, approximately 28.7% of our
outstanding common stock and our existing stockholders will beneficially own,
in the aggregate, approximately 79.3% of our outstanding common stock. As a
result, these stockholders will be able to exercise significant control over
all matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions, which may have the effect
of delaying or preventing a third party from acquiring control over us.
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We do not intend to pay dividends.
We have never declared or paid cash dividends on our common stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future.
FORWARD LOOKING STATEMENTS
Many of the statements included in this prospectus contain forward-looking
statements and information relating to our company. We generally identify
forward-looking statements by the use of terminology such as "may," "will,"
"could," "should," "potential," "continue," "expect," "intend," "plan,"
"estimate," "anticipate," "believe," or similar phrases or the negatives of
such terms. We base these statements on our beliefs as well as assumptions we
made using information currently available to us. Such statements are subject
to risks, uncertainties and assumptions, including those identified in the
foregoing "Risk Factors," as well as other matters not yet known to us or not
currently considered material by us. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected. Given these risks and uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements.
Forward-looking statements do not guarantee future performance. Recognize these
statements for what they are and do not rely on them as facts. We undertake no
obligation to update or revise any of the forward-looking statements to reflect
new events or circumstances after the date of this prospectus.
USE OF PROCEEDS
We estimate that we will receive approximately $39.5 million in net proceeds
from this offering based on an assumed initial public offering price of $11.00
per share and after deducting the underwriting discounts and commissions and
estimated expenses payable by us. If the underwriters' over-allotment option is
exercised in full, we estimate that we will receive approximately $45.6 million
in net proceeds from this offering.
We expect to use $5.0 million of the net proceeds from this offering to
repay the outstanding balance under our credit facility with CID Mezzanine,
which accrues interest at a rate of 11% annually and is due in July 2001. The
outstanding balance under this credit facility as of March 31, 2000 was $4.6
million, which amount is net of the unamortized original discount of $0.4
million. See "Related Party Transactions--CID Loan and Warrant." We intend to
use the balance of the net proceeds from this offering to fund the growth and
expansion of our business, and for working capital and other general corporate
purposes, including possible acquisitions of complementary technologies or
businesses. However, as of the date of this prospectus, we have no commitment
or agreement relating to any material acquisition or investment. We have not
yet determined the amount of net proceeds to be used specifically for any of
the foregoing purposes except the repayment of indebtedness. Accordingly,
management will have significant flexibility in applying the net proceeds of
this offering. Pending their use, we intend to invest the net proceeds of this
offering in short-term, investment-grade interest-bearing instruments.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future. Any determination in the future to
pay dividends will depend upon our financial condition, capital requirements,
results of operations and other factors deemed relevant by our board of
directors, including any contractual or statutory restrictions on our ability
to pay dividends.
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CAPITALIZATION
The following table shows our capitalization as of March 31, 2000 on an
actual, pro forma and pro forma as adjusted basis. The "actual" column reflects
our capitalization as of March 31, 2000 on an historical basis, without any
adjustments to reflect subsequent or anticipated events.
The "pro forma" column reflects our capitalization as of March 31, 2000 with
adjustments to reflect our reincorporation in Delaware upon the closing of this
offering, which will result in, among other things, the adoption of a new
certificate of incorporation that provides for authorized capital stock of 80
million shares of common stock and ten million shares of undesignated preferred
stock, and the conversion of all outstanding shares of preferred stock into
common stock upon the closing of this offering.
The "pro forma as adjusted" column reflects our capitalization as of March
31, 2000 with the preceding "pro forma" adjustments and adjustments for the
receipt of the estimated net proceeds from our sale of the 4,000,000 shares of
our common stock in this offering at an assumed initial public offering price
of $11.00 per share and the application of the net proceeds therefrom,
including the $5.0 million repayment of our credit facility with CID Mezzanine
which had an outstanding balance of $4.6 million as of March 31, 2000, net of
the unamortized original discount of $0.4 million. See "Use of Proceeds."
None of the columns shown below reflects:
. the 1,876,314 shares of common stock issuable as of March 31, 2000 upon
the exercise of outstanding stock options under our 1995 Incentive Stock
Option Plan and our 1995 Non-Employee Stock Option Plan at a weighted
average exercise price of $4.86 per share;
. the 414,681 shares of common stock issuable as of March 31, 2000 upon
the exercise of outstanding warrants at a weighted average exercise
price of $4.41 per share; and
. an aggregate of 490,122 shares of common stock available as of March 31,
2000 for future grants under our 1995 Stock Option Plans. See
"Management-Employee Benefit Plans."
<TABLE>
<CAPTION>
March 31, 2000
-------------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------- -------- -----------
(in thousands, except share
and per share data)
<S> <C> <C> <C>
Long-term obligations, less current portion.... $ 4,918 $ 4,918 $ 354
Redeemable convertible preferred stock at
redemption value, par value $.001 per share;
37,288,245 shares authorized, 36,597,039
shares issued and outstanding, actual; no
shares authorized, issued and outstanding, pro
forma and pro forma as adjusted............... 99,541 -- --
Stockholders' deficit:
Common stock, par value $.001 per share;
71,000,000 shares authorized, 3,428,915
shares issued and outstanding, actual;
80,000,000 shares authorized, 15,260,196
shares issued and outstanding, pro forma;
80,000,000 shares authorized, 19,260,196
shares issued and outstanding, pro forma as
adjusted.................................... 13 25 29
Preferred stock, undesignated par value; no
shares authorized, issued and outstanding,
actual; 10,000,000 shares authorized, no
shares issued and outstanding, pro forma and
pro forma as adjusted....................... -- -- --
Additional paid-in capital................... 6,058 105,587 145,033
Deferred stock-based compensation............ (4,723) (4,723) (4,723)
Stock purchase notes receivable.............. (126) (126) (126)
Accumulated other comprehensive loss......... (69) (69) (69)
Accumulated deficit.......................... (90,440) (90,440) (90,877)
-------- -------- --------
Total stockholders' equity (deficit)......... (89,287) 10,254 49,267
-------- -------- --------
Total capitalization........................ $ 15,172 $ 15,172 $ 49,621
======== ======== ========
</TABLE>
20
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was approximately
$10.3 million or $0.68 per share of common stock. Pro forma net tangible book
value per share represents the amount of our total tangible assets reduced by
the amount of our total liabilities, divided by the number of shares of common
stock outstanding after giving effect to the automatic conversion of all
outstanding shares of preferred stock upon the closing of this offering.
Dilution in net tangible book value per share represents the difference between
the amount per share paid by purchasers of shares of common stock in this
offering and the net tangible book value per share of common stock immediately
after the closing of this offering. After giving effect to the sale of the
4,000,000 shares of common stock offered by us at an assumed initial public
offering price of $11.00 per share, and after deducting the underwriting
discount and estimated offering expenses payable by us, our pro forma as
adjusted net tangible book value at March 31, 2000 would have been
approximately $49.3 million or $2.56 per share of common stock. This represents
an immediate increase in pro forma as adjusted net tangible book value of $1.88
per share to existing stockholders and an immediate dilution of $8.44 per share
to new investors in the common stock. The following table illustrates this
dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $11.00
Pro forma net tangible book value per share before the
offering.................................................... $0.68
Increase per share attributable to new investors............. 1.88
-----
Pro forma as adjusted net tangible book value per share after
this offering................................................. 2.56
------
Dilution per share to new investors............................ $ 8.44
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 2000
after giving effect to this offering, the difference between existing
stockholders and new investors with respect to the number of shares of common
stock purchased, the total consideration paid and the average price per share
paid to us for those shares. The table assumes that the initial public offering
price will be $11.00 per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 15,260,196 79.2% $55,654,938 55.8% $ 3.65
New investors.............. 4,000,000 20.8 44,000,000 44.2 11.00
---------- ----- ----------- -----
Total.................... 19,220,196 100.0% $99,654,938 100.0%
========== ===== =========== =====
</TABLE>
The outstanding share information shown in the table above excludes:
. 1,876,314 shares of common stock issuable as of March 31, 2000 upon the
exercise of outstanding stock options under our 1995 Incentive Stock
Option Plan and our 1995 Non-Employee Stock Option Plan at a weighted
average exercise price of $4.86 per share;
. an aggregate of 414,681 shares of common stock issuable as of March 31,
2000 upon the exercise of outstanding warrants at a weighted average
exercise price of $4.41 per share; and
. an aggregate of 490,122 shares of common stock available as of March 31,
2000 for future grants under our 1995 Stock Option Plans. See
"Management-Employee Benefit Plans."
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data set forth below as of
December 31, 1998 and 1999 and for each of the three years in the period ended
December 31, 1999 are derived from the audited consolidated financial
statements which are included elsewhere in this prospectus. The selected
consolidated financial data as of December 31, 1995, 1996 and 1997 and for each
of the two years in the period ended December 31, 1996 are derived from audited
consolidated financial statements not included in this prospectus. The balance
sheet data as of March 31, 2000 and the statement of operations data for the
three month periods ended March 31, 1999 and 2000 were derived from our
unaudited consolidated financial statements that are included in this
prospectus. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which we consider necessary for a fair
presentation of the consolidated financial position and results from operations
for these periods. The historical results are not necessarily indicative of the
results to be expected in any future period. You should read the selected
consolidated financial data shown below in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
---------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- -------- -------- -------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Software products...... $ 1,218 $ 892 $ 5,048 $ 3,241 $ 907 $ 26 $ 773
Maintenance and
professional
services.............. 65 517 1,266 1,600 1,443 359 580
Hardware products...... 642 867 835 506 -- -- --
------- ------- -------- -------- -------- ------- --------
Total revenues....... 1,925 2,276 7,149 5,347 2,350 385 1,353
------- ------- -------- -------- -------- ------- --------
Cost of revenues:
Software products...... 52 131 135 579 667 129 167
Maintenance and
professional services
(1)................... 118 1,775 2,668 2,871 2,403 552 780
Hardware products...... 378 521 430 331 -- -- --
------- ------- -------- -------- -------- ------- --------
Total cost of
revenues............ 548 2,427 3,233 3,781 3,070 681 947
------- ------- -------- -------- -------- ------- --------
Gross profit (loss)..... 1,377 (151) 3,916 1,566 (720) (296) 406
Operating expenses:
Sales and marketing
(1)................... 762 3,310 4,249 5,029 6,728 1,606 1,557
General and
administrative (1).... 1,009 1,449 1,547 1,932 2,304 444 738
Research and
development (1)....... 744 2,780 4,058 3,730 4,761 1,158 1,661
Stock-based
compensation.......... -- -- -- -- -- -- 118
------- ------- -------- -------- -------- ------- --------
Total operating
expenses............ 2,515 7,539 9,854 10,691 13,793 3,208 4,074
------- ------- -------- -------- -------- ------- --------
Operating loss.......... (1,138) (7,690) (5,938) (9,125) (14,513) (3,504) (3,668)
Net loss................ (1,138) (7,609) (6,090) (9,455) (15,860) (3,768) (3,974)
Net loss applicable to
common stockholders.... $(1,205) $(8,184) $ (7,320) $(11,271) $(20,714) $(4,252) $(38,994)
Basic and diluted net
loss per share (1)..... $ (0.38) $ (2.56) $ (2.29) $ (3.49) $ (6.15) $ (1.27) $ (11.39)
======= ======= ======== ======== ======== ======= ========
Shares used in
calculation of basic
and diluted net loss
per share (2).......... 3,200 3,200 3,200 3,230 3,370 3,342 3,423
======= ======= ======== ======== ======== ======= ========
Pro forma basic and
diluted net loss per
share (2).............. $ (2.23) $ (0.26)
======== ========
Shares used in
calculation of pro
forma basic and diluted
net loss per
share (2).............. 7,123 15,260
======== ========
Balance Sheet Data (at
end of period):
Working capital
(deficit).............. $ 211 $(1,441) $ 213 $ 133 $(10,647) $(3,016) $ 10,989
Total assets............ 2,998 7,281 8,257 5,644 4,705 5,730 19,269
Total liabilities....... 1,989 7,109 5,798 5,484 16,702 9,158 9,015
Redeemable convertible
preferred stock........ 2,067 9,392 19,022 27,956 36,449 28,211 99,541
Stockholders' equity
(deficit).............. (1,058) (9,220) (16,563) (27,796) (48,446) (31,369) (89,287)
</TABLE>
--------
(1) Excludes an aggregate of $118 of non-cash, stock-based compensation expense
for the three months ended March 31, 2000 as follows: maintenance and
professional services, $11; sales and marketing, $25; general and
administrative, $42; and research and development, $40.
(2) See note 1 to the Open Port consolidated financial statements for an
explanation of the methods used to determine the number of shares used in
computing net loss per share data.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read together with the financial statements and the
related notes included in another part of this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties.
Overview
We design, develop and distribute IP LaunchPad, a carrier-class software
platform that enables our customers to deliver enhanced communication services
over networks based on the Internet Protocol, or IP. Our customers are service
providers, including long distance telecommunication providers, regional Bell
operating companies, competitive local exchange carriers, public telephone and
telegraph companies, and Internet service providers. IP LaunchPad provides
software connections between IP networks and the public switched telephone
network, or PSTN, and wireless networks. These connections allow our customers
to offer enhanced IP services that connect to PSTN and wireless devices such as
fax machines, telephones, voicemail systems, cellular phones and pagers. The
types of enhanced IP services that we enable or intend to enable include
services such as delivering email messages to fax machines, voicemail messages
to email systems, and news alerts to mobile phones. As of the date of this
prospectus, we had entered into license agreements with 18 customers including
Bell Atlantic Data Solutions Group, Inc., Cable and Wireless Japan Ltd.,
Interpath Communications, Inc., Qwest Communications Corporation and Tele
Danmark A/S.
During the period from our inception on January 27, 1993 through December
31, 1994, we had very limited revenues and our operating activities related
primarily to the development of the initial versions of our software. During
1995 and 1996, we generated revenues primarily from licensing software to
large, multinational corporate enterprises to enable those enterprises to send
faxes across their internal local and wide-area networks, and from related
installation, training and other services. Also in 1996, recognizing the
growing importance of the service provider market, we focused our efforts on
developing and marketing software that enables enhanced IP services to be
provided by service providers. During 1997, we increased our revenues from the
licensing of software to corporate enterprises and began generating revenues
related to the licensing of Harmony NSP, the predecessor of IP LaunchPad, to
service providers. Research and development expenses for Harmony NSP peaked
during 1997.
In 1998, we began to develop our IP LaunchPad platform to better address the
needs of the service provider marketplace. During 1998, our revenues from the
licensing of Harmony fax server products declined as we de-emphasized that
product line and began to market the benefits of IP LaunchPad. During this
period, we also incurred substantial costs for the development of IP LaunchPad.
In September 1999, we announced that we would no longer support our Harmony fax
server and Harmony NSP product lines effective June 30, 2000. We are attempting
to transition customers who purchased our Harmony NSP product to our IP
LaunchPad solution. We began commercial deliveries of IP LaunchPad in September
1999.
Our top two customers, GRIC Communications, Inc. and UUNet Technologies,
Inc., totaled 51% of our total revenues in 1999. We do not expect either of
these customers to account for any revenues in the year ended December 31,
2000. However, other customers may account for more than 10% of our revenues in
the future and we expect that a small number of our customers will continue to
account for a substantial portion of our revenues.
23
<PAGE>
We derived approximately 20% of our net revenues from customers outside of
the United States for the year ended December 31, 1999, including approximately
8% of our net revenues from customers in Europe and 12% of our net revenues
from customers in Asia. We expect this percentage to increase in 2000, as one
component of our growth strategy is to increase our international presence by
expanding our five-person direct sales force in Europe and Asia and expanding
existing, and establishing new, relationships with resellers who can sell our
products to their service provider customers in those markets. We derived
approximately 41% of our net revenues from customers outside the United States
in the three months ended March 31, 2000. We presently are not subject to
significant market risks for changes in currency rates as our net assets
located outside the United States are not material. See "--Quantitative and
Qualitative Disclosures About Market Risk."
In order to grow our revenue base and implement our business strategy, we
intend to aggressively market IP LaunchPad and related software products to
service providers. We expect to derive substantially all of our revenues from
the licensing of our IP LaunchPad and related software products and from fees
earned on related maintenance and professional services. We believe that our
future revenues and operating results will depend largely on our ability to
license our IP LaunchPad software to service providers and to continue to
develop and release applications that leverage its capabilities. We intend to
significantly increase our investment in research and development, sales and
marketing and customer support. While we expect our investment in these areas
to increase in the future, we expect that these expenses will decrease as a
percentage of our total revenues as we implement our growth strategy and expand
our revenue base. We also expect our software product costs to increase as a
result of research and development expenditures on our voice and wireless
product suites in 2000. We expect to continue to incur substantial operating
losses for the foreseeable future as we execute our business strategy. We have
incurred significant losses since our inception, and as of March 31, 2000, had
an accumulated deficit of approximately $90.4 million ($44.3 million of which
was attributable to accretion of redeemable preferred stock and warrants to
acquire preferred stock and preferred stock dividends).
In a given period, overall operating profits are primarily impacted by the
size of individual software license sales, the mix of maintenance and other
services sold, the relative mix of revenues from software products versus
maintenance and other services and our level of research and development
expenditures. We typically realize higher profit margins on sales of software
licenses as compared to sales of maintenance and professional services.
Although we currently have negative margins on maintenance and professional
services, our margins on such services have improved in recent years. We expect
to realize additional improvement in such margins in the future as we implement
our growth strategy, expand our customer and revenue base, and realize the
efficiencies associated with a workforce experienced in servicing IP LaunchPad
and related software products.
Our limited operating history and the emerging nature of our marketplace
make predicting our future revenues difficult. We believe that forecasting
revenues from sales of our software will be difficult because of the lengthy
sales cycle involved in selling our software and the unpredictability of our
customers' service deployment plans. Our expense levels are based, in part, on
our expectations regarding future revenues, and our expenses are generally
fixed, particularly in the short term. We may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. Any
significant shortfall of revenues in relation to our expectations could cause
significant declines in our quarterly operating results.
We had 130 full-time employees as of May 31, 2000 and intend to hire
additional employees in the future. Hiring additional employees places
significant demands on our management and operational resources. To manage this
growth and increased demand, we must be able to hire, train, manage and retain
our employees.
Options were granted during early 2000 at exercise prices which were the
best estimate as to the fair value of the underlying common stock on the date
of grant. Subsequent to the grant date, management concluded that for these
grants the estimates may not have fully reflected the impact of changing
business conditions. Future earnings will incur a charge associated with the
difference between the exercise price and the deemed fair market value
amortized
24
<PAGE>
over the four year vesting period. In the quarter ended March 31, 2000, we
recorded total unearned stock compensation of approximately $4.8 million in
connection with stock options granted during the period. This amount represents
the difference between the exercise price of stock option grants and the
estimated fair market value of our common stock at the time of the grants. The
unearned stock compensation is being amortized to expense over the vesting
periods of the applicable options, which resulted in approximately $118,000 of
expense for the quarter ended March 31, 2000. Amortization of unearned
compensation expense arising from these grants for each of the next five fiscal
years is expected to be as follows:
<TABLE>
<CAPTION>
Amount
Year Ended (in thousands)
---------- --------------
<S> <C>
December 31, 2000......... $1,025
December 31, 2001......... 1,210
December 31, 2002......... 1,210
December 31, 2003......... 1,210
December 31, 2004......... 185
</TABLE>
Each series of our preferred stock is redeemable at the option of the holder
at any time during the period beginning July 15, 2002 and ending July 15, 2004.
In the event of redemption, holders of each series of preferred stock would be
entitled to receive the greater of their then-current liquidation preference or
the fair market value of their respective series as determined at that time.
The carrying value of the Company's shares of preferred stock is adjusted
through accretion to their full redemption value at the end of each quarter
period. Our Series E preferred stock sold in January 2000 was accreted to full
redemption value upon issuance as a result of a beneficial conversion feature
deemed to be inherent in its issuance. The accretion associated with this
Series E preferred stock beneficial conversion feature aggregated $18.5
million. The carrying value of the preferred stock was adjusted $2.7 million
for the year ended December 31, 1999 and $33.9 million (including $18.5 million
of Series E preferred stock beneficial conversion feature accretion) for the
quarter ended March 31, 2000. The preferred stock redemption option will
terminate upon the conversion of all outstanding preferred stock into common
stock upon the closing of this offering. See note 4 to the Open Port
consolidated financial statements.
Results of Operations
The following table sets forth for the periods indicated certain items from
our consolidated financial statements expressed as a percentage of total
revenues.
<TABLE>
<CAPTION>
As a Percentage of Total Revenues
-------------------------------------------------
Three Months
Ended
Year Ended December 31, March 31,
------------------------------- ---------------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software products.......... 63% 39% 71% 61% 39% 7% 58%
Maintenance and
professional services..... 3 23 18 30 61 93 42
Hardware products.......... 34 38 11 9 -- -- --
--- ---- --- ---- ---- ------ ------
Total revenues........... 100 100 100 100 100 100 100
--- ---- --- ---- ---- ------ ------
Cost of revenues:
Software products........... 3 6 2 11 29 34 12
Maintenance and
professional services...... 6 78 37 54 102 143 58
Hardware products........... 20 23 6 6 -- -- --
--- ---- --- ---- ---- ------ ------
Total cost of revenues.... 29 107 45 71 131 177 70
--- ---- --- ---- ---- ------ ------
Gross profit (loss).......... 71 (7) 55 29 (31) (77) 30
Operating expenses:
Sales and marketing........ 40 145 59 94 286 417 115
General and
administrative............ 52 64 22 36 98 115 54
Research and development... 38 122 57 70 203 300 123
Stock-based compensation... -- -- -- -- -- -- 9
--- ---- --- ---- ---- ------ ------
Total costs and
expenses................ 130 331 138 200 587 832 301
--- ---- --- ---- ---- ------ ------
Operating loss............... (59) (338) (83) (171) (618) (910) (271)
Other income (expense)....... -- 4 (1) (6) (56) (68) (22)
Net loss..................... 59% (334)% (85)% (177)% (675)% (979)% (294)%
=== ==== === ==== ==== ====== ======
</TABLE>
25
<PAGE>
Three Months ended March 31, 2000 Compared to Three Months ended March 31, 1999
Revenues
Software Products. Our software products revenues increased by $747,000 from
$26,000 in the three months ended March 31, 1999 to $773,000 in the three
months ended March 31, 2000. The increase was attributable to an increase in
our customer base due to product acceptance in the marketplace and the
introduction of new versions with additional enhancements and features.
Maintenance and Professional Services. Our maintenance and professional
services revenues increased $221,000 or 62% from $359,000 in the three months
ended March 31, 1999 to $580,000 in the three months ended March 31, 2000. The
increase was primarily due to the increase in customers who require training
services and installation support.
Operating Expenses
Software Products. Software product costs are comprised of amortization of
capitalized software development costs, such as wages, contractor fees and
equipment costs, and royalties relating to technology licensed from third-party
vendors that has been incorporated into our software products. Our software
products costs increased by $38,000 or 30% from $129,000 in the three months
ended March 31, 1999 to $167,000 in the three months ended March 31, 2000. The
increase was due to an increase in the amortization of capitalized software
development costs relating to the development of our IP LaunchPad platform. The
negative margin recorded in the first quarter of fiscal 1999 was primarily the
result of low sales volume offset by a greater level of fixed capitalized
software amortization costs.
Maintenance and Professional Services. Costs relating to maintenance and
professional services primarily include personnel and other expenses incurred
to provide those services. Our costs of maintenance and professional services
increased by $228,000 or 41% from $552,000 in the three months ended March 31,
1999 to $780,000 in the three months ended March 31, 2000. The increase was
primarily due to an increase in personnel needed to support and service our
growing base of customers.
Sales and Marketing. Sales and marketing expenses consist primarily of costs
relating to personnel including commissions, marketing programs, travel and
entertainment and the maintenance of sales offices. Our costs of sales and
marketing were approximately $1.6 million for each of the three month periods
ended March 31, 1999 and 2000.
General and Administrative. General and administrative expenses primarily
consist of executive and administrative personnel costs, professional fees,
facilities rent, depreciation and general office expenses. Our general and
administrative costs increased $294,000 or 67% from $444,000 in the three
months ended March 31, 1999 to $738,000 in the three months ended March 31,
2000. The increase was due to an increase in legal costs associated with
preparing software licenses and other corporate matters and an increase in
personnel in order to handle the additional administrative duties of our
growing company.
Research and Development. Research and development expenses consist
primarily of personnel costs, consulting services and other expenses incurred
in the development and enhancement of our software products. We expense all of
our research and development costs as they are incurred, although we do
capitalize certain software development costs. Our research and development
costs increased $503,000 or 42% from $1.2 million in the three months ended
March 31, 1999 to $1.7 million in the three months ended March 31, 2000. The
increase was primarily due to an increase in personnel and consulting costs
attributable to the continued development of the IP LaunchPad platform and the
Fax Suite products as well as the new development of the Voicemail Suite
products.
26
<PAGE>
Other Income (Expense)
Other income (expense) is primarily comprised of interest due on outstanding
notes payable and capital lease obligations, as well as the amortization of the
estimated fair value of warrants granted in connection with the issuance of
notes payable and capital lease arrangements over the term of the respective
borrowing arrangements, offset by interest earned on our outstanding cash
balance. Other income (expense) increased $40,000 from ($260,000) in the three
months ended March 31, 1999 to ($300,000) in the three months ended March 31,
2000. The increase was attributable to interest paid for additional capital
lease borrowings as well as the issuance of additional notes payable and
related warrants.
Year ended December 31, 1999 Compared to Year ended December 31, 1998
Revenues
Software Products. Our software products revenues decreased by $2.3 million
or 72% from $3.2 million in 1998 to $900,000 in 1999. This decrease was
attributable to the discontinuance of our Harmony NSP and Harmony Fax Server
products and our decision to focus solely on the development of our IP
LaunchPad solution during the first half of 1999. This decrease was partially
offset by $540,000 of revenue related to the settlement of an invoice dispute.
Shipments of IP LaunchPad, which began in late 1999, aggregated $338,000, of
which $268,000 was deferred into 2000. This deferral was due to an undelivered
feature, not sold separately by Open Port, with respect to two software license
agreements we entered into in 1999. Each feature was subsequently delivered in
the first quarter of fiscal 2000.
Maintenance and Professional Services. Our maintenance and professional
services revenues decreased by $157,000 or 10% from $1.6 million in 1998 to
$1.4 million in 1999. This decrease was also attributable to the discontinuance
of our Harmony NSP and Harmony Fax Server products, which resulted in a
decrease in the number of customers purchasing maintenance and professional
services on these product lines. Maintenance and professional services revenues
were a higher percentage of total revenue in 1999 due to the phaseout of our
Harmony products in 1999 and the introduction of IP LaunchPad in late 1999. In
the future, we expect to realize a higher percentage of our total revenues from
software product sales than from the providing of maintenance and professional
services.
Hardware Products. Our hardware products revenues decreased by 100% from
$506,000 in 1998 to $0 in 1999. This decrease was attributable to our decision
during 1998 to no longer sell and support hardware products.
Operating Expenses
Software Products. Our costs of software products increased by $88,000 or
15% from $579,000 in 1998 to $667,000 in 1999. This increase was due to an
increase in amortization of capitalized software development costs relating to
the development of our IP LaunchPad platform.
Maintenance and Professional Services. Our costs of maintenance and
professional services decreased by $468,000 or 16% from $2.9 million in 1998 to
$2.4 million in 1999. This decrease relates to our decision to discontinue
supporting our Harmony products.
Hardware Products. Our costs of hardware products decreased by 100% from
$331,000 in 1998 to $0 in 1999. This decrease was due to our decision to no
longer include hardware products as part of our solution.
Sales and Marketing. Our costs of sales and marketing increased by $1.7
million or 34% from $5.0 million in 1998 to $6.7 million in 1999. The increase
in these costs was attributable to our decision to grow our direct sales force
worldwide as well as an increase in our
27
<PAGE>
marketing initiatives associated with the introduction of IP LaunchPad to
increase our name and product recognition in the marketplace.
General and Administrative. Our general and administrative costs increased
by $372,000 or 19% from $1.9 million in 1998 to $2.3 million in 1999. This
increase was primarily attributable to an increase in our allowance for
doubtful accounts principally related to a specific customer dispute that arose
late in 1999 and to expenses billed to Harmony customers relating to
professional services deemed not to be collectible.
Research and Development. Our research and development costs increased by
$1.0 million or 28% from $3.7 million in 1998 to $4.8 million in 1999. This
increase in research and development expenses, as well as the increase in
capitalized software development costs, was attributable to the continuing
increase in personnel costs and consulting services related to the further
development of our IP LaunchPad product and related applications.
Other Income (Expense)
Total interest and warrant amortization expense aggregated $1.4 million in
1999 compared to $336,000 in 1998. The increase was primarily attributable to
additional capital lease borrowings and the issuance of additional notes
payable and related warrants between June 1998 and December 1999 and, to a
lesser extent, a general decrease in our cash position from 1998 to 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues
Software Products. Our software products revenues decreased by $1.8 million
or 36% from $5.0 million in 1997 to $3.2 million in 1998. This decrease was
primarily attributable to a decrease in revenues relating to our Harmony fax
server product. Sales efforts relating to the Harmony fax server product
decreased substantially during 1998 as we shifted our focus away from legacy
customers toward the service provider market.
Maintenance and Professional Services. Our maintenance and professional
services revenues increased by $334,000 or 26% from $1.3 million in 1997 to
$1.6 million in 1998. The increase in revenues was due to an increase in the
number of Harmony NSP customers who purchased maintenance.
Hardware Products. Our hardware products revenues decreased by $329,000 or
39% from $835,000 in 1997 to $506,000 in 1998. The decrease was due to our
decision in the second half of 1998 to not include hardware products as part of
our solution.
Operating Expenses
Software Products. Our costs of software products increased by $444,000 or
329% from $135,000 in 1997 to $579,000 in 1998. This increase was due to an
increase in amortization of capitalized software development costs relating to
updated versions of existing software products as well as increased royalties
on third-party technologies integrated into newer versions of our software
products.
Maintenance and Professional Services. Our maintenance and professional
services costs increased by $203,000 or 8% from $2.7 million in 1997 to $2.9
million in 1998. The increase was due to an increase in staffing to support
both our enterprise and service provider customers.
Hardware Products. Our costs of hardware products decreased by $99,000 or
23% from $430,000 in 1997 to $331,000 in 1998. The decrease was due to our
decision in the second half of 1998 not to include hardware products as part of
our solution.
Sales and Marketing. Our sales and marketing costs increased by $780,000 or
18% from $4.2 million in 1997 to $5.0 million in 1998. The increase in these
costs was attributable to an increase in the size of our direct sales force and
an increase in our marketing initiatives to increase our name recognition in
the marketplace in the second half of 1998.
General and Administrative. Our general and administrative costs increased
$385,000 or 25% from $1.5 million in 1997 to $1.9 million in 1998. The increase
was primarily due to
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increased legal fees relating to debt financings and customer, facility and
vendor/supplier contracts.
Research and Development. Our research and development costs decreased by
$328,000 or 8% from approximately $4.1 million in 1997 to $3.7 million in 1998.
The slight decrease was attributable to a reduction of third-party consultant
costs of $700,000, partially offset by increased personnel costs of $585,000.
Other Income (Expense)
Total interest and warrant amortization expense aggregated $336,000 in 1998
compared to $182,000 in 1997. The increase was due to additional capital lease
borrowings and the issuance of additional notes payable and related warrants
between June 1998 and September 1998.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly statements of
operations data for each of the nine quarters ended March 31, 2000. This
information has been derived from our unaudited consolidated financial
statements which, in management's opinion, have been prepared on a basis
consistent with the audited consolidated financial statements, and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the quarters presented. You should
read this information in conjunction with our audited financial statements and
the notes thereto included elsewhere in this prospectus. The operating results
for any quarter are not necessarily indicative of the operating results for a
full year or for any future period and there can be no assurance that any trend
reflected in such results will continue in the future.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------
Dec. Dec.
March 31, June 30, Sept. 30, 31, March 31, June 30, Sept. 30, 31, March 31,
1998 1998 1998 1998 1999 1999 1999 1999 2000
--------- -------- --------- ------- --------- -------- --------- ------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software products...... $1,735 $ 1,125 $ 174 $ 207 $ 26 $ 185 $ 68 $ 628 $ 773
Maintenance and
support services...... 378 493 340 389 359 343 344 397 580
Hardware products...... 115 353 38 -- -- -- -- -- --
------ ------- ------- ------- ------- ------- ------- ------- -------
Total revenues....... 2,228 1,971 552 596 385 528 412 1,025 1,353
------ ------- ------- ------- ------- ------- ------- ------- -------
Costs of revenues:
Software products...... 47 51 174 307 129 95 98 345 167
Maintenance and
support services...... 644 688 738 801 552 548 547 756 780
Hardware products...... 77 210 22 22 -- -- -- -- --
------ ------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues............ 768 949 934 1,130 681 643 645 1,101 947
------ ------- ------- ------- ------- ------- ------- ------- -------
Gross profit (loss)..... 1,460 1,022 (382) (534) (296) (115) (233) (76) 406
Operating Expenses:
Sales and marketing.... 852 1,003 1,543 1,631 1,606 1,888 1,848 1,386 1,557
General and
administrative........ 378 466 665 423 444 559 743 558 738
Research and
development........... 754 1,021 918 1,037 1,158 939 1,264 1,400 1,661
Stock-based
compensation.......... -- -- -- -- -- -- -- -- 118
------ ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 1,984 2,490 3,126 3,091 3,208 3,386 3,855 3,344 4,074
------ ------- ------- ------- ------- ------- ------- ------- -------
Operating loss......... $ (524) $(1,468) $(3,508) $(3,625) $(3,504) $(3,501) $(4,088) $(3,420) $(3,668)
====== ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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Revenues
Software Products. Our software products revenues decreased from the
beginning of 1998 to the third quarter of 1999 due to the decision to decrease
our sales emphasis on Harmony NSP, our predecessor product to IP LaunchPad. In
the fourth quarter of 1999, we commercially introduced IP LaunchPad to the
service provider market. This contributed to the increase in quarterly revenue
in the fourth quarter of 1999 and the first quarter of 2000.
Maintenance and Professional Services. Our maintenance and support services
revenues decreased slightly during 1998 but have remained consistent through
1999. The decrease is attributable to our decision to reduce our sales emphasis
on Harmony NSP. Our maintenance and services revenues have remained consistent
in 1999 due to an increase in maintenance and support from IP LaunchPad
customers, offset by a similar decrease in maintenance and support services
from our Harmony customers. Maintenance and professional services increased in
the first quarter of 2000 due to increased services for our growing customer
base.
Hardware Products. Revenues generated from hardware sales were discontinued
in late 1998. Customers are now required to furnish their own hardware for the
deployment of services. This decision was also the reason for there being no
hardware products revenues in 1999 or 2000.
Operating Expenses
Software Products. Our costs of software products increased in 1998 due to
increases in amortization of capitalized software development costs relating to
updated versions of existing software products as well as royalties on third-
party technologies integrated into newer versions of our software products. Our
costs of software products decreased in early 1999 in absolute dollars as
revenues from our software products decreased and increased in the fourth
quarter of 1999 as our revenues increased.
Maintenance and Professional Services. Our maintenance and support costs
increased in 1998 as we increased our staffing in both the U.S. and Europe to
handle the projected support needs of both Harmony customers and our new IP
LaunchPad customers. In 1999, our costs decreased in the first quarter as our
staffing needs to support our Harmony customers decreased but increased at the
end of 1999 as our IP LaunchPad customer base and related support needs
increased.
Hardware Products. Our costs relating to hardware products decreased in 1998
as a result of our decision to no longer sell hardware products as part of our
solution.
Sales and Marketing. Our sales and marketing costs increased in 1998 and
remained relatively consistent for the first quarter of 1999. In 1998,
management made a decision to increase the marketing and sales staffs in order
to gain first mover advantages in the marketplace and take advantage of an
emerging marketplace. We decreased our U.S. direct sales force in late 1999 and
are currently increasing our sales forces in Asia and Europe.
General and Administrative. Our general and administrative costs were
consistent in 1998 and have increased in 1999 and the first quarter of 2000.
These costs varied slightly due to fluctuating legal costs incurred for both
general business purposes and in connection with financings we completed during
those periods.
Research and Development. Our costs of research and development have
fluctuated in 1998 and 1999. These fluctuations relate primarily to increased
personnel costs, offset by the capitalization of software development costs
relating to the IP LaunchPad product in 1999.
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These fluctuations have been compounded by variability in consulting costs
resulting from the need for certain specific skills and temporary needs due to
impending product releases. The costs are currently increasing due to continued
development of our current products including our fax, voicemail and wireless
suites.
Liquidity and Capital Resources
At May 31, 2000, we had a cash and cash equivalent balance of approximately
$9.0 million. This represents our principal source of liquidity. Our principal
sources of funds since inception have been private sales of preferred stock,
the issuance of debt, and capital lease facilities.
Net proceeds from sales of preferred stock from our inception through May
31, 2000 totaled approximately $53.0 million, including sales of approximately
$7.0 million in 1998, $3.0 million in 1999 and $28.0 million (including $3.0
million of notes payable converted into preferred stock) in January 2000. We
have used these capital resources to fund operating losses, working capital,
capital expenditures, and the retirement of debt.
During 1998, we entered into a revolving credit facility with Silicon Valley
Bank which provided for the borrowing of up to $4.0 million at a variable
interest rate of prime plus 1.5%. This credit facility was decreased to $3.0
million in January 1999. We paid off all amounts outstanding and terminated
this credit facility in April 1999. Over the course of this credit facility, we
paid $197,000, including amortized estimated fair value of the warrants issued
in connection with the January 1999 amendment, in interest in connection with
borrowings under the credit facility.
In May 1999, we entered into a term loan arrangement with American National
Bank and Trust, which allowed for borrowings of up to $3.0 million for working
capital needs. We amended this arrangement in August 1999 to increase the
borrowing capacity to $4.0 million. Borrowings under the term loan accrued
interest at a variable rate equal to American National Bank and Trust's prime
rate plus 1% payable monthly. Over the course of its term, we paid a total of
$250,000 in interest in connection with this term loan. We repaid the $4.0
million outstanding under this loan in January 2000 and at which time the
facility was terminated.
In addition, in September 1998, we entered into a mezzanine debt facility
with CID Mezzanine Capital, L.P. that allowed for borrowings of up to $3.0
million for working capital needs. In April 1999, we amended this mezzanine
debt facility to increase the borrowing capacity to $5.0 million for working
capital needs, which amount was outstanding as of May 31, 2000. Borrowings
under the mezzanine debt facility accrue interest at an annual rate of 11%,
which interest is payable monthly. As of May 31, 2000, we had since inception
paid a total of $1.3 million, including amortized estimated fair value of the
warrants issued to CID Mezzanine, in interest on borrowings under this
mezzanine debt facility. We intend to repay the outstanding balance under this
mezzanine debt facility with a portion of the net proceeds from this offering.
As of December 31, 1999, we had $3.0 million of indebtedness outstanding
under a bridge facility with approximately 10 of our existing stockholders. See
"Related Party Transactions--Bridge Financing." Borrowings under this facility
accrued interest at an annual rate of 9.5%. These bridge notes, including
$73,000 of accrued interest, were converted into preferred stock in connection
with our issuance of $28.0 million of Series E preferred stock in January 2000.
Net cash used in operating activities was $2.9 million, $10.7 million and
$10.7 million in 1997, 1998, and 1999, respectively, and $4.9 million for the
three months ended March 31, 2000. Net cash used in operating activities in
each of these periods was primarily due to net losses, and was partially offset
by a decrease in accounts receivable in 1997. Net cash used in investing
activities was $759,000, $1.0 million and $1.7 million in 1997, 1998 and 1999,
respectively, and $987,000 for the three months ended March 31, 2000. Net cash
used in investing activities in all such periods was primarily related to
purchases of property and
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equipment and capitalization of additional software development costs. Net cash
provided by financing activities was $7.0 million, $8.8 million and $12.0
million in 1997, 1998, and 1999, respectively, and $19.0 million for the three
months ended March 31, 2000. Net cash provided by financing activities in all
such periods resulted primarily from the issuance of preferred stock and notes
payable.
We maintain allowances for uncollectible accounts to reflect our accounts
receivable balances at net realized value. The adequacy of the allowance is
determined by periodic reviews of individual customer accounts. The allowances
for uncollectible accounts at December 31, 1998, December 31, 1999 and March
31, 2000 were $0, $319,000 and $332,000, respectively.
As of March 31, 2000, we had an accumulated deficit of $90.4 million ($44.3
million of which was attributable to accretion of redeemable preferred stock
and warrants to acquire preferred stock and preferred stock dividends,) and
available net operating loss carryforwards of approximately $42.9 million,
which expire between 2010 and 2018. See note 7 to our consolidated financial
statements included elsewhere in this prospectus. Our ability to use these
operating loss carryforwards to offset future taxable income depends on a
variety of factors, including possible limitations on usage under Internal
Revenue Code Section 382. Section 382 imposes an annual limitation on the
future utilization of operating loss carryforwards due to changes in ownership
resulting from the issuance of common shares, stock options, warrants and
preferred shares.
We believe that the net proceeds from this offering, together with our
current cash, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. However, we
may need to raise additional funds in future periods through public or private
financings, or other arrangements. We cannot assure you that such additional
financings, if needed, will be available on attractive terms, if at all. The
failure to raise additional capital could have a material adverse effect on our
business, operating results and financial condition. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
our then-current stockholders would be reduced. Furthermore, such equity
securities might have rights, preferences or privileges senior to those of our
common and preferred stock.
Quantitative and Qualitative Disclosures About Market Risk
We believe that our exposure to market risks for changes in interest and
currency rates is not significant. Our investments generally are limited to
highly liquid instruments with maturities of three months or less.
Substantially all of our interest-bearing debt will be paid off with the net
proceeds of this offering. Foreign net assets currently consist of investments
in sales offices and local personnel and are not material. Sales office
operations are conducted in the local currency. Foreign operations are expected
to grow as we expand our global client base and as they grow we may become
subject to foreign currency fluctuations that could materially affect our
results of operations. Open Port does not hedge against foreign currency
fluctuations.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and
requires recognition of all derivatives as assets or liabilities in the
statement of financial position and measurement of those instruments at fair
value. The statement, as amended, is effective for fiscal years beginning after
June 15, 2000. Since we do not have any derivative instruments or hedging
activities, we do not expect SFAS No. 133 to have a material effect on our
financial results.
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<PAGE>
BUSINESS
We design, develop and distribute IP LaunchPad, a carrier-class software
platform that enables enhanced communication services to be deployed over
networks based on the Internet Protocol, or IP. The types of enhanced IP
services that we enable or intend to enable include services such as delivering
email messages to fax machines, voicemail messages to email systems, and news
alerts to mobile phones. Our solution enables these enhanced IP services to be
deployed with the accountability, tracking and reliability of services
delivered over the public switched telephone network, or PSTN, while taking
advantage of the more efficient use of bandwidth, increased functionality,
flexibility and reduced costs offered by IP networks. In addition, IP LaunchPad
provides software interfaces between IP networks and the PSTN and wireless
networks, which enable service providers to offer enhanced IP services that
connect to PSTN and wireless devices such as fax machines, telephones,
voicemail systems, mobile phones and pagers. Our customers are service
providers including long distance telecommunication providers, regional Bell
operating companies, competitive local exchange carriers, public telephone and
telegraph companies, and Internet service providers. As of the date of this
prospectus, we had entered into license agreements with 18 customers, including
Bell Atlantic Data Solutions Group, Inc., Cable and Wireless Japan Ltd.,
Interpath Communications, Inc., Qwest Communications Corporation and Tele
Danmark A/S.
We designed IP LaunchPad to provide an IP-based messaging infrastructure
that supports various types of enhanced IP services. The IP LaunchPad platform
facilitates message broadcasting, bridges incompatible messaging systems, and
enables service providers to offer different levels of service to subscribers
based upon their priority. We also develop and provide enhanced IP services
applications such as IP LaunchPad Fax Suite, which we commercially released in
the third quarter of 1999. In addition, we currently offer IP LaunchPad
Software Development Kit/Application Programmers Interface, which can be used
by service providers or third parties to develop their own custom applications.
We recently entered into an agreement with a service provider to begin trials
of certain applications included in our IP LaunchPad Voicemail Suite. Also, we
currently are developing and intend to introduce additional applications to be
included in our IP LaunchPad Voicemail Suite as well as our IP LaunchPad
Wireless Data Suite.
Industry Overview
Due to deregulation, industry consolidation and the advent of new
technologies, including the Internet, the market for communications has grown
and the number of service providers has increased. As the number of service
providers has increased, competition among them has intensified, and their
profit margins generally have been reduced. To differentiate themselves,
service providers have attempted to compete on factors other than price.
Traditionally, service providers delivered basic PSTN and wireless network-
based services such as dial-tone and call waiting. Recently, a new class of
service providers began to offer basic IP network-based services such as dial-
up Internet access and web site hosting. We believe service providers will
increasingly compete based on the types of enhanced services they offer to
their subscribers. These enhanced services are designed to enable people to
receive and deliver voicemail, email and wireless data conveniently using a
variety of devices. For example, a business person could specify that email
messages be converted and delivered as voicemail to his or her mobile phone,
providing convenience and increased responsiveness to his or her customers.
These enhanced services offer service providers the opportunity to gain new
subscribers, retain existing subscribers and increase revenue per subscriber.
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The PSTN, wireless and IP networks can each be used to provide enhanced
services. Links among these networks offer the potential to enable more and
increasingly sophisticated enhanced IP services. Historically, attempts to
provide enhanced services that work across each of these networks have proven
difficult and have not been commercially successful. Instead, service providers
have generally been limited to delivering enhanced services such as voicemail
within each network, subject to the advantages and disadvantages of each
network.
The PSTN has the largest deployed network infrastructure in the world, and
its advantages and disadvantages are well known. The PSTN is a circuit-switched
network that, for each communication, reserves a dedicated circuit with fixed
bandwidth that remains allocated during the entire communication. Maintaining a
dedicated circuit allows for short, predictable transmission delays, high
quality and reliability. However, since the PSTN dedicates a fixed amount of
bandwidth to each communication, it uses bandwidth inefficiently, making it
less well suited to data intensive communication. Another advantage of the PSTN
is its extensive management and control facilities that permit traditional
telecommunications companies to determine whether a communication has reached
its destination and provide the ability to track, account and bill for
individual subscribers. However, the PSTN comprises thousands of switching
points, often called central offices, or COs, each of which must usually be
upgraded before a new service can be offered across the network. As a result,
it is time-consuming and costly to deploy new communication services. Also,
because the PSTN is highly regulated, it is costly for long distance
communications.
Wireless networks are growing rapidly and can be deployed by service
providers with significantly less investment than the PSTN. Wireless networks
offer users the advantages of increased flexibility and convenience due to the
mobility of wireless devices. However, wireless devices currently are not
capable of displaying large amounts of data and the cost of transmitting
wireless communications is generally higher and the quality and reliability
generally are lower than comparable transmissions over the PSTN. Further,
wireless networks comprise many base stations, each of which must usually be
upgraded before a new service can be offered.
IP networks are packet-switched networks that divide a communication into
discrete packets for transmission. The multiple packets that make up a single
communication move independently of each other and may take different routes
through IP networks before being reassembled at the destination. Each
communication uses only the bandwidth necessary to send its packets and as a
result, IP networks use bandwidth more efficiently than the PSTN and wireless
networks.
IP networks also enable flexible management and provisioning of services.
While IP networks also contain many switching points, new services can be
installed at one location in the core of an IP network and made immediately
available to all subscribers. This is significantly less expensive and time-
consuming than in the PSTN and wireless networks, where the new service has to
be deployed in each CO or wireless base station. IP networks also allow
subscribers to minimize long distance charges by transporting traffic across
unregulated IP backbones instead of the regulated PSTN or wireless networks.
However, IP networks also have limitations. The discrete packets of an IP
network have to be reordered and reassembled, for example, causing
unpredictable delays in transmissions. To date, IP networks have also lacked
the quality, reliability, tracking, and accountability associated with
traditional PSTN services, such as voice and fax.
Because IP networks carry large amounts of data efficiently and have other
transmission advantages over the PSTN and wireless networks, we believe service
providers will choose to deliver enhanced services using the IP network as a
backbone. However, because PSTN and wireless devices are familiar and simple to
use, and users have come to rely upon the phone
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<PAGE>
numbers attached to them, we also believe service providers will want to
deliver these enhanced services to and from the IP network to subscribers who
use the PSTN and wireless networks. Therefore, service providers must be able
to deliver these enhanced IP services to the millions of subscribers who use
PSTN and wireless devices such as telephones, wireless phones, fax machines,
pagers and wireless personal data assistants, or PDAs.
In order to commercially deliver enhanced IP services to all network
subscribers, we believe that service providers must address the following key
issues:
. Eliminate Barriers between Networks. For the foreseeable future, we
believe traditional PSTN and wireless network devices will provide one
of the primary means for subscribers to take advantage of enhanced IP
services. To date, commercial acceptance of enhanced IP services has
been restrained because subscribers do not want to change or add to
their existing email addresses and PSTN and wireless phone numbers.
Accordingly, service providers planning to offer enhanced IP services
must have the ability to bridge these networks, enabling users to retain
their existing email addresses and phone numbers while still enjoying
the benefits of IP networks.
. Enable New Services Quickly. Service providers must deploy services
quickly to increase their revenues, retain customers and build their
competitive position. When adding a new service to a service provider's
network, the application must be integrated with existing billing, user
provisioning and network management systems, as well as the network
hardware communications infrastructure. In addition, service providers
often desire to customize applications and differentiate their services
from those offered by their competitors. As a result, deploying new
applications on a service provider's network can be time consuming and
expensive.
. Provide Tiered Service Level Offerings for IP Communications. We believe
many subscribers are willing to compensate the service provider for an
"elite" level of service, for example, rather than "basic" service.
However, today there are no mechanisms in an IP network that allow
service level agreements, or SLAs, for enhanced IP services. To provide
these different levels of service, a service provider must have the
capability to create SLAs for its subscribers, and then have a system
that ensures the services are being delivered according to the SLAs.
. Enable Subscriber Self-Care. Subscriber care activities for enhanced IP
services include provisioning a new service, adjusting preferences and
providing message delivery status. If these subscriber care activities
are performed by service providers, it will be at a significant cost. To
minimize the costs associated with subscriber care and increase
subscriber satisfaction and loyalty, service providers need a mechanism
that enables subscribers to perform these activities for themselves.
. Support Service Wholesaling Capabilities. Today many service providers
wholesale basic IP services over their networks to other service
providers that then brand the service as their own and market it to
their subscribers. As a typical example in use today, one service
provider may have an extensive network infrastructure, including
thousands of dial-up Internet access lines. Another service provider,
who may own some network components, can resell the access lines of the
former service provider, using its own brand name to offer dial-up
Internet access to its subscribers. To take advantage of this powerful
distribution model, enhanced IP services must be designed to allow
wholesaling from one service provider to another.
We believe that service providers are seeking software solutions to help
them address these key issues and to deliver enhanced IP services, enabling
them to increase their revenues by gaining new subscribers, retaining existing
subscribers and increasing their revenue per subscriber.
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The Open Port Solution
We have designed and developed IP LaunchPad, a carrier-class software
platform that enables enhanced IP services to be deployed over IP networks with
connections to the PSTN and wireless networks. Our solution allows service
providers to deliver enhanced IP services to their subscribers with the
accountability, tracking and reliability of PSTN systems while taking advantage
of the more efficient use of bandwidth, increased functionality, flexibility
and reduced costs offered by IP networks. Our customers can use our solution to
create and realize new revenue opportunities by offering messaging services
across a combination of the PSTN, IP and wireless networks that previously
could be offered only over each network individually. In addition, our
customers can use our solution to offer enhanced IP services that are not
currently possible on the PSTN and traditional wireless networks.
Our comprehensive messaging solution allows service providers to offer
enhanced IP services by providing an interface between IP networks and
traditional PSTN and wireless devices, and by addressing the five key
challenges limiting deployment of those services today:
. IP LaunchPad Bridges Dissimilar Networks and Messaging Systems. Our
solution provides connections enabling traditional PSTN and wireless
devices to use an enhanced IP services infrastructure. For example, a
voicemail user can specify that messages be forwarded to email. The
creator of financial reports can submit the list of recipients to IP
LaunchPad, which is designed to enable delivery of the message to some
of those recipients via fax, to others via voicemail, to others in their
home email system, and to still others via wireless phones capable of
displaying that information. Additionally, existing voicemail systems,
departmental fax servers, and corporate-wide email servers can be
connected as if they were IP devices.
. IP LaunchPad Enables New Services Quickly. We integrate with a service
provider's billing, user provisioning, network management and network
hardware communications infrastructure. As a result, developers of
applications that provide enhanced IP services can create applications
that will integrate with our platform rather than directly with each
service provider's environment. Since service providers only need to
integrate with our solution rather than with each application
separately, they can more quickly and easily offer their subscribers new
enhanced services, which are created by Open Port and third party
application developers. The flexibility of our software suites, combined
with application programmer interfaces, or APIs, also enables service
providers to customize the applications and differentiate their services
from those offered by competitors.
. IP LaunchPad Allows Service Providers to Offer Tiered Service Contracts
for Enhanced IP Services. Our solution allows service providers to
guarantee, track and monitor the delivery of enhanced IP services,
enabling them to conform to SLAs with each subscriber. In addition,
service providers can offer their subscribers a variety of premium
service levels based on the subscriber's needs. For example, a
subscriber distributing information, such as financial reports, may
offer the reports to high-priority subscribers first.
. IP LaunchPad Allows Service Providers to Enable Subscriber Self-
Care. Our solution allows subscribers to provide subscriber care
activities for themselves through a web browser interface, without
involving the service provider's personnel. Additionally, each new
service launched on IP LaunchPad can have subscriber care controls
contained in a web browser interface. For example, a subscriber can sign
up for a new enhanced service, quickly adjust user preferences and track
the progress of sent messages using a web browser interface.
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. IP LaunchPad Enables Service Providers to Reach Subscribers through
Wholesale Distribution. Our solution enables wholesale distribution of
enhanced IP services, such that each new service launched on IP
LaunchPad can also be distributed in a wholesale manner by one service
provider to another. For example, larger service providers have the
opportunity to realize additional revenues by wholesaling enhanced
services to service providers who do not own a network infrastructure.
Strategy
Our objective is to become the leading provider of software that enables
service providers to deliver enhanced IP services. Key elements of our strategy
include:
. Targeting our Service Provider Networks. We believe that by delivering
our solution to service providers early in the evolution of enhanced IP
services, we achieve a number of strategic advantages. These advantages
include being the first enhanced communications solution offered by
service providers. By becoming the enabling infrastructure technology
most widely used in service providers' systems for enhanced IP services,
we believe that we will be well-positioned to offer new applications
that leverage the capabilities of the IP LaunchPad platform.
. Leveraging our Direct Sales Model. We intend to aggressively target the
service provider market and resellers to that market through our direct
sales force. We plan to expand our direct sales force in the European
and Asian markets. Further, we plan to continue to leverage our
relationships with global service providers that wholesale their network
services. We believe that these customers will sell services enabled by
our software solutions to their service provider customers, including
Internet service providers, regional Bell operating companies,
competitive local exchange carriers and local service providers.
. Introducing our Enhanced IP Services Applications Incrementally. We
believe we can more easily achieve acceptance of the IP LaunchPad
platform by offering enhanced IP services applications incrementally,
rather than by offering multiple applications for services not yet in
demand by service providers or their subscribers. Fax-related services
are the first type of enhanced IP services enabled by our solution. As
enhanced IP services and the IP LaunchPad platform achieve greater
market acceptance, we intend to incrementally introduce more advanced
applications and functionality. In line with this strategy, we are
currently developing and intend to introduce a suite of voice messaging
services as well as a suite of services directed to wireless data
devices.
. Extending our Technology Leadership. We intend to continue to invest
significant resources in technology and product development. We also
intend to ensure that the Open Port solution can serve as a platform for
third-party applications. We plan to support a wide variety of IP
messaging types and enhanced services by further enhancing our platform
and developing new messaging applications.
. Leveraging our Strategic Relationships with Technology Leaders. In order
to facilitate the acceptance of our solution and enhance our marketing
and distribution efforts, we have established strategic relationships
with certain technology industry leaders such as Ascend (now a
subsidiary of Lucent), Cisco, Optus, Sun Microsystems and 3Com. Through
these relationships, we have accelerated the market acceptance of our
products by integrating our technology with our strategic allies'
products and by forming joint marketing arrangements. We intend to
further develop and expand our strategic relationships.
. Enhancing our Solutions with Professional Services. We have developed
internal expertise that enhances the value of our solutions and
strengthens our customer relationships through customer support. Our
customer support personnel work with
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our customers to identify their optimal solutions, provide expert
consultation on system development and deployment, manage the
implementation of the solutions, and design customized training plans.
We intend to further invest in our professional service capabilities in
order to enhance our customer relationships and revenue opportunities.
Products
We design, develop and distribute IP LaunchPad, a carrier-class software
platform that enables enhanced IP services. We offer or are developing software
applications designed to enable a wide variety of enhanced IP services that
fall into three broad categories: fax services, voice messaging services and
wireless data services. All of our enhanced IP services applications are
enabled by the IP LaunchPad platform's core capabilities.
We currently offer IP LaunchPad Fax Suite, which we commercially released in
the third quarter of 1999. IP LaunchPad Fax Suite supports fax-related enhanced
IP services. We also currently offer IP LaunchPad Software Development
Kit/Application Programmers Interface, which can be used by service providers
or third parties to develop their own custom applications. We recently entered
into an agreement with a service provider to begin trials of certain
applications included in our IP LaunchPad Voicemail Suite. Also, we are
currently developing and intend to introduce additional applications for our IP
LaunchPad Voicemail Suite, and our IP LaunchPad Wireless Data Suite. A service
provider can offer any of the services enabled by our solutions separately or
together as bundled services, and can provide the services directly to
subscribers, or as a wholesale offering that can be resold to other service
providers.
Core Capabilities of the IP LaunchPad Platform
. Least Cost Routing. Our patented least cost routing technology allows
the service provider to establish the optimal path that a message should
follow to get to the intended recipient. The correct route is determined
based on the type of message (such as voice, fax, or email), the time of
day, network availability, rate structures, and other parameters. Once
this information is entered, IP LaunchPad will automatically route any
message type through an IP network, the PSTN or a wireless network to
its intended recipient. This capability is designed to enable service
providers to optimize message delivery costs.
. Message Tracking. Our technology enhances the quality and reliability of
message transmission over IP networks and among IP networks, the PSTN
and wireless networks. When a message is created by a subscriber, it is
routed by IP LaunchPad to the recipient using our least cost routing
technology. If a message cannot be delivered on the first attempt, our
software will continue to attempt delivery. The sender can track the
current progress of the message on an ongoing basis. All message
activity is automatically logged and reporting is available to the
subscriber showing message delivery history. Tracking is critical when
the sender wants some guarantee of message delivery, including active
feedback from the recipient. This functionality is important for
individual messages, but even more so for large broadcasts that may go
to hundreds or thousands of recipients.
. Scalability, High Availability, and Redundancy. IP LaunchPad can be
installed across a few servers initially, and as the service provider's
business grows, additional servers can be added to the system to
increase the service capacity. This architecture can reduce the service
provider's initial investment and its cost of system expansion. Our
product achieves high availability to subscribers in two ways. We run
our software on Sun Microsystems SPARC servers, which provide their own
hardware redundancy and
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high availability. We enhance this by allowing the service provider to
configure software fail-over and load balancing to keep the system
running if a piece of the equipment fails, and to distribute the
workload during peak times. This combination of hardware and software
makes the overall system solution highly scalable, available and
redundant.
. Network Independence. Each service provider's network comprises
different vendors' remote access server, or RAS, hardware, and their
billing, customer provisioning and network management systems, which
form a complex and unique environment. IP LaunchPad neutralizes the
unique aspects of the service provider's network environment, so that
applications can quickly interface with the service provider's network
without having to develop custom interfaces for each service provider.
The service provider benefits by having a simpler and less expensive
implementation, and can leverage its existing investment in RAS devices,
billing, provisioning and network management systems. The service
provider's capital costs associated with deploying our product are
limited to our software and the servers on which our software resides.
We leverage the service provider's existing infrastructure, enhancing
the service provider's return on its existing investment in equipment
and support systems.
. Service Level Offerings and Enforcement. IP LaunchPad allows service
providers to build policies, assign policies to users, and then ensure
that applications running on IP LaunchPad adhere to those policies. This
enables service providers to offer higher levels of service to some
subscribers than to others, and to commit to SLAs with their
subscribers, which often is a requirement for rolling out a commercial
grade service.
. Multiple Language Support. Our products support all major languages. The
global economy combined with the reach of the Internet have enabled
businesses to market services outside their traditional borders. IP
LaunchPad allows service providers to offer enhanced IP services to any
market in the world in the local language of the respective market--all
from one system. Multiple language support also facilitates peering
relationships between service providers in different parts of the world.
In a peering relationship, service providers deliver each other's
traffic and offer services to one another's subscribers. For example, a
service provider in the United States can offer virtual United States
phone numbers to subscribers of its peers in South American countries.
The value in this increases greatly if the South American subscribers
can retrieve their messages using Spanish or Portuguese user interfaces.
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Enhanced IP Service Application Suites. The following is an overview of our
current and anticipated enhanced IP service application suites and software
solutions that leverage the core capabilities of our IP LaunchPad platform.
IP LaunchPad Fax Suite
<TABLE>
<CAPTION>
Application Description Status
----------- ----------- ------
<C> <S> <C>
Broadcast Fax........ A subscriber may create a Currently available
broadcast fax that is sent to
multiple recipients.
Email-to-Fax......... A subscriber may use his/her Currently available
existing email system to send a
fax to a fax machine in the same
way that he/she sends a message
to an email user.
Fax-to-Email......... Faxes sent to a subscriber's fax Currently available
number are automatically routed
to the subscriber as an email
message.
Web-to-Fax........... A subscriber can send faxes and Currently available
view received faxes with a
standard web browser.
Fax Mailbox.......... Faxes sent to a subscriber's fax Currently available
number are automatically routed
to the subscriber's IP LaunchPad
mailbox, and can then be
retrieved via a web browser.
Never Busy Fax....... Faxes sent to a subscriber's fax Currently available
machine are stored by IP
LaunchPad if the fax machine is
busy and resent when the fax
machine is available.
Fax Machine.......... All faxes sent from a Currently available
Redirection subscriber's fax machine are
routed through IP LaunchPad for
access to broadcasting functions
or for lower cost delivery across
an IP network.
IP LaunchPad Software Development Kit / Application Programmers Interface
<CAPTION>
Application Description Status
----------- ----------- ------
<C> <S> <C>
Business Process..... Third-party messaging software Currently available
Integration and service provider back office
administrative systems can be
linked to IP LaunchPad across an
IP network.
Custom Messaging..... Messaging software developers can Currently available
Applications interface their custom
applications with IP LaunchPad-
enabled service providers.
User Provisioning.... Developers and system integrators Currently available
can integrate third-party user
provisioning systems with IP
LaunchPad to avoid duplicate data
entry.
</TABLE>
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IP LaunchPad Voicemail Suite
<TABLE>
<CAPTION>
Application Description Status
----------- ----------- ------
<C> <S> <C>
Voicemail-to-Email... A subscriber may forward to an email In test stage
account some or all of the voice
messages that come into his/her
existing legacy voice mailbox.
Enterprise-to-Mobile. This service auto-forwards messages In development
Voicemail from a subscriber's enterprise voice
mailbox to the subscriber's
mobile/wireless voice mailbox.
Send/Forward......... A subscriber on one voicemail system In development
Voicemail to Another may send a voice message to a
Subscriber recipient on a different voicemail
system, or directly to the recipient
via a home, work or mobile phone.
Voicemail.. Broadcast A subscriber may create a voice In development
message within his/her existing
voicemail account and send it to a
browser-managed list of recipients.
Recipients may be on disparate
voicemail systems.
Email-to-Voicemail... A subscriber can use his/her existing In development
Delivery email system to send a voice or text
message that will be translated into a
synthetic voice message and sent to
his/her home, work or mobile/wireless
voicemail system. The recipient's
voicemail system may be located
anywhere, and does not have to be part
of the sender's intranet or voicemail
system.
IP LaunchPad Wireless Data Suite
<CAPTION>
Application Description Status
----------- ----------- ------
<C> <S> <C>
WAP/SMS.............. Message receipt, message delivery In development
Notification confirmation and data availability
notifications can be made through
wireless application protocol (WAP) or
small message system (SMS)
communication.
Email-to-WAP/SMS..... Email subscribers can direct short In development
messages to a wireless device.
WAP/SMS-to-Email..... Senders of WAP/SMS messages can direct In development
short messages to a wireless device.
Message Push and..... IP LaunchPad can pass parts of a In development
Response message to a wireless device along
with a pointer for rapid retrieval of
the complete message content.
Information Push..... Data content providers can target In development
wireless data messages such as news
alerts to individuals, pre-defined
groups, or by matches to pre-recorded
recipients' preferences.
Information Push..... Information pushed to wireless devices In development
Tracking may include pointers for responses and
follow-up.
</TABLE>
We price initial system deployment of our software solution based on a
variety of factors, including the number of ports our customers will need to
support their projected traffic levels, the number of subscribers provisioned
in the system, gateways to external voicemail, fax and other systems, and
recurring maintenance. Our customers deploy an initial system
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configuration with prices generally ranging from $50,000 to $1.0 million. The
service provider can then purchase additional port licenses and subscriber
licenses as the demand for its service grows. We invoice our customers annually
for software maintenance which currently is calculated as a percentage of the
list price of all of our installed software.
Technology
IP Network Overview. Our technology comprises a software platform that is
deployed within a service provider's existing network infrastructure to route,
track, deliver and control the flow of messaging traffic across IP networks. An
IP network comprises an array of transmission lines that connect servers and
other devices to create a network. Information is transmitted by routers which
use the destination addresses of the packets of information passing through
them to determine on which routes to send them. Access to an IP network is
obtained through a direct line into the network or through a remote access
server, or RAS. Each RAS has ports through which subscribers can establish
dial-up connections to the IP network. RASs are located throughout IP networks
at geographically dispersed points of presence, or PoPs, which are often the
functional edges of IP networks.
The Software Architecture. Our solution enhances the quality and reliability
of message transmission over IP networks. Our architecture centralizes IP
messaging intelligence by placing management and control functions at hub
locations in IP networks rather than at PoPs. Centralization of IP messaging
intelligence at the hub of IP networks is fundamental to least cost routing
decisions and facilitates expansions in system functionality and processing
capacity. Complementary to this centralized structure, the IP LaunchPad
platform is a modular architecture which allows the service provider
flexibility in creating those new functions and offering scalability from the
processing needs of the smallest service provider to those of the largest. Our
software modules are designed to operate as independent components in order to
promote system stability and availability. Additional traffic can be handled by
adding additional modules without affecting any other module's performance.
Additional features and enhancements can be implemented by adding different
modules without affecting the overall system flow.
How a Message is Processed by Our Technology. Our technology enables parties
to communicate through any combination of telephony or network-connected
devices, including fax machines, telephones, voicemail systems, wireless
devices, stand-alone PCs with modems, servers and PC workstations that are
directly connected to the IP network. Our technology processes messages in the
following manner:
To collect messages for delivery:
. The sender, or some automated process such as an invoice-creation system
or data content mining application, generates a message using a PSTN, IP
or wireless device, such as voice, fax, email, application server, or
video mail.
. If the originating device is on an IP network directly connected to an
Open Port-enabled IP network, the message flows through the service
provider's direct connection router into an IP LaunchPad hub location
(typically, a network operations center).
. If the sender is on a network which is not directly connected to an Open
Port-enabled IP network, the message is converted to an IP message
format using an Open Port-enabled IP LaunchPad Connector. The specific
processes used depends upon whether the message is sent in analog or
digital format.
. IP LaunchPad software determines user privileges and authenticates and
updates user account information for the sender.
. Information needed for billing, tracking and controlling message
delivery is stored or transmitted, as applicable, to service provider
network administration systems.
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To deliver the message, IP LaunchPad then:
. Identifies the type of message being sent, assigns specific attributes
to the message and designates the delivery requirement, such as
immediate or deferred delivery, to be applied.
. Determines whether the intended recipient of the message has a mailbox
on the IP network. If so, the message is delivered. If the intended
recipient of the message does not have a mailbox on the IP network, our
least cost routing technology is used to determine the lowest cost
method for delivering the message at the particular time and date.
. Queues this message with others contending for limited resources, if
applicable. IP LaunchPad applies SLA policies to determine whether this
message should be moved to the top of the queue, or possibly delivered
in sequence (after higher-priority messages have been delivered).
. Continuously collects and updates network status information such as
bandwidth and port availability for our least cost routing algorithm.
. Delivers the message either to a destination on the IP network or to an
off network device through an Open Port-enabled RAS and a dial-out
through either a PSTN or wireless connection.
When the message transmission is complete:
. The associated tracking information is sent back to the network
operations center which pairs the send request with the receipt
confirmation.
. This tracking information is immediately delivered to the service
provider's network administration systems that have been linked to our
software.
Using the tracking information:
. End-users can determine in real-time the current status of messages
which have been delivered or are in process of delivery.
. Settlement issues between service providers who contract with one
another for delivery services are resolved.
. Message senders and content providers can be assured of delivery, or
create detailed or summary management reports indicating recipients'
responses to messages sent.
Professional Services
We offer a comprehensive line of professional services to help our customers
offer enhanced IP services to their subscribers. As of May 31, 2000, our
professional services staff consisted of 28 employees. We provide three phases
of service support: management consulting, service development and
implementation, and full-scale production support.
Management Consulting. In the first phase, we help customers define an
enhanced IP services solution by providing some or all of the following:
. establishing the business definition and business case;
. determining market definition and selecting target market segments;
. defining details of the hardware and software to be distributed;
. defining the business processes that are required to manage and support
the service offering;
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. determining a high level marketing and sales plan; and
. establishing the acceptance criteria and plan for the service to go into
production.
Concurrently, we begin planning for service deployment which may include:
. developing detailed deployment schedules and budgets;
. determining outsourcing needs and establishing contracts with identified
partners;
. monitoring the project schedules and deliverables and taking corrective
actions to meet established delivery goals; and
. establishing executive and technical review teams and conducting regular
review meetings for information exchange and processing and system buy-
in.
Service Development and Implementation. In the second phase, we develop the
enhanced IP services solutions with our customers and implement the solutions
in internal trials and initial deployment, prior to full-scale production. We
have gained international systems implementation knowledge and experience by
deploying hardware and software at customer sites worldwide. Our systems
implementation services include:
. establishing requirements for the hardware and software deployment
needed for the successful implementation of the desired services;
. scheduling the deployment based on the availability of the required
facilities, telephony, hardware and software;
. installing software at the deployment sites; and
. training the customer to perform installations.
Production Support. In the final phase, as the services solution is rolled
out by our customer, we continue to provide management consulting, training,
implementation, and customer support services as needed. Also, on an ongoing
basis after the roll out, for a maintenance fee our customers receive support
and software upgrades.
Customers
We currently target sales of IP LaunchPad to service providers as our
principal customers. As of the date of this prospectus, the following customers
had entered into license agreements to deploy our solution in their networks:
. AT&T Unisource Communications . Interpath Communications, Inc.
Service v.o.f. . LEC Unwired, LLC
. Bell Atlantic Data Solutions . LTS S.p.A.
Group, Inc. . MCI WorldCom Network Services,
. Cable & Wireless HKT CSL Limited Inc.
(Hong Kong Telephone) . Pacific Internet Limited
. Cable & Wireless Japan Ltd. . QQ Interactive, Inc.
. Cable & Wireless Optus . Qwest Communications
. China Telecom-Guandong PTA Corporation
. Digitel Communications (Asia) . Spata Communications Corp.
Ltd. . Taiwan Telecommunication
. Ics.IP S.p.A. Network Services Co., Ltd.
. Tele Danmark A/S
In December 1999 we entered into a master license agreement with Cable &
Wireless plc, which has approximately 70 operating units. This agreement
provides the terms and conditions under which Cable & Wireless operating units
may elect to license our software solutions. As of May 31, 2000, four Cable &
Wireless operating units had entered into license agreements for our software.
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Our top two customers, GRIC Communications, Inc. and UUNet Technologies,
Inc., totaled 51% of our total revenues in 1999. We do not expect either of
these customers to account for any revenues in the year ended December 31,
2000. However, other customers may account for more than 10% of our revenues in
the future and we expect that a small number of our customers will continue to
account for a substantial portion of our revenues.
Strategic Relationships
In order to facilitate the acceptance of our solutions and enhance our
marketing and distribution efforts, we have established strategic relationships
with certain technology industry leaders such as Ascend (now a subsidiary of
Lucent), Cisco, Optus, Sun Microsystems and 3Com. These relationships have
accelerated the market acceptance of our products through technology
integration into our allies' products and/or joint marketing arrangements.
. Ascend. Starting in 1997, we jointly developed software with Ascend,
which was acquired by Lucent in 1999. In 1998, we entered into a non-
exclusive worldwide strategic alliance agreement with Ascend which makes
it simpler for Ascend's customers to use our solution.
. Cisco. We are a member of Cisco's New World Ecosystem Program, a
community of technology partners. In 1999, we announced an alliance to
bring certain IP LaunchPad fax solutions to Cisco's AS5X00 product
family. We engage in joint marketing activities and receive sales
referrals from Cisco.
. iReady. In January 1999, we entered into a strategic alliance to provide
iReady with our protocols that enable fax transmissions over the
Internet. iReady's Internet Tuner module, enhanced with these these
protocols, allows multi-function peripherals and fax machines to send
and receive faxes over the Internet.
. Kanbay. In 1999, we entered into a global integrator agreement with
Kanbay under which they will provide integration and customization
services for IP LaunchPad, either by subcontracting with us or by
contracting directly with the end user. In addition, Kanbay will promote
IP LaunchPad to their service provider customers.
. Optus. In 1998, we entered into a worldwide development and license
agreement with Optus under which Optus granted us a license to certain
fax technology, and we granted Optus a license to our Internet gateway
software, which allows Optus products to communicate with Open Port-
enabled service providers.
. Sun Microsystems. In 1999, we became a Sun strategic developer and a
founding member of Sun's SunTone Architecture Council. We also have a
marketing alliance that combines IP LaunchPad with the Sun-Netscape
Alliance messaging server software. We engage in joint marketing with,
and receive sales referrals from, Sun.
. 3Com. In 1998, we entered into a non-exclusive worldwide strategic
alliance and referral agreement with 3Com. Under this agreement, we
participate in joint product development and co-marketing activities.
We intend to selectively pursue additional strategic alliances and
relationships in the future. We are conducting preliminary discussions with
third parties regarding potential strategic business opportunities that may
take a number of different forms. These discussions are in early stages, and no
definitive terms and conditions have been agreed upon. Accordingly, there can
be no assurance as to the terms, timing or consummation of any of these
opportunities.
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Sales and Marketing
We rely on our direct sales force to make sales to service providers. As of
May 31, 2000, we had 16 direct sales professionals on our staff. A sales
director in Chicago manages Latin America, Canada and the midwest and eastern
portions of the United States. A sales director in our San Francisco office
manages the western United States and Asian region business, and a sales
director in our Paris office manages Europe, Africa and the Middle East. All of
these sales directors report to our Senior Vice President of Sales and
Marketing. We plan to expand our domestic and international sales opportunities
by increasing the size of our sales force and through reseller/distribution
alliances.
The sales process is divided into three phases: business definition, due
diligence and contract, and service deployment.
. Business Definition. Our sales personnel review the prospective
customer's business and network infrastructure before presenting a
formal proposal. Following the proposal, we perform a series of
technical reviews, analyzing the prospective customer's network and
objectives, combined with a marketing implementation review. We work
closely with the prospective customer in defining our solutions.
. Due Diligence and Contract. We install our software on the prospective
customer's network on a limited scale. Once testing of this limited
installation is successfully completed, we negotiate with our customers
and sign a contract. Our customer's decision to license our software is
usually enterprise-wide, involving approval by numerous members of the
customer's management team, and thus several months often elapse between
initial contact and final contract signing.
. Service Deployment. Our professional services organization works with
the customer to install and test the software in their network. We train
the customer's support services personnel in the operation and
management of the installed software as a billable service. Service
deployment typically takes two to three months depending on the
customer's requirements and is implemented in a phased approach tailored
to such requirements. A global account manager, who is on site at the
customer's headquarters, maintains an understanding of the customer
deployment to better service the needs of the customer and thereby
increase sales to the customer.
As of May 31, 2000, 12 of our employees were responsible for a variety of
marketing activities, including product management, market research, sales
collateral development, web design and implementation, public relations,
channel partnerships, trade shows and conferences. Continued revenue growth
depends, in part, on our ability to retain and maintain sales and marketing
personnel as well as our ability to expand and maintain our strategic business
relationships with resellers, distributors and other third parties that are
crucial in our sales process.
Research and Development
We believe that our future success depends in large part on our ability to
enhance our current product family and introduce new products that enable a
wide range of enhanced IP services to service providers. As of May 31, 2000,
our product development organization consisted of 49 full-time employees. We
also utilize contract technical professionals on an as-needed basis.
Our product development organization is responsible for product design,
development and testing, as well as user documentation. This group is
responsible for integrating our software with various third-party components.
In addition, our advanced technologies group
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investigates ways to expand the usability of our IP LaunchPad platform
software, including researching possible future unified messaging applications
and enhancements to our wireless data product suite.
Competition
Our industry is intensely competitive, rapidly evolving and subject to rapid
technological change. We expect competition to intensify in the future. Many
companies that offer products or services that compete with one or more of our
products or services have greater financial, technical, product development,
marketing and other resources than we have. These organizations may be better
known and may have more customers than we have. We may be unable to compete
successfully against these organizations.
We currently compete with other companies offering software to enable
enhanced IP services. We compete directly with a number of private companies in
the fax-over-IP market such as Netcentric Corporation and Arelnet Ltd. We
believe a critical component to success in this market is the ability to
provide a flexible, complete platform solution which enables service provider
customers to readily add enhanced IP applications on an ongoing basis. We
believe that there are no competitors in our market that currently offer a
comprehensive solution with the functionality, features, and value proposition
for service providers comparable to ours. However, several organizations offer
components that compete with certain components of our solutions and may become
increasingly competitive with us in the future. We believe that the main
competitive factors in our market are product features, particularly the types
of enhanced services which may be delivered, product quality and value,
deployment expertise and customer service, and relationships with service
providers and their network system equipment vendors.
As our product and service offerings evolve and the markets in which we
compete develop, we may in the future face competition from several other types
of organizations, including:
. manufacturers of network hardware and infrastructure devices, such as
Cisco Systems, Inc. and Ascend Communications (now a division of Lucent
Technologies Inc.), that currently concentrate on communications between
devices such as telephones and fax machines;
. traditional manufacturers of telephony equipment, such as Lucent
Technologies Inc. and Nortel Networks Corp., some of which recently
began manufacturing telephony equipment for IP networks;
. traditional providers of corporate voice, fax and email systems
including such companies as Comverse Technology, Inc. for voice, Omtool,
Ltd. for fax, and ISOCOR (recently acquired by Critical Path, Inc.) for
email; and
. companies that currently, or may in the future, provide IP messaging
applications individually or through alliances.
In addition, we expect that major software companies and others specializing
in the telephony or messaging industries may offer products or services that
are competitive with components of our solutions. While many of these types of
organizations are potential competitors, we believe opportunities exist to
establish strategic relationships, alliances or agreements with some of them.
We have entered into strategic agreements with some of these types of
organizations, and intend to selectively pursue other opportunities in the
future.
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Intellectual Property
We rely primarily on a combination of patents, copyrights, trademarks, trade
secret laws, restrictions on disclosure and other methods to protect our
intellectual property and trade secrets. We also enter into confidentiality
agreements with our employees and consultants, and generally control access to
and distribution of our documentation and other proprietary information.
Although we have not secured registration of all of our marks, we pursue the
registration of certain of our trademarks and service marks in the United
States and in other countries. In addition to our existing registered
trademarks set forth elsewhere in this prospectus, we have applications for the
words-only marks "IP LaunchPad" and "IP LaunchPad Fax Suite" pending with the
United States Patent and Trademark Office and for "IP LaunchPad" pending in the
European Community and Japan. We have entered into an agreement with Sequent
Computer Systems, Inc. in Europe in which we agreed that we will not use the
"Open Port" mark in connection with software for migrating application software
from a mainframe environment to an open system environment or related services,
and Sequent agreed not to object to or challenge our use or registration of the
"Open Port" mark in Europe in connection with messaging software for networks
or related services. Also, in 1995, we entered into an agreement with Relay
Technology, Inc. in which we agreed not to use the mark "Open Port," "Open Port
Harmony," or any similarly confusing mark in connection with computer software
for transferring data between standard query language databases. Relay
Technology agreed not to use the mark "Relay/Open Port" or any similarly
confusing mark in connection with computer software and hardware for providing
electronic messaging, video messaging, voice messaging, image messaging, or fax
transmission functions to computer users.
We own four issued patents and three pending United States patent
applications, each relating to aspects of our business. One of our four issued
United States patents which expires in 2013 is generally directed to the use of
a re-router device to provide alternative paths for digitally-encoded messages
when the initial attempt to deliver the fax or other message is unsuccessful.
The second and third of our United States patents, each of which expires in
2015, are generally directed to a least cost method of routing messages. In one
application, this least cost routing option produces different results
depending on a variety of factors, including the time-of-day and day-of-week
for delivery, the message sender's request for a particular level of service,
the conditions of the network delivery sites as well as bandwidth to those
sites, the location of sending and receiving devices and whether or not the
message is being delivered to one or many devices. The fourth of our United
States patents expires in 2017 and is generally directed to forwarding received
messages to online end-users capable of processing the contents of those
messages. In one application, end-users are agents working for a customer
service center, and our system forwards messages pertaining to specific types
of customer service problems to the agent most ready and capable of handling
each specific type of problem. We have granted licenses under our patents to
certain third parties. For example, we licensed to Microsoft Corporation
perpetual rights to certain of our proprietary technologies, including our
patented least cost routing technology, subject to certain field of use
restrictions.
Governmental Regulation
The following summary of regulatory developments and legislation does not
purport to describe all present and proposed federal, state, local and foreign
regulations and legislation affecting our industry. Other existing federal,
state, local and foreign legislation and
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regulations are currently subject to judicial proceedings, legislative hearings
and administrative proposals that could change, in varying degrees, the manner
in which this industry operates. We cannot predict the outcome of these
proceedings or their impact upon us, our customers or the growth of IP network
infrastructure and utilization of enhanced IP
services. Any legislation that substantially impairs the growth of IP network
infrastructure, enhanced IP services or service providers could materially
affect our business.
In the United States and most countries in which we conduct our operations,
we are not currently subject to direct regulation other than pursuant to laws
applicable to businesses generally and specific United States export and import
controls of other countries, including controls on the use of encryption
technologies that may apply to our products. Adverse developments in the legal
or regulatory environment relating to enhanced IP services and IP network
infrastructure in the United States, Europe, Asia or elsewhere could have a
material adverse effect on our business, financial condition and operating
results. Such regulation could also negatively affect our customers resulting
in a decrease in the demand for our products. A number of legislative and
regulatory proposals from various international bodies and foreign and domestic
governments in the areas of telecommunications, IP network infrastructure,
access charges, encryption standards and related export controls, content,
consumer protection, advertising, intellectual property, privacy, electronic
commerce, taxation, and tariffs and other trade barriers, among others, are now
under consideration. The Federal Trade Commission recently recommended that
Congress take legislative action directed toward further regulation of the
collection and dissemination of information on the Internet. Some members of
Congress have announced that they intend to introduce legislation that reflects
the Federal Trade Commission's recommendations, including provisions that
authorize monetary sanctions. We are unable at this time to predict which, if
any, of these proposals may be adopted and, if adopted, whether these proposals
would have a beneficial or an adverse effect on our business, financial
condition and operating results.
Similarly, we are unable to predict the effect of certain existing
legislation related to use of IP networks. For example, United States laws
protecting internet privacy including the Children's Online Privacy Protection
Act, recently became effective and the European Parliament and the European
Council issued Directive 95/46/EC regarding the processing of personal data and
the free movement of such data. The manner in which these existing domestic and
foreign laws will or may be applied to us or our customers is uncertain.
Employees
As of May 31, 2000, we had 130 full-time employees. Of the total, 33 were
employed in sales, marketing and business development, 49 in research and
development, 28 in professional services, and 20 in finance, information
systems and administration. Our future performance depends, in significant
part, upon our ability to attract new personnel and retain existing personnel
in key areas including engineering, technical support and sales. Competition
for this personnel is intense, and we cannot be sure that we will be successful
in attracting or retaining the personnel in the future. We have never had a
work stoppage, and no employees are represented under collective bargaining
agreements. We consider our relations with our employees to be good.
Facilities
Our principal executive offices currently are located at 676 North St. Clair
Street, Suite 900, Chicago, Illinois 60611. Our lease on these premises covers
24,531 square feet and expires February 28, 2002. We recently leased additional
space covering 8,406 square feet at 205 N. Michigan, Suite 1305, Chicago,
Illinois 60601. This lease expires December 31, 2000. We also lease regional
sales office facilities in: San Francisco, California; Denver, Colorado;
Rotterdam, Netherlands; Diegem, Belgium; Paris, France; and Hong Kong.
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We believe that, except as described below with respect to our Chicago
facilities, our facilities generally are adequate for our current needs and
that additional suitable space will be available as needed on commercially
reasonable terms. Our Chicago facilities do not have adequate available space
to accommodate our anticipated growth, and we expect to identify and lease a
new facility within the next several months to replace our existing facilities.
Upon leasing a new facility, we would attempt to sublet our 676 North St. Clair
Street facility for the remainder of its lease term. While the market for
commercial real estate in the Chicago metropolitan area is competitive, we
believe that suitable space will be available at market rates.
Legal Proceedings
We are not a party to any litigation or other legal proceedings that we
believe would have a material adverse effect on our business or financial
condition.
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<PAGE>
MANAGEMENT
The following table sets forth certain information concerning our executive
officers, directors and certain other key employees:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<C> <C> <S>
Executive Officers and Directors:
Randy S. Storch.................. 41 Chairman of the Board, President and
Chief Executive Officer
Cheryl E. Mayberry............... 44 Senior Vice President/General Manager of
Sales and Marketing
Omprasad S. Nandyal.............. 34 Chief Technical Officer, Secretary and
Director
Michael B. Clauer................ 43 Vice President and Chief Financial
Officer
Clarissa Cerda................... 35 Vice President, General Counsel and
Assistant Secretary
Peter J. Barris(1)............... 47 Director
Thomas J. Crotty(1).............. 41 Director
Royce J. Holland................. 50 Director
Donald R. Hollis(2).............. 64 Director
John E. Major(2)................. 54 Director
Joseph A. Piscopo(2)............. 55 Director
Other Key Employees:
Antonio Dutra.................... 48 Vice President of Strategy
Michael Flockenhaus.............. 37 Vice President of Engineering
Joseph M. Fuller................. 35 Vice President of Finance and
Administration
Alvon D. Ramp.................... 52 Vice President of Client Services
James B. Tucker.................. 44 Vice President of Global Business
Development
Martin T. Wegner................. 33 Vice President and Chief Scientist
</TABLE>
--------
(1) Member of the compensation committee
(2) Member of the audit committee
Executive Officers
Randy S. Storch, a co-founder of Open Port, has served as Chairman of the
Board, President and Chief Executive Officer since our inception in January
1993. Prior to founding Open Port, Mr. Storch was a consultant to Tandem
Computers as a subject matter expert in the area of messaging from October 1992
to December 1993 and served as general manager of Ameritech Corporation's
enhanced messaging services group from March 1991 to October 1992. In 1985, he
founded and was chief executive officer of Airplan Travel Systems until 1987.
Upon the sale of Airplan Travel Systems to Texas Air in June 1987, Mr. Storch
served as a corporate vice president of Texas Air and was responsible for
running the Airplan division and directing the strategy for the company through
February 1991.
Cheryl E. Mayberry has served as Senior Vice President/General Manager of
Sales and Marketing since November 1997. Ms. Mayberry is responsible for
directing and implementing all sales and marketing strategies. From September
1992 to July 1997, Ms. Mayberry served as vice president of sales for U.S.
Robotics, where she established and managed their network systems division.
From 1977 to 1992, she was employed at IBM in various sales and marketing
management positions. Ms. Mayberry also serves as chairman of the board of
BrownAngels.com, an early stage e-commerce company.
Omprasad S. Nandyal, a co-founder of Open Port, has served as Chief
Technical Officer and as a director since January 1995. Mr. Nandyal was
responsible, in conjunction with Chief Scientist Martin Wegner, for the
original design of our messaging architecture. He now
51
<PAGE>
oversees the overall direction of our products. Between April 1990 and January
1995, Mr. Nandyal was a co-owner and principal of Frontline Software
Technology, a maker of corporate network fax server software which was
purchased by Open Port in January 1995.
Michael B. Clauer has served as Vice President and Chief Financial Officer
since April 2000. He previously served in various management capacities, most
recently as executive vice president and chief financial officer, for Budget
Group, Inc., a company engaged in the business of renting cars and trucks, from
November 1997 to February 2000. From April 1996 to November 1997, he served as
senior director of finance, strategy and planning for the North America
national franchise business units of the Pepsi-Cola Company, and from September
1994 to April 1996, he was the senior director field finance for Pepsico
International Restaurants, Inc.
Clarissa Cerda has served as Vice President, General Counsel and Assistant
Secretary since May 2000. Prior to joining Open Port, Ms. Cerda focused on
corporate and securities law matters at Sonnenschein Nath & Rosenthal, a
national law firm, from August 1995 to May 2000, serving most recently as a
partner. From May 1993 to July 1995, she served in the White House Counsel's
Office as Assistant Counsel to the President of the United States.
Outside Directors
Peter J. Barris has served as a director of Open Port since March 1997. He
has been a general partner of New Enterprise Associates, a venture capital
firm, since 1993. He specializes in investments in information technology
companies. Before joining NEA, Mr. Barris was president and chief operating
officer of Legent Corporation, a systems software manufacturer, and senior vice
president and general manager of the systems software division at UCCEL. Mr.
Barris also serves as a director of CareerBuilder Inc., a provider of
recruitment products and services, and Mobius Management Systems, Inc., a
provider of software products.
Thomas J. Crotty has served as a director of Open Port since March 2000. He
has been a general partner of Battery Ventures, a venture capital partnership
focused on investments in communications, software and Internet/e-commerce
companies, since 1989. Mr. Crotty served as an observer at our board meetings
from June 1998 to February 2000. Prior to joining Battery Ventures, he worked
at Abacus Ventures, a partnership specializing in communications investments.
Mr. Crotty also serves as a director of Witness Systems, Inc., a software
provider.
Royce J. Holland has served as a director of Open Port since February 1997.
He is chairman and chief executive officer and co-founder of Allegiance
Telecom, Inc., a competitive local exchange carrier headquartered in Dallas,
Texas that was formed in 1997. Previously, Mr. Holland was president and one of
several co-founders of MFS Communications Company, Inc., a competitive local
exchange carrier with operations in 52 metropolitan areas in North America,
Europe and Asia, from January 1992 to December 1996. Mr. Holland also serves as
a director of Choice One Communications, Inc., an integrated communications
provider of broadband data and voice telecommunications services, and CSG
Systems International, Inc., a provider of customer care and billing solutions
to the communications industry.
Donald R. Hollis has served as a director of Open Port since December 1996.
He is president of DRH Strategic Consulting, Inc., which assists clients in
developing strategies for leveraging technology and quality practices to
improve payments related transaction processing products as well as in finding
appropriate acquisitions. From 1981 to 1996 he was an executive vice president
of First Chicago Corporation responsible for its technology leadership and its
commercial transaction processing businesses. Mr. Hollis serves on the
executive committee of the Illinois Institute of Technology's board of trustees
and the IIT research institute board of governors. Mr. Hollis also serves as a
director of Deluxe Corporation.
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<PAGE>
John E. Major has served as a director of Open Port since March 2000. He has
served as chief executive officer of the Wireless Internet Solutions Group, a
consulting and investment strategy business focused on the convergence of the
wireless and Internet industries. Mr. Major served as the chairman and chief
executive officer of Wireless Knowledge, a Qualcomm and Microsoft joint venture
which provides Internet based solutions for wireless access to corporate
information, from November 1998 to November 1999. Prior to that, Mr. Major
served as an executive vice president of Qualcomm and as president of its
wireless infrastructure division. Prior to joining Qualcomm in 1997, Mr. Major
served as senior vice president and staff chief technical officer at Motorola,
Inc., a manufacturer of telecommunications equipment, and as senior vice
president and general manager for Motorola's worldwide systems group. Mr. Major
currently serves on the board of directors of Lennox International Inc., a
provider of climate control solutions, Littlefuse, Inc., a manufacturer of
fuses, and Verilink Corporation, a manufacturer of network access devices.
Joseph A. Piscopo has served as a director of Open Port since December 1995.
He is a private investor in software and technology firms. He was chairman of
Software Artistry, Inc., an Indianapolis software firm, from 1992 to 1998, when
it was acquired by IBM. He founded Pansophic Systems, a systems software
company in Lisle, Illinois and served as chairman and chief executive officer
of the company from 1969 to 1987.
Key Employees
Antonio Dutra, a co-founder of Open Port, has served as Vice President of
Strategy since 1993. Mr. Dutra has an extensive background in communications
services, hardware and software. Prior to founding Open Port, from 1985 to 1993
Mr. Dutra was an independent consultant with a practice focused on email
applications, electronic data interchange and fax networking. From 1981 to 1985
Mr. Dutra was a technical manager for CompuServe Inc.
Michael Flockenhaus has served as the Vice President of Engineering since
August 1999. Mr. Flockenhaus joined Open Port in November 1998 as Director of
Engineering. From October 1997 to October 1998, Mr. Flockenhaus was vice
president of research and development of Cruise Technologies, a developer of
wireless thin client technology for the health care industry. From March 1988
to October 1997, Mr. Flockenhaus held several senior management positions at
U.S. Robotics, serving most recently as director of modem and telco interface
development.
Joseph M. Fuller has served as Vice President of Finance and Administration
since October 1999. Mr. Fuller joined Open Port in January 1996 as Director of
Finance and Administration and Controller. From 1994 to 1995, Mr. Fuller was
vice president of operations for Crown Mortgage Company, one of the largest
privately-owned mortgage companies in Illinois.
Alvon D. Ramp has served as Vice President of Client Services since January
1996. From December 1993 to January 1996, he was employed at May & Speh, Inc.,
a computer services outsourcing and direct marketing systems company, where he
served as a strategic account consultant, managing relationships with direct
marketing accounts.
James B. Tucker has served as Vice President of Global Business Development
since January 2000. From 1994 to 1999, Mr. Tucker served as director of
strategic sales initiatives for U.S. Robotics and its successor, 3Com
Corporation, where he managed relationships with telecommunications carriers
and network service providers. From 1976 to 1994, Mr. Tucker was employed at
IBM in various sales and marketing management positions.
Martin T. Wegner, a co-founder of Open Port, has served since January 1995
as Chief Scientist in our advanced technologies group, which is our principal
research and development organization for applications in the area of IP
messaging. Working with our Chief
53
<PAGE>
Technical Officer, Mr. Nandyal, Mr. Wegner helped develop the original design
of Open Port's messaging architecture. Between April 1990 and January 1995, Mr.
Wegner was a co-owner and principal of Frontline Software Technology, a maker
of corporate network fax server software which was purchased by Open Port in
January 1995.
Board of Directors
Our business is managed under the direction of our board of directors.
Following this offering, the board of directors will be composed of three
classes, with each class as nearly equal in number as possible. Upon the
expiration of the term of each class of directors, directors comprising that
class will be elected for a three-year term at the annual meeting of
stockholders in the year in which their term expires. Messrs. Holland and
Piscopo will serve in the class with a term that expires on the date of the
annual meeting of stockholders to be held in 2001. Messrs. Barris, Crotty and
Hollis will serve in the class with a term that expires on the date of the
annual meeting of stockholders to be held in 2002. Messrs. Major, Nandyal and
Storch will serve in the class with a term that expires on the date of the
annual meeting of stockholders to be held in 2003. Following this offering, no
person will have the right to have its designee elected to our board of
directors. All officers serve at the discretion of the board of directors.
There are no family relationships among any of our directors or executive
officers.
Committees of the Board of Directors
Our board of directors has established two committees: a compensation
committee and an audit committee. Each such committee has two or more members,
who serve at the discretion of the board of directors.
Our compensation committee will consist of Messrs. Barris and Crotty upon
completion of this offering. The compensation committee reviews, acts on and
reports to the board of directors with respect to various compensation and
employee benefit matters. This includes overseeing and making recommendations
with respect to the salaries, bonuses, and other compensation paid to our
officers and key employees, including the terms and conditions of their
employment, and administering all stock option and other benefit plans (except
that with respect to participation by persons who are not officers, such stock
option and other benefit plans may also be administered by the board of
directors or a committee which includes our chairman of the board unless
otherwise specified in the applicable plan documents) affecting officers' and
key employees' direct and indirect remuneration.
Our audit committee currently consists of Messrs. Hollis, Major and Piscopo.
The audit committee reviews, acts on and reports to the board of directors with
respect to various auditing and accounting matters, including: reviewing the
adequacy of our system of internal accounting controls; reviewing the results
of the independent auditors' annual audit, including any significant
adjustments, management judgements and estimates, new accounting policies and
disagreements with management; reviewing the scope and results of our internal
auditing procedures; reviewing our audited financial statements and discussing
them with management; reviewing the audit reports submitted by the independent
auditors; reviewing disclosures by independent auditors concerning
relationships with our company and the performance of our independent auditors
and annually recommending independent auditors; adopting and annually assessing
our committee charter; and preparing such reports or statements as may be
required by Nasdaq or the securities laws.
Compensation of Directors
We have agreed to pay each director who is not one of our employees a fee of
$1,500 for each meeting of the board of directors that they attend after
completion of this offering. Such persons will also receive stock option grants
pursuant to our 2000 Outside Directors Stock Option Plan. See "--Employee
Benefit Plans--2000 Outside Directors Stock Option Plan." Messrs. Barris,
Crotty, Holland, Hollis, Major and Piscopo are currently eligible to receive
such
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<PAGE>
meeting fees and stock option grants. All directors are reimbursed for out-of-
pocket expenses incurred in connection with attendance at meetings of the board
of directors and meetings of committees of the board of directors. Mr. Hollis
received options to purchase 6,666 shares of common stock at an exercise price
of $1.13 per share on January 1, 1997 pursuant to our 1995 Non-Employee Stock
Option Plan.
Executive Compensation
The following table sets forth information for the year ended December 31,
1999, regarding the compensation of our Chief Executive Officer and each of our
other executive officers whose salary and bonus for the year ended December 31,
1999 were in excess of $100,000. No options or stock appreciation rights were
granted to any of the named executive officers in 1999. We use the term "named
executive officers" to refer collectively to these individuals later in this
prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
------------------ ------------
Securities
Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Options (#) Compensation
--------------------------- ---- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Randy S. Storch............... 1999 $190,000 -- -- --
Chairman of the Board,
President and Chief
Executive Officer
Cheryl E. Mayberry............ 1999 125,000 -- -- --
Senior Vice
President/General Manager of
Sales and Marketing
Omprasad S. Nandyal........... 1999 125,400 -- -- --
Chief Technical Officer and
Secretary
</TABLE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table provides information about options held as of December
31, 1999 and option exercises during 1999 by the named executive officers. The
value of unexercised in-the-money options at fiscal year end is calculated
using the difference between the option exercise price and the fair market
value at December 31, 1999, which has been deemed to be $5.63 per share,
multiplied by the number of shares underlying the option. An option is in-the-
money if the fair market value of the common stock subject to the option is
greater than the exercise price. Based on the assumed initial public offering
price of $11.00 per share, the value of unexercised in-the-money options
following the completion of this offering is expected to significantly exceed
the value of these options at fiscal year end.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised in-the-
Underlying Unexercised Money Options at
Options at Fiscal Year End (#) Fiscal Year End ($)
------------------------------ --------------------------------
Shares
Acquired on Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------ --------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Randy S. Storch......... -- -- 25,555 27,778 $ 114,998 $ 125,001
Cheryl E. Mayberry...... -- -- 50,806 89,887 228,627 404,492
Omprasad S. Nandyal..... -- -- 12,777 13,889 57,497 62,501
</TABLE>
In addition, in March 2000, we granted options to acquire 247,587, 66,666,
and 93,333 shares, respectively, to Mr. Storch, Ms. Mayberry and Mr. Nandyal.
In April 2000, we granted options to acquire 176,000 shares to Mr. Clauer and
in May 2000 we granted options to acquire 7,722 and 80,000 shares,
respectively, to Mr. Storch and Ms. Cerda. These options have an exercise price
of $5.63 per share and generally vest over four years.
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<PAGE>
Compensation Committee Interlocks And Insider Participation
Our compensation committee will consist of Messrs. Barris and Crotty upon
completion of this offering. During the fiscal year ended December 31, 1999,
the compensation committee was comprised of Mr. Storch and two former
directors, John C. Aplin and James E. Crawford. Neither of Messrs. Aplin or
Crawford serves, or has at any time served, as an officer or employee of Open
Port or any of its subsidiaries. Mr. Storch also serves as our Chairman of the
Board, President and Chief Executive Officer. None of our executive officers
has served as a member of the compensation committee, or other committee
serving an equivalent function, of any other entity, one of whose executive
officers served as a member of our compensation committee.
Employment Agreements
Messrs. Storch and Nandyal each have entered into an employment agreement
with us, dated August 1, 1995, which provides, among other things, for certain
salary and bonus payments. The agreement provides that Messrs. Nandyal and
Storch will receive 12 months and 18 months severance, respectively, if their
employment is terminated without "cause" (defined as having been convicted of a
crime, engaged in habitual substance abuse, engaged in professional misconduct
or failed to perform duties or obligations to us). The agreements provide that
Messrs. Nandyal and Storch will each receive six months and nine months
severance, respectively, if employment is terminated for "cause" on account of
a failure to perform duties or obligations to us. In addition, each of the
employees has agreed not to solicit our employees or customers for a period of
one year following the termination of employment. The agreement also contains
nondisclosure provisions.
Ms. Mayberry entered into an employment agreement with us dated October 31,
1997, which provides, among other things, for certain salary and bonus
payments. In addition, she has agreed not to solicit employees or customers for
a period of one year following the termination of employment. The agreement
also contains nondisclosure provisions.
We are currently negotiating with each of Messrs. Storch and Nandyal and Ms.
Mayberry with respect to amended and restated employment agreements. We expect
that such agreements will be completed prior to completion of this offering. We
also plan to enter into employment agreements with Mr. Clauer, our Vice
President and Chief Financial Officer, and Ms. Cerda, our Vice President and
General Counsel, and certain key employees prior to completion of this
offering.
Employee Benefit Plans
2000 Equity Incentive Plan
In April 2000, our board of directors approved our 2000 Equity Incentive
Plan, subject to the approval of our stockholders. We have authorized an
aggregate limit on shares of common stock for issuance under this plan and the
2000 Outside Directors Stock Option Plan. The limit is 1,866,667 shares, plus
the number of shares (2,595,385) that are authorized for issuance under our
1995 Incentive Stock Option Plan and our 1995 Non-Employee Stock Option Plan,
minus the number of shares (2,415,252 as of May 31, 2000) subject to
outstanding or exercised options under the 2000 Equity Incentive Plan, the 2000
Outside Directors Stock Option Plan, the 1995 Incentive Stock Option Plan and
the 1995 Non-Employee Stock Option Plan. The number of authorized shares will
automatically increase each May 1, beginning on May 1, 2001 and ending on the
May 1 preceding the date on which the plan is terminated, by 5% of the number
of our then outstanding shares of common stock, or by 1,333,333 shares,
whichever is less. The plan also includes limits on the number of shares which
may be subject to awards granted to any person in a calendar year.
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<PAGE>
The plan is for the benefit of all employees, directors, officers,
consultants, suppliers, contractors and certain other providers of service to
us. The plan will become effective upon approval by our stockholders. No
options or other awards will be granted under this plan prior to effectiveness
of this registration statement.
The plan may be administered by our compensation committee or any other
committee approved by the board of directors, provided that all awards to
officers and directors must be approved by the compensation committee. The
committee will have the power, subject to the terms of the plan, to interpret
the plan and may prescribe, amend and rescind rules and make all other
determinations necessary or desirable for the administration of the plan
including: determining when, to whom and what type and amounts of awards should
be granted, accelerating the exercisability of awards, accelerating or waiving
terms and conditions of awards, extending the time awards may be exercised, and
in certain circumstances rescinding any exercise, payment or delivery of shares
and requiring the repayment from the grantee of any gain realized or payment
received as a result of the exercise, payment or delivery so rescinded.
We may issue two types of stock options under the plan: incentive stock
options, or ISOs, which are intended to qualify under Section 422 of the
Internal Revenue Code and non-qualified stock options. The options have a 10-
year term. The exercise price of each ISO granted under the plan must be at
least equal to the fair market value of a share of common stock on the date the
option is granted and if the employee owns more than 10% of our stock, at least
110% of the fair market value of the underlying stock on the date of grant. The
exercise price for non-qualified stock options will be determined by the
committee on the date of grant. The option exercise price may be paid in cash
or, if permitted by the committee, in stock (including restricted stock) or by
a "cashless exercise" through a broker. An option or other award becomes
exercisable at the time or times determined by the committee.
Incentive stock options are not transferable. To the extent permitted in the
award agreement, awards other than ISOs may be transferred to certain family
members, family trusts, family partnerships or similar entities.
Stock appreciation rights, or SARs, may be granted under the plan either
alone or in conjunction with all or part of any stock option granted under the
plan. A SAR granted under the plan entitles its holder to receive, at the time
of exercise, an amount per SAR equal to the excess of the fair market value at
the date of exercise of a share of common stock over a specified price fixed by
the committee.
Restricted stock, performance shares, performance units, deferred shares,
bonus shares, reload options and cash-based awards may also be granted under
the plan. The committee will determine the purchase price, performance period
and performance goals, if any, with respect to any grant of restricted stock,
performance shares, performance units, deferred shares, bonus shares or cash-
based awards.
Except as otherwise determined by the committee:
. If an employee is terminated for cause (as defined in the plan), all
unvested or unexercised awards will terminate and be forfeited and, in
the case of restricted stock, we will refund to the employee the amount,
if any, paid to purchase the stock.
. In the event of death or disability of an employee, any restricted stock
and deferred shares will become vested; any option, ISO or SAR will vest
immediately and may be exercised by the grantee's personal
representative, beneficiary or by the individual receiving such option,
ISO or SAR by will or by descent; and any performance shares,
performance units or cash-based awards will be paid on a pro rata basis.
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<PAGE>
. If an employee terminates for any other reason, any restricted stock or
deferred shares to the extent forfeitable will be forfeited, subject to
the refund to the employee of the amount, if any, paid to purchase
restricted stock, the then-exercisable portion of any unexercised option
or SAR may be exercised for three months and any unexercised performance
shares, performance units or cash-based awards will terminate
immediately.
Upon a change of control as defined in the plan, restricted stock and
deferred shares may immediately become vested. Options, ISOs and SARs may also
vest upon a change of control, if not already vested, to the extent specified
in the plan or applicable award or employment agreements. All performance
shares, performance units and cash-based awards will be paid out on a pro rata
basis to the extent specified in the plan or applicable award or employment
agreements.
The committee may amend, suspend or terminate the plan at any time. Further,
no action may be taken that adversely affects any rights under outstanding
awards without the holder's consent. The plan will terminate on the 10th
anniversary of its effective date unless it is terminated earlier by our board
of directors.
2000 Outside Directors Stock Option Plan
In April 2000, our board of directors approved the 2000 Outside Directors
Stock Option Plan, subject to the approval of our stockholders. The plan will
become effective upon approval by our stockholders. No options or other awards
will be granted under this plan prior to effectiveness of this registration
statement. We have authorized an aggregate limit on shares of common stock for
issuance under this plan and the 2000 Equity Incentive Plan. See "--Employee
Benefit Plans--2000 Equity Incentive Plan."
The 2000 Outside Directors Stock Option Plan provides for the grant of stock
options to eligible directors. An eligible director is any director who is not
(at the time of grant) an employee of the company. Each eligible director will
receive on the date this offering is completed, on the date of the 2001 annual
meeting, and every annual meeting thereafter, an automatic grant of an option
to purchase 5,000 shares, provided in case of grants after completion of this
offering that the eligible director is either elected to serve at such annual
meeting, or continues to serve through the date of such meeting as a previously
elected director in a class whose term does not expire at such annual meeting.
Each eligible director elected to the board between annual meeting grant dates
will receive on the date of election an automatic annual grant of an option to
purchase a reduced number of shares proportional to the time remaining until
the next regular automatic grant date.
The exercise price for the options granted upon the closing of this offering
will be the initial public offering price, and the exercise price for all other
options granted under the plan will be the fair market value of our common
stock on the date of grant. All options become vested and exercisable in three
equal annual installments on the first three anniversaries of the grant date or
the date preceding the related scheduled annual meeting of stockholders, if
earlier. Each option has a ten-year term, but will terminate 90 days after a
grantee ceases to be a director (180 days if he or she ceases to be a director
because of disability or death). Options vest and become exercisable for 180
days if the grantee ceases to be a director due to disability or death. In
addition, all options become vested and exercisable upon a change of control as
defined in the plan.
The exercise price may be paid in cash, or if permitted by the board by
turning in currently owned shares, or by "cashless exercise" through a broker.
Options are not transferable during the grantee's lifetime except to certain
family members, family trusts, family partnerships or similar entities.
58
<PAGE>
The plan is administered by our board of directors. Our board may amend or
terminate the plan at any time. Further, no action may be taken that adversely
affects any rights under outstanding awards without the holder's consent. The
plan will terminate on the 10th anniversary of its effective date unless it is
terminated earlier by our board of directors.
1995 Stock Option Plans
In October 1995, our board of directors and stockholders adopted our 1995
Incentive Stock Option Plan and our 1995 Non-Employee Stock Option Plan. The
plans have since been amended from time to time. The Incentive Plan provides
for the grant of options, which may be ISOs, to employees. The Non-Employee
Plan provides for the grant of non-qualified stock options to members of our
board, consultants, suppliers, contractors and certain other providers of
services to us. We have reserved an aggregate of 2,595,385 shares of our common
stock for issuance pursuant to awards under these stock option plans. If an
option terminates or expires without having been exercised in full, the shares
subject to such option continue to be available under our stock option plans.
Options granted under these stock option plans generally expire ten years after
the date of grant.
As of May 31, 2000, options to purchase an aggregate of 2,132,733 shares of
common stock were outstanding to employees under the Incentive Plan and options
to purchase an aggregate of 31,917 shares of common stock were outstanding
under the Non-Employee Plan. No further options will be granted under these
plans after completion of this offering. However, the number of shares of our
common stock reserved under these plans before the offering that are not
committed by outstanding or exercised options will be available for grant under
our 2000 Equity Incentive Plan and the 2000 Outside Directors Stock Option
Plan.
The 1995 stock option plans are administered by one or more committees
designated by the board, which has the authority to determine who receives
options and the number of shares that may be purchased. All options are granted
at an exercise price determined by our board equal to or greater than the fair
market value of the underlying stock on the date of grant. Our board may amend
or terminate the plan at any time. However, any amendment which increases the
number of shares reserved under the plans or materially changes the persons
eligible for awards is subject to the approval of our stockholders.
Options under the Incentive Plan become vested and exercisable as follows
unless otherwise provided in the applicable award agreement: 25% on the first
anniversary of the date of grant and monthly thereafter for a 36-month period.
Options under the Non-Employee plan become vested and exercisable in three
equal annual installments unless otherwise provided in the applicable option
agreement. Upon a change of control as defined in the plan, options under the
Incentive Plan will vest, if not already vested, unless otherwise provided by
the committee, to the extent they would have been vested if they had been
granted three years prior to the change of control, and options under the Non-
Employee Plan become fully vested and exercisable.
Except as otherwise provided in the option agreement, upon termination of
employment (for options under the Incentive Plan) or service (for options under
the Non-Employee Plan), the nonvested portion of an option terminates, and the
vested portion must be exercised if at all within 30 days following termination
of employment or within three months following termination of service. Options
are not transferable during the grantee's lifetime, except that options under
the Non-Employee Plan, and options under the Incentive Plan if the option
agreement so provides, may be transferred to certain family members, family
trusts, family partnerships or similar entities. The exercise price may be paid
in cash or, if permitted by the committee, by turning in currently owned shares
or by "cashless exercise" through a broker.
59
<PAGE>
Employee Stock Purchase Plan
In April 2000, our board approved our 2000 Employee Stock Purchase Plan,
subject to the approval of our stockholders. The plan will become effective
upon approval by our stockholders. No options or other awards will be granted
under this plan prior to effectiveness of this registration statement. We have
authorized a total of 480,000 shares of common stock for issuance under the
plan. The number of authorized shares automatically increases each May 1,
beginning on May 1, 2001 and ending on the May 1 preceding the date on which
the plan is terminated, by 1% of our then outstanding shares of common stock or
by 266,667 shares, whichever is less. Our compensation committee will
administer the plan. The first enrollment period under the plan will begin on
the first day of the first calendar quarter that begins at least 30 days after
this offering becomes effective, or such other date designated by the
committee.
Employees generally will be eligible to participate in the plan if they are
employed for at least six months as of the beginning of the applicable offering
period and they are customarily employed by us, or any of our subsidiaries that
we designate, for more than 20 hours per week and more than five months in a
calendar year. Employees are not eligible to participate in the plan if they
hold 5% or more of our outstanding stock, or would become 5% stockholders as a
result of their participation in this plan, or are non-U.S. employees barred
from participation by the laws of their own country, or are members of a
collective bargaining unit.
Under the plan, eligible employees will be able to acquire shares of our
common stock through payroll deductions. Eligible employees may elect payroll
deductions between 1% and 10% of their cash compensation, or a dollar amount,
up to $15,000 (or such higher or lower amount determined by the committee) for
the enrollment period, and are subject to maximum purchase limitations.
Participation in this plan will end automatically upon termination of
employment for any reason. Each enrollment period under the plan will be six
months or such other period (not longer than 27 months) as the committee may
designate. A new enrollment period will begin on the semiannual anniversary of
the commencement of the prior enrollment period or on such other date as the
committee designates. The purchase price for common stock under the plan will
be 85% of the fair market value of our common stock on the first day of the
applicable enrollment period or on the date of purchase, whichever is less.
The plan is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code. The plan will terminate on the day
prior to the 10th anniversary of the approval of the plan by our board of
directors unless it is terminated earlier by the board. The board may amend or
terminate the plan at any time.
401(k) Plan
We have adopted a 401(k) retirement savings plan. This plan is available to
all employees other than nonresident aliens with no U.S. source income.
Beginning on the first day of the quarter following date of hire, an employee
may contribute, on a pretax basis, 1% to 15% of the employee's compensation
from us, subject to certain limitations under the Internal Revenue Code. In our
discretion, we may match the employee's contributions at such rate as we
determine or make other contributions on behalf of the employees. Contributions
are allocated to each employee's individual account and are, at the employee's
election, invested in one, all, or some combination of the mutual funds offered
under the plan. Employee contributions are fully vested and non-forfeitable.
Employer contributions vest over a six-year period.
60
<PAGE>
RELATED PARTY TRANSACTIONS
Our policy is that all transactions between Open Port and its executive
officers, directors and principal stockholders occurring outside the ordinary
course of business be on terms no less favorable than could be obtained from
unaffiliated third parties or be subject to the approval of our disinterested
directors.
Series D Preferred Stock. In April 1999, we sold an aggregate of 935,454
shares of Series D convertible preferred stock at a cash purchase price of
$3.207 per share to 11 investors. All outstanding shares of Series D preferred
stock will automatically convert into an aggregate of 495,785 shares of common
stock upon completion of this offering. The following directors and 5%
beneficial owners of Open Port common stock purchased shares of Series D
preferred stock convertible upon completion of this offering into the number of
shares of common stock indicated:
<TABLE>
<CAPTION>
Number of Series D
Name Conversion Shares
---- ------------------
<S> <C>
Battery Ventures III,
L.P.................... 100,550
Frontenac VI Limited
Partnership............ 129,151
New Enterprise
Associates VII, Limited
Partnership............ 108,247
NEA Presidents' Fund,
L.P.................... 1,652
Donald R. Hollis
(including a related
stockholder)........... 82,631
Joseph A. Piscopo....... 23,466
Royce J. Holland........ 1,560
</TABLE>
Mr. Crotty, one of our directors, is a general partner of Battery Ventures,
the general partner of Battery Ventures III, L.P. James Crawford, a former
director, is a general partner of Frontenac Company, the general partner of
Frontenac VI Limited Partnership. Mr. Barris, one of our directors, is the
general partner of: (a) NEA Partners VII, Limited Partnership, the general
partner of New Enterprise Associates VII, Limited Partnership and (b) NEA
General Partners, L.P., the general partner of NEA Presidents' Fund, L.P.
Series E Preferred Stock. In January 2000, we sold an aggregate of
17,436,746 shares of our Series E convertible participating preferred stock.
15,527,950 of such shares were sold at a cash purchase price of $1.61 per share
to 26 investors and 1,908,796 of such shares were issued to ten investors
pursuant to the conversion of the principal of and interest on the subordinated
convertible promissory notes described below which were issued in September
1999. The Series E preferred stock will automatically convert into an aggregate
of 4,707,904 shares of common stock upon completion of this offering. The
following directors and investors affiliated with 5% beneficial owners of Open
Port purchased shares of Series E preferred stock convertible upon completion
of this offering into the number of shares of common stock indicated:
<TABLE>
<CAPTION>
Number of Series E
Name Conversion Shares
---- ------------------
<S> <C>
Battery Ventures III,
L.P.................... 136,335
Brookside Capital
Partners Fund, L.P..... 1,677,018
CID Equity Capital V,
L.P.................... 71,804
CID Mezzanine Capital,
L.P.................... 48,829
Frontenac VI Limited
Partnership............ 110,380
New Enterprise
Associates VII, Limited
Partnership............ 94,097
Joseph A. Piscopo....... 20,055
WPG Raytheon Networking
Fund, L.P.............. 287,633
WPG Institutional
Software Fund, L.P..... 195,204
WPG Raytheon Software
Fund, L.P.............. 138,228
WPG Networking Fund,
L.P.................... 116,103
WPG Software Fund,
L.P.................... 85,821
WPG Institutional
Networking Fund, L.P... 13,002
</TABLE>
61
<PAGE>
Mr. Crotty, one of our directors, is a general partner of Battery Ventures,
the general partner of Battery Ventures III, L.P. James Crawford, a former
director, is a general partner of Frontenac Company, the general partner of
Frontenac VI Limited Partnership. Mr. Barris, one of our directors, is the
general partner of NEA Partners VII, Limited Partnership, the general partner
of New Enterprise Associates VII, Limited Partnership. In addition, Raj Mehra,
the general partner of WPG Raytheon Software Fund, L.P., WPG Software Fund,
L.P., WPG Institutional Software Fund, L.P., WPG Raytheon Networking Fund,
L.P., WPG Networking Fund, L.P. and WPG Institutional Networking Fund, L.P.,
purchased shares of Series E preferred stock which will convert into 2,515
shares of common stock upon completion of this offering.
Bridge Financing. In September 1999, we entered into a subordinated
convertible promissory note purchase agreement with certain of our existing
investors, including Battery Ventures III, L.P., CID Equity Capital V, L.P.,
CID Mezzanine Capital, L.P., Frontenac VI Limited Partnership, New Enterprise
Associates VII, Limited Partnership and Mr. Piscopo, one of our directors,
whereby we authorized the issuance of subordinated convertible promissory notes
in the original aggregate principal amount of up to $3.0 million. Interest
accrued on the outstanding amounts at a rate of 1% above the prime rate of
interest. We issued $3.0 million aggregate principal amount of these notes in
three installments between September 1999 and November 1999. All of the notes
issued in connection with this facility were converted to Series E preferred
stock in connection with the Series E preferred stock financing.
Voting and Co-Sale Agreement. In July 1995, in connection with our Series A
preferred stock financing, Open Port, the holder of the Series A preferred
stock and the holders of the then outstanding common stock, entered into a
voting and co-sale agreement, which was subsequently amended and restated in
connection with our Series B preferred stock financing in March 1996, April
1996 and March 1997, our Series C preferred stock financing in June 1998, our
Series D preferred stock financing and our Series E preferred stock financing.
As of the completion of the Series E preferred stock financing, the parties to
the voting and co-sale agreement included Open Port, each of the holders of our
existing preferred stock and the following founding stockholders: Messrs.
Storch, Nandyal, Dutra and Wegner and Gordon Kapes, as well as certain
stockholders affiliated with certain of these founding stockholders. The voting
and co-sale agreement will terminate upon completion of this offering.
Registration Rights Agreement. In July 1995, in connection with the Series A
preferred stock financing, we and the holder of Series A preferred stock,
entered into a registration rights agreement, which was subsequently amended
and restated in connection with each of the Series B preferred stock financing,
the Series C preferred stock financing, the Series D preferred stock financing
and the Series E preferred stock financing, at which time each holder of
existing preferred stock became a party to that agreement. Pursuant to the
registration rights agreement, each holder of existing preferred stock and each
of our founding stockholders have certain registration rights with respect to
their shares of common stock including common stock to be issued upon
conversion of our preferred stock.
CID Loan and Warrant. In June 1998, we entered into a note and warrant
purchase agreement with CID Mezzanine Capital, L.P., which was later amended in
December 1998, February 1999, and April 1999. This agreement authorized us to
issue up to an aggregate of $5.0 million in principal amount of our 11%
subordinated notes to CID Mezzanine. As of December 31, 1999, we had issued all
$5.0 million in subordinated notes under this facility. The proceeds of these
loans have been used for working capital and other general corporate purposes.
In connection with the issuance of these subordinated notes, in June 1998 we
granted CID Mezzanine warrants to purchase up to 370,310 shares of Series C
preferred stock (103,686 shares of common stock upon completion of this
offering) at an exercise price of $0.01 per share. All outstanding subordinated
notes are due and payable on July 1, 2001. We also entered into a security
agreement with CID Mezzanine which granted a security interest in all of our
assets, and agreed that upon exercise of the warrants, CID would become a party
to the voting and co-sale agreement and the registration rights agreement
between us and various investors. CID Mezzanine is an affiliate of CID Equity
Capital III, L.P. and CID Equity Capital V, L.P. We intend to repay the
outstanding balance under this mezzanine debt facility with a portion of the
net proceeds from this offering. See "Use of Proceeds."
62
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding ownership of
our common stock, as of May 31, 2000, by:
. each person known to us to own beneficially more than 5% of our
outstanding common stock;
. each of our directors;
. each of our executive officers named in the summary compensation table;
and
. all of our directors and executive officers as a group.
The beneficial ownership of our common stock set forth in this table is
determined in accordance with the rules of the Securities and Exchange
Commission. As of May 31, 2000, we had 15,281,847 shares of common stock
outstanding, assuming conversion of all of our outstanding preferred stock. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
or warrants held by that person that are currently exercisable or will become
exercisable within 60 days after May 31, 2000 are considered outstanding, while
these shares are not considered outstanding for purposes of computing
percentage ownership of any other person. Unless otherwise indicated in the
footnotes below, the persons and entities named in the table have sole voting
and investment power as to all shares beneficially owned, subject to community
property laws where applicable.
<TABLE>
<CAPTION>
Percent of
Shares Beneficially Owned(1) Ownership
---------------------------- -----------------
Warrants
Common and Before After
Name of Beneficial Owner Stock Options Total Offering Offering
------------------------ --------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
CID Equity Capital III, L.P. 1,641,063 103,686 1,744,749 11.4% 9.0%
(2)...........................
One American Sq., Suite 2850
Indianapolis, IN 46282
Brookside Capital Partners
Fund,
L.P. (3)...................... 1,677,018 -- 1,677,018 11.0 8.7
2 Copley Place
Boston, MA 02116
Frontenac VI Limited 1,660,067 -- 1,660,067 10.9 8.6
Partnership (4)...............
135 South LaSalle, Suite 3800
Chicago, IL 60603
New Enterprise Associates VII,
Limited Partnership (5)....... 1,413,349 -- 1,413,349 9.2 7.3
11911 Freedom Drive
Reston, VA 20190
Battery Ventures III, L.P. 1,342,308 -- 1,342,308 8.8 7.0
(6)...........................
20 William Street, Suite 200
Wellesley, MA 02181
WPG Software Fund, L.P. (7).... 838,506 -- 838,506 5.5 4.3
One New York Plaza
New York, NY 10004
Randy S. Storch (8)............ 493,333 33,333 526,666 3.4 2.7
Cheryl E. Mayberry............. 113,564 78,163 191,727 1.3 1.0
Omprasad S. Nandyal (9)........ 493,332 16,606 509,998 3.3 2.6
Michael B. Clauer.............. -- -- -- -- --
Clarissa Cerda................. -- -- -- -- --
Peter J. Barris (10)........... 1,413,349 -- 1,413,349 9.2 7.3
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Percent of
Shares Beneficially Owned(1) Ownership
---------------------------- -----------------
Warrants
Common and Before After
Name of Beneficial Owner Stock Options Total Offering Offering
------------------------ --------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Thomas J. Crotty (11).......... 1,342,308 -- 1,342,308 8.8% 7.0%
Royce J. Holland............... 18,728 -- 18,728 * *
Donald R. Hollis (12).......... 149,116 416 149,393 1.0 *
John E. Major.................. -- -- -- -- --
Joseph A. Piscopo.............. 301,594 -- 301,594 2.0 1.6
All directors and executive
officers as a group (11
persons)...................... 4,325,324 128,578 4,453,902 29.1% 23.1%
</TABLE>
--------
* Represents beneficial ownership of less than one percent of the outstanding
common stock.
(1) This tables assumes that all of our outstanding shares of preferred stock
will be converted into common stock, that the voting and co-sale agreement
between our existing preferred stockholders and our founding stockholders
will be terminated upon completion of this offering and that the proxies
granted to Mr. Storch by certain employees will be terminated upon
completion of this offering. See "Related Party Transactions-Voting and
Co-sale Agreement."
(2) Includes 236,983 shares held by CID Equity Capital V, L.P., an affiliate
of CID Equity Capital III, L.P, and 48,829 shares held and 103,686 shares
subject to warrants held by CID Mezzanine Capital, L.P., an affiliate of
CID Equity Capital III, L.P. CID Equity Partners II is the general partner
of CID Equity Capital III, L.P. The general partners of CID Equity
Partners II are John C. Aplin, John T. Hackett and Kevin E. Sheehan.
(3) Brookside Capital Investors, L.P. is the sole general partner of Brookside
Capital Partners Fund, L.P. Brookside Capital Investors, Inc. is the sole
general partner of Brookside Capital Investors, L.P. W. Mitt Romney is the
sole stockholder of Brookside Capital Investors, Inc., and Mr. Romney is
thus the controlling person of Brookside Capital Partners Fund, L.P.
(4) Voting and dispositive power over such shares is shared by Frontenac
Company, the general partner of Frontenac VI Limited Partnership, and by
Paul D. Carbery, James E. Cowie, James E. Crawford III, Rodney L.
Goldstein, Martin J. Koldyke, M. Laird Koldyke, Roger S. McEniry, Laura P.
Pearl and Jeremy H. Silverman, the general partners of Frontenac Company.
(5) Includes 28,081 shares held by NEA Presidents' Fund, L.P., an affiliate of
New Enterprise Associates VII, Limited Partnership. NEA Partners VII,
Limited Partnership is the sole general partner of New Enterprise
Associates VII, Limited Partnership and exercises sole voting and
investment control with respect to all shares held of record by New
Enterprise Associates VII, Limited Partnership. Peter J. Barris, Nancy L.
Dorman, Ronald H. Kase, Richard Kramlich, Arthur J. Marks, Thomas C.
McConnell, Peter T. Morris, John M. Nehra, Charles W. Newhall III, and
Mark W. Perry are the general partners of NEA Partners VII, Limited
Partnership. Includes 1,651 shares held by NEA Ventures 1997, L.P. New
Enterprise Associates VII, Limited Partnership disclaims beneficial
ownership of the shares held by NEA Ventures 1997, L.P.
(6) Voting and dispositive power over such shares is shared by Battery
Partners III, L.P., the sole general partner of Battery Ventures III,
L.P., and by Richard D. Frisbie, Robert G. Barrett, Howard Anderson,
Oliver D. Curme, Thomas J. Crotty, Kenneth P. Lawler and Todd A. Dagres,
the general partners of Battery Partners III, L.P.
(7) Includes 195,204 shares held by WPG Institutional Software Fund, L.P.,
138,228 shares held by WPG Raytheon Software Fund, L.P., 13,002 shares
held by WPG Institutional Networking Fund, L.P., 116,103 shares held by
WPG Networking Fund, L.P., 287,633 shares held by WPG Raytheon Networking
Fund, L.P. and 2,515 shares held by Raj Mehra, affiliates of WPG Software
Fund, L.P and of each other. Weiss, Peck & Greer, L.L.C., the general
partner of WPG Software Fund, L.P., is wholly owned by Robeco Group, N.V.,
a Dutch money management firm that is 50% owned by Rabobank Group, a
commercial bank, and 50% owned by shareholders of various investment funds
advised by Robeco Group, N.V.
(8) Includes 20,000 shares held in the name of Mark L. Gordon, trustee of the
Deborah S. Storch Generation-Skipping Trust of 1998 and 20,000 shares held
in the name of Mark L. Gordon, trustee of the Randy S. Storch Generation-
Skipping Trust of 1998. Mr. Storch disclaims beneficial ownership of these
shares.
(9) Includes 13,333 shares held in the name of Srinath Nandyal, trustee of the
Omprasad Srinath Nandyal Generation-Skipping Trust of 1998, and 13,333
shares held in the name of Srinath Nandyal, trustee of the Shubha Omprasad
Nandyal Generation-Skipping Trust of 1998. Mr. Nandyal disclaims
beneficial ownership of these shares.
(10) Mr. Barris shares voting and dispositive power over such shares in his
capacity as a general partner of: (a) NEA Partners VII, Limited
Partnership, the general partner of New Enterprise Associates VII, Limited
Partnership; (b) NEA General Partners, L.P., the general partner of NEA
Presidents' Fund, L.P.; and (c) NEA Ventures 1997, L.P. Mr. Barris does
not directly own any shares of our common stock.
(11) Mr. Crotty shares voting and dispositive power over such shares in his
capacity as a general partner of Battery Ventures, the general partner of
Battery Ventures III, L.P. Mr. Crotty does not directly own any shares of
our common stock.
(12) Includes 109,998 shares held in the name of the Hollis Family Limited
Partnership #1 f/k/a Hollis Family Limited Partnership.
64
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our certificate of incorporation will
provide that our authorized capital stock consists of 80 million shares of
common stock, $.001 par value, and ten million shares of preferred stock, $.001
par value. As of May 31, 2000, there were 3,450,565 shares of common stock
outstanding, which were held of record by approximately 81 stockholders. An
additional 11,831,282 shares of common stock will be issued to approximately 48
stockholders upon the closing of this offering as the result of mandatory
conversion of our outstanding preferred stock. Upon closing of this offering,
there will be no shares of preferred stock outstanding.
Common Stock
Holders of common stock will be entitled to one vote for each share held on
all matters subject to a vote of stockholders, subject to the rights of holders
of any outstanding preferred stock, and will not have cumulative voting rights.
Accordingly, holders of a majority of the shares of common stock entitled to
vote in any election of directors may elect all of the directors standing for
election, subject to the rights of holders of any outstanding preferred stock.
Holders of common stock will be entitled to receive ratably any dividends that
the board of directors may declare out of funds legally available therefor,
subject to any preferential dividend rights of outstanding preferred stock.
Upon the liquidation, dissolution or winding up of Open Port, the holders of
common stock will be entitled to receive ratably the net assets of Open Port
available after the payment of all debts and other liabilities and subject to
the prior rights of holders of any outstanding preferred stock. Holders of
common stock will have no 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 fully paid and
nonassessable and the shares of common stock to be issued on completion of this
offering will be fully paid and nonassessable.
Preferred Stock
Under our certificate of incorporation, we will be authorized to issue 10
million shares of preferred stock, which may be issued from time to time in one
or more series upon authorization by the board of directors. The board of
directors, without further approval of the stockholders, will be authorized to
fix the number of shares constituting any series, as well as the dividend,
conversion, voting and redemption rights and terms, as well as liquidation
preferences and any other rights, preferences, privileges and restrictions
applicable to each series of preferred stock. The issuance of preferred stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes, could also adversely affect the voting power and dividend
and liquidation rights of the holders of common stock. The issuance of
preferred stock could also, under some circumstances, have the effect of making
it more difficult for a third party to acquire, or discouraging a third party
from acquiring, a majority of our outstanding voting stock or otherwise
adversely affect the market price of our common stock. It is not possible to
state the actual effect of the issuance of any shares of preferred stock on the
rights of holders of common stock until the board of directors determines the
specific rights of that series of preferred stock.
Registration Rights of Stockholders
Following this offering, holders of an aggregate of 13,804,625 shares of our
outstanding common stock and holders of warrants to purchase 380,733 shares of
our common stock will be entitled to rights with respect to registration of
these shares of common stock under the Securities Act. Subject to limitations
provided in the agreement and those in lock-up
65
<PAGE>
agreements that these stockholders have signed relating to this offering, these
stockholders have the right, beginning six months after completion of this
offering, in certain circumstances to require us to register their shares of
common stock under the Securities Act. We have granted up to four company-paid
demand registration rights to the holders of our outstanding preferred stock,
each such demand right being exercisable by any such holder or holders owning
not less than 5% of the common stock issuable upon conversion of the Series E
preferred stock or 7.6% of the common stock issuable upon conversion of any
other series of preferred stock. With respect to any demand registration,
including those described in the next paragraph, we are not required to, but
may, include shares held by other holders of preferred stock in such
registration statement.
In addition, we have granted up to three other demand registration rights to
the purchasers of Series E preferred stock as a group (provided that the
holders of Series E preferred stock may not demand more than four
registrations, including registrations that were demanded by the holders of
Series E preferred stock pursuant to the registration rights described in the
preceding paragraph). These demand registration rights are exercisable by any
stockholder holding not less than 5% of the common stock issuable upon
conversion of the Series E preferred stock. These demand rights may first be
exercised 120 days after this offering, requiring us to use our best commercial
efforts to cause a registration statement to become effective on the 181st day
after the effectiveness of this registration statement and to keep such
registration statement effective for 180 days. Any such demand registration
will be underwritten only if requested by the holders of a majority of the
common stock issuable upon conversion of the Series E preferred stock included
in such registration. The holders of Series E preferred stock have agreed that
they will not offer or sell securities pursuant to a registration statement
without giving us 10 days' notice.
If we propose to register our securities under the Securities Act after this
offering, these stockholders and the holder of warrants to purchase up to
381,857 shares of our common stock will be entitled to notice of the
registration and to include their shares in the registration, provided that the
underwriters of the proposed offering will have the right to limit the number
of shares included in the registration. We must pay for all expenses in
connection with these registrations, other than any underwriters' discounts and
commissions.
Options and Warrants
As of May 31, 2000, options to purchase an aggregate of 180,133 shares of
common stock were available for future grants under the 1995 Stock Option Plan.
There were 2,164,650 options outstanding under the plan at a weighted average
exercise price of $5.00 per share, of which 382,667 were exercisable as of May
31, 2000.
As of May 31, 2000, 414,681 shares of common stock were issuable upon the
exercise of outstanding warrants with a weighted average exercise price of
$4.41 per share. Upon the closing of this offering, we will have outstanding
warrants as follows:
<TABLE>
<CAPTION>
Exercise Price
Holder Number of Shares Per Share Expiration Date
------ ---------------- -------------- ----------------
<S> <C> <C> <C>
Comdisco, Inc................ 19,663 $ 3.05 November 7, 2005
Comdisco, Inc................ 14,285 4.20 August 15, 2006
Third Coast Venture
Lease Partners I, L.P....... 5,530 7.23 June 22, 2008
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Exercise Price
Holder Number of Shares Per Share Expiration Date
------ ---------------- -------------- ---------------------
<S> <C> <C> <C>
CID Mezzanine Capital, 103,686 $0.04 The third anniversary
L.P.................... of the date the loan
is repaid. See "Use
of Proceeds."
Silicon Valley Bank..... 21,000 7.23 January 28, 2004
Deutsche Bank Securities
Inc.................... 250,517 6.04 October 22, 2004
</TABLE>
Indemnification and Limitation of Liability
Upon the closing of this offering, our certificate of incorporation will
provide that no director of Open Port shall have any personal liability to Open
Port or its stockholders for breach of fiduciary duty as a director, except for
liability:
. for breach of the director's duty of loyalty to Open Port or its
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for payment of dividends or stock purchases or redemptions by the
corporation in violation of Section 174 of the Delaware General
Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
As a result of this provision, Open Port and our stockholders may be unable
to obtain monetary damages from a director for certain breaches of his or her
fiduciary duty. This provision does not, however, eliminate the directors'
fiduciary responsibilities and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Delaware law. The provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
Upon the closing of this offering, our by-laws will provide for the
indemnification of our directors and officers to the fullest extent authorized
by the Delaware General Corporation Law. Such indemnification may include, if
we so decide, the right of the indemnified party to be paid expenses in advance
of any proceeding for which indemnification may be had, provided that the
payment of these expenses incurred by a director or officer in advance of the
final disposition of a proceeding may be made only upon delivery to us of an
undertaking by or on behalf of the director or officer to repay all amounts
paid in advance if it is ultimately determined that the director or officer is
not entitled to be indemnified. In addition, our certificate of incorporation
provides that our employees and other agents, may be indemnified in accordance
with the Delaware General Corporation Law to the extent determined by our board
of directors in its sole discretion.
Anti-Takeover Effects of Certain Provisions of Delaware Law and our Certificate
of Incorporation and By-laws
Some provisions of Delaware law, our certificate of incorporation and by-
laws may be deemed to have an anti-takeover effect and may delay or prevent a
tender offer or takeover attempt that a stockholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders.
67
<PAGE>
Section 203 of Delaware General Corporation Law
Section 203 of the Delaware General Corporation Law prohibits certain
transactions between a Delaware corporation and an "interested stockholder,"
which is defined as a person who, together with any affiliates or associates,
beneficially owns, directly or indirectly, 15% or more of the outstanding
voting shares of a Delaware corporation. This provision prohibits certain
business combinations between an interested stockholder and a corporation for a
period of three years after the date the interested stockholder becomes an
interested stockholder, unless:
. the business combination is approved by the corporation's board of
directors prior to the date the interested stockholder becomes an
interested stockholder;
. the interested stockholder acquired at least 85% of the voting stock of
the corporation (other than stock held by directors who are also
officers or by certain employee stock plans) in the transaction in which
it becomes an interested stockholder; or
. the business combination is approved by a majority of the board of
directors and by the affirmative vote of 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
For this purpose, business combinations include mergers, consolidations,
sales or other dispositions of assets having an aggregate value in excess of
10% of the consolidated assets of the corporation, and certain transactions
that would increase the interested stockholder's proportionate share ownership
in the corporation.
Classified Board of Directors
Our board of directors will be divided into three classes of directors
serving staggered three-year terms. As a result, approximately one-third of the
board of directors is elected each year. These provisions, when coupled with
the provision of our certificate of incorporation authorizing the board of
directors to fill vacant directorships or increase the size of the board of
directors, may deter a stockholder from removing incumbent directors and
simultaneously gaining control of the board of directors by filling the
vacancies created by such removal with its own nominees.
Number of Directors; Removal; Vacancies
Our by-laws will provide that we have at least three directors, with the
exact number fixed by the board of directors. Vacancies on the board of
directors may be filled only by the affirmative vote of the remaining directors
then in office. Our certificate of incorporation will provide that directors
may be removed only for cause and only by the holders of at least 80% of the
outstanding shares of stock entitled to vote generally in the election of
directors, voting together as a single class.
Special Meetings of Stockholders; Limitations on Stockholder Action By Written
Consent
Our certificate of incorporation will provide that special meetings of our
stockholders may be called only by a majority of the board of directors, the
chairman of the board or the chief executive officer. In addition, the
certificate of incorporation will provide that, following the closing of this
offering, our stockholders may only take actions at a duly called annual or
special meeting of stockholders and may not take action by written consent
unless the action to be effected by written consent of stockholders and the
taking of such action by such written consent have expressly been approved in
advance by the board of directors.
68
<PAGE>
Advance Notice Requirements for Stockholder Proposals and Nomination of
Directors
Our by-laws will provide that stockholders seeking to bring business before
an annual meeting of stockholders, or to nominate candidates for election as
directors at an annual meeting of stockholders, must provide timely notice in
writing. To be timely, a stockholder's notice must be delivered to or mailed
and received at our principal executive offices not less than 90 days nor more
than 120 days prior to the anniversary date of the immediately preceding annual
meeting of stockholders. However, in the event that the annual meeting is
called for a date that is not within 30 days before or after such anniversary
date, notice by the stockholder in order to be timely must be received not
later than the close of business on the tenth day following the date on which
notice of the date of the annual meeting was mailed to stockholders or made
public, whichever first occurs. Our by-laws also specify requirements as to the
form and content of a stockholder's notice.
Consideration of Constituencies with respect to Acquisitions
Our certificate of incorporation will provide that in determining whether an
acquisition proposal is in the best interests of Open Port and its
stockholders, our board of directors may, to the extent permitted by law,
consider all factors it deems relevant, including the effects of the
acquisition upon employees, suppliers, customers and the communities in which
we are located.
Amendments; Supermajority Vote Requirements
The Delaware General Corporation Law 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 either a
corporation's certificate of incorporation or by-laws require a greater
percentage. Our certificate of incorporation and by-laws will impose
supermajority vote requirements in connection with the amendment of provisions
of our certificate of incorporation and by-laws, including those provisions
relating to the classified board of directors, stockholder action by written
consent and the ability of stockholders to call special meetings.
Ability to Adopt Stockholder Rights Plan
The board of directors may in the future resolve to issue shares of
preferred stock or rights to acquire such shares to implement a stockholder
rights plan. A stockholder rights plan typically creates voting or other
impediments that would discourage persons seeking to gain control of Open Port
by means of a merger, tender offer, proxy contest or otherwise if the board of
directors determines that such change in control is not in the best interests
of our stockholders.
Transfer Agent
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company, New York, New York.
Listing
We have applied to list our shares of common stock on the Nasdaq National
Market under the symbol "OPRT."
69
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Following this offering, we will have 19,281,847 shares of common stock
outstanding. All the shares we sell in this offering will be freely tradable
without restriction or further registration under the Securities Act, except
that any shares purchased by our affiliates, as that term is defined in Rule
144, may generally only be sold in compliance with the limitations of Rule 144
described below.
The remaining 15,281,847 shares of common stock outstanding following this
offering will be "restricted securities" as the term is defined under Rule 144.
We issued and sold these restricted securities in private transactions in
reliance on exemptions from registration under the Securities Act. Restricted
securities may be sold in the public market only if they are registered or if
they qualify for an exemption under Rule 144 or Rule 701 under the Securities
Act, as summarized below.
Taking into account the lock-up agreements described below and assuming
Deutsche Bank Securities Inc. does not release stockholders from these
agreements, the following shares will be eligible for sale in the public market
at the following times:
. on the date of this prospectus, 4,001,808 shares (including the
4,000,000 shares sold in this offering) will be immediately available
for sale in the public market;
. 180 days after the date of this prospectus, approximately 10,572,135
shares will be eligible for sale, 4,250,861 of which will be subject to
volume, manner of sale and other limitations under Rule 144; and
. the remaining 4,707,904 shares may be eligible for sale as early as the
181st day after the date of this prospectus if the holders of these
shares exercise the demand registration rights described below;
otherwise such shares will be eligible for sale under Rule 144 from time
to time upon the expiration of various one-year holding periods.
Lock-up Agreements. We have agreed with the underwriters that we will not,
without the prior written consent of Deutsche Bank Securities Inc., issue any
additional shares of common stock or securities convertible into, exercisable
for or exchangeable for shares of common stock for a period of 180 days after
the date of this prospectus, except that we may grant options to purchase
shares of common stock under our employee benefit plans, and issue shares of
common stock upon the exercise of outstanding options and warrants.
Our officers, directors and substantially all of our stockholders have
agreed that they will not, without the prior written consent of Deutsche Bank
Securities Inc., offer, sell, pledge or otherwise dispose of any shares of our
common stock or any securities convertible into or exercisable or exchangeable
for, or any rights to acquire or purchase, any of our common stock, or publicly
announce an intention to effect any of these transactions, for a period of 180
days after the date of this prospectus.
Rule 701. Shares issuable upon exercise of options we granted prior to the
date of this prospectus will also be available for sale in the public market
pursuant to Rule 701 under the Securities Act, subject to certain Rule 144
limitations and to the lock-up agreements. Rule 701 permits resales of these
shares beginning 90 days after the date of this prospectus by persons other
than affiliates.
70
<PAGE>
Rule 144. In general, under Rule 144, a stockholder who owns restricted
shares that have been outstanding for at least one year is entitled to sell,
within any three-month period, a number of these restricted shares that does
not exceed the greater of:
. one percent of the then outstanding shares of common stock, or
approximately shares immediately after this offering; or
. the average weekly trading volume in the common stock on the Nasdaq
Stock Market during the four calendar weeks preceding the sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements.
Persons deemed to be our affiliates must always sell pursuant to Rule 144,
even after expiration of the 144(k) holding period described below. In other
words, our affiliates must comply with the restrictions and requirements of
Rule 144, other than the one-year holding period requirement, to sell shares of
common stock which are not restricted securities.
Rule 144(k). Under Rule 144(k), a stockholder who is not currently, and who
has not been for at least three months before the sale, an affiliate of ours
and who owns restricted shares that have been outstanding for at least two
years may resell these restricted shares without compliance with the above
requirements. The one- and two-year holding periods described above do not
begin to run until the full purchase price is paid by the person acquiring the
restricted shares from us or an affiliate of ours.
Employee Benefit Plans. As of May 31, 2000, there were options outstanding
to purchase 2,164,650 shares of common stock pursuant to our stock option
plans. We intend to file, after the effective date of this offering, one or
more registration statements on Form S-8 to register the shares of common stock
reserved for issuance under our stock option plans. The registration statement
on Form S-8 will become effective automatically upon filing. Shares issued
under our 1995 Stock Option Plan, after the filing of a registration statement
on Form S-8 may be sold in the open market, subject, in the case of some
holders, to the Rule 144 limitations applicable to affiliates, the lock-up
agreements and vesting restrictions imposed by us.
Registration Rights. In addition, following this offering, the holders of
13,804,625 shares of outstanding common stock and the holders of warrants to
purchase 380,773 shares of common stock will, under some circumstances, have
rights to require us to register their shares for future sale. These include
the demand registration rights we granted to the holders of our Series E
preferred stock, which will convert into 4,707,904 shares of common stock upon
completion of this offering. We expect these registration rights to be
exercised. If exercised, these rights would require us to use our best
commercial efforts to cause a registration statement under the Securities Act,
to become effective on the 181st day, after the effectiveness of this
registration statement and to keep such registration statement effective for
180 days. Registration of these shares would result in these shares becoming
freely tradable without restriction under the Securities Act provided the
shares are not purchased by any of our affiliates. See "Description of Capital
Stock--Registration Rights of Stockholders."
71
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank
Securities Inc., FleetBoston Robertson Stephens Inc., and Dain Rauscher
Incorporated, have severally agreed to purchase from us the following
respective number of shares of common stock at the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this prospectus:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Deutsche Bank Securities Inc..........................................
FleetBoston Robertson Stephens Inc....................................
Dain Rauscher Incorporated............................................
---------
Total............................................................... 4,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are subject
to certain conditions precedent and that the underwriters will purchase all of
the shares of common stock offered hereby, other than those covered by the
over-allotment option described below, if any of these 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 that price less a concession not in excess
of $ per share. The underwriters may allow, and these dealers may re-
allow, a concession of not more than $ per share to other dealers. After
the initial public offering, the offering price and other selling terms may be
changed by the representatives of the underwriters.
We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to 600,000 shares of
common stock at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered in this offering. To the
extent that the underwriters exercise this option, each of the underwriters
will become obligated, subject to conditions, to purchase approximately the
same percentage of additional shares of common stock as the number of shares of
common stock to be purchased by it in the above table bears to the total number
of shares of common stock offered in this offering. If any additional shares of
common stock are purchased, the underwriters will offer the additional shares
on the same terms as those on which the 4,000,000 shares are being offered.
The underwriting fee is equal to the initial public offering price per share
of common stock less the amount paid by the underwriters to us per share of
common stock. We have agreed to pay the underwriters the following fees,
assuming either no exercise or full exercise by the underwriters of the
underwriters' over-allotment option:
<TABLE>
<CAPTION>
Total Fees
---------------------------------------------------------
Without Exercise Of With Full Exercise Of
Fee Per Share Over-Allotment Option Over-Allotment Option
------------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by Open Port.. $ $ $
</TABLE>
72
<PAGE>
In addition, we estimate that our share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $1,450,000.
We have agreed to indemnify the underwriters against certain specified
liabilities, including liabilities under the Securities Act, and to contribute
to payments the underwriters may be required to make in respect of any of these
liabilities.
Each of our officers and directors, certain stockholders and certain holders
of options and warrants to purchase our stock, has agreed not to offer, sell,
sell short, contract to sell, transfer, hypothecate, pledge or otherwise
dispose of, or enter into any transaction that is designed to, or could be
expected to, result in the disposition of any shares of our common stock or
other securities convertible into or exchangeable or exercisable for shares of
our common stock or derivatives of our common stock for a period of 180 days
after the effective date of the registration statement of which this prospectus
is a part, directly or indirectly, without the prior written consent of
Deutsche Bank Securities Inc. This consent may be given at any time without
public notice. We have entered into a similar agreement with the
representatives of the underwriters.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thus creating a
short position in our common stock for their own account. A short position
results when an underwriter sells more shares of common stock than that
underwriter is committed to purchase. Additionally, to cover these over-
allotments or to stabilize the market price of our common stock, the
underwriters may bid for, and purchase, shares of our common stock in the open
market. Finally, the representatives, on behalf of the underwriters, may also
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
These transactions may be effected on the Nasdaq National Market or otherwise.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 400,000 shares for our directors, officers,
employees, vendors, customers and other third parties. The number of shares of
our common stock available for sale to the general public will be reduced to
the extent these reserved shares are purchased. Any reserved shares that are
not purchased by these persons will be offered by the underwriters to the
general public on the same basis as the other shares in this offering.
In January 2000, we sold shares of our Series E preferred stock in a private
placement at a price of $1.61 per share. Each share of Series E preferred stock
is convertible at the option of the holder into approximately 0.27 shares of
our common stock. In conjunction with this private placement, Deutsche Bank
Securities Inc. received a warrant dated as of October 22, 1999 to purchase
250,517 shares of common stock at an exercise price of $6.04 per share. The
exercise price per share under the warrant issued to Deutsche Bank Securities
Inc. is the same price per share paid by the investors in the private
placement. In addition, persons affiliated with Deutsche Bank Securities Inc.
purchased Series E preferred stock on the same terms as the other investors in
the private placement. Deutsche Bank Securities Inc. is deemed the beneficial
owner of 48,136 shares of Series E preferred stock.
73
<PAGE>
Pricing of this Offering
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock
will be determined by negotiation among us and the representatives of the
underwriters. Among the primary factors to be considered in determining the
public offering price are:
. prevailing market conditions;
. our results of operations in recent periods;
. the present stage of our development;
. the market capitalization and stage of development of other companies
that we and the representatives of the underwriters believe to be
comparable to our business; and
. estimates of our business potential.
The estimated initial public offering price range set forth on the cover of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for Open
Port by Sonnenschein Nath & Rosenthal, Chicago, Illinois. Certain legal matters
with respect to this offering will be passed upon for Open Port by Gordon &
Glickson LLC, Chicago, Illinois. Gordon & Glickson LLC owns 17,346 shares of
our common stock. Certain legal matters with respect to this offering will be
passed upon for the underwriters by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts.
EXPERTS
The financial statements of Open Port as of December 31, 1998 and 1999 and
for each of the three years in the period ended December 31, 1999 included in
this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits, schedules and any amendments with
respect to the common stock we are offering hereby. This prospectus is a part
of the registration statement and includes all of the information which we
believe is material to you in considering whether to make an investment in our
common stock. We refer you to the registration statement for additional
information about us, our common stock and this offering, including the full
texts of the exhibits, some of which have been summarized in this prospectus.
Statements contained in this prospectus as to the contents of any contract or
any other document referred to are not necessarily complete. With respect to
each such contract or other document filed as a part of the Registration
Statement, reference is made to the exhibit for a more complete description of
the matters involved, and each such statement shall be deemed qualified in its
entirety by such reference. The registration statement is available for
inspection and copying at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. The public may obtain information about the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site that makes available the
registration statement. The address of the SEC's Internet site is www.sec.gov.
As a result of this offering, Open Port will be required to file reports and
other information with the SEC pursuant to the informational requirements of
the Securities Exchange Act of 1934.
REPORTS TO STOCKHOLDERS
We intend to distribute to our stockholders annual reports containing
audited financial statements and will make available copies of quarterly
reports for the first three quarters of each fiscal year containing unaudited
interim financial information.
74
<PAGE>
OPEN PORT TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 and March 31,
2000 (unaudited)......................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999 and the three months ended (unaudited) March 31, 1999
and 2000 ................................................................ F-4
Consolidated Statements of Redeemable Convertible Preferred Stock,
Stockholders' Deficit and Comprehensive Loss for the Years Ended December
31, 1997, 1998 and 1999 and the three months ended (unaudited) March 31,
2000..................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999 and the three months ended (unaudited) March 31, 1999
and 2000 ................................................................ F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Open Port Technology, Inc.
The reverse stock split described in Note 12 to the financial statements has
not been consummated as of April 4, 2000. When it has been consummated, we will
be in a position to furnish the following report:
"In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of redeemable convertible
preferred stock, stockholders' deficit and comprehensive loss and of cash
flows present fairly, in all material respects, the financial position of
Open Port Technology, Inc. and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion
expressed above."
PricewaterhouseCoopers LLP
Chicago, Illinois
April 4, 2000
F-2
<PAGE>
OPEN PORT TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31,
December 31, (unaudited)
------------------ -------------------
2000
1998 1999 2000 Pro forma
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............ $ 706 $ 277 $ 13,436 $ 13,436
Accounts receivable, net............. 1,563 482 1,107 1,107
Prepaid expenses and other current
assets.............................. 649 368 543 543
-------- -------- -------- --------
Total current assets................ 2,918 1,127 15,086 15,086
Property and equipment, net........... 2,122 2,016 2,556 2,556
Software development costs, net....... 465 1,238 1,232 1,232
Other assets, net..................... 139 324 395 395
-------- -------- -------- --------
$ 5,644 $ 4,705 $ 19,269 $ 19,269
======== ======== ======== ========
Liabilities, Redeemable Convertible
Preferred Stock and Stockholders'
Equity (Deficit)
Current liabilities:
Accounts payable..................... $ 948 $ 1,610 $ 1,514 $ 1,514
Accrued expenses and other current
liabilities......................... 779 1,626 1,386 1,386
Notes payable--current............... -- 7,000 -- --
Current portion of capital lease
obligations......................... 558 429 410 410
Deferred revenue..................... 500 1,109 787 787
-------- -------- -------- --------
Total current liabilities........... 2,785 11,774 4,097 4,097
Notes payable.......................... 2,320 4,481 4,564 4,564
Capital lease obligations.............. 379 447 354 354
-------- -------- -------- --------
Total liabilities................... 5,484 16,702 9,015 9,015
-------- -------- -------- --------
Commitments and contingencies (Note 8)
Redeemable convertible preferred stock,
and warrants at redemption value,
$0.001 par value, no shares authorized
or outstanding--pro forma:
Series A preferred stock, authorized,
issued and outstanding--1,228,917
shares............................... 2,547 2,707 3,281 --
Series B preferred stock, authorized,
issued and outstanding--13,526,786
shares............................... 17,847 21,778 36,116 --
Series C preferred stock, authorized--
4,009,199 shares; issued and
outstanding--3,469,136 shares........ 7,562 8,802 10,366 --
Series D preferred stock, authorized--
1,160,454 shares; issued and
outstanding--935,454 shares.......... -- 3,162 3,222 --
Series E preferred stock, authorized--
17,662,889 shares; issued and
outstanding--17,436,746 shares....... -- -- 46,556 --
-------- -------- -------- --------
Total redeemable convertible
preferred stock.................... 27,956 36,449 99,541 --
-------- -------- -------- --------
Stockholders' equity (deficit):
Common Stock, $0.001 par value:
authorized--71,000,000 shares; issued
and outstanding--3,273,362, 3,417,784
and 3,428,915 shares; and 15,260,196
shares pro forma..................... 12 13 13 25
Additional paid-in capital............ 249 425 6,058 105,587
Deferred stock-based compensation..... -- -- (4,723) (4,723)
Stock purchase notes receivable....... (53) (126) (126) (126)
Accumulated deficit................... (27,990) (48,704) (90,440) (90,440)
Accumulated other comprehensive loss.. (14) (54) (69) (69)
-------- -------- -------- --------
Total stockholders' equity
(deficit).......................... (27,796) (48,446) (89,287) 10,254
-------- -------- -------- --------
$ 5,644 $ 4,705 $ 19,269 $ 19,269
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
OPEN PORT TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31, (unaudited)
---------------------------------- -----------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Software products...... $ 5,048 $ 3,241 $ 907 $ 26 $ 773
Maintenance and
professional
services.............. 1,266 1,600 1,443 359 580
Hardware products...... 835 506 -- -- --
---------- ---------- ---------- ---------- -----------
Total revenues........ 7,149 5,347 2,350 385 1,353
---------- ---------- ---------- ---------- -----------
Costs of revenues:
Software products...... 135 579 667 129 167
Maintenance and
professional
services(1)........... 2,668 2,871 2,403 552 780
Hardware products...... 430 331 -- -- --
---------- ---------- ---------- ---------- -----------
Total cost of
revenues............. 3,233 3,781 3,070 681 947
---------- ---------- ---------- ---------- -----------
Gross profit (loss)..... 3,916 1,566 (720) (296) 406
Operating expenses:
Sales and
marketing(1).......... 4,249 5,029 6,728 1,606 1,557
General and
administrative(1)..... 1,547 1,932 2,304 444 738
Research and
development(1)........ 4,058 3,730 4,761 1,158 1,661
Stock-based
compensation.......... -- -- -- -- 118
---------- ---------- ---------- ---------- -----------
Total operating
expenses............. 9,854 10,691 13,793 3,208 4,074
---------- ---------- ---------- ---------- -----------
Loss from operations.... (5,938) (9,125) (14,513) (3,504) (3,668)
Other income (expense):
Interest income........ 79 83 34 2 39
Interest expense....... (182) (336) (1,356) (247) (339)
Other expense, net..... -- (57) -- (15) --
---------- ---------- ---------- ---------- -----------
Total other income
(expense)............ (103) (310) (1,322) (260) (300)
---------- ---------- ---------- ---------- -----------
Loss before income
taxes.................. (6,041) (9,435) (15,835) (3,764) (3,968)
Provision for income
taxes (Note 7)......... 49 20 25 4 6
---------- ---------- ---------- ---------- -----------
Net loss.............. (6,090) (9,455) (15,860) (3,768) (3,974)
Accretion and dividends
on redeemable
convertible preferred
stock and warrants..... (1,230) (1,816) (4,854) (484) (35,020)
---------- ---------- ---------- ---------- -----------
Net loss applicable to
common stockholders.... $ (7,320) $ (11,271) $ (20,714) $ (4,252) $ (38,994)
========== ========== ========== ========== ===========
Basic and diluted net
loss per share......... $ (2.29) $ (3.49) $ (6.15) $ (1.27) $ (11.39)
========== ========== ========== ========== ===========
Shares used in
calculation of basic
and diluted net loss
per share.............. 3,200,000 3,229,776 3,369,802 3,342,077 3,423,168
========== ========== ========== ========== ===========
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (2.23) $ (0.26)
========== ===========
Shares used in
calculation of pro
forma basic and diluted
net loss per share
(unaudited)............ 7,123,372 15,260,196
========== ===========
</TABLE>
--------
(1) Excludes non-cash, stock-based compensation expense as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Maintenance and
professional
services.............. $ -- $ -- $ -- $ -- $ 11
Sales and marketing.... -- -- -- -- 25
General and
administrative........ -- -- -- -- 42
Research and
development........... -- -- -- -- 40
---------- ---------- ---------- ---------- -----------
$ -- $ -- $ -- $ -- $ 118
========== ========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
OPEN PORT TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE
PREFERRED STOCK, STOCKHOLDERS' DEFICIT AND COMPREHENSIVE LOSS
(in thousands, except share data--March 31, 2000 balances are unaudited)
<TABLE>
<CAPTION>
Redeemable Redeemable Redeemable Redeemable Redeemable
Convertible Convertible Convertible Convertible Convertible
Preferred Stock-- Preferred Stock-- Preferred Stock-- Preferred Stock-- Preferred Stock--
Series A Series B Series C Series D Series E
------------------ ------------------- ------------------ ------------------ -------------------
Number Carrying Number Carrying Number of Carrying Number Carrying Number Carrying
of Shares Value of Shares Value shares Value of Shares Value of Shares Value
--------- -------- ---------- -------- --------- -------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
1, 1997......... 1,228,917 $2,227 6,026,786 $ 7,165 -- $ -- -- $ -- -- --
Issuance of
redeemable
convertible
preferred
stock........... -- -- 7,500,000 8,400 -- -- -- -- -- --
Cumulative
preferred
dividends....... -- 160 -- 1,070 -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- --
Cumulative
translation
adjustment...... -- -- -- -- -- -- -- -- -- --
--------- ------ ---------- ------- --------- ------- ------- ------ ---------- -------
Balance,
December 31,
1997............ 1,228,917 2,387 13,526,786 16,635 -- -- -- -- -- --
Issuance of
redeemable
convertible
preferred stock,
net of issuance
costs of $136... -- -- -- -- 3,469,136 7,025 -- -- -- --
Issuance of
common stock.... -- -- -- -- -- -- -- -- -- --
Issuance of
warrants........ -- -- -- -- -- 229 -- -- --
Cumulative
preferred
dividends....... -- 160 -- 1,212 -- 308 -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- --
Cumulative
translation
adjustment...... -- -- -- -- -- -- -- -- -- --
--------- ------ ---------- ------- --------- ------- ------- ------ ---------- -------
Balance,
December 31,
1998............ 1,228,917 2,547 13,526,786 17,847 3,469,136 7,562 -- -- -- --
Issuance of
redeemable
convertible
preferred
stock........... -- -- -- -- -- -- 935,454 3,000 -- --
Issuance of
common stock.... -- -- -- -- -- -- -- -- -- --
Purchase of
treasury stock..
Issuance of
warrants........ -- -- -- -- -- 678 -- -- -- --
Accretion and
cumulative
preferred
dividends....... -- 160 -- 3,931 -- 562 -- 162 -- --
Net loss........ -- -- -- -- -- -- -- -- -- --
Cumulative
transition
adjustment...... -- -- -- -- -- -- -- -- -- --
--------- ------ ---------- ------- --------- ------- ------- ------ ---------- -------
Balance,
December 31,
1999............ 1,228,917 2,707 13,526,786 21,778 3,469,136 8,802 935,454 3,162 -- --
Issuance of
redeemable
convertible
preferred
stock........... -- -- -- -- -- -- -- -- 17,436,746 28,072
Issuance of
common stock.... -- -- -- -- -- -- -- -- -- --
Issuance of
warrants........ -- -- -- -- -- -- -- -- -- --
Accretion and
cumulative
preferred
dividends....... -- 574 -- 14,338 -- 1,368 -- 60 -- 18,484
Adjustment of
warrants to
redemption
value........... -- -- -- -- -- 196 -- -- -- --
Deferred
compensations
related to stock
options
granted......... -- -- -- -- -- -- -- -- -- --
Amortizations of
stock based
compensation.... -- -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- --
Cumulative
translation
adjustment...... -- -- -- -- -- -- -- -- -- --
--------- ------ ---------- ------- --------- ------- ------- ------ ---------- -------
Balance, March
31, 2000........ 1,228,917 $3,281 13,526,786 $36,116 3,469,136 $10,366 935,454 $3,222 17,436,746 $46,556
<CAPTION>
Common Stock Stock Other Total
------------------- Additional Deferred Purchase Accumu- Compre- Stock- Compre-
Number Carrying Paid-In Stock-Based Notes lated hensive holders' hensive
of Shares Value Capital Compensation Receivable Deficit Loss Deficit Loss
---------- -------- ---------- ------------ ---------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
1, 1997......... 3,200,000 $12 $ 167 $ -- $ -- $ (9,399) $ -- $ (9,220) --
Issuance of
redeemable
convertible
preferred
stock........... -- -- -- -- -- -- -- -- --
Cumulative
preferred
dividends....... -- -- -- -- -- (1,230) -- (1,230) --
Net loss........ -- -- -- -- -- (6,090) -- (6,090) $ (6,090)
Cumulative
translation
adjustment...... -- -- -- -- -- (23) (23) (23)
---------- -------- ---------- ------------ ---------- --------- ------- --------- ---------
Balance,
December 31,
1997............ 3,200,000 12 167 -- -- (16,719) (23) (16,563) $ (6,113)
=========
Issuance of
redeemable
convertible
preferred stock,
net of issuance
costs of $136... -- -- -- -- (136) -- (136) --
Issuance of
common stock.... 73,362 -- 82 -- (53) -- -- 29 --
Issuance of
warrants........ -- -- -- -- -- -- -- -- --
Cumulative
preferred
dividends....... -- -- -- -- -- (1,680) -- (1,680) --
Net loss........ -- -- -- -- -- (9,455) -- (9,455) $ (9,455)
Cumulative
translation
adjustment...... -- -- -- -- -- -- 9 9 9
---------- -------- ---------- ------------ ---------- --------- ------- --------- ---------
Balance,
December 31,
1998............ 3,273,362 12 249 -- (53) (27,990) (14) (27,796) $ (9,446)
=========
Issuance of
redeemable
convertible
preferred
stock........... -- -- -- -- -- (39) -- (39) --
Issuance of
common stock.... 146,439 1 178 -- (73) -- -- 106 --
Purchase of
treasury stock.. (2,017) -- (2) -- -- -- -- (2) --
Issuance of
warrants........ -- -- -- -- -- -- -- -- --
Accretion and
cumulative
preferred
dividends....... -- -- -- -- -- (4,815) -- (4,815) --
Net loss........ -- -- -- -- -- (15,860) -- (15,860) $(15,860)
Cumulative
transition
adjustment...... -- -- -- -- -- -- (40) (40) (40)
---------- -------- ---------- ------------ ---------- --------- ------- --------- ---------
Balance,
December 31,
1999............ 3,417,784 13 425 -- (126) (48,704) (54) (48,446) $(15,900)
=========
Issuance of
redeemable
convertible
preferred
stock........... -- -- -- -- -- (1,963) -- (1,963) --
Issuance of
common stock.... 11,131 -- 13 -- -- -- -- 13 --
Issuance of
warrants........ -- -- 779 -- -- (779) -- -- --
Accretion and
cumulative
preferred
dividends....... -- -- -- -- -- (34,824) -- (34,824) --
Adjustment of
warrants to
redemption
value........... -- -- -- -- -- (196) -- (196) --
Deferred
compensations
related to stock
options
granted......... -- -- 4,841 (4,841) -- -- -- -- --
Amortizations of
stock based
compensation.... -- -- -- 118 -- -- -- 118 --
Net loss........ -- -- -- -- -- (3,974) (3,974) (3,957)
Cumulative
translation
adjustment...... -- -- -- -- -- -- (15) (15) (15)
---------- -------- ---------- ------------ ---------- --------- ------- --------- ---------
Balance, March
31, 2000........ 3,428,915 $13 $6,058 $(4,723) $(126) $(90,440) $ (69) $(89,287) $ (3,972)
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
OPEN PORT TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
Year Ended December 31, (unaudited)
--------------------------- ----------------
1997 1998 1999 1999 2000
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss....................... $(6,090) $ (9,455) $(15,860) $(3,768) $(3,974)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization
of property and equipment..... 767 1,046 1,196 279 289
Amortization of capitalized
software costs and other
assets........................ 139 288 347 83 167
Amortization of debt
discount...................... -- 44 350 86 82
Amortization of stock-based
compensation.................. -- -- -- -- 118
Provision for doubtful
accounts...................... -- -- 319 -- 13
Changes in assets and
liabilities:
Accounts receivable........... 2,291 (741) 762 (299) (638)
Prepaid expenses and other
assets....................... 416 568 281 (198) (175)
Other assets.................. (46) (46) (193) (4) (74)
Accounts payable.............. (644) 218 662 (67) (96)
Accrued expenses and other
current liabilities.......... 164 (531) 847 250 (240)
Deferred revenue.............. 111 (2,042) 609 90 (322)
------- -------- -------- ------- -------
Net cash used in operating
activities.................. (2,892) (10,651) (10,680) (3,548) (4,850)
------- -------- -------- ------- -------
Cash flows from investing
activities:
Additions to property and
equipment..................... (524) (623) (551) (139) (827)
Additions to capitalized
software costs................ (235) (339) (1,112) (223) (160)
------- -------- -------- ------- -------
Net cash used in investing
activities.................. (759) (962) (1,663) (362) (987)
------- -------- -------- ------- -------
Cash flows from financing
activities:
Proceeds from issuance of notes
payable....................... -- 2,500 13,500 3,518 --
Payment of notes payable....... (950) -- (4,000) -- (4,000)
Payments of capital lease
obligations................... (477) (655) (612) (181) (111)
Proceeds from sale of common
stock......................... -- 29 105 89 13
Proceeds from sale of
redeemable convertible
preferred stock, net of
issuance costs................ 8,400 6,889 2,961 -- 23,109
------- -------- -------- ------- -------
Net cash provided by
financing activities........ 6,973 8,763 11,954 3,426 19,011
------- -------- -------- ------- -------
Effect of foreign currency
exchange rate fluctuations on
cash........................... (18) 9 (40) 11 (15)
------- -------- -------- ------- -------
Net increase (decrease) in
cash........................... 3,304 (2,841) (429) (473) 13,159
Cash and cash equivalents at
beginning of period............ 243 3,547 706 706 277
------- -------- -------- ------- -------
Cash and cash equivalents at end
of period...................... $ 3,547 $ 706 $ 277 $ 233 $13,436
======= ======== ======== ======= =======
Supplemental disclosure of cash
flow information:
Cash paid for interest......... $ 182 $ 266 $ 604 $ 134 $ 221
Cash paid for income taxes..... 1 -- 2 -- --
Supplemental disclosure of non-
cash investing and financing
activities:
Property and equipment acquired
under capital leases.......... $ 510 $ 379 $ 548 $ 58 $ --
Estimated fair value of
warrants recorded as debt
discount or issuance costs.... -- 229 678 175 779
Issuance of 46,897 and 65,128
shares of common stock in
exchange for stock purchase
notes receivable.............. -- 53 73 73 --
Accretion and dividends on
redeemable convertible
preferred stock and warrants.. 1,230 1,816 4,854 484 35,020
Deferred stock-based
compensation.................. -- -- -- -- 4,841
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Operations and Significant Accounting Policies
Nature of Operations
Open Port Technology, Inc. (the "Company") which was formed in 1993,
designs, develops and distributes software products that enable enhanced
communication services to be deployed over Internet Protocol ("IP") based
networks ("enhanced IP services"). The Company's products enable enhanced
IP services to be deployed with the accountability, tracking and
reliability of services delivered over the public switched telephone
network, while taking advantage of the more efficient use of bandwidth,
increased functionality, flexibility and reduced costs offered by IP
networks. The Company's headquarters are located in Chicago, Illinois, and
the Company maintains sales offices in the United States and Europe. The
Company sells to customers worldwide.
Basis of Presentation
The accompanying interim financial statements for the three months ended
March 31, 1999 and 2000 and the related notes have not been audited.
However, they have been prepared consistent with the accounting principles
disclosed in the audited financial statements and include all adjustments,
which were of a normal and recurring nature, which in the opinion of
management are necessary to present fairly the financial position of the
Company and results of operations and cash flows for the periods presented.
The operating results for the interim periods are not necessarily
indicative of results expected for the full years.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Foreign Currency Translation
The functional currencies for all of the Company's foreign subsidiaries are
their local currencies. The foreign subsidiaries' balance sheets are
translated at the year end rates of exchange and their results of
operations are translated at weighted average rates of exchange for the
year.
Translation adjustments resulting from this process are recorded as a
separate component of stockholders' deficit and will be included in the
determination of net income (loss) only upon sale or liquidation of the
subsidiaries, which is not contemplated at this time. Foreign exchange
transaction losses were not significant for any period presented.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents.
F-7
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, which are
comprised of accounts receivable, accounts payable, capital lease
obligations, and notes payable, approximates their estimated fair value
based upon market prices for the same or similar types of financial
instruments.
Concentration of Credit Risk and Significant Customers
Financial instruments which potentially expose the Company to
concentrations of credit risk are primarily comprised of accounts
receivable. Management believes its credit policies are prudent and reflect
normal industry terms and business risk. The Company does not anticipate
non-performance by the counterparties and, accordingly, does not require
collateral.
At December 31, 1998, 50% of the Company's accounts receivable were due
from two customers. At December 31, 1999, 84% of the Company's accounts
receivable were due from two customers. As of March 31, 2000, 39% of the
Company's accounts receivable were due from three customers.
During 1997, seven customers accounted for 94% of the Company's revenues.
During 1998, four customers accounted for 76% of the Company's revenues.
Two customers accounted for 51% of the Company's revenues in 1999. During
the three months ended March 31, 1999 and 2000, three and three customers
accounted for 65% and 44% of the Company's revenues respectively.
Sales totaling $2,688,000, or 38% of total 1997 revenue, $439,000, or 8% of
total 1998 revenue and $194,000 or 8% of total 1999 revenue, were made to
customers in Europe. Sales totaling $276,000, or 12% of total 1999 revenue,
were made to customers in Asia. Sales totaling $30,000 or 8% and $309,000
or 23% of revenue for the three months ended March 31, 1999 and 2000,
respectively, were made to customers in Europe. Sales totaling $3,000 or 1%
and $246,000 or 18% of total revenue for the three months ended March 31,
1999 and 2000, respectively, were made to customers in Asia.
Revenue Recognition
The Company recognizes revenues in accordance with American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," as amended. The Company's revenues are
derived from licenses for its software as well as software maintenance and
support, training and professional services. In those instances where a
software license agreement includes multiple elements (software,
professional services and maintenance and support) the value of the total
agreement is assigned to each separate element using the residual method.
Under the residual method, the fair value assigned to professional services
and maintenance and support is based on established business practice and
actual transactions. The remaining (residual) amount of the total software
license agreement fee is allocated to the delivered software element.
Software product revenues are recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the license fee is fixed and
determinable and the collection of the fee is probable. In those instances
where software products are sold together with professional services,
software product revenue is recognized upon delivery provided that the
above criteria have been met and payment of the software product license
fee is not dependent upon the performance of the services. In instances
where customer acceptance criteria are included in software product license
agreements, software product revenue is not recognized until the customer
acceptance provision has been satisfied.
F-8
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenues from professional services are recognized when the services are
performed. Revenues derived from software maintenance arrangements is
recognized ratably over the period the services are provided, typically one
year. Revenue related to maintenance and support provided during the
initial 3 month warranty period and annual maintenance and support provided
in an initial software license agreement is unbundled from the license fee
based on standard annual renewal rates and is recognized ratably over a 15
month period.
Revenue from hardware products is recognized when the products have been
delivered and collection is probable.
The allowance for doubtful accounts was $0 and $319,000 at December 31,
1998 and 1999, respectively, and $332,000 at March 31, 2000. There were no
write-offs of accounts receivable during 1999.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon estimated useful lives ranging from
three to seven years. Maintenance and repair charges are expensed as
incurred.
Software Development Costs and Research and Development
Capitalization of software development costs in accordance with SFAS 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed", begins upon the establishment of technological
feasibility and ends upon general release of the final product. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized software development costs require
considerable judgment by management with respect to certain external
factors including, but not limited to, anticipated future revenues,
estimated economic life and changes in software and hardware technologies.
Amortization of capitalized software development costs begins upon general
release of the final product and is provided on a product-by-product basis
at the greater of the amount computed using (a) the ratio of current
revenues for a product to the total of current and anticipated future
revenues or (b) the straight-line method over the remaining economic life
of the product, generally 3 years. Research and development costs, which
principally relate to the design and development of proprietary software
prior to the establishment of technological feasibility, are expensed as
incurred.
Capitalized software development costs as of December 31, 1998 and 1999 and
March 31, 2000 (net of accumulated amortization of $527,000, $430,000 and
$595,000, respectively) aggregated $465,000, $1,238,000 and $1,232,000,
respectively. Amortization of capitalized software costs totaled $282,000
and $338,000 during 1998 and 1999, respectively, and $120,000 and $165,000
for the three months ended March 31, 1999 and 2000 respectively, and is
recorded in cost of software products. Fully amortized assets of $435,000
were written-off in 1999.
Accounting for Stock-based Compensation
The Company accounts for stock-based awards to employees using the
intrinsic value method as prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Compensation expense is recorded for options issued to
employees in fixed amounts which have exercise prices below the estimated
fair value of the Company's common stock at the date
F-9
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of grant. The Company has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," through disclosure only (Note 6).
Pro Forma Balance Sheet (unaudited)
The unaudited pro forma balance sheet as of March 31, 2000 presents the
conversion of 36,597,039 of the outstanding shares of Series A, B, C, D and
E preferred stock into 11,831,282 shares of common stock assuming the
completion of the Company's initial public offering.
Net Loss Per Share
Basic and diluted net loss per share applicable to common stockholders is
computed by dividing the net loss applicable to common stockholders for the
period by the weighted average number of common shares outstanding for the
period. The calculation of diluted net loss per share excludes the number
of shares of common stock issuable upon exercise of employee stock options
and warrants, and the shares of common stock issuable upon the conversion
of convertible preferred stock as the effect would be antidilutive.
Potential common shares consist of the incremental common shares issuable
upon the conversion of the redeemable convertible preferred stock (using
the incremental method) and shares issuable upon the conversion of stock
options and warrants (using the treasury stock method). See Note 9 for the
reconciliation of the numerator and denominator of the basic and diluted
EPS computations. Unaudited proforma basic and diluted net loss per share
has been calculated assuming the conversion of all outstanding shares of
preferred stock into shares of common stock, as if the shares had converted
immediately upon their issuance.
Comprehensive Income
Comprehensive income is comprised of two components, net income and other
comprehensive income. Other comprehensive income was comprised solely of
cumulative foreign currency translation adjustments.
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax liabilities for the expected
future tax consequences of temporary differences between tax bases and
financial reporting bases of assets and liabilities, using enacted tax
rates in effect for the year in which the differences are expected to be
paid or recovered. Deferred tax assets are reduced by a valuation allowance
to the extent that utilization is not considered more likely than not.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates made by
management regarding the reported amounts of assets and liabilities as well
as the revenues and expenses recognized during the reporting periods.
Actual results could differ from those estimates.
F-10
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment Reporting
The Company operates in one segment, selling software products and related
services. Substantially all product and service revenues through December
31, 1999 have been attributable to the sale of the Company's software
products. Service revenues through December 31, 1999 have been derived
principally from implementation and support of the Company's software
products. The Company's chief operating decision maker evaluates revenue
and profitability performance on an enterprise-wide basis to make operating
and strategic decisions. Therefore, segment information is identical to the
information included in the consolidated balance sheet and consolidated
statement of operations.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments and hedging activities
and requires recognition of all derivatives as assets or liabilities in the
statement of financial position and measurement of those instruments at
fair value. The statement, as amended, is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 is not expected to have a
material effect on its financial results.
Reclassifications
Certain reclassifications now have been made to the financial statements to
conform to the 2000 presentation. These reclassifications had no impact on
the reported net loss for the periods presented.
2.Financial Statement Components
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
December 31, March 31,
---------------------- ----------------
1998 1999 2000
---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Equipment under capital lease:
Computer equipment............ $1,722,000 $2,242,000 $ 2,242,000
Computer software............. 485,000 513,000 513,000
Furniture and fixtures........ 375,000 375,000 375,000
Computer equipment.............. 1,040,000 1,429,000 2,200,000
Furniture, fixtures and
improvements................... 912,000 1,065,000 1,123,000
---------- ---------- -----------
4,534,000 5,624,000 6,453,000
Less: Accumulated amortization
and depreciation............. (2,412,000) (3,608,000) (3,897,000)
---------- ---------- -----------
$2,122,000 $2,016,000 $ 2,556,000
========== ========== ===========
</TABLE>
Depreciation expense for 1997, 1998, 1999 and for the three months ended
March 31, 1999 and 2000 was $296,000, $338,000, $574,000, $117,000 and
$169,000, respectively. Amortization expense related to property and
equipment acquired under capital lease
F-11
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
arrangements was $471,000, $707,000 and $622,000 during 1997, 1998 and
1999, respectively and $159,000 and $120,000 for the three months ended
March 31, 1999 and 2000. Accumulated amortization on property and equipment
under capital lease totaled $861,000, $1,568,000 and $2,190,000 as of
December 31, 1997, 1998 and 1999, respectively and $2,310,000 as of March
31, 2000. Interest expense relating to capital lease obligations totaled
$156,000, $148,000 and $140,000 during 1997, 1998 and 1999, respectively
and $39,000 and $24,000 for the three months ended March 31, 1999 and 2000.
Other assets are comprised of the following:
<TABLE>
<CAPTION>
December 31, March 31,
------------------ ---------------
1998 1999 2000
-------- -------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Patent costs........................... $141,000 $154,000 $157,000
Security deposits and other............ 14,000 14,000 14,000
Deferred financing costs............... -- 181,000 251,000
-------- -------- --------
155,000 349,000 422,000
Less: Accumulated amortization......... (16,000) (25,000) (27,000)
-------- -------- --------
$139,000 $324,000 $395,000
======== ======== ========
</TABLE>
Amortization expense relating to capitalized patent costs totaled $4,000,
$7,000 and $9,000 in 1997, 1998 and 1999, respectively and $2,000 and
$2,000 for the three months ended March 31, 1999 and 2000.
Accrued expenses and other current liabilities are comprised of the
following:
<TABLE>
<CAPTION>
December 31, March 31,
------------------- ---------------
1998 1999 2000
-------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Accrued compensation................... $176,000 $ 296,000 $ 296,000
Accrued bonus.......................... -- 743,000 503,000
Commissions payable.................... 313,000 222,000 138,000
Other ................................. 290,000 365,000 449,000
-------- ---------- ----------
$779,000 $1,626,000 $1,386,000
======== ========== ==========
</TABLE>
3.Credit Facilities and Notes Payable
Revolving Credit Facility
During 1998, the Company changed an existing loan arrangement with Silicon
Valley Bank (SVB) to create a revolving credit facility. As amended, this
facility provided for up to $4,000,000 in borrowings by the Company, except
that the maximum amount available was limited to the Company's borrowing
base (defined as the greater of $1,500,000 or 80% of the Company's eligible
accounts receivable), if lower. The facility also provided for the issuance
of up to $2,500,000 in standby letters of credit on behalf of the Company.
All borrowings made by the Company were collateralized by substantially all
of the Company's assets and were due on August 6, 1999. Interest accrued on
outstanding
F-12
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
borrowings at SVB's prime rate (8.5% at December 31, 1998) and was payable
monthly. The Company was subject to certain financial and non-financial
covenants under the facility. As of December 31, 1998, no borrowings or
letters of credit were outstanding under this revolving credit facility.
In January 1999, the Company amended its revolving credit facility with SVB
to decrease the borrowing facility from $4,000,000 to $3,000,000 and remove
the limitation on the amount available for borrowing relating to the
Company's borrowing base. In connection with this amendment, the due date
for all amounts outstanding was changed to the earlier of April 30, 1999 or
the closing of the Company's Series D preferred stock financing and the
interest rate was increased to the SVB's prime rate plus 1.5%. All amounts
available under the amended facility were drawn down during the first
quarter of 1999 and repaid in April 1999, at which time the arrangement
terminated.
In connection with this amendment in January 1999, the Company granted SVB
warrants to purchase 75,000 shares of the Company's Series C preferred
stock at price of $2.025 per share. These warrants can be exercised at any
time before the later of two years from the effective date of the Company's
initial public offering or January 28, 2004. The estimated fair value of
these warrants of $100,000 was recorded as a debt discount and is amortized
to interest expense over the term of the related debt. The warrants permit
the holder, upon an acquisition of the Company, to require the Company to
redeem each warrant for the difference between the warrant exercise price
and the fair value of a share of common stock. The Company will adjust the
warrants to redemption value through accretion and a charge/credit to
interest expense based on the estimated fair value of a share of common
stock at the end of each reporting period.
Mezzanine Credit Facility
In June 1998, the Company entered into a one-year borrowing agreement with
CID Mezzanine (a related party) under which the lender agreed to loan up to
$3,000,000 to the Company, the proceeds of which were to be used to finance
the acquisition of fixed assets and for working capital purposes. Each
borrowing under the agreement is collateralized by substantially all of the
Company's assets and is due on July 1, 2001 unless a change of control of
the Company occurs, in which case the notes become payable in full
immediately. Interest payments are due on a monthly basis at an annual
interest rate of 11%. In the event of default, this rate would increase to
13%. As of December 31, 1998, $2,500,000 was outstanding under this
arrangement. In connection with borrowings made in 1998, the Company also
issued warrants to purchase 111,093 shares of the Company's Series C
preferred stock (Note 6).
In January 1999, the remaining $500,000 available under the pre-existing
borrowing arrangement with the mezzanine capital company (a related party)
was drawn down by the Company. In April 1999, this facility was amended and
the borrowings increased by $2.0 million. The facility has the same terms
and interest rate as before the amendment. As of December 31, 1999,
$5,000,000 was outstanding under this facility. The Company was in non-
compliance with a covenant requiring audited financial statements within 90
days of year-end. A waiver for this non-compliance was received from the
lender. As of March 31, 2000, $5,000,000 was outstanding under this
facility.
F-13
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the aforementioned borrowing arrangements, the Company
granted the lender warrants to purchase an additional 259,217 shares of the
Company's Series C preferred stock at a price of $0.01 per share during
1999. These warrants can be exercised at any time before the later of July
1, 2001 or the third anniversary of the Company's repayment of the notes in
full. The estimated fair value of these warrants of $578,000 was recorded
as debt discount and is being amortized to interest expense over the
remaining term of the related notes payable.
Issuance of Term Notes Payable
In April 1999 and August 1999, the Company issued term notes payable to
American National Bank in exchange for cash proceeds totaling $4,000,000.
These borrowings, which are collateralized by substantially all of the
Company's assets, are due on February 1, 2000 (Note 12). Interest on these
notes, which accrues at the bank's prime rate plus 1% (8.4% at December 31,
1999), is payable monthly. Upon the occurrence of non-payment, all
outstanding principal under the notes would be callable at the option of
the holder and the interest rate would increase to the bank's prime rate
plus 4% on a prospective basis. As of December 31, 1999, $4,000,000 was
outstanding under this agreement. During the first quarter of 2000, this
loan was repaid and the agreement terminated.
Issuance of Subordinated Convertible Promissory Notes
In September 1999, the Company entered into a Subordinated Convertible
Promissory Note Purchase Agreement under which certain existing investors
agreed, at their sole option, to loan the Company up to $3,000,000.
Subsequently, the Company issued subordinated convertible promissory notes
to various stockholders in exchange for gross proceeds totaling $3,000,000.
These borrowings bear interest at prime rate plus 1% (8.4% at December 31,
1999) and all principal and accrued interest was due on January 31, 2000.
As of December 31, 1999, $3,000,000 was outstanding under this agreement.
In the event that a subsequent financing takes place prior to that date
which results in gross proceeds to the Company of at least $15,000,000, all
principal and accrued interest will automatically convert into the
securities sold in that financing with the number of securities received
being based upon the offering price at which such securities are sold (Note
12). Subsequent to year-end the $3,000,000 converted to Series E preferred
shares (Note 12).
Notes Payable Maturities
Future payments under the above notes payable obligations are as follows
for the years ended December 31;
<TABLE>
<S> <C>
2000......................................................... $ 7,000,000
2001......................................................... 5,000,000
-----------
Gross minimum payments....................................... 12,000,000
Less: Amounts representing warrants issued
(net of amortization)....................................... 519,000
-----------
Net present value of minimum payments........................ 11,481,000
Less: Current portion........................................ 7,000,000
-----------
$ 4,481,000
===========
</TABLE>
F-14
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4.Redeemable Convertible Preferred Stock
As of December 31, 1999, the authorized shares of preferred stock were
designated as follows:
<TABLE>
<S> <C>
Series A preferred stock........................................ 1,228,917
Series B preferred stock........................................ 13,526,786
Series C preferred stock........................................ 4,009,199
Series D preferred stock........................................ 1,160,454
----------
19,925,356
==========
</TABLE>
The holders of the Series A, Series B, Series C, Series D and Series E
redeemable convertible preferred stock (the "Preferred Stock") are herein
referred to collectively as the "Preferred Stockholders." Series E
redeemable convertible preferred stock was issued in January of 2000 (see
Note 12). At March 31, 2000, the Preferred Stockholders have the following
rights and privileges.
Voting Rights
The Preferred Stockholders generally vote together with all other classes
and series of stock as a single class on all matters and are entitled to a
number of votes equal to the number of shares of common stock into which
each share of such stock is convertible.
Conversion Rights
Each share of Series A preferred stock is convertible into 0.53 shares of
the Company's common stock, subject to adjustment in the case of any
subsequent dilutive financing, at the discretion of the holder or
automatically at the closing of an initial public offering of the Company's
common stock. Each share of Series B preferred stock is convertible into
0.37 shares of the Company's common stock, subject to any subsequent
dilutive financing, at the discretion of the holder or automatically at the
closing of an initial public offering of the Company's common stock. Each
share of Series C preferred stock is convertible into 0.28 shares of the
Company's common stock subject to adjustment in the case of any subsequent
dilutive financing, at the discretion of the holder or automatically at the
closing of an initial public offering of the Company's common stock. Each
share of Series D preferred stock is convertible into 0.53 shares of the
Company's common stock subject to adjustment in the case of any subsequent
dilutive financing, at the discretion of the holder or automatically at the
closing of an initial public offering of the Company's common stock. Each
share of Series E preferred stock is convertible into 0.27 shares of the
Company's common stock subject to adjustment in the case of any subsequent
dilutive financing, at the discretion of the holder or automatically at the
closing of an initial public offering of the Company's common stock.
Dividend Rights
Each share of Series A preferred stock is entitled to an 8% cumulative
dividend, which has preference over any dividends on the common stock.
Accrued dividends are payable upon the conversion of the Series A preferred
stock to common stock, unless the conversion is made upon the occurrence of
an initial public offering of the Company's common stock
F-15
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
meeting certain requirements or other defined events. Each share of Series
B preferred stock is entitled to an 8% cumulative dividend, which has
preference over any dividends on the common stock or Series A preferred
stock. Accrued dividends are payable upon the conversion of the Series B
preferred stock to common stock, unless the conversion is made upon the
occurrence of certain events. Each share of Series C preferred stock is
entitled to an 8% cumulative dividend. Accrued dividends are payable upon
the conversion of the Series C preferred stock to common stock, unless the
conversion is made upon the occurrence of certain events. Each share of
Series D preferred stock is entitled to an 8% cumulative dividend. In the
event of conversion upon a qualified public offering or corporate
transaction, all accrued and unpaid dividends on the Series D preferred
stock would be payable while accrued and unpaid dividends on all other
series of preferred stock would not. Each share of Series E preferred stock
is entitled to an 8% cumulative dividend.
Liquidation Preferences
In the event of any liquidation event including the sale or winding up of
the Company, the holders of the Preferred Stock are entitled to receive,
prior and in preference to the common stockholders, the following initial
liquidation amounts:
<TABLE>
<S> <C>
Series A preferred stock................................ $1.62745 per share
Series B preferred stock................................ $1.12 per share
Series C preferred stock................................ $2.025 per share
Series D preferred stock................................ $3.207 per share
Series E preferred stock................................ $1.61 per share
</TABLE>
If proceeds remain after the initial liquidation amounts are paid in full
to the holders of each class of the Preferred Stock, the Preferred
Stockholders are entitled to receive secondary liquidation payments equal
to all accrued and unpaid dividends. With regard to priority in the payment
of both the initial and secondary liquidation amounts, the Series E is
senior to Series A, Series B, Series C and Series D preferred stock, the
Series D is senior to Series A, Series B, and Series C preferred stock, the
Series C preferred stock is senior to both Series A and Series B preferred
stock, and the Series B preferred stock is senior to the Series A preferred
stock. In the event that any proceeds remain after payment of all initial
and secondary liquidation amounts to the Preferred Stockholders, all
remaining proceeds will be shared ratably by the holders of all classes of
the Company's capital stock.
Redemption
Each series of Preferred Stock is redeemable at the option of the holder at
any time during the period beginning July 15, 2002 and ending July 15,
2004. In the event of redemption, holders of each series of Preferred Stock
would be entitled to receive the greater of their then-current liquidation
preference or the fair market value of a share of common stock as
determined at that time. As a result of this provision, the carrying value
of the preferred stock is adjusted through accretion to their full
redemption value at the end of each reporting period. The option to redeem
is terminated upon an initial public offering of the Company's common stock
meeting certain specified requirements.
F-16
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The accretion recorded for each series of preferred stock and related
warrants is as follows:
<TABLE>
<CAPTION>
Series E
Series A Series B Series C Series D (unaudited)
-------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Carrying value at
December 31, 1998....... $2,547 $17,847 $ 7,562 $ -- $ --
Issuance value........... -- -- -- 3,000 --
Dividends................ 160 1,212 562 162 --
Issuance of warrants
convertible into
preferred stock......... -- -- 678 -- --
Accretion to redemption
value at $1.61 per
share................... -- 2,719 -- -- --
------ ------- ------- ------ -------
Carrying value at
December 31, 1999....... 2,707 21,778 8,802 3,162 --
Issuance value........... -- -- -- -- 28,072
Dividends................ 39 303 141 60 398
Accretion to redemption
value at $2.67 per
share................... 535 14,035 1,423 -- 18,086
------ ------- ------- ------ -------
Carrying value at March
31, 2000................ $3,281 $36,116 $10,366 $3,222 $46,556
====== ======= ======= ====== =======
</TABLE>
5.Stockholders' Deficit
Common Stock
Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of the Company's stockholders. Common stockholders are
entitled to receive dividends, if any, as may be declared by the Board of
Directors, subject to any preferential dividend rights of the preferred
stockholders. In April 1999, the Company approved an increase in the number
of authorized shares of its common stock to 48,950,438 shares. On January
25, 2000, the Company amended its Articles of Incorporation to increase the
number of authorized shares of its common stock to 71,000,000 shares.
Stock Purchase Notes Receivable
In July 1998, an employee issued a recourse note payable to the Company in
the amount of $53,000 as consideration for the exercise of vested options
to purchase 46,897 shares of the Company's common stock. This note is due
on July 30, 2003 and accrues interest at an annual a rate of 5.75%.
In February, 1999, another employee issued a recourse note payable to the
Company in the amount of $73,000 as consideration for the exercise of
vested options to purchase 65,128 shares of the Company's common stock.
This note is due on February 18, 2004 and accrues interest at an annual
rate of 4.71%.
F-17
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6.Stock Options and Warrants
Stock Option Plans
In 1995, the Company adopted its 1995 Incentive Stock Option Plan (the
"Employee Plan"). The Employee Plan provides for the issuance of shares of
common stock to key personnel at an option price to be determined by the
Board of Directors, which shall not be less than fair market value at the
date of the grant. The options vest over a four-year period beginning one
year from the date of grant and expire ten years from the date of the
grant.
In 1995, the Company adopted the 1995 Non-Employee Stock Option Plan (the
"Non-Employee Plan"). The plan provides for the issuance of stock options
to certain providers of service to the Company, such as members of the
Board of Directors, consultants, suppliers and contractors. The terms of
the plan are substantially similar to the 1995 Incentive Stock Option Plan.
During 1997, the Company granted 6,666 options at an exercise price of
$1.13 per share under the Non-Employee Plan. During 1998, the Company
granted 5,333 options at an exercise price of $11.62 per share under the
Non-Employee Plan. During 1999, the Company did not grant options under the
Non-Employee Plan. The fair value of these options was not significant. No
options expired during 1997, 1998 or 1999 nor were any options exercised or
canceled under the Non-Employee Plan.
The aggregate number of options authorized under both plans as of December
31, 1999 was 1,448,718. At December 31, 1999, 309,589 shares were available
for future grant.
During 1997, 1998 and 1999, compensation expense recognized for stock
option grants made by the Company under APB Opinion No. 25 was not
significant. Had compensation cost for these option grants been determined
based on their fair value at the date of grant consistent with the method
prescribed by SFAS No. 123, the Company's net loss applicable to common
stockholders would have been increased to $7,338,000, or $(2.29) per share,
$11,367,000 or $(3.52) per share and $20,922,000 or $(6.21) per share
during 1997, 1998 and 1999, respectively. Because most options vest over
several years and additional option grants are expected to be made in
future periods, the pro forma effects of applying the fair value method of
SFAS No. 123 may be increasingly significant in future years.
Under SFAS No. 123, the fair value of each employee option grant is estimated
on the date of grant using the Black-Scholes option pricing model to apply the
minimum value method with the following weighted average assumptions used for
options granted during the following periods:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Dividend yield..................................... 0.0% 0.0% 0.0%
Risk free interest rate............................ 6.0% 5.0% 5.2%
Volatility......................................... 0.0% 0.0% 0.0%
Expected term...................................... 5 years 5 years 4 years
</TABLE>
In the quarter ended March 31, 2000, the Company recorded total unearned stock
compensation of approximately $(4.8) million in connection with stock options
granted during the period. These amounts represent the difference between the
exercise price of stock option
F-18
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
grants and the estimated fair market value of common stock at the time of the
grants. The unearned compensation is being amortized to expense over the
vesting periods of the applicable options, resulting in approximately $118,000
of expense for the quarter ended March 31, 2000. Amortization of unearned
compensation expense for each of the next five fiscal years arising from these
grants is as follows:
<TABLE>
<CAPTION>
Amount
Year Ended (in thousands)
---------- --------------
<S> <C> <C> <C>
December 31, 2000............... $ 1,025
December 31, 2001............... 1,210
December 31, 2002............... 1,210
December 31, 2003............... 1,210
December 31, 2004............... 185
</TABLE>
Stock option activity during 1997, 1998 and 1999 was as follows:
<TABLE>
<CAPTION>
Outstanding
Options
-------------------
Weighted
Average
Number of Exercise
Shares Price
--------- --------
<S> <C> <C>
Outstanding--January 1, 1997........................... 654,987 $ 1.13
Granted (weighted average fair value of $0.08)....... 513,751 $ 1.13
Exercised............................................ -- --
Cancelled............................................ (461,360) --
---------
Outstanding--December 31, 1997......................... 707,378 $ 1.13
Granted (weighted average fair value of $0.26)....... 837,573 $ 4.43
Exercised............................................ (73,362) $ 1.13
Cancelled............................................ (236,218) $ 1.45
---------
Outstanding--December 31, 1998......................... 1,235,371 $ 3.31
Granted (weighted average fair value of $0.57)....... 102,027 $11.62
Exercised............................................ (144,456) $ 2.15
Cancelled............................................ (271,559) $ 1.23
---------
Outstanding--December 31, 1999......................... 921,383 $ 4.88
Granted.............................................. 1,106,461 $ 5.63
Exercised............................................ (11,131) $ 1.13
Cancelled............................................ (140,399) $11.57
---------
Outstanding--March 31, 2000 (unaudited)................ 1,876,314 $ 4.86
=========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Exercise Number Life Exercise Number Exercise
Price Outstanding (Years) Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.13 585,134 7.1 $ 1.13 276,383 $ 1.13
$ 7.59 4,800 8.3 7.59 838 7.59
$ 9.61 25,767 8.4 9.61 8,433 9.61
$ 11.62 305,682 9.0 11.62 20,377 11.62
------- -------
$0.30 - $3.10 921,383 8.6 $ 4.88 306,031 $ 2.38
======= =======
</TABLE>
F-19
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warrants
In connection with a master equipment lease agreement entered into in
November 1995 (Note 8), the Company granted the lessor warrants to purchase
19,663 shares of the Company's common stock at a price of $3.05 per share.
These warrants can be exercised at any time before the earlier of November
2005 or an initial public offering of the Company's common stock.
Subsequently, in August 1996, warrants to purchase an additional 14,285
shares of common stock at a price of $4.20 per share were issued to the
same lessor. These warrants can be exercised at any time before the earlier
of August 15, 2006 or five years from the date of an initial public
offering of the Company's stock. The estimated fair value of these
warrants, aggregating $45,000, was recorded as a debt discount and is being
amortized to interest expense over the term of the lease agreement.
In connection with a separate master lease agreement entered into in June
1998 (Note 8), the Company granted a different lessor warrants to purchase
9,876 shares of the Company's Series C preferred stock at a price of $2.025
per share which can be exercised at any time before July 1, 2008. In
connection with additional borrowings made under this master lease
agreement in 1999, the Company issued warrants to purchase an additional
9,877 shares of its Series C preferred stock to the lessor in August 1999.
These warrants have the same exercise price as those granted in 1998, but
may be exercised any time before October 1, 2009. The estimated fair value
of these warrants was not significant.
In connection with a debt financing arrangement entered into in June 1998
(Note 3), the Company granted the lender warrants to purchase 111,093
shares of the Company's Series C preferred stock at a price of $0.01 per
share. The warrants can be exercised at any time before the later of July
1, 2001 or the third anniversary of the Company's repayment of the note in
full. The estimated fair value of these warrants of $229,000 was recorded
as a debt discount and is being amortized to interest expense over the term
of the related notes payable.
In conjunction with the Series E preferred stock sale, the Company issued
an investment advisor a warrant for the purchase of 250,517 shares of
common stock. The warrant expires in October 2004 and has an exercise price
of $6.04 per share. The fair value of the warrant will be recorded as
offering costs.
The fair value of each issuance of warrants was estimated on the date of
grant using the Black-Scholes pricing model utilizing the following
assumptions:
<TABLE>
<CAPTION>
Deutsche
Silicon Bank
Valley Securities
CID Equity Bank Inc.
------------------ -------- ----------
1998 1999 1999 2000
Warrants Warrants Warrants Warrants
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Number of warrants issued........ 111,093 259,217 75,000 250,517
======== ======== ======== ========
Risk free interest rate.......... 5.0% 5.0% 4.6% 5.65%
Volatility....................... 50% 50% 30% 70%
Term-in years.................... 3 3 3 4
Exercise price per share......... $ .01 $ .01 $ 2.03 $ 6.04
Estimated fair value per share... $ 2.03 $ 2.24 $ 3.10 $ 5.63
Value recorded................... $229,000 $578,000 $100,000 $779,000
</TABLE>
F-20
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7.Income Taxes
For the years ended December 31, 1997, 1998 and 1999, the Company's income
tax provision is comprised solely of current foreign income taxes.
The components of the Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
---------- -----------
<S> <C> <C>
Operating loss carryforwards...................... $9,330,000 $15,716,000
Deferred compensation............................. 70,000 70,000
Depreciation...................................... 92,000 97,000
Bad debt allowance................................ -- 128,000
Vacation accrual.................................. -- 48,000
Other............................................. 9,000 86,000
Capitalized software development costs............ (186,000) (495,000)
---------- -----------
9,315,000 15,650,000
Less: Valuation allowance......................... (9,315,000) (15,650,000)
---------- -----------
$ -- $ --
========== ===========
</TABLE>
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to losses before income tax expense as a
result of the following:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Computed expected income tax
benefit.......................... $(2,114,000) $(3,303,000) $(5,542,000)
Increase (decrease) in tax benefit
resulting from:
Change in valuation allowance.... 2,395,000 3,749,000 6,335,000
State and local income taxes, net
of federal benefit.............. (302,000) (472,000) (792,000)
Other............................ 70,000 46,000 24,000
----------- ----------- -----------
Income tax expense................ $ 49,000 $ 20,000 $ 25,000
=========== =========== ===========
</TABLE>
Realization of deferred tax assets is contingent upon the generation of
future taxable income. The Company has recorded a full valuation allowance
against its deferred tax asset due to the uncertainty surrounding the
generation of future taxable income created by the limited operating
history and early stage of development of the Company. As a result, no
income tax benefit has been recognized relating to the losses generated
during 1997, 1998 and 1999 or any prior years.
At December 31, 1999, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $39.0 million, which
will expire between 2010 and 2018 if not utilized. Under the provisions of
the Internal Revenue Code, certain substantial changes in the Company's
ownership may limit the amount of net operating loss carryforwards which
could be utilized annually to offset future taxable income. The amount of
any such limitation is determined based upon the Company's value prior to
an ownership change.
F-21
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8.Commitments and Contingencies
Operating Leases
The Company is obligated under various lease agreements relating to its
property and equipment and facilities. In some cases, these obligations
contain renewal options. As of December 31, 1999, future minimum lease
payments for noncancelable operating leases are as follows for the years
ending December 31,:
<TABLE>
<S> <C>
2000............................................................ $ 657,000
2001............................................................ 495,000
2002............................................................ 119,000
2003............................................................ 23,000
----------
$1,294,000
==========
</TABLE>
Rent expense on operating leases totaled $512,000, $616,000 and $802,000
during 1997, 1998 and 1999, respectively, and $148,000 and $273,000 for the
three months ended March 31, 1999 and 2000.
Capital Leases
On November 7, 1995, the Company entered into a master lease agreement with
a financing company for the lease of computer hardware and software used in
its business. Each borrowing under the lease has a three-year term and is
collateralized by the assets purchased. The Company has the right to extend
each individual borrowing for one additional year and has exercised this
right for all individual borrowings with terms expiring through 1999. At
the end of the term of each borrowing, the Company has the option to
purchase the equipment for its then fair value. Equipment obtained pursuant
to these leases is capitalized and is included in property and equipment on
the balance sheet. The Company's ability to borrow under this arrangement
expired during 1998.
On June 22, 1998, the Company entered into a new master lease agreement
with a financing company under which the Company may borrow up to
$1,000,000 for the lease of computer hardware and software used in its
business. The terms of this arrangement are substantially similar to those
of the previous master lease agreement described above except that the
Company's ability to borrow expired on July 1, 1999.
In connection with the aforementioned arrangements, the Company issued
warrants to purchase certain of its equity securities to the respective
lessors (Note 6).
Future payments under noncancelable capital lease agreements are as follows
for the years ended December 31,:
<TABLE>
<S> <C>
2000........................................................... $ 514,000
2001........................................................... 365,000
2002........................................................... 141,000
2003........................................................... --
2004 and thereafter............................................ --
----------
Gross minimum lease payments................................... 1,020,000
Less: Amount representing interest and debt discount........... (144,000)
----------
Net present value of minimum lease payments.................... 876,000
Less: Current portion.......................................... (429,000)
----------
$ 447,000
==========
</TABLE>
F-22
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Matters
During 1999, the Company agreed to the settlement of a 1998 invoice dispute
surrounding software license fees and services with a former customer
resulting in the receipt of $600,000 which has been included in revenues.
This item had not been recorded as revenue in 1998 due to uncertainty
relating to its collectibility.
9.Earnings Per Share
SFAS 128, "Earnings per Share," requires companies to provide a
reconciliation of the numerator and denominator of the basic and diluted
EPS computations. The calculation below provides net loss applicable to
common stockholders, weighted average common shares outstanding and the
resultant net loss per share for both basic and diluted EPS for the years
ended December 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Numerator:
Net loss applicable to common
stockholders................. $(7,320,000) $(11,271,000) $(20,714,000)
=========== ============ ============
Denominator:
Weighted average common
shares....................... 3,200,000 3,229,776 3,369,802
(Denominator for basic
calculation)
Weighted average effect of
dilutive securities:
Convertible preferred
stock...................... -- -- --
Stock options and warrants.. -- -- --
----------- ------------ ------------
Denominator for diluted
calculation.............. 3,200,000 3,229,776 3,369,802
=========== ============ ============
Earnings per share:
Basic.......................... $ (2.29) $ (3.49) $ (6.15)
=========== ============ ============
Diluted........................ $ (2.29) $ (3.49) $ (6.15)
=========== ============ ============
Securities excluded because of their anti-dilutive effect:
Convertible preferred stock..... 5,656,224 6,627,580 7,123,372
Options......................... 707,378 1,235,371 921,383
Warrants........................ 33,948 88,566 414,681
</TABLE>
10.Related Party Transactions
The Company obtains legal services from a stockholder at amounts which
approximate fair value. During 1997, 1998 and 1999, the Company incurred
expenses of $258,000, $397,000 and $329,000, respectively, and $45,000 and
$236,000 for the three months ended March 31, 1999 and 2000 for services
provided by this firm.
11.Employee Savings Plan
The Company maintains an employee retirement savings plan under Section
401(k) of the Internal Revenue Code (the "401(k) Plan") which covers
substantially all employees. Under
F-23
<PAGE>
OPEN PORT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the terms of the 401(k) Plan, employees may contribute a percentage of
their salary, up to a maximum of 15%, which is then invested in one or more
of several mutual funds selected by each employee. The Company did not make
any contributions to the 401(k) Plan on behalf of its employees during
1997, 1998 or 1999.
12.Subsequent Events
On January 25, 2000 the Company amended its Articles of Incorporation. As a
result, the Company authorized shares of stock designated as follows:
<TABLE>
<S> <C>
Common stock................................................... 71,000,000
Series A preferred stock....................................... 1,228,917
Series B preferred stock....................................... 13,526,786
Series C preferred stock....................................... 3,934,199
Series D preferred stock....................................... 935,454
Series E preferred stock....................................... 17,662,889
-----------
108,288,245
===========
</TABLE>
In January 2000, the Company issued 17,436,746 shares of its Series E
preferred stock for proceeds of $28,000,000. The proceeds consist of cash
payments totaling $25,000,000 and the conversion of notes payable (Note 3)
in the amount of $3,000,000. A portion of the cash proceeds received was
used to repay the December 31, 1999 notes payable balance of $4,000,000. Of
the total shares issued, 1,597,012 were to related parties. Each share of
Series E preferred stock is convertible into one share of the Company's
common stock. The rights and preferences of the Series E preferred stock
are substantially the same as those of the other series of preferred stock
as outlined in Note 4, except that (i) it has liquidation preference over
all existing series of the preferred stock and (ii) its initial liquidation
value is $1.61 per share. The beneficial conversion feature, inherent in
the Series E preferred stock, of $18,484,000 was recorded upon issuance and
is included in accretion and dividends on redeemable convertible preferred
stock in the statement of operations.
On January 27, 2000 and on March 28, 2000 the Company's Board of Directors
amended the 1995 Incentive and Non-Employee Stock Option Plans. The
amendment increased the number of shares available for grant under both
plans from 1,448,719 to 2,248,719 on January 27, 2000 and to 2,595,385 on
March 28, 2000.
During 2000, the Company granted options to purchase shares of common stock
to employees at a weighted average exercise price of approximately $1.50
per share. Compensation expense related to these stock options,
representing the difference between the exercise price and the fair market
value of a share of common stock at the date of grant, will be amortized to
compensation expense over the four-year vesting period.
Reverse stock split
The Board of Directors of Open Port has authorized the merger of the
Company into a subsidiary incorporated in Delaware and a 1:3.75 reverse
stock split subject to shareholder approval. The accompanying financial
statements have been adjusted assuming the reverse stock split has been
approved.
F-24
<PAGE>
[Inside Back Cover]
[Over the graphical depiction are the words "'OPEN PORT DRIVES INTERNET
MESSAGING."
Graphical representation of four concentric circles appears centered in the
page. Inside the smaller circle appear the words "IP LaunchPad" enclosed by a
rectangular border with four circular button symbols situated horizontally
across the top of the rectangular border. Inside the second smallest circle
appear the logos for "Cisco Systems, Inc.," "Sun Microsystems," "3Com" and
"Lucent Technologies Inc.," at the top of the circle appear the words "HARDWARE
INFRASTRUCTURE." Inside the second largest circle appear the logos for "Qwest
Communications Corporation," "MCI WorldCom Network Services, Inc.," "Bell
Atlantic Data Solutions Group, Inc." and "Cable & Wireless," at the top of the
circle appear the words "CARRIER INFRASTRUCTURE." The largest circle is divided
into four quadrants. The four quadrants are labeled, clockwise from the top,
"AT HOME," "AT WORK," "WHEREVER YOU ARE" and "IN YOUR CAR" and contain
graphical depictions of those locations and communication devices used in those
locations.]
<PAGE>
You should rely only on the
information contained in this
prospectus. We have not authorized
anyone to provide information
different from that contained in
this prospectus. We are offering to
sell, and seeking offers to buy,
shares of common stock only in
jurisdictions where offers and sales
are permitted. The information
contained in this prospectus is
accurate only as of the date of this
prospectus, regardless of the time
of delivery of this prospectus or of
any sale of our common stock.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Forward Looking Statements............................................... 19
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Consolidated Financial Data..................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 33
Management............................................................... 51
Related Party Transactions............................................... 61
Principal Stockholders................................................... 63
Description of Capital Stock............................................. 65
Shares Eligible For Future Sale.......................................... 70
Underwriting............................................................. 72
Legal Matters............................................................ 74
Experts.................................................................. 74
Where You Can Find Additional Information................................ 74
Reports to Stockholders.................................................. 74
Index to Consolidated Financial Statements............................... F-1
</TABLE>
Until , 2000 (25 days after the
date of this prospectus), all
dealers that buy, sell or trade in
these securities, whether or not
participating in this offering, may
be required to deliver a prospectus.
Dealers are also obligated to
deliver a prospectus when acting as
underwriters and with respect to
their unsold allotments or
subscriptions.
[OPEN PORT TECHNOLOGY LOGO]
4,000,000 Shares
Common Stock
Deutsche Banc Alex. Brown
Robertson Stephens
Dain Rauscher Wessels
Prospectus
, 2000
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses (other than underwriting
discounts and commissions) expected to be incurred in connection with this
offering described in this registration statement.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 21,252
NASD Examination Fee............................................. 8,550
Nasdaq National Market Listing Fee............................... 95,000
Accounting Fees and Expenses..................................... 250,000
Printing and Engraving Expenses.................................. 160,000
Legal Fees and Expenses.......................................... 775,000
Blue Sky Fees and Expenses....................................... 10,000
Transfer Agent Fees and Expenses................................. 7,500
Miscellaneous.................................................... 122,698
----------
Total.......................................................... $1,450,000
==========
</TABLE>
The foregoing items, except for the Securities and Exchange Commission and
NASD fees, are estimated. All expenses will be borne by Open Port.
Item 14. Indemnification of Directors and Officers
As permitted by Section 102 of the Delaware General Corporation Law, the
Certificate of Incorporation of Open Port (filed as Exhibit 3.1 to this
registration statement) eliminates its directors' personal liability to Open
Port or its stockholders for monetary damages for a breach of fiduciary duty as
a director of Open Port, except:
. for any breach of the director's duty of loyalty to Open Port or its
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for payment of dividends or stock purchases or redemptions by the
corporation in violation of Section 174 of the Delaware General
Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
As a result of this provision, Open Port and its stockholders may be unable
to obtain monetary damages from a director for certain breaches of his or her
fiduciary duty to Open Port. This provision does not, however, eliminate the
directors' fiduciary responsibilities and, in appropriate circumstances,
equitable remedies such as injunctive or other forms of non-monetary relief
will remain available under Delaware law. The provision also does not affect a
director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
The by-laws of Open Port (filed as Exhibit 3.2 to this registration
statement) provide that Open Port must indemnify its directors and officers to
the fullest extent permitted by the Delaware General Corporation Law and that
it may indemnify its employees and agents in accordance with Delaware law as
determined by Open Port's board of directors in its sole discretion. Under
Section 145 of the Delaware General Corporation Law, a Delaware corporation has
the power to indemnify any person who was or is a party or is threatened to
II-1
<PAGE>
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that the person is or was a director, officer, employee or agent of
the corporation. The corporation may indemnify such a person against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by the person in connection with the action,
suit or proceeding if the person acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful, except that, in
the case of an action by or in the right of the corporation, judicial approval
is required for indemnification in respect of any claim, issue or matter as to
which the person was adjudged to be liable to the corporation. To the extent
that a present or former director or officer of a corporation is successful on
the merits or otherwise in the defense of any such action, suit or proceeding,
the corporation must indemnify him or her against the expenses (including
attorney's fees) he or she actually and reasonably incurred. Under Delaware
law, the expenses of an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by a
Delaware corporation in advance of the final disposition of the action, suit or
proceeding after delivery to the corporation of an undertaking by or on behalf
of the director or officer to repay such amounts if it is ultimately determined
that the director or officer is not entitled to be indemnified. Expenses
incurred by former directors and officers or other employees and agents may be
so paid on such terms and conditions, if any, as the corporation deems
appropriate.
The form of Underwriting Agreement (to be filed as Exhibit 1.1 to this
registration statement) provides for indemnification by the underwriters of
Open Port and its officers and directors for certain liabilities arising under
the Securities Act of 1933, as amended, or otherwise.
The indemnification provision in Open Port's Certificate of Incorporation,
by-laws and the Underwriting Agreement may be sufficiently broad to permit
indemnification of Open Port's directors and executive officers for liabilities
arising under the Securities Act of 1933, as amended.
Open Port maintains directors' and officers' liability insurance policies
covering certain liabilities of persons serving as officers and directors and
providing reimbursement to Open Port for its indemnification of such persons.
Item 15. Recent Sales of Unregistered Securities
In the three years preceding the filing of this registration statement, we
issued the following securities (adjusted to give effect to a one-for-3.75
reverse stock split) that were not registered under the Securities Act:
In January 1998, we issued a warrant for the purchase of 75,000 shares of
Series C convertible participating preferred stock at a price of $2.025 per
share to Silicon Valley Bank. Exemption from registration is claimed pursuant
to Section 4(2) of the Securities Act and Regulation D promulgated thereunder,
no public sale having been involved.
In June 1998, we issued an aggregate of 3,469,136 shares of Series C
convertible participating preferred stock with a per share purchase price of
$2.025 to four accredited investors. In addition, from June 1998 through May
1999, we issued to CID Mezzanine Capital, L.P. warrants to purchase up to
370,310 shares of Series C convertible participating preferred stock with a per
share exercise price of $0.01. Exemption from registration is claimed pursuant
to Section 4(2) of the Securities Act and Regulation D promulgated thereunder,
no public sale having been involved.
II-2
<PAGE>
In June 1998, we issued a warrant for the purchase of 19,753 shares of
Series C convertible participating preferred stock at a price of $2.025 per
share to Third Coast Venture Lease Partners I, L.P. Exemption from registration
is claimed pursuant to Section 4(2) of the Securities Act and Regulation D
promulgated thereunder, no public sale having been involved.
In June 1998, we entered into a note and warrant purchase agreement with CID
Mezzanine Capital, L.P., which was subsequently amended, under which we
authorized the issuance of up to an aggregate of $5.0 million in principal
amount of our 11% subordinated notes to CID Mezzanine Capital, L.P. As of
September 30, 1999, we had issued all $5.0 million in subordinated notes under
this facility. Exemption from registration is claimed pursuant to Section 4(2)
of the Securities Act and Regulation D promulgated thereunder, no public sale
having been involved.
In April 1999, we issued an aggregate of 935,454 shares of Series D
convertible preferred stock with a per share purchase price of $3.207 to 11
accredited investors, four of whom owned 5% or more of our common stock on a
fully diluted basis, excluding outstanding options and warrants. See "Related
Party Transactions--Series D Preferred Stock." Exemption from registration is
claimed pursuant to Section 4(2) of the Securities Act and Regulation D
promulgated thereunder, no public sale having been involved.
In September 1999, we authorized the issuance of subordinated convertible
promissory notes in the original aggregate principal amount of up to $3.0
million. We issued $3.0 million aggregate principal amount of these notes in
three installments in September 1999, October 1999 and November 1999 to ten
accredited investors: Battery Ventures III, L.P., CID Equity Capital, L.P., CID
Mezzanine Capital, L.P., Frontenac VI Limited Partnership, MKW Partners, L.P.,
Microsoft Corporation, New Enterprise Associates VII, Limited Partnership, Oak
Investment Partners VII, Limited Partnership, Oak VII Affiliates Fund, Limited
Partnership, and Joseph A. Piscopo, one of our directors. All of the notes
issued were converted to Series E convertible participating preferred stock in
January 2000. Exemption from registration is claimed pursuant to Section 4(2)
of the Securities Act and Regulation D promulgated thereunder, no public sale
having been involved.
Pursuant to our October 1999 engagement letter, we issued a warrant for the
purchase of 939,441 shares of common stock at a price of $1.61 per share to
Deutsche Bank Securities Inc. Exemption from registration is claimed pursuant
to Section 4(2) of the Securities Act and Regulation D promulgated thereunder,
no public sale having been involved.
In January 2000, we issued an aggregate of 17,436,746 shares of Series E
convertible participating preferred, 15,527,950 shares of which were sold at a
cash purchase price of $1.61 per share to 26 accredited investors and 1,908,796
shares of which were issued to 10 accredited investors pursuant to the
conversion, at a price of $1.61 per share, of principal and interest of our
subordinated convertible promissory notes issued in September 1999 (see
description above). Of the 36 purchasers of Series E preferred stock, 12 own 5%
or more of our common stock on a fully diluted basis, excluding outstanding
options and warrants. See "Related Party Transactions--Series E Preferred
Stock." Exemption from registration is claimed pursuant to Section 4(2) of the
Securities Act and Regulation D promulgated thereunder, no public sale having
been involved.
In the three years preceding May 31, 2000, we have granted options to
purchase an aggregate of 2,654,814 common shares and have issued an aggregate
of 250,602 common shares to current and former employees upon exercise of
options for an aggregate exercise price of $1.19. Exemption from registration
is claimed pursuant to Rule 701, no public sale having been involved.
Upon the closing of this offering, Open Port Technology, Inc., an Illinois
corporation, will merge with and into its wholly owned subsidiary, Open Port
Technology, Inc., a Delaware
II-3
<PAGE>
corporation. In connection with the merger, Open Port Technology, Inc. --
Delaware will issue shares of common stock to the holders of common stock of
Open Port Technology, Inc.--Illinois, in exchange for such holders' shares of
Open Port common stock. Exemption from registration is claimed pursuant to
Section 3(a)(9) of the Securities Act.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Form of Agreement and Plan of Merger between the registrant and Open
Port Technology, Inc., an Illinois corporation(1)
3.1 Form of Certificate of Incorporation of Open Port(1)
3.2 Form of By-Laws of Open Port(1)
4.1 Specimen certificate representing Open Port's common stock
4.2 Form of Warrant between Open Port and Comdisco, Inc.(1)
4.3 Form of Warrant between Open Port and CID Mezzanine Capital, L.P.(1)
4.4 Form of Warrant between Open Port and Silicon Valley Bank(1)
4.5 Form of Warrant between Open Port and Third Coast Venture Lease
Partners I, L.P.(1)
4.6 Form of Warrant between Open Port and Deutsche Bank Securities Inc.(1)
4.7 Second Amended and Restated Voting and Co-Sale Agreement(2)
5.1 Opinion of Sonnenschein Nath & Rosenthal
10.1+ 1995 Incentive Stock Option Plan, as amended
10.2+ 1995 Non-Employee Stock Option Plan, as amended(1)
10.3+ 2000 Equity Incentive Plan(2)
10.4+ 2000 Outside Directors Stock Option Plan(2)
10.5+ 2000 Employee Stock Purchase Plan(2)
10.6+* Employment Agreement between Open Port and Randy S. Storch
10.7+* Employment Agreement between Open Port and Cheryl Mayberry
10.8+* Employment Agreement between Open Port and Omprasad S. Nandyal
10.9+* Employment Agreement between Open Port and Michael B. Clauer
10.10 Amended and Restated Registration Rights Agreement among Open Port and
the investors specified therein(2)
10.11 Lease between Open Port and Teachers Insurance and Annuity Association
of America(1)
10.12 First Amendment to Lease betwen Open Port and Teachers Insurance and
Annuity Association of America(1)
10.13 Master Lease Agreement between Open Port and Third Coast Venture Lease
Partners I, L.P.(1)
10.14 Form of Software License Agreement(1)
10.15 Note and Warrant Purchase Agreement between Open Port and CID
Mezzanine Capital, L.P.(2)
10.16+* Employment Agreement between Open Port and Clarissa Cerda
21.1 Subsidiaries of Open Port
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Sonnenschein Nath & Rosenthal (included in Exhibit 5.1)
24.1 Powers of Attorney(1)
27.1 Financial Data Schedule(2)
</TABLE>
--------
(1) Previously filed on April 5, 2000 as part of this Registration Statement.
(2) Previously filed on May 19, 2000 as part of this Registration Statement.
* To be filed by amendment
+ Indicates compensatory plan or arrangement.
II-4
<PAGE>
(b) Financial Statement Schedules
No schedules have been included for the reason that they are not required or
are not applicable, or the required information is shown in the financial
statements or notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act,
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, 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 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 Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, 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.
(3) It will 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.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the registration statement to be filed on its
behalf by the undersigned, thereunto duly authorized in Chicago, Illinois on
June 9, 2000.
Open Port Technology, Inc.
/s/ Randy S. Storch
By: _________________________________
Randy S. Storch,
Chairman of the Board,
President and Chief Executive
Officer
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities indicated on the 9th day of June, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Randy S. Storch Chairman of the Board, President and Chief
___________________________________________ Executive Officer (principal executive
Randy S. Storch officer)
/s/ Michael B. Clauer Vice President and Chief Financial Officer
___________________________________________ (principal accounting and financial
Michael B. Clauer officer)
* Chief Technical Officer, Secretary and
___________________________________________ Director
Omprasad S. Nandyal
* Director
___________________________________________
Peter J. Barris
* Director
___________________________________________
Thomas J. Crotty
* Director
___________________________________________
Royce J. Holland
* Director
___________________________________________
Donald R. Hollis
* Director
___________________________________________
John E. Major
* Director
___________________________________________
</TABLE> Joseph Piscopo
/s/ Randy S. Storch
*By: ________________________________
(Randy S. Storch, as attorney-in-
fact)
II-6
