<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 2000
REGISTRATION NO. 333-33884
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------------
OBJECTSPACE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 75-2441715
(State or other jurisdiction (Primary standard (I.R.S. employer
of industrial identification no.)
incorporation or organization) classification code number)
</TABLE>
--------------------------
OBJECTSPACE, INC.
14850 QUORUM DRIVE, SUITE 500
DALLAS, TEXAS 75240
TELEPHONE: (972) 726-4100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
DAVID NORRIS
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
OBJECTSPACE, INC.
14850 QUORUM DRIVE, SUITE 500
DALLAS, TEXAS 75240
TELEPHONE: (972) 726-4100
FACSIMILE: (972) 715-9000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
Copies of communications to:
<TABLE>
<S> <C>
GREGORY R. SAMUEL RONALD G. SKLOSS
GARRETT A. DEVRIES J. KEVIN BOARDMAN
HAYNES AND BOONE, LLP BROBECK, PHLEGER & HARRISON LLP
901 MAIN STREET, SUITE 3100 301 CONGRESS AVENUE, SUITE 1200
DALLAS, TEXAS 75202 AUSTIN, TEXAS 78701
TELEPHONE: (214) 651-5000 TELEPHONE: (512) 477-5495
FACSIMILE: (214) 651-5940 FACSIMILE: (512) 477-5813
</TABLE>
--------------------------
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, 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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION -- AUGUST 14, 2000
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAW TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PROSPECTUS
, 2000
[LOGO]
7,500,000 SHARES OF COMMON STOCK
----------------------------------------------------------------------
<TABLE>
<S> <C>
OBJECTSPACE, INC.: THE OFFERING:
- ObjectSpace, Inc. - We are offering 7,500,000 shares of
14850 Quorum Drive, Suite 500 our common stock.
Dallas, Texas 75240 - The underwriters have an option to
(972) 726-4100 purchase up to 1,125,000 additional
shares of common stock from us to
PROPOSED SYMBOL & MARKET: cover over-allotments.
- OBSP/Nasdaq National Market - We anticipate that the initial
public offering price will be between
$9.00 and $11.00 per share.
- This is our initial public offering.
Before this offering, no public
market existed for our shares of
common stock.
- Closing: , 2000.
</TABLE>
<TABLE>
<CAPTION>
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<S> <C> <C>
Per Share Total
---------------------------------------------------------------------------------
Estimated public offering price: $ $
Underwriting fees:
Proceeds to ObjectSpace, Inc.:
---------------------------------------------------------------------------------
</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
--------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
--------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
BEAR, STEARNS & CO. INC.
DAIN RAUSCHER WESSELS
UBS WARBURG LLC
DLJDIRECT INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 5
Forward-Looking Statements and
Market Data....................... 15
Use of Proceeds..................... 15
Dividend Policy..................... 15
Corporate Information............... 16
Capitalization...................... 17
Dilution............................ 18
Selected Financial Data............. 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 21
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Business............................ 32
Management.......................... 45
Related Party Transactions.......... 55
Principal Stockholders.............. 58
Description of Capital Stock........ 59
Shares Eligible for Future Sale..... 62
Underwriting........................ 65
Legal Matters....................... 67
Experts............................. 67
Where You Can Find More
Information....................... 68
Index to Financial Statements....... F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION THAT WE BELIEVE IS ESPECIALLY IMPORTANT
CONCERNING OUR BUSINESS AND THIS OFFERING OF COMMON STOCK. IT DOES NOT CONTAIN
ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOUR INVESTMENT DECISION. YOU
SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND OUR FINANCIAL
STATEMENTS AND RELATED NOTES, BEFORE DECIDING TO INVEST IN OUR COMMON STOCK.
OUR BUSINESS
OVERVIEW
We are a leading provider of business-to-business integration, or B2Bi,
software products and professional services that enable organizations to easily
and rapidly integrate business applications within and across organizations over
the Internet. Our software products allow organizations to link their business
processes to share services, conduct transactions and exchange information in
real-time with customers, suppliers and other trading partners. Our professional
services, which comprise the majority of our revenue, assist our customers in
all phases of the B2Bi process, from concept development to design to
implementation.
By simplifying and automating business-to-business, or B2B, processes and
information flows, our solution enables organizations to realize significant
benefits from integrating customers, suppliers and other trading partners within
a new Internet-based community. These benefits include both enhanced revenue
opportunities, such as enabling organizations to introduce products to market
more quickly and to provide new services to their customers, and increased
operating efficiencies, such as efficiently managing inventories, automating
manual processes and improving forecasting capabilities.
We have designed our solution to be rapidly deployed, permitting our
customers to reduce the time necessary to execute new Internet-based B2B
strategies. Our solution does not require customers to modify existing
applications or to adopt a common integration technology, saving valuable
implementation time. Because our solution's integration capabilities easily
extend existing applications to a wide range of users without costly
reprogramming, organizations can realize greater returns on their prior
information technology investments.
PRODUCTS
Our OpenBusiness product line is comprised of our:
- OPENBUSINESS INFRASTRUCTURE PLATFORM that provides an essential foundation
for integrating an organization's incompatible business applications,
allowing them to be easily extended to their external B2B partners. Our
Infrastructure Platform was introduced in October 1997.
- OPENBUSINESS GATEWAY that builds upon the functionality of the
Infrastructure Platform by extending an organization's internally
integrated applications to their B2B partners over the Internet.
Alternatively, the Gateway may also be used with a customer's existing
infrastructure, such as application servers or databases, or with a
customer's existing applications. Our Gateway was introduced in
March 2000.
- OPENBUSINESS PORTAL that builds on the integration and access capabilities
of the Infrastructure Platform and Gateway, allowing organizations to
rapidly create a website to catalog business applications they choose to
make available to their community of B2B partners. Our Portal was
introduced in March 2000.
BUSINESS STRATEGY
Our goal is to be the leading provider of B2Bi software products and
professional services that enable organizations to develop and implement new
Internet-based B2B models. To achieve this
1
<PAGE>
objective, we intend to extend our product and technological leadership, sell
additional products and services to our installed customer base, expand our
sales and distribution channels, benefit from network effects as our customers'
B2B partners adopt our products and capitalize on our professional services
capabilities.
SALES AND MARKETING
We market our products and professional services globally primarily through
our direct sales force. Our direct sales force is complemented by the selling
and support efforts of our value-added resellers and system integrators. As of
July 31, 2000, we had licensed our OpenBusiness products or provided
professional services to over 300 customers, including Caterpillar, General
Motors, Intel, Merrill Lynch, Nokia, Sprint and Unisys.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered......................... 7,500,000 Shares
Common stock to be outstanding after this
offering................................... 37,876,530 Shares
Use of proceeds.............................. We plan to use the net proceeds from this
offering for working capital and other
general corporate purposes and for the
repayment of approximately $3.0 million of
indebtedness.
Proposed Nasdaq National Market symbol....... OBSP
</TABLE>
ABOUT THIS PROSPECTUS
Unless otherwise indicated, all information contained in this prospectus:
- assumes no exercise of the underwriters' option to purchase an
over-allotment of up to 1,125,000 additional shares;
- gives effect to a 100% stock dividend completed in January 2000 and a 40%
stock dividend completed in March 2000; and
- gives effect to the conversion of each outstanding share of preferred
stock into 2.8 shares of common stock upon the closing of this offering.
The number of shares of our common stock to be outstanding after this
offering includes:
- 21,208,963 shares of our common stock outstanding as of August 8, 2000;
and
- 9,167,567 shares of our common stock to be issued upon the conversion of
all shares of our preferred stock upon the closing of this offering.
The number of shares of our common stock to be outstanding after this
offering excludes:
- 5,737,683 shares issuable upon exercise of options outstanding as of
August 8, 2000 with a weighted-average exercise price of $4.02;
- 4,163,663 shares available for future issuance under our stock option
plans as of August 8, 2000; and
- 434,795 shares plus that number of shares equal to $2.5 million divided by
the offering price of the common stock in this offering, issuable upon the
exercise of warrants outstanding as of August 8, 2000.
2
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
When reading this summary financial data, please refer to "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited financial statements and accompanying
notes for additional information. The pro forma information in the table below
gives effect to the automatic:
- conversion of all outstanding shares of our preferred stock into shares of
common stock, as if the shares had converted immediately upon issuance;
and
- elimination of redemption rights on 1,144,433 shares of our common stock.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Revenue:
License............................. $ 588 $ 1,097 $ 1,547 $ 908 $ 5,250 $ 1,231 $ 5,548
Service............................. 3,972 8,757 10,070 10,897 14,896 6,438 10,533
------- ------- ------- ------- ------- ------- -------
Total net revenue................. 4,560 9,854 11,617 11,805 20,146 7,669 16,081
Gross profit.......................... 1,908 4,557 3,841 3,670 8,774 2,750 8,513
Operating loss from continuing
operations.......................... (755) (1,578) (3,789) (4,661) (6,262) (3,857) (4,026)
Net income (loss)..................... 179 5 (2,292) (4,362) (4,153) (3,997) (1,948)
Basic and diluted net income (loss)
per common share.................... $ 0.01 $ -- $ (0.12) $ (0.23) $ (0.49) $ (0.34) $ (0.23)
Weighted average number of common
shares outstanding.................. 16,800 17,611 19,624 19,632 19,640 19,635 19,912
Pro forma basic and diluted net loss
per common share.................... $ (0.14) $ (0.06)
Shares used in computing pro forma net
loss per common share............... 30,076 30,224
</TABLE>
In accordance with generally accepted accounting principles, net income
(loss) per common share does not reflect the conversion of all outstanding
shares of our preferred stock into shares of common stock or the elimination of
redemption rights on shares of our common stock, both of which will occur upon
the closing of this offering.
3
<PAGE>
The pro forma column of the table below gives effect to the automatic:
- conversion of all outstanding shares of our preferred stock into shares of
common stock upon the closing of this offering; and
- elimination of redemption rights on 1,144,433 shares of our common stock
upon the closing of this offering.
The pro forma as adjusted information in the table below gives effect to:
- our sale of 7,500,000 shares of common stock in this offering at an
assumed initial public offering price of $10.00 per share, after deducting
the underwriting discounts and commissions and estimated offering expenses
payable by us; and
- our repayment of approximately $3.0 million of outstanding indebtedness
from the net proceeds of this offering.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
------------------------------------
PRO FORMA PRO FORMA
ACTUAL (UNAUDITED) AS ADJUSTED
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.......... $ 8,340 $ 8,340 $73,940
Working capital........................................... 5,696 5,696 73,546
Total assets.............................................. 18,863 18,863 84,463
Long-term obligations, net of current portion............. 1,004 1,004 254
Mandatorily redeemable convertible preferred stock, common
stock and warrants...................................... 22,699 -- --
Stockholders' equity (deficit)............................ (15,692) 7,007 75,607
</TABLE>
4
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER INFORMATION IN THIS
PROSPECTUS, INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED
NOTES, BEFORE INVESTING IN OUR COMMON STOCK. ANY OF THE FOLLOWING RISKS COULD
SERIOUSLY HARM OUR BUSINESS, OPERATING RESULTS OR FINANCIAL CONDITION AND CAUSE
THE TRADING PRICE OF OUR COMMON STOCK TO DECLINE. AS A RESULT, YOU COULD LOSE
ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE EXPECT TO INCUR LOSSES IN THE FUTURE. OUR FAILURE TO ACHIEVE OR MAINTAIN
PROFITABILITY COULD LOWER OUR STOCK PRICE AND ULTIMATELY FORCE US TO CEASE OUR
OPERATIONS.
We may not be able to generate sufficient revenue from sales of our products
and professional services to become profitable. We incurred net losses in 1997,
1998, 1999 and the six months ended June 30, 2000, as we spent heavily,
particularly during 1999, to develop our products and expand our sales and
marketing organization. Our net loss was $2.3 million in 1997, $4.4 million in
1998, $4.2 million in 1999 and $1.9 million in the six months ended June 30,
2000. We expect to make significant investments in our sales and marketing
programs and research and development, resulting in a substantial increase in
our operating expense. As a result, we will need to generate significant
additional revenue to achieve and maintain profitability in the future. Even if
we do achieve profitability, we may not sustain or increase profitability on a
quarterly or annual basis. We cannot predict when we will operate profitably, if
at all. If we fail to achieve or maintain profitability, our stock price may
decline and we may have to discontinue our operations.
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO FLUCTUATIONS BECAUSE OF MANY
FACTORS, ANY OF WHICH COULD HARM OUR BUSINESS PROSPECTS AND LOWER OUR STOCK
PRICE.
Our quarterly revenue and results of operations are difficult to predict. We
have experienced fluctuations in revenue and operating results from
quarter-to-quarter and anticipate that these fluctuations will continue.
Therefore, it is likely that in some future quarter our revenue and operating
results will fall below the expectations of market analysts and investors,
causing our stock price to fall.
The fluctuations in our revenue and operating results are due to a variety
of factors, some of which are outside of our control, including:
- our ability to attract new customers and retain existing customers;
- the length and variability of our sales cycle, which makes it difficult to
forecast the quarter in which our sales will occur;
- our history of deriving a large portion of our quarterly revenue from a
small number of relatively large sales;
- the amount and timing of operating expense relating to the expansion of
our business and operations;
- our mix of license and service revenue;
- the utilization rate for our professional services personnel and the need
to staff customer projects with third party contractors;
- changes in our pricing policies or our competitors' pricing policies;
- the development of new products or product enhancements by us or our
competitors;
- our mix of domestic and international sales;
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<PAGE>
- the market for B2Bi solutions and general economic factors; and
- changes to generally accepted accounting principles, especially those
related to the recognition of software revenue.
We also typically realize a significant portion of our license revenue in
the last few weeks of a quarter because of our customers' purchasing patterns.
As a result, we are subject to significant variations in license revenue and
results of operations if we incur a delay in a large customer's order. If we
fail to close one or more significant license agreements that we have targeted
to close in a given quarter, this failure could seriously harm our operating
results for that quarter. Failure to meet or exceed the expectation of
securities analysts or investors may cause our stock price to fall.
OUR REVENUE DEPENDS ON A SINGLE PRODUCT LINE, OUR OPENBUSINESS SOLUTION, WHICH
IS IN AN EARLY STAGE OF COMMERCIALIZATION. THE FAILURE OF OUR OPENBUSINESS
PRODUCTS TO ACHIEVE MARKET ACCEPTANCE COULD CAUSE OUR REVENUE AND STOCK PRICE TO
DECLINE.
We expect licenses of, and professional services related to, our
OpenBusiness products to account for a significant portion of our total revenue
for the foreseeable future. Because our OpenBusiness products are at an early
stage of commercialization, it is difficult for us to forecast whether our
OpenBusiness solution will achieve market acceptance or whether we will be able
to attract and retain a broad customer base. If the market does not accept our
products and we are unable to attract and retain the necessary customer base,
our revenue could decline and our stock price could fall.
We also expect revenue from licenses of our OpenBusiness products to
constitute an increasing portion of our total revenue. A decline in demand for,
or in the average licensing price of, our OpenBusiness products would have a
direct negative effect on our business and our ability to increase our mix of
license revenue relative to service revenue and could cause our stock price to
fall.
IF BROAD MARKET ACCEPTANCE FOR XML DOES NOT DEVELOP, SALES OF OUR OPENBUSINESS
PRODUCTS MAY SUFFER AND OUR STOCK PRICE MAY DECLINE.
We have designed our OpenBusiness products to use eXtensible Markup
Language, or XML, an emerging standard for sharing data over the Internet.
Although we believe that XML will achieve broad market acceptance in the next
two years, it is possible that the market will perceive a competing standard as
superior to XML. If a competing standard replaced XML, the market might not
accept XML-based products. Also, our OpenBusiness products might not be
compatible with the new standard or we might not be able to develop a product
using this standard in a timely manner. Consequently, a failure of XML-based
products to achieve broad market acceptance or the introduction of a competing
standard that the market perceives as superior could adversely affect our sales
of our OpenBusiness products and could cause our stock price to decline.
OUR PRODUCT DEVELOPMENT EFFORTS AND OUR BUSINESS WILL SUFFER IF WE CANNOT
ATTRACT AND RETAIN THE TECHNICAL PERSONNEL NECESSARY TO CONTINUE OUR RESEARCH
AND DEVELOPMENT EFFORTS.
We cannot be certain that we can hire or retain a sufficient number of
highly qualified technical personnel. Our business depends on the continued
development and evolution of our OpenBusiness products. Competition for
qualified technical personnel is intense, particularly because we are in a new
area of software development and only a limited number of individuals have
acquired the skills they need to develop and maintain the products we offer. Our
competitors have attempted to hire our employees away from us, and we expect
that they will continue these attempts in the future. Failure to attract and
retain a sufficient number of qualified technical personnel will harm our
product development efforts and business and could cause our stock price to
fall.
6
<PAGE>
THE LOSS OF A MAJOR CUSTOMER COULD CAUSE OUR REVENUE TO FALL QUICKLY AND
UNEXPECTEDLY.
We generally derive a significant portion of our revenue from a small number
of relatively large sales, and our business generally depends on a limited
number of customers. For example, in 1999, two customers accounted for an
aggregate of approximately 46% of our total revenue, ClubCorp for approximately
26% and General Motors for approximately 20%. Also, our top ten customers in
1997, 1998 and 1999 accounted for more than 70% of our total revenue in those
fiscal years. We may continue to derive a significant portion of our revenue
from a relatively small number of customers in the future. A major customer's
decision not to use our products or our professional services could cause our
revenue to fall and harm our business, operating results and financial
condition. The loss of a major customer could also result in our failure to meet
quarterly revenue expectations, causing the trading price of our common stock to
fall.
WE HAVE A LIMITED HISTORY OF SELLING OUR OPENBUSINESS GATEWAY AND PORTAL
PRODUCTS. AS A RESULT, EVALUATING OUR CURRENT BUSINESS MODEL AND PROSPECTS FOR
THESE PRODUCTS MAY BE DIFFICULT.
We shipped the first commercial version of our OpenBusiness Integration
Platform in October 1997 and released our OpenBusiness Gateway and Portal
products to customers in March 2000. We have licensed our OpenBusiness Gateway
and OpenBusiness Portal products to a limited number of customers, many of whom
have not completely implemented these products. Thus, we have only a limited
operating history with which you can evaluate our current business model and our
prospects.
THE MARKET FOR B2BI SOLUTIONS IS HIGHLY COMPETITIVE. WE MAY NOT BE ABLE TO
COMPETE EFFECTIVELY AND MAY SUFFER PRICE REDUCTIONS, REDUCED GROSS MARGINS AND
LOSS OF MARKET SHARE.
The market for B2Bi solutions is rapidly changing and intensely competitive.
We expect competition to intensify as the number of entrants increases and as
other software companies expand into this marketplace. Increased competition
could result in price reductions, lower gross margins and loss of market share,
any of which could significantly reduce our future revenue.
Our current and potential competitors include other B2Bi vendors, internal
information technology departments, enterprise application integration software
vendors and other large software vendors. Many of our existing and potential
competitors have better brand recognition, longer operating histories, larger
customer bases and greater financial, technical, marketing and other resources
than us. As a result, they may be able to use these advantages to gain market
share from us. Also, they may be able to respond more effectively than we can to
changing technologies, conditions or customer demands, especially during
economic downturns. We may not be able to compete effectively against our
competitors, which could significantly reduce our future revenue and cause our
stock price to decline.
WE INTEND TO EXPAND OUR INTERNATIONAL SALES EFFORTS. FAILURE TO GROW OUR
INTERNATIONAL OPERATIONS SUCCESSFULLY COULD UNNECESSARILY STRAIN OUR RESOURCES
AND CAUSE OUR STOCK PRICE TO DECLINE.
We intend to expand our international sales efforts, particularly in Europe
and Asia, but we have very limited experience in selling, marketing, licensing
and supporting our products and professional services abroad. Expansion of our
international operations will require a significant amount of attention from our
management, who have limited experience maintaining foreign operations, and
substantial financial resources. Failure to grow our international operations
successfully and in a timely manner could unnecessarily strain our resources,
harm our business and cause our stock price to fall.
Doing business internationally involves additional risks, particularly:
- fluctuations in currency exchange rates;
- less protective intellectual property rights;
- differing labor regulations;
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<PAGE>
- changes in a country's or region's political or economic conditions; and
- greater difficulty in staffing and managing foreign operations.
Because of these risks, we may not achieve an acceptable return on our
investment or be able to compete effectively in international markets.
A FAILURE TO EXPAND OUR SALES FORCE AND DISTRIBUTION CHANNELS COULD ADVERSELY
AFFECT SALES OF OUR PRODUCTS AND PROFESSIONAL SERVICES AND CAUSE OUR REVENUE TO
DECLINE.
To increase market awareness and sales of our OpenBusiness products and
related professional services, we plan to expand our direct and indirect sales
and distribution efforts, both domestically and internationally. Competition for
qualified sales and marketing personnel is intense, and we may not be able to
attract and retain adequate numbers of these personnel to maintain our growth.
Even if we can attract qualified personnel, these personnel require training and
will take time to achieve full productivity. Our competitors have attempted to
hire our employees away from us, and we expect that they will continue these
attempts in the future. Failure to attract and retain qualified sales and
marketing personnel could harm sales of our products and professional services,
resulting in lost revenue and a decline in our stock price.
In addition to expanding our sales force, we also plan to expand our
relationships with system integrators and other technology leaders to further
develop our indirect sales channel. However, we may be unable to expand these
relationships or develop new relationships in a timely manner. As we continue to
develop our indirect sales channel, we will need to manage potential conflicts
between our direct sales force and third party reselling efforts. Failure to
expand and develop these relationships or successfully manage these conflicts
could harm our business and cause our stock price to decline.
IF WE CANNOT MEET OUR FUTURE CAPITAL REQUIREMENTS, OUR REVENUE AND STOCK PRICE
COULD DECLINE, AND WE COULD BE FORCED TO DISCONTINUE OUR OPERATIONS.
We estimate that the net proceeds from this offering and our existing
working capital immediately before this offering will be sufficient to meet our
anticipated working capital and capital expenditure requirements through at
least the next twelve months. After that, or earlier if our estimates prove
incorrect, we may need to raise additional funds. We cannot be certain we will
be able to obtain additional funding on favorable terms, or at all. If we need
additional capital and cannot raise it on acceptable terms, we may not be able
to:
- fund operating losses;
- take advantage of opportunities, including more rapid expansion or
acquisitions of complementary businesses or technologies;
- hire, train and retain employees; or
- develop new products or professional services.
If we are unable to raise sufficient funds to do these things or to
otherwise continue our operations, our revenue and stock price could decline,
and we could be forced to discontinue our operations.
WE COULD LOSE CUSTOMERS AND REVENUE IF WE DO NOT EXPAND OUR PROFESSIONAL
SERVICES ORGANIZATION.
We cannot be certain that we can attract or retain a sufficient number of
highly qualified professional services personnel. Customers that license our
software may engage our professional services staff to assist with support,
training, consulting and implementation. We believe that growth in our product
licenses depends on our ability to provide our customers with these services. As
a result, we plan to increase the number of our professional services personnel
to meet these needs. If we cannot provide adequate professional services to our
customers, we may lose sales of our products and services.
8
<PAGE>
Competition for qualified personnel is intense, particularly because we are
in a new market and only a limited number of individuals have acquired the
skills they need to provide the services our customers require. New professional
services personnel will require training and education and take time to reach
full productivity. We also intend to use more costly third party consultants to
supplement our own professional services staff. Our revenue may decline and our
stock price may fall, if we are unable to expand our professional services
organization.
A FAILURE TO MANAGE OUR PLANNED GROWTH COULD PLACE A SIGNIFICANT STRAIN ON OUR
RESOURCES AND CAUSE OUR STOCK PRICE TO FALL.
Our ability to successfully license products, sell professional services and
implement our business plan in a rapidly evolving market requires an effective
plan for managing our future growth. We plan to increase the scope of our
operations during the next twelve months. Future expansion efforts will be
expensive and may significantly strain our managerial and other resources. To
manage future growth effectively, we must maintain and enhance our financial and
accounting systems and controls, integrate new personnel and manage expanded
operations. If we do not manage growth properly, it could harm our operating
results and financial condition and cause our stock price to fall.
IF WE CANNOT DEVELOP ENHANCEMENTS TO, AND NEW VERSIONS OF, OUR OPENBUSINESS
PRODUCTS IN A TIMELY AND EFFECTIVE MANNER, WE MAY LOSE MARKET SHARE TO OUR
COMPETITORS AND OUR REVENUE MAY DECLINE.
We have recently released the first version of our OpenBusiness Gateway and
OpenBusiness Portal and plan to release enhancements to, and new versions of,
this line of products. The market for Internet-based B2Bi solutions is
characterized by rapid technological change and new and improved product
introductions. If we cannot develop our planned enhancements to, and new
versions of, our OpenBusiness products in a timely and effective manner, we may
lose market share to our competitors and our revenue may decline.
We may not be able to successfully complete the development of currently
planned or future enhancement or new versions for a number of reasons. Because
of the complexity of our OpenBusiness products, our internal testing and
customer testing may reveal desirable feature enhancements that could lead us to
postpone the release of new versions. Also, the reallocation of resources from
any postponement could cause delays in the development and release of future
enhancements to, and new versions of, our currently available OpenBusiness
products. Any failed or delayed development efforts could harm our operating
results and lower our stock price.
IF OUR OPENBUSINESS PRODUCTS CONTAIN DEFECTS, WE COULD LOSE CUSTOMERS AND
REVENUE.
Products as complex as ours often contain known errors, undetected errors
and performance problems. Software developers frequently find many serious
defects during the period immediately following introduction of new software or
enhancements to existing software. These defects may be present in the recent
release of our OpenBusiness products or our planned releases of enhancements to
our OpenBusiness products. Although we attempt to resolve all errors that we
believe our customers would consider to be serious, our software is not
error-free. Our customers may consider as serious those known errors that we
consider to be minor. We or our customers may discover undetected errors and
performance problems in the future. Defects in our software could lead to:
- delays in customer acceptance of our product;
- loss of existing customers;
- harm to our reputation; and
- liability to our customers or third parties.
Thus, any defects could result in lost revenue and could harm our business
and lower our stock price.
9
<PAGE>
OUR EXECUTIVE OFFICERS ARE CRITICAL TO OUR BUSINESS, BUT MAY NOT REMAIN WITH US
IN THE FUTURE.
Our future success depends upon the continued service of our executive
officers, and none of our executive officers are bound by an employment
agreement for any specific term. The loss of services of one or more of our
executive officers, or their decision to join a competitor or compete directly
or indirectly with us, could harm our business and lower our stock price. In
particular, David Norris, our chairman of the board, chief executive officer and
president, would be especially difficult to replace and his departure could harm
our business and lower our stock price.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, OUR PROFITABILITY AND
COMPETITIVE POSITION MAY SUFFER.
Our success depends heavily upon our proprietary technology and other
intellectual property rights. Our profitability could suffer if third parties
infringe upon our intellectual property rights or misappropriate our technology.
To protect our proprietary technology, we have relied primarily on a combination
of employment agreements, contractual provisions and copyright, trade secret,
trademark and patent laws. We have 17 pending patent applications for technology
related to our OpenBusiness products, but we cannot assure you that these
patents will be successfully issued. Our means of protecting our intellectual
property rights in the United States or abroad may not be adequate to fully
protect our intellectual property rights.
A few of our agreements would allow others to obtain the source code for our
products upon our bankruptcy or similar reorganization, which may limit our
ability to protect our intellectual property rights in the future. Litigation to
enforce our intellectual property rights or protect our trade secrets could
result in substantial costs and may not be successful. Also, the laws of some
foreign countries may not protect our intellectual property rights to the same
extent as do the laws of the United States. Any inability to protect our
intellectual property rights could seriously harm our business, stock price and
ability to compete in the B2Bi solutions market.
OTHERS MAY CLAIM THAT WE INFRINGE UPON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH
COULD INCREASE OUR COSTS AND LOWER OUR STOCK PRICE.
We expect that others may bring claims of infringement against us, which may
be with or without merit. We believe that B2Bi products and services may be
increasingly subject to infringement claims as the number of competitors in our
industry segment grows and the functionality of products in different industry
segments overlaps. Any litigation to defend against claims of infringement or
invalidity could result in substantial costs and diversion of resources. Also, a
party making such a claim could secure a judgment that requires us to pay
substantial damages or that prevents us from licensing our products. Any of
these events could harm our business, and lower our stock price.
We have also agreed, and may agree in the future, to indemnify some of our
customers against claims that our software infringes upon the intellectual
property rights of others. We could incur substantial costs in defending
ourselves and our customers against infringement claims. If a claim of
infringement is made against us, we and our customers may need to obtain one or
more licenses from others. We, or our customers, may be unable to obtain
necessary licenses from others at a reasonable cost, or at all. Defense of any
lawsuit or failure to obtain any required licenses could harm our business and
result in decline in our stock price.
ACQUISITIONS OF COMPANIES OR TECHNOLOGIES OR JOINT VENTURE INVESTMENTS MAY
DISRUPT OUR BUSINESS OR DILUTE STOCKHOLDER VALUE.
We may acquire companies, products or technologies or enter into joint
ventures. If we are unable to integrate these acquisitions with our existing
operations, we may not receive the intended benefits of the acquisitions. Also,
acquisitions may subject us to unanticipated liabilities or risks. Any
acquisition or joint venture may temporarily disrupt our operations and divert
management's attention from day-to-day operations.
10
<PAGE>
If we make future acquisitions, we may incur debt or issue equity securities
to finance the acquisitions. The issuance of equity securities for any
acquisition could cause our stockholders to suffer significant dilution. Also,
our profitability may suffer due to acquisition-related expenses, additional
interest expense or amortization costs for acquired goodwill and other
intangible assets and operating losses generated by the acquired entity or joint
venture. Acquisitions and joint ventures that do not successfully complement our
existing operations may harm our business and cause our stock price to decrease.
We currently rely upon our strategic relationships. If these relationships
terminate, we could lose important opportunities, our revenue could decline and
our stock price could fall.
We rely upon strategic relationships with system integrators and other
technology leaders. These relationships expose our products to many potential
customers to which we may not otherwise have access. Also, these relationships
provide us with insights into new technology and with third-party service
providers that our customers can use for implementation assistance. Maintaining
and expanding these relationships is a part of our business strategy. However,
some of our current and potential strategic partners are actual or potential
competitors, which may impair the viability of these relationships. Termination
of, or failure to expand, any of these relationships with these organizations
could cause us to lose important opportunities, including sales and marketing
opportunities, and our our revenue and stock price may decline.
IF WE DO NOT MEET THE CHANGING NEEDS OF OUR CUSTOMERS IN THE MARKET FOR B2BI
SOLUTIONS, OUR EXISTING PRODUCTS COULD BECOME OBSOLETE OR UNMARKETABLE.
The characteristics of the market for B2Bi solutions include rapidly
changing technology, evolving industry standards and frequent new product
announcements. To keep our OpenBusiness products from becoming unmarketable or
obsolete, we must adapt to market changes by continually improving the
performance, features and reliability of our products. We could incur
substantial costs to modify our products and professional services in order to
adapt to these changes. Our incurring significant costs without adequate results
or inability to adapt rapidly to these changes could harm our business and cause
our stock price to fall.
Also, our customers and their B2B partners use a wide variety of constantly
changing hardware, applications and server platforms. If our products are unable
to support a variety of these or are unable to adapt to the rapidly changing
B2Bi market, our products may fail to gain and maintain broad market acceptance,
causing our operating results and stock price to decline.
WE TYPICALLY EXPERIENCE SEASONAL VARIATIONS IN OUR SALES. THESE VARIATIONS MAY
LEAD TO FLUCTUATIONS IN OUR REVENUE AND OPERATING RESULTS AND MAY CAUSE OUR
STOCK PRICE TO FALL.
We have experienced and expect to continue to experience seasonality in the
sales of our OpenBusiness products. For example, we anticipate that sales may be
lower in our first fiscal quarter each year due to patterns in the capital
budgeting and purchasing cycles of our current and prospective customers. These
seasonal variations in our sales may lead to fluctuations in our revenue and
quarterly operating results. Any fluctuations could cause our stock price to
fall.
IF THE MARKET FOR INTERNET-BASED B2BI SOLUTIONS DOES NOT EXPAND, SALES OF OUR
PRODUCTS AND SERVICES WILL SUFFER.
The Internet-based B2Bi solutions market is relatively new and may not grow
as fast as we expect. Our potential customers are just beginning to seek
solutions for managing interactions with their trading partners, and concerns
about the security, reliability and quality of the services delivered over the
Internet may inhibit the growth of our market. If Internet-based B2Bi solutions
fail to achieve market acceptance, sales of our products and services and our
business will suffer.
11
<PAGE>
RISKS RELATED TO OUR INDUSTRY
IF THE INTERNET DOES NOT CONTINUE TO GROW AS A METHOD OF CONDUCTING BUSINESS,
DEMAND FOR OUR PRODUCTS AND SERVICES WILL SLOW AND OUR REVENUE COULD DECLINE.
Demand for our products and services depends upon the widespread acceptance
and use of the Internet as an effective medium for B2B commerce. The failure of
the Internet to continue to develop as a commercial or business medium could
harm our business, revenue and stock price. A number of factors could limit the
acceptance and use of the Internet for B2B commerce. These factors include the
growth and use of the Internet in general, the relative ease of conducting
business on the Internet and the efficiencies and improvements that conducting
commerce on the Internet provides.
DEMAND FOR OUR PRODUCTS AND SERVICES DEPENDS UPON THE SPEED AND RELIABILITY OF
THE INTERNET AND OUR CUSTOMERS' INTERNAL NETWORKS.
The recent growth in Internet traffic has caused frequent periods of
decreased operating performance of systems and applications accessed over the
Internet. If Internet usage continues to grow rapidly, the underlying
infrastructure may not be able to support these demands, and performance and
reliability may decline. If outages or delays on the Internet occur frequently
or increase in frequency, B2B commerce could grow more slowly or decline, which
may reduce the demand for our OpenBusiness solution. The speed and reliability
of both the Internet and our customers' internal networks limit the ability of
our products to satisfy our customers' needs. Failure to improve the speed and
reliability of the Internet may hinder the ability of our customers to utilize
our solution, and our business may suffer, and our stock price may decline.
INTERNET COMMERCE INVOLVES INCREASED SECURITY RISKS AND MAY DETER FUTURE USE OF
OUR PRODUCTS AND SERVICES.
Internet-based B2B commerce depends upon the secure transmission of
confidential information over public networks. Advances in computer capabilities
or new discoveries in the field of cryptography may result in a compromise or
breach of the security features contained in our software or the algorithms that
our customers and their B2B partners use to protect content and transactions
over the Internet or proprietary information in our customers' and their
partners' databases. Anyone who is able to circumvent security measures could
misappropriate proprietary, confidential customer information or cause
interruptions in our customers' and their partners' operations. Our customers
and their business partners may need to incur significant costs to protect
against security breaches or to alleviate problems caused by breaches, reducing
their demand for our products and services. Further, a well-publicized
compromise of security could deter businesses from using the Internet to conduct
transactions that involve transmitting confidential information. The failure of
the security features of our products to prevent security breaches, or well
publicized security breaches affecting the Internet in general, could
significantly harm our business and our stock price.
CHANGES IN THE LAWS RELATING TO THE INTERNET COULD ADVERSELY AFFECT OUR
PROFITABILITY BY DECREASING THE DEMAND FOR OUR PRODUCTS AND SERVICES.
Regulation of the Internet is largely unsettled. The adoption of laws or
regulations that increase the costs or administrative burdens of doing business
using the Internet could cause companies to seek an alternative means of
transacting business. If the adoption of new Internet laws or regulations causes
companies to seek alternative methods for conducting business, the demand for
our products and services could decrease, harming our profitability, business
and stock price.
12
<PAGE>
RISKS RELATED TO THIS OFFERING
A FEW OF OUR EXISTING STOCKHOLDERS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK.
THESE STOCKHOLDERS WILL HAVE SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING
STOCKHOLDER APPROVAL, WHICH WILL LIMIT YOUR VOTING POWER AND COULD DELAY OR
PREVENT A CHANGE OF CONTROL.
Following this offering, our officers, directors and their affiliates will
beneficially own or control approximately 50.7% of our common stock. In
combination with our 5% stockholders, following this offering this group
beneficially owns approximately 69.5% of the outstanding shares of our stock. As
a result, if these persons act together, they will have the ability to control
all matters submitted to our stockholders for approval, including the election
and removal of directors and the approval of any merger, consolidation or sale
of all or substantially all of our assets. These stockholders may make decisions
that are adverse to your interests and could prevent or delay a change of
control.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
Sales of a significant number of shares of our common stock after this
offering could cause the market price of our common stock to decline or could
adversely affect our ability to raise money through the sale of additional
equity securities. Our directors, executive officers and 5% stockholders
collectively will beneficially own 26,083,731 shares of common stock following
this offering, not including shares they have the right to acquire through the
exercise of options. All of these persons and entities have entered into a
lock-up agreement, prohibiting them from selling or otherwise disposing of any
shares for 180 days after the date of this prospectus without the approval of
Donaldson, Lufkin & Jenrette. However, holders who have not been our officers,
directors or affiliates of our company on or since the date of this prospectus
may be eligible to sell their shares 90 days after the date of this prospectus.
Also, Donaldson, Lufkin & Jenrette has approved pledges of up to 3,609,446
shares of common stock to secure loans. If a default occurs under a loan, the
lender may foreclose upon and sell any pledged shares. When the lock-up
agreements expire, all of the shares held by our directors, executive officers
and 5% stockholders will become eligible for sale, subject to limitations
provided by applicable law.
WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS, AND THE INVESTMENT OF
THESE PROCEEDS MAY NOT YIELD RETURNS THAT YOU WILL CONSIDER SUFFICIENT.
We have not allocated most of the net proceeds of this offering for specific
purposes. Thus, our management has broad discretion over how we use these
proceeds and could spend most of these proceeds in ways with which our
stockholders may not agree. Our management may invest the proceeds in ways that
do not yield returns that you will consider sufficient.
THERE MAY NOT BE AN ACTIVE TRADING MARKET FOR OUR STOCK AFTER THE OFFERING,
CAUSING YOU TO LOSE ALL OR PART OF YOUR INVESTMENT.
Before this offering, there has not been a public market for our common
stock. An active public market for our common stock may not develop or continue
after this offering. We have negotiated with representatives of the underwriters
to determine the initial public offering price. The trading prices of many
technology companies' stocks reflect financial ratios substantially above
historic levels. We cannot be certain that these ratios will continue. As a
result, the trading market price of our common stock may decline below our
initial public offering price.
THE PRICE VOLATILITY OF INTERNET-RELATED STOCKS MAY CAUSE OUR STOCK PRICE TO
DECLINE.
The stock market, and specifically the stock prices of Internet-related
companies, has been very volatile. This volatility is often not related to the
operating performance of the companies. This broad market volatility and
industry volatility may substantially reduce the price of our common stock.
13
<PAGE>
Fluctuations in the price of our common stock may affect our visibility and
credibility in the market for B2Bi solutions. If broad fluctuations occur in the
market price of our common stock, you may be unable to resell your shares if at
or above the offering price.
IF THE VOLATILITY IN THE STOCK PRICE OF INTERNET-RELATED COMPANIES CAUSES OUR
STOCK PRICE TO FALL, PLAINTIFFS MAY BRING CLASS ACTIONS SUITS AGAINST US.
Our stock price may decline or become volatile because of the price
volatility of Internet-related stocks. Plaintiffs have often brought securities
class action litigation against companies that experience volatility in the
market price of their securities. Litigation brought against us could result in
substantial costs to us in defending against a lawsuit and could divert
management's attention from our business.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION OF BOOK VALUE PER SHARE
FROM THE PRICE YOU PAY FOR ANY SHARES OF COMMON STOCK THAT YOU PURCHASE IN THIS
OFFERING.
The initial offering price of our common stock will be significantly higher
than the net tangible book value per share of the outstanding common stock
immediately after this offering. Assuming an initial public offering price of
$10.00 per share of common stock, you will incur immediate dilution of $8.01 in
the net tangible book value per share of common stock from the price you pay for
any shares you purchase in this offering.
A CUSTOMER CONTRACT, OUR CORPORATE GOVERNANCE DOCUMENTS AND DELAWARE LAW CONTAIN
ANTI-TAKEOVER PROVISIONS.
We have granted one of our licensees a right of first refusal to acquire a
significant portion of our OpenBusiness Infrastructure Platform if we sell
ObjectSpace or the licensed technology assets. This right of first refusal,
along with provisions of our certificate of incorporation, our bylaws and
Delaware law, could make it more difficult to acquire us, even if doing so would
be beneficial to our stockholders.
14
<PAGE>
FORWARD-LOOKING STATEMENTS AND MARKET DATA
Some of the statements under "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus constitute forward-looking
statements. These statements relate to future events or other future financial
performance, and are identified by terminology such as may, will, should,
expects, scheduled, plans, intends, anticipates, believes, estimates, aims,
potential or continue or the negative of these terms and other comparable
terminology. These statements are only predictions. In evaluating these
statements, you should specifically consider various factors, including the
risks outlined under "Risk Factors." These factors may cause our actual results
to differ materially from any forward-looking statement.
This prospectus contains market data related to our business, the Internet
and e-commerce. This market data includes projections that are based on a number
of assumptions. If these assumptions turn out to be incorrect, actual results
may differ from the projections based on these assumptions. As a result, our
markets may not grow at the rates projected by these data, or at all. The
failure of these markets to grow at these projected rates may have a material
adverse effect on our business, results of operations, financial condition and
stock price.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot assure you that our future results, levels
of activity, performance or goals will be achieved. We undertake no obligation
to update any of the forward-looking statements after the date of this
prospectus to conform these statements to reflect the occurrence of
unanticipated events.
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the 7,500,000
shares of common stock we are selling in this offering will be approximately
$68.6 million, at an assumed initial public offering price of $10.00 per share,
after deducting estimated offering expenses of approximately $1.2 million and
underwriters' discounts and commissions payable by us. If the underwriters
exercise their over-allotment option in full, we estimate that the net proceeds
to us will be approximately $79.1 million.
We intend to use the net proceeds we receive from this offering primarily
for working capital and other general corporate purposes, including funding
operating losses. We also intend to use approximately $3.0 million of the net
proceeds of this offering to repay outstanding indebtedness. Of this amount,
approximately:
- $2.2 million bears interest at an effective rate of approximately 15.2%
and matures in June 2001; and
- $800,000 bears interest at a variable interest rate that at June 30, 2000
was approximately 10.2% and matures in November 2001.
Other than the repayment of this indebtedness, we have not identified
specific uses for the net proceeds of this offering, and we will have broad
discretion to invest and use the net proceeds. Pending their use, we plan to
invest the net proceeds in interest-bearing, investment grade securities. We may
use a portion of the net proceeds to acquire or invest in technology or
businesses that are complementary to our business, although we have no current
plans to do this.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the future. We
currently intend to retain any earnings for use in the operation of our
business. Payment of any future dividends will be at the discretion of our board
of directors after taking into account various factors, including our financial
condition, operating
15
<PAGE>
results, current and anticipated cash needs and plans for expansion. Also, the
terms of our revolving line of credit prohibit us from paying dividends without
the lender's consent.
CORPORATE INFORMATION
We were initially incorporated in Texas in August 1992 and reincorporated in
Delaware in December 1997. Our principal executive offices are located at 14850
Quorum Drive, Suite 500, Dallas, Texas 75240, and our telephone number is
(972) 726-4100. Our website address is www.objectspace.com. THE INFORMATION
CONTAINED ON OUR WEBSITE DOES NOT CONSTITUTE A PART OF THIS PROSPECTUS.
We have registered the trademark ObjectSpace-Registered Trademark- in the
United States and have applied for the trademark OpenBusiness-TM- in the United
States. All other trademarks or tradenames referred to in this prospectus are
the property of their owners.
16
<PAGE>
CAPITALIZATION
The following table presents our cash position, current portion of long-term
obligations and total capitalization as of June 30, 2000.
The pro forma column of the table gives effect to the automatic:
- conversion of all outstanding shares of our preferred stock into shares of
common stock upon the closing of this offering; and
- elimination of redemption rights on 1,144,433 shares of our common stock
upon the closing of this offering.
The pro forma as adjusted information in the table below gives effect to the
sale in this offering of 7,500,000 shares of common stock at an assumed price of
$10.00 per share, less estimated underwriting discounts and estimated offering
expenses payable by us, and the application of the net proceeds from this
offering as described in "Use of Proceeds."
This table should be read with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
--------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and marketable securities............ $ 8,340 $ 8,340 $ 73,940
======== ======== ========
Current portion of long-term obligations.................... $ 2,424 $ 2,424 $ 174
======== ======== ========
Long-term obligations, net of current portion............... $ 1,004 $ 1,004 $ 254
Redeemable stock and warrants:
Common stock and warrants................................. 4,342 -- --
Series A convertible preferred stock...................... 3,141 -- --
Series B convertible preferred stock...................... 15,216 -- --
-------- -------- --------
Total redeemable stock and warrants....................... 22,699 -- --
Stockholders' equity (deficit):
Preferred stock, $1.00 par value, 1,725,868 shares
authorized and no shares outstanding, actual; 5,000,000
shares authorized and no shares outstanding, pro forma
and pro forma as adjusted............................... -- -- --
Common stock, $0.01 par value, 95,000,000 shares
authorized and 20,052,726 shares outstanding, actual;
95,000,000 shares authorized and 30,364,726 shares
outstanding, pro forma; 95,000,000 shares authorized and
37,864,726 shares outstanding, pro forma as adjusted.... 201 304 379
Additional paid-in capital................................ -- 22,596 91,121
Deferred stock compensation............................... (1,923) (1,923) (1,923)
Accumulated deficit....................................... (13,986) (13,986) (13,986)
Accumulated other comprehensive income.................... 16 16 16
-------- -------- --------
Total stockholders' equity (deficit)...................... (15,692) 7,007 75,607
-------- -------- --------
Total capitalization........................................ $ 8,011 $ 8,011 $ 75,861
======== ======== ========
</TABLE>
This table excludes:
- 5,339,457 shares issuable upon exercise of options outstanding as of
June 30, 2000;
- 4,575,093 shares available for future issuance under our stock option
plans as of June 30, 2000; and
- 434,795 shares plus that number of shares equal to $2.5 million divided by
the offering price of the common stock in this offering, issuable upon the
exercise of warrants outstanding as of June 30, 2000.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000, after giving
effect to the conversion of all outstanding shares of preferred stock into
9,167,567 shares of common stock, was approximately $6.8 million, or
approximately $0.22 per share. We have calculated our pro forma net tangible
book value per share by:
- subtracting our total liabilities from our total tangible assets; and
- dividing the difference by 30,364,726 shares of common stock outstanding,
which gives effect to the conversion of all outstanding shares of
preferred stock into shares of common stock and elimination of redemption
rights on 1,144,433 shares of common stock.
After giving effect to the sale by us of 7,500,000 shares of common stock in
this offering at an assumed initial offering price of $10.00 per share, and
after deducting the estimated underwriting discounts and commissions and
estimated offering expenses payable by us, our pro forma net tangible book value
as of June 30, 2000, would have been $75.4 million, or $1.99 per share. This
represents an immediate increase in net tangible book value of $1.77 per share
to existing stockholders and an immediate dilution in net tangible book value of
$8.01 per share to purchasers of common stock in this offering.
Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of our common stock in this offering and the
pro forma net tangible book value per share of common stock immediately after
completion of this offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $10.00
Pro forma net tangible book value per share as of
June 30, 2000........................................... $0.22
Increase per share attributable to this offering.......... 1.77
-----
Pro forma net tangible book value per share after this
offering.................................................. 1.99
------
Dilution per share to new investors......................... $ 8.01
======
</TABLE>
The following table presents, on a pro forma basis as of June 30, 2000, the
differences between the number of shares of common stock purchased from us, the
total consideration paid and the average price per share paid by existing
stockholders and by new investors purchasing shares of common stock in this
offering. The total consideration paid by new investors assumes an initial
public offering price of $10.00 per share and has not been reduced for
underwriting discounts and commissions and estimated offering expenses payable
by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing stockholders...................... 30,365 80.2% $17,193 18.6% $0.57
New investors.............................. 7,500 19.8 75,000 81.4 10.00
------ ----- ------- -----
Total.................................... 37,865 100.0% $92,193 100.0% $2.43
====== ===== ======= =====
</TABLE>
If any shares are issued upon exercise of outstanding options or warrants,
there will be further dilution to new investors.
18
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read with our financial
statements and the notes to the financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
are included elsewhere in this prospectus.
We derived the statement of operations data for the years ended
December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31,
1998 and 1999 from our financial statements, which have been audited by Ernst &
Young LLP, independent auditors, and are included elsewhere in this prospectus.
The statement of operations data from the years ended December 31, 1995 and 1996
and the balance sheet data as of December 31, 1995, 1996 and 1997 are derived
from our audited financial statements for the years then ended. The statement of
operations data for the years ended December 31, 1995 and 1996 and the balance
sheet data as of December 31, 1995 and 1996 are not included in this prospectus.
The statement of operations data for the six month periods ended June 30,
1999 and 2000 are derived from our unaudited financial statements included
elsewhere in this prospectus. We have prepared this unaudited information on the
same basis as the audited financial statements and have included all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of our financial position and operating
results for such periods. Historical results are not necessarily indicative of
future results.
The pro forma information in the table below gives effect to the automatic:
- conversion of all outstanding shares of our preferred stock into shares of
common stock, as if the shares had converted immediately upon issuance;
and
- elimination of redemption rights on 1,144,433 shares of our common stock.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
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:
Net Revenue:
License............................................ $ 588 $ 1,097 $ 1,547 $ 908 $ 5,250 $ 1,231 $ 5,548
Service............................................ 3,972 8,757 10,070 10,897 14,896 6,438 10,533
------- ------- ------- ------- ------- ------- -------
Total net revenue................................ 4,560 9,854 11,617 11,805 20,146 7,669 16,081
Cost of revenue:
License............................................ 74 97 968 714 924 467 383
Service............................................ 2,578 5,200 6,808 7,421 10,448 4,452 7,185
------- ------- ------- ------- ------- ------- -------
Total cost of revenue............................ 2,652 5,297 7,776 8,135 11,372 4,919 7,568
Gross profit......................................... 1,908 4,557 3,841 3,670 8,774 2,750 8,513
Operating expense:
Sales and marketing................................ 562 1,276 2,863 3,712 6,773 3,120 7,191
Research and development........................... 217 465 1,802 1,811 4,075 1,610 2,755
General and administrative......................... 1,884 4,394 2,965 2,808 3,956 1,821 2,251
Noncash stock compensation expense................. -- -- -- -- 232 56 342
------- ------- ------- ------- ------- ------- -------
Total operating expense.......................... 2,663 6,135 7,630 8,331 15,036 6,607 12,539
Operating loss from continuing operations............ (755) (1,578) (3,789) (4,661) (6,262) (3,857) (4,026)
Interest expense..................................... 179 161 56 249 642 299 2,446
Interest income and other, net....................... -- -- (22) (56) (257) (180) (148)
------- ------- ------- ------- ------- ------- -------
Loss from continuing operations before income
taxes.............................................. (934) (1,739) (3,823) (4,854) (6,647) (3,976) (6,324)
Income tax expense (benefit)......................... 112 17 (214) -- -- -- 67
------- ------- ------- ------- ------- ------- -------
Loss from continuing operations...................... (1,046) (1,756) (3,609) (4,854) (6,647) (3,976) (6,391)
Discontinued operations:
Income (loss) from discontinued operations......... 1,225 1,761 1,317 492 (73) (21) --
Gain on sale of discontinued operations............ -- -- -- -- 2,567 -- 4,443
------- ------- ------- ------- ------- ------- -------
Income (loss) from discontinued operations....... 1,225 1,761 1,317 492 2,494 (21) 4,443
------- ------- ------- ------- ------- ------- -------
Net income (loss).................................... 179 5 (2,292) (4,362) (4,153) (3,997) (1,948)
------- ------- ------- ------- ------- ------- -------
Accretion of redeemable preferred stock and common
stock.............................................. -- -- -- 210 5,425 2,710 2,728
------- ------- ------- ------- ------- ------- -------
Net income (loss) attributable to common
stockholders....................................... $ 179 $ 5 $(2,292) $(4,572) $(9,578) $(6,707) $(4,676)
======= ======= ======= ======= ======= ======= =======
Basic and diluted net income (loss) per common
share.............................................. $ 0.01 -- $ (0.12) $ (0.23) $ (0.49) $ (0.34) $ (0.23)
Weighted average number of common shares
outstanding........................................ 16,800 17,611 19,624 19,632 19,640 19,635 19,912
Pro forma basic and diluted net loss per common
share.............................................. $ (0.14) $ (0.06)
Shares used in computing pro forma basic and diluted
net loss per common share.......................... 30,076 30,224
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, JUNE 30,
---------------------------------------------------- ---------
1995 1996 1997 1998 1999 2000
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities....... $ 323 $2,218 $ 546 $11,327 $ 4,671 $ 8,340
Working capital........................................ (133) 3,514 1,309 10,890 4,871 5,696
Total assets........................................... 2,242 7,247 6,269 15,805 17,543 18,863
Long-term obligations, net of current portion.......... 167 64 480 3,102 177 1,004
Mandatorily redeemable convertible preferred stock,
common stock and warrants............................ -- 1,429 1,429 12,931 17,969 22,699
Total stockholders' equity (deficit)................... 302 3,865 1,588 (2,981) (11,778) (15,692)
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS WHEN YOU READ
"SELECTED FINANCIAL DATA" AND OUR FINANCIAL STATEMENTS AND RELATED NOTES
APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION AND ANALYSIS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS.
OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF FACTORS, INCLUDING THOSE DISCUSSED
UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are a leading provider of business-to-business integration, or B2Bi,
software products and professional services that enable organizations to
integrate business applications within and across organizations over the
Internet.
At our founding in August 1992, we focused on providing services to assist
organizations in developing business software applications. In March 1994, we
introduced our first software product, which supported C++ applications
development. During October 1997, with the first license of our OpenBusiness
Infrastructure Platform, we shifted our focus from the C++ product line towards
B2Bi products. In each of September 1999 and March 2000, we sold businesses that
did not align with our strategic focus on B2Bi products. Both of these
businesses are treated in our financial statements as discontinued operations.
REVENUE
We derive our revenue from selling licenses of our products to end user
companies and original equipment manufacturers, or OEMs, and providing
professional services. Our service revenue includes strategic information
technology consulting and custom program development. Our services are typically
sold independently of licenses of our software. Historically, service revenue
has constituted the substantial majority of our total net revenue. However, as a
result of the increasing acceptance of our OpenBusiness products, license
revenue has comprised an increasingly larger percentage of our total net
revenue. Specifically, license revenue accounted for approximately 26.1% and
34.5% of our total net revenue in 1999 and the six months ended June 30, 2000,
respectively, compared to approximately 7.7% and 16.1% of our total net revenue
in 1998 and the six months ended June 30, 1999, respectively. We expect license
revenue to continue to increase as a percentage of our total net revenue.
We recognize license revenue on product licenses to end user companies when
all of the following have occurred:
- the product has been delivered;
- the license fee is fixed and determinable;
- persuasive evidence of an arrangement exists;
- collection of the resulting receivable is considered probable; and
- vendor-specific objective evidence exists to allow allocation of the total
fee to elements of the arrangement.
License revenue from resale of our products by OEMs is recognized at the
time the OEM delivers our product to their customer. Our license transactions
generally do not create recurring revenue streams, other than for post-contract
support. Historically, we have not experienced significant returns or exchanges
of our products.
Service revenue includes professional services, maintenance, support and
reimbursable expenses. Service revenue is billed on either a time-and-materials
or fixed-fee basis. The vast majority of our service revenue is derived from
professional service engagements performed on a time-and-materials
21
<PAGE>
basis. Service revenue realized from time-and-materials professional services
contracts is recognized as the service is provided. Service revenue realized
from fixed-fee professional services contracts is recognized using the
percentage of completion method based on hours incurred versus estimated hours
to complete. Revenue from post-contract customer support agreements, or
maintenance, is recognized ratably over the term of the related agreements,
which typically have a 12-month term. Billings in advance of revenue recognition
are recorded as unearned revenue.
MARKETING
We market our products and services globally through our direct sales force,
resellers and system integrators. We believe our participation in a number of
technology and standards organizations, and the conformity of our products to
those standards, has increased the penetration and market acceptance of our B2Bi
solutions.
OPERATING LOSSES
Although we have experienced revenue growth, we have incurred significant
losses since our founding, and as of June 30, 2000, had an accumulated deficit
of approximately $14.0 million. We believe our success depends on rapidly
increasing our customer base, further developing our B2Bi products and
introducing creative product enhancements into the marketplace. We intend to
continue to invest heavily in sales and marketing and research and development.
DISCONTINUED OPERATIONS
In September 1999, we completed the sale of our educational services
division, which provided software training services. This disposition resulted
in a gain on sale of $2.6 million. In March 2000, we completed the sale of our
FAB solutions division, which provided manufacturing software solutions for the
semiconductor industry. This disposition resulted in a gain on sale of
approximately $4.4 million. Both of these divisions are treated as discontinued
operations, and as a result their results of operations are presented as income
(loss) from discontinued operations for all periods presented.
22
<PAGE>
RESULTS OF OPERATIONS
The following table presents our statement of operations data as a
percentage of total net revenue for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
Net Revenue:
License................................................ 13.3% 7.7% 26.1% 16.1% 34.5%
Service................................................ 86.7 92.3 73.9 83.9 65.5
------ ------ ------ ----- -----
Total net revenue.................................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
License................................................ 8.3 6.0 4.6 6.1 2.4
Service................................................ 58.6 62.9 51.9 58.1 44.7
------ ------ ------ ----- -----
Total cost of revenue................................ 66.9 68.9 56.5 64.2 47.1
Gross profit............................................. 33.1 31.1 43.5 35.8 52.9
Operating expense:
Sales and marketing.................................... 24.6 31.4 33.6 40.7 44.7
Research and development............................... 15.5 15.4 20.2 21.0 17.1
General and administrative............................. 25.5 23.8 19.6 23.7 14.0
Noncash stock compensation expense..................... 0.0 0.0 1.2 0.7 2.1
------ ------ ------ ----- -----
Total operating expense.................................. 65.6 70.6 74.6 86.1 77.9
Operating loss from continuing operations................ (32.5) (39.5) (31.1) (50.3) (25.0)
Interest expense......................................... 0.5 2.1 3.2 3.9 15.2
Interest income and other, net........................... (0.2) (0.5) (1.3) (2.3) (0.9)
------ ------ ------ ----- -----
Loss from continuing operations before income tax........ (32.8) (41.1) (33.0) (51.9) (39.3)
Income tax expense (benefit)............................. (1.8) 0.0 0.0 0.0 0.4
------ ------ ------ ----- -----
Loss from continuing operations.......................... (31.0)% (41.1)% (33.0)% (51.9)% (39.7)%
====== ====== ====== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
NET REVENUE
TOTAL NET REVENUE. Total net revenue was $7.7 million for the six months
ended June 30, 1999 and $16.1 million for the six months ended June 30, 2000,
representing an increase of 109.7%.
LICENSE. License revenue was $1.2 million for the six months ended
June 30, 1999 and $5.5 million for the six months ended June 30, 2000,
representing an increase of 350.7%. The increase is attributed to increased
market acceptance of our OpenBusiness products. License revenue as a percentage
of total net revenue was 16.1% for the six months ended June 30, 1999 and 34.5%
for the six months ended June 30, 2000.
SERVICE. Service revenue was $6.4 million for the six months ended
June 30, 1999 and $10.5 million for the six months ended June 30, 2000,
representing an increase of 63.6%. The increase was a result of our ability to
sell additional services to existing customers and attract new customers. In
addition, we experienced an increase in maintenance revenue as a result of our
increased license sales. Service revenue as a percentage of total net revenue
was 83.9% for the six months ended June 30, 1999 and 65.5% for the six months
ended June 30, 2000.
COST OF REVENUE
LICENSE. Cost of license revenue consists of distribution and order
fulfillment costs, product media and packaging and documentation. Cost of
license revenue was $467,000 for the six months ended June 30, 1999 and $383,000
for the six months ended June 30, 2000, representing a decrease of 18.2%. The
decrease was a result of lower material costs resulting from our shift to
electronic documentation
23
<PAGE>
of our products instead of paper documentation. Our production and distribution
costs are relatively fixed and generally do not increase proportionately as a
result of increases in license revenue. As a percentage of license revenue, cost
of license revenue was 38.0% for the six months ended June 30, 1999 and 6.9% for
the six months ended June 30, 2000.
SERVICE. Cost of service revenue consists primarily of direct labor costs
of our professional service group. Cost of service revenue was $4.5 million for
the six months ended June 30, 1999 and $7.2 million for the six months ended
June 30, 2000, representing an increase of 61.4%. This increase was a result of
the expansion of our professional services organization to support the increased
service revenue. Personnel-related costs constitute the vast majority of our
cost of service. As a percentage of service revenue, cost of service revenue was
69.1% for the six months ended June 30, 1999 and 68.2% for the six months ended
June 30, 2000. Due to the cost of recruiting personnel with our desired skill
sets, we may choose to carry under-utilized personnel for short periods of time
rather than reduce the size of our service organization. This approach may cause
our cost of service revenue as a percentage of service revenue to vary
significantly in the future, especially on a quarterly basis.
OPERATING EXPENSE
SALES AND MARKETING. Sales and marketing expense consists primarily of
salaries, commissions, bonuses, recruiting costs, travel, marketing materials
and trade shows and other related costs. Sales and marketing expense was
$3.1 million for the six months ended June 30, 1999 and $7.2 million for the six
months ended June 30, 2000, representing an increase of 130.5%. The increase was
a result of increased spending on promotional activities for our OpenBusiness
products and an expansion of our sales force. Our marketing expenses increased
$2.1 million during the six months ended June 30, 2000 as compared to the six
months ended June 30, 1999. As a result of the increased spending on marketing
activities, sales and marketing expense increased as a percentage of total net
revenue from 40.7% in the six months ended June 30, 1999 to 44.7% for the six
months ended June 30, 2000. We intend to invest substantial resources to expand
our selling efforts and to execute marketing programs that will enhance
awareness of our products and services. As a result, we expect sales and
marketing expense to increase significantly in the future.
RESEARCH AND DEVELOPMENT. Research and development expense consists
primarily of personnel and related expenses and the equipment and software
required to develop, test and enhance products. Research and development expense
was $1.6 million for the six months ended June 30, 1999 and $2.8 million for the
six months ended June 30, 2000, representing an increase of 71.1%. The increase
was due to increased personnel related costs resulting from our expansion of the
development efforts related to our OpenBusiness products. Research and
development expense as a percentage of total net revenue was 21.0% for the six
months ended June 30, 1999 and 17.1% for the six months ended June 30, 2000. We
believe that continued investment in research and development is vital to our
future, and we plan to accelerate the development of new products. As a result,
we expect to continue to increase our research and development expenditures.
GENERAL AND ADMINISTRATIVE. General and administrative expense consists
primarily of salaries and other related costs for finance, human resources and
other administrative personnel, as well as accounting, legal and other
professional fees. General and administrative expense was $1.8 million for the
six months ended June 30, 1999 and $2.3 million for the six months ended
June 30, 2000, representing an increase of 23.6%. The increase was a result of
increased personnel related expense due to the hiring of additional personnel in
our administrative departments. General and administrative expense as a
percentage of total net revenue declined from 23.7% in the six months ended
June 30, 1999 to 14.0% in the six months ended June 30, 2000. We expect general
and administrative costs to increase in the future, as we expect to add
personnel to support our expanding operations, to incur additional costs related
to the growth of our business and to incur the ongoing costs of being a public
company.
24
<PAGE>
NONCASH STOCK COMPENSATION. During 1999, as well as during the six months
ended June 30, 2000, we recorded deferred stock compensation related to stock
options issued to employees with an exercise price below the deemed fair value
of the stock options as of the dates of grant. This charge represents the
difference between the deemed fair value of the stock options on the date of
grant, based on an independent appraisal commissioned by us, and the exercise
price of the stock options. Deferred stock compensation charges are being
amortized over the four-year vesting period of the related stock options. The
resulting noncash stock compensation expense was $56,000 for the six months
ended June 30, 1999 and $342,000 for the six months ended June 30, 2000.
INTEREST EXPENSE
Interest expense was $299,000 for the six months ended June 30, 1999 and
$2.4 million for the six months ended June 30, 2000, representing an increase of
717.0%. The increase in interest expense is a result of accretion of put
warrants issued in connection with our $3.0 million of subordinated
indebtedness. As a result of the increase in our estimate of fair value of these
warrants, the amount of accretion recorded as interest expense increased from
$34,000 for the six months ended June 30, 1999 to $2.2 million for the six
months ended June 30, 2000. We plan to use a portion of the proceeds from this
offering to repay this subordinated indebtedness in its entirety.
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NET REVENUE
TOTAL NET REVENUE. Total net revenue was $11.6 million in 1997,
$11.8 million in 1998 and $20.1 million in 1999, representing increases of 1.6%
from 1997 to 1998 and 70.6% from 1998 to 1999. Four customers in 1997, two
customers in 1998 and two customers in 1999 individually accounted for over
10.0% of our total net revenue in those fiscal years. In the aggregate, these
customers accounted for 65.7% of total net revenue in 1997, 36.2% in 1998 and
46.1% in 1999.
LICENSE. License revenue was $1.5 million in 1997, $908,000 in 1998 and
$5.3 million in 1999, representing a decrease of 41.3% from 1997 to 1998 and an
increase of 478.2% from 1998 to 1999. The decrease in 1998 was due to a shift in
focus of our sales and marketing staff from our C++ line of products, which
constituted the majority of our license revenue in 1997, to our OpenBusiness
product line. Our OpenBusiness suite of products serves an emerging market,
which results in longer sales cycles than our C++ products. As a result, the
increase in 1999 was due to increased market acceptance of our OpenBusiness
product line and the success of our earlier marketing efforts. The majority of
our license revenue in 1999 resulted from a large transaction which was
completed during the fourth quarter. Consistent with our typical transactions,
we do not anticipate this transaction to create any recurring revenue, other
than for post-contract support. License revenue as a percentage of total net
revenue was 13.3% in 1997, 7.7% in 1998 and 26.1% in 1999.
SERVICE. Service revenue was $10.1 million in 1997, $10.9 million in 1998
and $14.9 million in 1999, representing increases of 8.2% from 1997 to 1998 and
36.7% from 1998 to 1999. These increases were due to our ability to sell
additional services to existing customers, attract new customers and increase
the size of our professional services engagements. The increase in 1999 was also
due, in part, to additional development projects utilizing our OpenBusiness
products. Service revenue as a percentage of total net revenue was 86.7% in
1997, 92.3% in 1998 and 73.9% in 1999.
COST OF REVENUE
LICENSE. Cost of license revenue was $1.0 million in 1997, $714,000 in 1998
and $924,000 in 1999, representing a decrease of 26.2% from 1997 to 1998 and an
increase of 29.4% from 1998 to 1999. The decrease in cost of license revenue in
1998 was due to a shift in product mix to our OpenBusiness products, which
resulted in lower license revenue. The increase in cost of license revenue in
1999 was due to increased revenue from licenses of our OpenBusiness products. As
a percentage of license revenue, cost of license revenue was 62.6% in 1997,
78.6% in 1998 and 17.6% in 1999. The percentage
25
<PAGE>
decrease in 1999 was due to our relatively fixed production and distribution
costs being spread over a larger revenue base.
SERVICE. Cost of service revenue was $6.8 million in 1997, $7.4 million in
1998 and $10.4 million in 1999, representing increases of 9.0% from 1997 to 1998
and 40.8% from 1998 to 1999. The increases in cost of service revenue were due
to an increase in the number of personnel from 43 in January 1997 to 73 in
December 1999 to support the increase in service revenue. As a percentage of
service revenue, cost of service revenue was 67.6% in 1997, 68.1% in 1998 and
70.1% in 1999. These increases are due to the use of higher cost outside
contractors.
OPERATING EXPENSE
SALES AND MARKETING. Sales and marketing expense was $2.9 million in 1997,
$3.7 million in 1998 and $6.8 million in 1999, representing increases of 29.7%
from 1997 to 1998 and 82.5% from 1998 to 1999. The increases in sales and
marketing expense were related to increased hiring and higher commissions and
bonuses. We also increased our spending on trade shows and other marketing
activities to increase awareness of our OpenBusiness products. Sales and
marketing expense as a percentage of total net revenue was 24.6% in 1997, 31.4%
in 1998 and 33.6% in 1999.
RESEARCH AND DEVELOPMENT. Research and development expense was
$1.8 million in 1997, $1.8 million in 1998 and $4.1 million in 1999,
representing increases of 0.5% from 1997 to 1998 and 125.0% from 1998 to 1999.
The increase from 1998 to 1999 was due to increases in our research and
development personnel dedicated to the development of our OpenBusiness products
and related compensation expense. Research and development expense as a
percentage of total net revenue was 15.5% in 1997, 15.4% in 1998 and 20.2% in
1999.
GENERAL AND ADMINISTRATIVE. General and administrative expense was
$3.0 million in 1997, $2.8 million in 1998 and $4.0 million in 1999,
representing a decrease of 5.3% from 1997 to 1998 and an increase of 40.9% from
1998 to 1999. The increase in 1999 was related to increased personnel-related
costs in administrative functions, including information technology, human
resources and finance and accounting, to support the growth of our business.
General and administrative expense as a percentage of total net revenue was
25.5% in 1997, 23.8% in 1998 and 19.6% in 1999, reflecting increasing revenue.
NONCASH STOCK COMPENSATION. During 1999, we recorded $2.0 million of
deferred stock compensation from stock options issued to employees. As a result,
$337,000 of noncash stock compensation expense was recognized during 1999,
$105,000 of which was attributed to discontinued operations. We did not incur
any stock-based compensation expense before 1999.
INTEREST EXPENSE
Interest expense was $56,000 in 1997, $249,000 in 1998 and $642,000 in 1999,
representing increases of 346.7% from 1997 to 1998 and 157.6% from 1998 to 1999.
The increases were due to approximately $3.0 million of subordinated
indebtedness incurred in June 1998.
DISCONTINUED OPERATIONS
In September 1999, we completed the sale of our educational services
division for $2.9 million, resulting in a gain on sale of $2.6 million. Also, in
March 2000, we sold our FAB solutions division, resulting in a gain on sale of
approximately $4.4 million. The results of operations for both educational
services and FAB solutions are reported as discontinued operations for all
periods presented.
INCOME TAXES
No provision for income taxes was recorded in 1998 or 1999, as we incurred
net losses. During 1997, we recognized a tax benefit of $214,000 related to the
change in our deferred tax position from a net deferred tax liability to a net
deferred tax asset, which was completely offset by a valuation allowance.
26
<PAGE>
QUARTERLY RESULTS OF CONTINUING OPERATIONS
The following table shows unaudited quarterly financial data for the ten
quarterly periods ended June 30, 2000. We obtained this information from
unaudited quarterly financial statements and, in the opinion of our management,
it includes all adjustments necessary to present fairly the financial results
for the periods. These adjustments consist of only normal recurring adjustments.
The quarterly results are not necessarily indicative of future results of
operations. Our quarterly financial results are subject to seasonality and
fluctuations because of many factors.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue:
License.............. $ 230 $ 163 $ 183 $ 332 $ 175 $ 1,056 $ 883 $3,137
Service.............. 2,202 2,651 2,794 3,250 3,039 3,399 4,022 4,435
------- ------ ------- ------- ------- ------- ------- ------
Total net
revenue.......... 2,432 2,814 2,977 3,582 3,214 4,455 4,905 7,572
Cost of revenue:
License.............. 138 153 178 244 226 242 238 218
Service.............. 1,623 1,737 1,817 2,245 2,043 2,408 2,588 3,408
------- ------ ------- ------- ------- ------- ------- ------
Total cost of
revenue.......... 1,761 1,890 1,995 2,489 2,269 2,650 2,826 3,626
Gross profit........... 671 924 982 1,093 945 1,805 2,079 3,946
Operating expense:
Sales and
marketing.......... 605 624 1,213 1,270 1,375 1,745 1,614 2,040
Research and
development........ 452 487 371 502 718 892 1,099 1,366
General and
administrative..... 640 677 663 827 847 975 865 1,269
Noncash stock
compensation
expense............ -- -- -- -- -- 56 57 119
------- ------ ------- ------- ------- ------- ------- ------
Total operating
expense.......... 1,697 1,788 2,247 2,599 2,940 3,668 3,635 4,794
------- ------ ------- ------- ------- ------- ------- ------
Operating loss from
continuing
operations........... (1,026) (864) (1,265) (1,506) (1,995) (1,863) (1,556) (848)
Interest expense....... 46 46 129 28 160 139 172 170
Interest income and
other, net........... (8) (5) (19) (25) (108) (73) (27) (48)
------- ------ ------- ------- ------- ------- ------- ------
Loss from continuing
operations........... $(1,064) $ (905) $(1,375) $(1,509) $(2,047) $(1,929) $(1,701) $ (970)
======= ====== ======= ======= ======= ======= ======= ======
<CAPTION>
THREE MONTHS ENDED
--------------------
MARCH 31, JUNE 30,
2000 2000
(IN THOUSANDS)
<S> <C> <C>
Net Revenue:
License.............. $ 2,533 $ 3,015
Service.............. 5,069 5,464
------- -------
Total net
revenue.......... 7,602 8,479
Cost of revenue:
License.............. 206 176
Service.............. 3,634 3,552
------- -------
Total cost of
revenue.......... 3,840 3,728
Gross profit........... 3,762 4,751
Operating expense:
Sales and
marketing.......... 2,533 4,658
Research and
development........ 1,297 1,458
General and
administrative..... 1,189 1,062
Noncash stock
compensation
expense............ 172 170
------- -------
Total operating
expense.......... 5,191 7,348
------- -------
Operating loss from
continuing
operations........... (1,429) (2,597)
Interest expense....... 1,514 932
Interest income and
other, net........... (68) (80)
------- -------
Loss from continuing
operations........... $(2,875) $(3,449)
======= =======
</TABLE>
27
<PAGE>
AS A PERCENTAGE OF TOTAL NET REVENUE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue:
License.............. 9.4% 5.8% 6.1% 9.3% 5.4% 23.7% 18.0% 41.4%
Service.............. 90.6 94.2 93.9 90.7 94.6 76.3 82.0 58.6
------ ------ ------ ------ ------ ------ ------ ------
Total net
revenue.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
License.............. 5.7 5.5 6.0 6.8 7.0 5.4 4.9 2.9
Service.............. 66.7 61.7 61.0 62.7 63.6 54.1 52.8 45.0
------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenue.......... 72.4 67.2 67.0 69.5 70.6 59.5 57.7 47.9
Gross profit........... 27.6 32.8 33.0 30.5 29.4 40.5 42.3 52.1
Operating expense:
Sales and
marketing.......... 24.9 22.2 40.7 35.4 42.8 39.2 32.9 26.9
Research and
development........ 18.6 17.3 12.5 14.0 22.3 20.0 22.4 18.0
General and
administrative..... 26.3 24.1 22.3 23.1 26.4 21.9 17.6 16.8
Noncash stock
compensation
expense............ 0.0 0.0 0.0 0.0 0.0 1.2 1.2 1.6
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expense.......... 69.8 63.6 75.5 72.5 91.5 82.3 74.1 63.3
------ ------ ------ ------ ------ ------ ------ ------
Operating loss from
continuing
operations........... (42.2) (30.8) (42.5) (42.0) (62.1) (41.8) (31.8) (11.2)
Interest expense....... 1.9 1.6 4.3 0.8 5.0 3.1 3.5 2.2
Interest income and
other, net........... (0.3) (0.2) (0.6) (0.7) (3.4) (1.6) (0.6) (0.6)
------ ------ ------ ------ ------ ------ ------ ------
Loss from continuing
operations........... (43.8)% (32.2)% (46.2)% (42.1)% (63.7)% (43.3)% (34.7)% (12.8)%
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
THREE MONTHS ENDED
--------------------
MARCH 31, JUNE 30,
2000 2000
<S> <C> <C>
Net Revenue:
License.............. 33.3% 35.6%
Service.............. 66.7 64.4
------ ------
Total net
revenue.......... 100.0 100.0
Cost of revenue:
License.............. 2.7 2.1
Service.............. 47.8 41.9
------ ------
Total cost of
revenue.......... 50.5 44.0
Gross profit........... 49.5 56.0
Operating expense:
Sales and
marketing.......... 33.3 54.9
Research and
development........ 17.1 17.2
General and
administrative..... 15.6 12.5
Noncash stock
compensation
expense............ 2.3 2.0
------ ------
Total operating
expense.......... 68.3 86.6
------ ------
Operating loss from
continuing
operations........... (18.8) (30.6)
Interest expense....... 19.9 11.0
Interest income and
other, net........... (0.9) (0.9)
------ ------
Loss from continuing
operations........... (37.8)% (40.7)%
====== ======
</TABLE>
Our total net revenue has generally increased during each of the ten
quarters presented. The increases in license revenue over the periods presented
are related to market acceptance of our OpenBusiness Infrastructure Platform. We
have historically experienced stronger demand for our products and services
during the fourth quarter and weaker demand in the first quarter. We expect to
continue to experience this seasonal pattern.
We experienced a significant increase in license revenue during the quarter
ended December 31, 1999 as a result of a transaction with one of our largest
customers. This resulted in license revenue accounting for 41.4% of total net
revenue for the quarter. Because license revenue typically carries a higher
margin percentage than service revenue, our gross profit percentage for the
quarter ended December 31, 1999 was significantly above our historical levels.
Our gross profit percentage increased significantly during the quarter ended
June 30, 2000 as a result of our higher mix of license revenue and improved
margins in our service business.
Due to the difference in gross profit percentage, or gross margin, between
license and service revenue, our overall gross margin is heavily dependent on
our mix of revenue. Specifically, we experience a higher gross margin in
quarters where license revenue is a larger percentage of total net revenue and a
lower gross margin in quarters where license revenue is a relatively smaller
percentage of our total net revenue.
Our cost of license revenue is relatively fixed and does not vary
significantly based on license revenue volume. Our operating expense has
continued to increase as we have expanded our operations, especially in sales
and marketing and research and development.
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LIQUIDITY AND CAPITAL RESOURCES
Since our founding, we have financed our operations through private sales of
common and preferred stock, resulting in net proceeds from our founding to
June 30, 2000 of approximately $17.0 million, and, to a lesser extent, through
bank loans, subordinated indebtedness and equipment leases. As of June 30, 2000,
we had $8.3 million in cash and short-term investments and $5.7 million in
working capital.
Net cash used in operating activities was $1.6 million in 1997,
$3.3 million in 1998 and $8.3 million in 1999. Net cash flows from operating
activities in each period reflect increasing losses from continuing operations.
Also, the net cash flow from operating activities in 1999 was affected by a
significant increase in accounts receivable. For the six months ended June 30,
2000, net cash used in operating activities was $1.7 million. Net cash flows
from operating activities for the six months ended June 30, 2000 benefitted from
collections from a transaction with one of our largest customers during the
quarter ended December 31, 1999.
Net cash used in investing activities was $1.0 million in 1997, $645,000 in
1998 and $1.6 million in 1999. Cash used in investing activities reflects
purchases of property and equipment, primarily computer equipment, and purchases
of marketable securities. Our capital expenditures are primarily related to
supporting the increase in the number of our personnel. Therefore, we expect our
capital expenditures to continue to increase in the future. At June 30, 2000, we
had no material commitments for capital expenditures. For the six months ended
June 30, 2000, net cash provided by investing activities was $168,000. Net cash
flows from investing activities for the six months ended June 30, 2000
benefitted from the sale of our FAB solutions division in March 2000.
Net cash used in financing activities was immaterial in 1997. Net cash
provided by financing activities was $13.7 million in 1998. In 1998, cash was
primarily generated by private sales of preferred stock and issuance of debt.
Net cash used in financing activities was $289,000 in 1999, which was a result
of payments for the redemption of common stock. Net cash used in financing
activities was $45,000 for the six months ended June 30, 2000.
In September 1999, we received $2.9 million in net proceeds from the sale of
our educational services division, and in March 2000, we received approximately
$5.0 million in proceeds net of related expenses and escrowed amounts from the
sale of our FAB solutions division. An additional $800,000 was placed in escrow
until March 2001 for satisfaction of indemnification claims against us which may
arise from the sale of our FAB solutions division.
As of June 30, 2000 our financing arrangements consisted of:
- $2.2 million of indebtedness, which has an effective interest rate of
approximately 15.2% and matures in June 2001;
- a $5.0 million revolving line of credit, which had an outstanding balance
of $750,000 and matures in November 2001;
- a 36-month equipment financing note in the original amount of $438,000,
which had an outstanding balance of $288,000 and matures in June 2002; and
- various equipment leases totaling $238,000.
Borrowings under the revolving line of credit are limited to a borrowing
base calculation and bear interest at prime rate plus 0.75%. The $3.0 million
senior subordinated note and the equipment financing note contain cross-default
provisions to the revolving line of credit. As of December 31, 1999, we were not
in compliance with a financial covenant to have positive operating income in the
three months ended December 31, 1999. As a result, all three facilities were
classified as current liabilities at December 31, 1999. We have subsequently
modified and amended the revolving credit facility to permit
29
<PAGE>
operating losses through June 2001 and as of June 30, 2000, we were in
compliance with all covenants. The equipment financing note bears interest at a
rate of 11.0%.
We expect to experience significant growth in our operating expense. In
particular, we would expect sales and marketing and research and development
expense to increase substantially in support of our OpenBusiness product line.
As a result, we expect to continue to generate operating losses. We may also use
our cash to fund acquisitions of complementary businesses, technologies or
product lines. We believe that the net proceeds of this offering and our
existing working capital immediately before this offering will be sufficient to
fund our operations and capital expenditures for at least the next twelve
months. Any material acquisitions may require that we obtain additional
financing, including issuing equity or debt securities. We cannot be sure that
we will be able to obtain any additional financing or that, if we can, the terms
will be acceptable to us.
As of December 31, 1999, we had net operating loss carryforwards for federal
income tax reporting purposes of $10.4 million that expire in various amounts
beginning in 2009. Federal income tax laws contain provisions that limit the use
in any future period of net operating losses and credit carryforwards upon the
occurrence of various events, including a significant change in ownership
interests. We had net deferred tax assets, including our net operating loss
carryforwards and tax credits, of $4.0 million as of December 31, 1999. To
reflect the uncertainty of whether we will be able to use the benefit of these
net operating loss carryforwards, a valuation allowance has been recorded for
the entire net deferred tax asset.
Two officers we recently hired have received a letter from their former
employer demanding the officers to repay $866,647 in gain received by the
officers from the exercise of stock options issued by their former employer. In
August 2000, we agreed to indemnify the officers for any amounts they are
required to repay their former employer as a result of this claim. The officers
have denied any wrongdoing and intend to defend any action taken by their former
employer.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS 133 is
effective for all quarters in fiscal years beginning after June 15, 2000. We do
not currently utilize derivative financial instruments. Therefore, we do not
expect that the adoption of SFAS 133 will have a material impact on our results
of operations or financial position.
In December 1999, the Securities and Exchange Commission issued SAB
No. 101, which summarizes some of the staff's view in applying generally
accepted accounting principles to revenue recognition in financial statements.
We must comply with SAB 101 beginning with the quarter ended December 31, 2000.
We continue to evaluate the impact that SAB 101 will have on our timing of
revenue recognition in future periods. Based on our initial evaluation, we
believe SAB 101 will not have a material impact on our future results of
operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation. This interpretation is effective July 1, 2000, but some
conclusions in the interpretation cover events that occur after either
December 15, 1998 or January 12, 2000. We do not expect the interpretation to
have a material impact on our results of operations or financial position.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and market our products in North
America, Europe and Asia. As a result, our financial results could be affected
by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. Substantially all of our sales are made in U.S.
dollars, and a strengthening of the dollar could make our products less
competitive in foreign
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<PAGE>
markets. Our interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the short-term nature of our investments, we
believe that there is no material risk exposure. All of our credit facilities,
with the exception of our revolving credit facility, bear interest at fixed
rates. Because we had not utilized our revolving credit facility through
December 31, 1999, our interest expense for the periods presented through
December 31, 1999 were not subject to fluctuations based on changes in the
general level of U.S. interest rates. Therefore, no quantitative tabular
disclosures are required. We utilized the revolving credit facility during the
six months ended June 30, 2000. The interest expense on borrowings under this
facility is subject to fluctuation based on the general level of U.S. interest
rates. However, we do not expect these fluctuations to have a material impact on
our financial position or results of operations.
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<PAGE>
BUSINESS
THE FOLLOWING DESCRIPTION OF OUR BUSINESS SHOULD BE READ WITH THE
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DESCRIPTION CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS COULD DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF THE FACTORS DISCUSSED IN "RISK
FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are a leading provider of business-to-business integration, or B2Bi,
software products and services that enable organizations to easily and rapidly
integrate business applications within and across organizations over the
Internet. Our software products allow organizations to link their business
processes with customers, suppliers and other trading partners to share
services, conduct transactions and exchange information in real-time. We have
designed our OpenBusiness solution to provide an easy to configure integration
platform that ensures reliable, secure integration of complex software
applications and scales to accommodate large numbers of business-to-business, or
B2B, partners.
Our OpenBusiness solutions are frequently implemented by systems
integrators, independent consulting firms and by our customer's internal
information technology departments. We also have the capability to deliver
solutions through our professional services organization. Our professional
services, which currently comprise the majority of our revenues, include project
planning, architectural design, prototyping, implementation, application
integration and project management.
We market our products and services globally primarily through our direct
sales force, complemented by the selling and supporting efforts of value-added
resellers and system integrators. As of July 31, 2000, we had licensed our
OpenBusiness products or provided professional services to over 300 customers,
including Caterpillar, General Motors, Intel, Merrill Lynch, Nokia, Sprint and
Unisys.
INDUSTRY BACKGROUND
THE EMERGENCE OF THE NEW B2B MODEL
The Internet has emerged as a powerful new medium for communication and
commerce by fundamentally changing B2B interactions. We believe that
organizations have adopted the Internet as a new business platform in three
distinct phases.
In the first phase, organizations sought to quickly establish a presence on
the Internet by creating websites that provided online access to information
about a company's products, services and operations. In this first stage,
organizations began to utilize the communication benefits of the Internet, but
generally failed to embrace the Internet as a viable commerce and distribution
channel. In the second phase, early adopters of e-commerce technology designed
and implemented basic order entry websites so consumers could purchase goods or
services online. Today, in the third phase, escalating competitive pressures,
shifting supplier relationships and diverse customer demands are forcing
organizations of all sizes to quickly embrace a new B2B model. This new model
requires a higher level of business process integration in which multiple
customers, suppliers and other trading partners transact business electronically
in real-time over the Internet. We believe organizations will not be able to
effectively compete in today's global markets without rapidly embracing this new
B2B model.
According to Forrester Research, revenue generated from B2B e-commerce will
grow from $406 billion in 2000 to $2.7 trillion in 2004. Forrester Research also
estimates that B2B e-commerce will account for more than 90% of U.S. e-commerce
transactions by 2004. To participate in this new market opportunity, we believe
organizations will be required to implement B2Bi software. This software enables
B2B e-commerce by integrating business processes and related information
technology systems of multiple customers, suppliers and other trading partners.
As a result, businesses are spending heavily to purchase B2Bi software to
transact business effectively over the Internet. The
32
<PAGE>
Delphi Group forecasts revenues from B2B e-commerce software and services to
grow from $5 billion in 1999 to $40 billion in 2002.
LIMITATIONS OF EXISTING B2B INTEGRATION SOLUTIONS
Over the last decade, organizations have invested billions of dollars in
custom and packaged software applications to improve and integrate internal
information technology systems. These applications frequently:
- reside on different hardware platforms;
- utilize varying data formats and communications standards; and
- were not designed to communicate with other companies' applications.
To enable the emerging B2B model, isolated applications must be integrated
not only within an organization, but also externally with an organization's
customers, suppliers and other trading partners. For example, organizations are
increasingly integrating their inventory and order management applications with
external purchasing applications to automate the purchasing process once an
order has been placed.
Most traditional approaches to B2Bi have been unable to adequately address
the challenges of integrating multiple customers, suppliers and other trading
partners. These approaches include:
- in-house custom solutions;
- electronic data interchange, or EDI, solutions; and
- enterprise application integration, or EAI, solutions.
Most of these solutions are delivered over private networks, resulting in
limited scalability, long implementation times and high setup and maintenance
costs.
IN-HOUSE CUSTOM SOLUTIONS. In-house custom solutions are typically
point-to-point solutions developed by organizations and use closed or
proprietary technologies. These point-to-point solutions, where one specific
software application is typically integrated with another with inflexible code,
often limit an organization's ability to easily modify existing integrated
software applications. These custom solutions often require long development
lead times and are typically limited to the application for which they were
designed. As a result, custom solutions usually require large, expensive
information technology staffs or system integrators to develop and maintain, and
they often lack the needed flexibility and scalability for today's B2B model.
EDI SOLUTIONS. EDI represented one of the first attempts to standardize
business-to-business interactions without the disadvantages of developing and
maintaining in-house custom solutions. However, due to the high cost and lengthy
time to implement and deploy EDI solutions, their benefits have been limited
typically to large organizations. Because EDI is based on point-to-point
integration, fixed data formats and batch processing, it limits organizations'
ability to quickly respond to changing business demands and to scale to large
numbers of organizations. Therefore, EDI solutions are often too time consuming,
inflexible and expensive to effectively solve today's B2Bi problems.
EAI SOLUTIONS. EAI solutions have been designed to effectively integrate
systems within an enterprise, but typically do not provide the open and scalable
inter-business integration that is necessary for successful B2Bi. While EAI
solutions can be extended to integrate external customers, suppliers and other
trading partners, to do so often requires all parties to implement a common
integration architecture. As organizations develop their new B2B models and
rapidly expand their B2B relationships, requiring a common integration
architecture for all participants has become increasingly difficult. Also, EAI
solutions often have difficulty integrating the applications of a diverse set of
B2B
33
<PAGE>
partners because many corporate computer security systems do not readily
recognize EAI communications protocols. As a result, EAI solutions are typically
too inflexible to provide the necessary level of integration to fully achieve
the benefits of B2Bi.
THE OPPORTUNITY FOR A NEW INTERNET-BASED B2BI SOLUTION
We believe that by utilizing the Internet there is a significant opportunity
to provide organizations with a cost-effective B2Bi solution. This solution
should enable business process integration among customers, suppliers and other
trading partners, to facilitate the transition to a new B2B model. This solution
should provide the flexibility and scalability to adjust to changing business
needs and allow organizations to offer their B2B partners the ability to
exchange information and conduct transactions in real-time, regardless of their
installed technology infrastructure. Further, because many organizations lack
the expertise or resources to design and deploy new B2Bi solutions, we believe a
B2Bi solution should be supported by an experienced professional services
organization.
OUR SOLUTION
We provide an Internet-based B2Bi solution that enables organizations to
easily and rapidly integrate business applications within and across
organizations for sharing services, conducting transactions and exchanging
information in real-time. We believe our OpenBusiness solution allows our
customers to integrate business processes with trading partners with fewer
alterations to their existing software applications than the current
alternatives require. Through the use of XML and support for a broad range of
additional communications standards, our solution provides a high level of
interoperability among incompatible applications. As a result, we believe our
OpenBusiness solution, unlike other B2Bi solutions, allows multiple customers,
suppliers and other trading partners to successfully integrate otherwise
incompatible software applications without significant reprogramming or adopting
the same communications standards. To help our customers adopt new B2B models,
we also provide a wide range of professional services, including strategic
planning, architectural design, prototyping, implementation services,
application integration and project management.
Our OpenBusiness solution provides the following business benefits to our
customers:
ENABLES NEW B2B MODELS. Our solution is designed to be easy-to-use and
highly scalable solution, allowing our customers to rapidly adopt new B2B models
that require seamless business process integration. By improving, streamlining
and automating B2B processes and information flows, our solution enables
organizations to realize significant benefits from integrating customers,
suppliers and other trading partners in Internet-based B2B communities. These
benefits include enhanced revenue opportunities by enabling organizations to
introduce products to market more quickly and to provide new services to their
customers. Organizations are also able to increase operating efficiencies by
automating manual processes, efficiently managing inventories, reducing cycle
times and improving planning and forecasting capabilities.
REDUCES TIME TO MARKET. Our solution is designed to be easily and rapidly
deployed, permitting our customers to reduce their time to market for new
Internet-based B2B strategies. Because our OpenBusiness solution does not
require customers to modify existing applications or to adopt a common
integration technology, customers generally need less time to implement our
OpenBusiness solution. We believe our solution is further differentiated by
providing easy-to-use portal software that allows our customers to simplify the
process of integrating applications of B2B partners over the Internet. As a
result, we believe our customers can quickly integrate their applications with
those of their customers, suppliers and other trading partners, saving
significant time and expense and speeding deployment of their B2B strategies. To
further speed time to market, we can support our customers with extensive
professional services to help accelerate their implementation of B2Bi solutions.
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<PAGE>
IMPROVES RETURNS ON EXISTING TECHNOLOGY INVESTMENTS. Over the last decade,
organizations have invested billions of dollars in custom and packaged software
applications, referred to as legacy applications. Using XML and supporting a
wide variety of other communications standards unlike other solutions, our
solution provides a high level of interoperability among legacy applications
without costly reprogramming. By eliminating reprogramming costs, organizations
are more likely to achieve broader, more extensive integration of their
incompatible legacy applications, resulting in more effective B2Bi solutions.
Because our solution's integration capabilities easily extend legacy
applications to a wide range of users regardless of the user's location or
underlying infrastructure, organizations can realize greater returns on their
prior information technology investments.
OUR STRATEGY
Our goal is to be the leading provider of B2Bi software and services that
enable organizations to develop and implement new Internet-based B2B models. To
achieve this objective, we are pursuing the following strategies:
EXTEND OUR PRODUCT AND TECHNOLOGICAL LEADERSHIP. Our products feature a
number of different B2B software integration capabilities that utilize XML
extensively. We believe our solution supports more B2B communications and data
format standards than any other competing solution, allowing us to provide
improved interoperability among business processes of B2B partners. We intend to
build upon our integration technology and improve our solution's functionality
and ease of use for rapidly developing B2Bi requirements. We also intend to
continue to remain actively involved with industry standard organizations to
ensure that our OpenBusiness products incorporate new integration technology and
communications standards as they emerge. We may also seek to enhance our product
leadership through licensing or acquiring complementary technologies or
businesses.
FOCUS ON OUR EXISTING CUSTOMER BASE. We believe our current customer base
represents a significant opportunity for additional revenues. Since 1997, we
have developed relationships with over 800 customers, of which approximately 140
have purchased licenses for our OpenBusiness Infrastructure Platform. We believe
that many of these companies are beginning to implement new Internet-based B2B
strategies, and we intend to market our solution to them. As our customers
expand and refine their Internet strategies and begin to realize the full
potential of B2Bi, we believe we can increase sales by expanding limited
deployments into enterprise-wide implementations, as well as by selling
additional OpenBusiness products.
EXPAND SALES AND DISTRIBUTION CHANNELS. We intend to pursue a
multi-channel, global distribution strategy by expanding our direct sales force
and key relationships with system integrators, value-added resellers, OEMs and
international distributors. We intend to increase our domestic distribution by
opening additional field offices and adding sales personnel in our existing
offices. We also plan to continue to expand our indirect distribution through
alliances with additional system integrators, value-added resellers and
OEMs. We intend to increase our international distribution by developing
additional relationships with international distributors, establishing foreign
direct sales offices and creating strategic alliances with international system
integrators.
BENEFIT FROM NETWORK EFFECTS. As customers utilize our OpenBusiness
products to integrate their B2B partners, these B2B partners will experience the
features and benefits of our products. We have already experienced additional
sales as a result of customers recommending and exposing our products to their
networks of customers, suppliers and other trading partners. Depending on the
level of B2B integration desired, some of our customers may require their B2B
partners to use our products. We believe this network effect will increase the
demand for our products, increase our brand recognition and strengthen our
position in the B2Bi solutions market.
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<PAGE>
CAPITALIZE ON OUR PROFESSIONAL SERVICES CAPABILITIES. We have established
highly successful relationships with customers by assisting them in designing,
developing and deploying B2Bi solutions. Our extensive professional services
range from strategic and architectural planning to complete integration and
deployment of our products. We will continue to extend our professional services
expertise in applying emerging standards, especially XML standards, to create
B2Bi solutions. By offering a full range of professional services, we believe we
can strengthen our existing customer relationships and foster new customer
relationships, creating opportunities to sell additional OpenBusiness products.
PRODUCTS
Our OpenBusiness products consist of three products: the OpenBusiness
Infrastructure Platform, the OpenBusiness Gateway and the OpenBusiness Portal.
Utilizing the technology developed in the OpenBusiness Infrastructure Platform,
which we first licensed in October 1997, we released the OpenBusiness Gateway
and OpenBusiness Portal in March 2000. These products work together to provide
an integrated B2Bi solution that allows organizations to integrate business
processes over the Internet and to share services and exchange information in
real-time.
Our OpenBusiness product line is illustrated below:
[The diagram of our OpenBusiness product line consists of:
Four informational boxes arranged in a diamond pattern, each connected to an
oval in the center representing the Internet.
The box at the top of the diamond pattern contains the following
information:
"Inter-business application catalog includes:
Product Company--ERP Application
Retail Company--CRM Application
Shipping Company--Logistics Application"
This box also contains two other boxes connected in serial to the
representation of the Internet described above. One box is labeled "OpenBusiness
Portal." The other box is labeled "Firewall."
The box at the left of the diamond pattern is labeled "Product Company" and
contains headings arranged in a diamond pattern, each connected to a heading in
the center labeled "OpenBusiness Infrastructure." The heading at the top of this
diamond pattern is labeled "ERP Application." The heading at the left of this
diamond pattern is labeled "Inventory Application." The heading at the bottom of
this diamond pattern is labeled "Accounting Application." The center of this
diamond is connected in serial to: a box on the right of this diamond labeled
"OpenBusiness Gateway", then to a box labeled "Firewall" and finally to the
representation of the Internet described above.
The box at the bottom of the diamond pattern is labeled "Shipping Company"
and contains headings arranged in a diamond pattern, each connected to a heading
in the center labeled "OpenBusiness Infrastructure." The heading at the left of
this diamond pattern is labeled "Logistics Application." The heading at the
bottom of this diamond pattern is labeled "Tracking Application." The heading at
the right of this diamond pattern is labeled "Billing Application." The center
of this diamond is connected in serial to: a box on the top of this diamond
labeled "OpenBusiness Gateway", then to a box labeled "Firewall" and finally to
the representation of the Internet described above.
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The box at the right of the diamond pattern is labeled "Retail Company" and
contains headings arranged in a diamond pattern, each connected to a heading in
the center labeled "OpenBusiness Infrastructure." The heading at the bottom of
this diamond pattern is labeled "Customer Billing Application." The heading at
the right of this diamond pattern is labeled "Order Entry Application." The
heading at the top of this diamond pattern is labeled "CRM Application." The
center of this diamond is connected in serial to: a box on the left of this
diamond labeled "OpenBusiness Gateway", then to a box labeled "Firewall" and
finally to the representation of the Internet described above.]
OPENBUSINESS INFRASTRUCTURE PLATFORM. The OpenBusiness Infrastructure
Platform automates the exchange of information between incompatible legacy
software applications, databases and EDI software within an organization. For
example, by automatically translating between communications standards used by
different business applications, such as supply chain management and customer
relationship management applications, the Infrastructure Platform simplifies the
challenge of connecting an organization's applications. The Infrastructure
Platform provides a necessary foundation for integrating an organization's
incompatible business applications, allowing them to be easily extended to their
external B2B partners.
OPENBUSINESS GATEWAY. The OpenBusiness Gateway extends an organization's
internally integrated applications to their B2B partners over the Internet. The
OpenBusiness Gateway may be used with the OpenBusiness Infrastructure Platform,
with a customer's existing infrastructure, such as application servers or
databases, or with a customer's existing applications. An organization that
wants to make its internal applications accessible by its B2B partners can use
the Gateway to:
- define which applications can be accessed;
- manage security, defining who can access applications;
- limit when and for how long each application can be accessed;
- extend applications beyond corporate computer security systems; and
- monitor, audit and bill for the usage of each application.
The Gateway utilizes XML to simplify the process of integrating the business
processes of B2B partners. Our XML-based approach also provides higher levels of
interoperability among incompatible business applications, regardless of the
underlying communications standards, hardware platforms or operating systems.
The Gateway can be fully integrated with the OpenBusiness Portal software,
allowing customers to establish their own website to provide quick and easy
access to their business applications.
OPENBUSINESS PORTAL. By using the integration and access capabilities of
the Infrastructure Platform and Gateway, the OpenBusiness Portal allows
organizations to rapidly create a website to catalog business applications that
they choose to make available to their community of B2B partners.
Organizations that establish websites using the Portal can configure and
manage the features and options of the website, including security features that
authorize portal access to their community of B2B partners. Once an organization
has created a website, any authorized partner using our Gateway product can also
provide access to their business applications on the website. This functionality
allows each member in a B2B community to easily exchange information and
services with other participants.
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PRODUCT TECHNOLOGY
Our OpenBusiness solution utilizes several key technologies to provide B2B
integration. These key technologies are described below:
XML STANDARDS. We use XML, a key standard for providing interoperability
between incompatible business applications, in our OpenBusiness solution. XML is
an emerging standard for defining uniform data formats. XML allows descriptive
tags to be attached to data, allowing applications to understand the meaning and
context of the data. While these descriptive tags provide significant
flexibility in how data is described, organizations often use them to describe
data differently. Many industries are establishing groups to define
industry-specific standards for the use of XML tags.
Our OpenBusiness solution provides support for many of the emerging industry
XML standards. With its non-intrusive architecture, our OpenBusiness solution
provides support for XML standards with minimal impact to existing business
applications. We believe this is a key in enabling integration of business
processes among B2B partners.
NON-INTRUSIVE ARCHITECTURE. Other B2Bi solutions typically require
organizations to make significant modifications to existing business application
source code, resulting in higher maintenance costs and lengthy time to market.
Our OpenBusiness products allow organizations to make existing business
applications available to other organizations over the Internet, without the
need for significant reprogramming. By minimizing the impact on existing
business applications, we believe our B2Bi solutions generally can be
implemented more rapidly and at a lower cost than other B2Bi solutions. In
addition, our OpenBusiness products can be implemented without interfering with
the normal operation of a customer's business applications.
OPEN STANDARDS. Our OpenBusiness solution supports many open communications
standards, including XML, HTTP, CORBA, DCOM, SOAP, SSL and RMI. Communications
standards represent defined methods by which applications communicate
information. OpenBusiness also supports many current and emerging industry XML
standards, including Open Financial Exchange, Oasis, RosettaNet, Open Travel
Association and Microsoft BizTalk. As new standards emerge, we intend to enhance
our OpenBusiness products to support these new standards, consistent with our
strategy to maintain OpenBusiness' support for open standards.
MULTIPLE SERVER PLATFORM SUPPORT. Our OpenBusiness products are designed to
operate on most major server platforms, which facilitates implementing our
OpenBusiness products over a large number of B2B partners. These platforms
include Hewlett Packard HP-UX, IBM AIX, Linux, Microsoft Windows NT and Sun
Microsystems Solaris.
POWERFUL SECURITY FEATURES. Our OpenBusiness solution contains powerful
security features that permit organizations to securely transmit confidential
information over the Internet. Our software includes various forms of encryption
and access controls to ensure privacy of confidential data. Also, all
information sent through the OpenBusiness solution can be sent using popular
communications standards which readily pass through corporate computer security
systems. As a result, our customers' business partners are not required to
modify their existing security features.
HIGHLY SCALABLE ARCHITECTURE. Our OpenBusiness solution has been designed
with a flexible architecture that can be scaled to allow usage by thousands of
integrated organizations operating over a geographically dispersed area in a
high transaction volume environment. Our OpenBusiness solution also includes
features that allow it to be readily deployed across a large number of different
hardware platforms and operating systems. Our OpenBusiness solution is also
designed to improve system performance in a multi-server, multi-processor
environment that can be configured by our customers.
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PRODUCT DEVELOPMENT
We licensed our first OpenBusiness product in October 1997. Using the
technology developed in our Infrastructure Platform, we recently introduced our
Gateway and Portal products. We continue to enhance our OpenBusiness products
with particular emphasis on providing improved interoperability, functionality
and ease of use. We also work closely with industry standard organizations to
ensure that our products incorporate emerging technology and communications
standards. Our product development organization primarily focuses on enhancing
our existing products and technologies and on developing additional products to
extend our position as a leader in the B2Bi solutions market.
As of July 31, 2000, our product development organization consisted of 44
employees. Our product development employees typically have experience in
distributed computing, XML, Java and other advanced technologies. Our research
and development expenditures were $1.8 million in 1997, $1.8 million in 1998,
$4.1 million in 1999 and $2.8 million in the six months ended June 30, 2000. We
expect to continue to invest heavily in product development and to increase the
size of our product development organization.
SERVICES
We offer a full range of professional services to customers who are engaged
in developing, deploying and managing applications using our OpenBusiness
products. Specifically, we assist customers in all phases of establishing their
new B2B models, from concept development to design and implementation. Our
professional services include strategic planning, architectural design,
prototyping, implementation services, application integration and project
management. We believe that our professional services organization plays a key
role in creating opportunities to sell our OpenBusiness products.
As of July 31, 2000, we employed 86 professionals in our professional
services group, substantially all of whom are based in Dallas, Texas. Many of
our professional services employees have advanced degrees or substantial
industry experience in systems design and software architecture. We generally
charge for our professional services on a time-and-materials basis.
We expect to increase the size of our professional services group and expand
the scope of the services they offer as we continue to address the needs of
domestic and international businesses. We will also continue to extend our
professional services expertise in applying emerging standards, especially XML
standards, to B2Bi solutions. Our professional services customers include
ClubCorp, EDS, General Motors, Merrill Lynch, Nokia, Nortel, PageMart and
Sprint. In each of the last five years, revenue from professional services has
accounted for more than 70% of our total net revenue. However, with the
introduction of our Gateway and Portal products and the increasing acceptance of
our Infrastructure Platform, we expect license revenue to comprise an
increasingly larger percentage of our total net revenue.
We provide training on our OpenBusiness products to customers and system
integrators through a staff of full-time, dedicated training professionals. Our
curriculum includes introductory through advanced courses on our products. We
offer many forms of training, including in-house lectures, on-site training and
customized workshops tailored to address unique requirements.
CUSTOMERS
Since January 1, 1998, we have licensed our OpenBusiness products or
provided professional services to over 300 customers. Of these customers,
approximately 140 have purchased licenses for our OpenBusiness products. These
customers operate in a broad range of industries, including financial,
automotive, travel and entertainment and telecommunications. The following is a
partial list of our
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customers, other than distributors, that accounted for more than $10,000 of
OpenBusiness product license revenue or more than $50,000 of professional
services revenue since January 1, 1998:
<TABLE>
<CAPTION>
PRODUCTS PROFESSIONAL SERVICES
------------------------------------------------ ------------------------------------------
<S> <C> <C> <C>
2Bridgesoftware Jones Knowledge.com ABT Infotech Software
Abatis Lockheed Martin Bell Atlantic Intel
ABT LogicTier BP Amoco Intercap
AT&T MCI Caterpillar Jones Knowledge.com
Bowne Software Omron ClubCorp Merrill Lynch
Solutions Pinnacle Multimedia Coles Myer Nokia
Carbon Street RentOnTheDot Connex Northern Telecom
CES International RetailClick Crag Technologies Omron
Countrywide Home Loans Solect Technology Group Earthcars.com Pagemart
Edge Technologies Spark Online EDS Peapod
EMC Temasek Polytechnic Experian ProCure
Fujitsu Tivoli Galileo International Ridge Technologies
Galileo International Unisys General Motors Sprint
General Motors Zmarket ILog USAA
Globeset WDC Storage Systems
Intercap
</TABLE>
In 1999, ClubCorp accounted for approximately $5.2 million, or 26%, of our
total net revenue, and General Motors accounted for approximately $4.1 million,
or 20% of our total net revenue. In 1998, ClubCorp also accounted for
approximately $2.5 million, or 21%, of our total net revenue.
CASE STUDIES
The following case studies illustrate how some companies use our products to
enable new business models. Neither of the following companies are endorsing our
OpenBusiness products by appearing in this prospectus.
GENERAL MOTORS/ONSTAR
OnStar, a division of General Motors, operates several call centers to
provide GM vehicle owners with on board convenience and emergency services.
BUSINESS CHALLENGE. OnStar wanted to expand the functionality and breadth
of travel related services it could offer to GM car owners. OnStar decided to
create a call center service that could be accessed by the push of a button
within a car, through which a car passenger could speak with a call center agent
about a large variety of convenience services. Examples of these services
include providing dinner reservations, travel planning and entertainment
choices. In providing its new expanded service, OnStar was confronted with the
challenge of integrating multiple, disparate internal call center and back
office systems with external applications from services organizations, such as
restaurants and travel agencies, that provided OnStar access to additional
convenience services. OnStar also required a flexible and scalable solution that
could easily manage increasing service and customer contact information as well
as accommodate millions of potential General Motors customers.
SOLUTION. OnStar selected our OpenBusiness solution as a flexible
integration architecture to quickly integrate new call center services. Our
Infrastructure Platform enabled OnStar to efficiently integrate a wide variety
of internal applications, data bases and other business systems seamlessly into
a new web-based call center application. Our solution also reduced the time
required to integrate service offerings or applications from external service
providers into OnStar's Call Center Application. OnStar's service partners who
employ a variety of computer operating platforms and technologies were able to
provide services to OnStar without having to adopt new integration technologies
or reprogram their existing applications. Through the use of our solution,
OnStar expects to rapidly expand its service
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offerings and deliver these services across a larger base of car owners in a
highly efficient and cost-efficient process.
GALILEO INTERNATIONAL
Galileo International is one of the world's leading providers of global
distribution services for the travel industry.
BUSINESS CHALLENGE. Galileo has historically provided global distribution
services for travel agencies located throughout the world and travel suppliers,
including more than 500 airlines, 38 car rental companies, 44,700 hotel
properties and all major cruise lines. Galileo wanted to enable a new business
model by expanding the potential user base of its services over the Internet.
The challenge was to allow traditional customers such as travel agencies and
end-user corporations, as well as new classes of customers such as application
service providers and wireless communications companies, to quickly and easily
integrate travel services into their business solutions. Because Galileo's
customers typically have a broad range of disparate systems that use proprietary
or closed technologies, the challenge for Galileo was to install a
business-to-business infrastructure that could easily extend its services over
the Internet while integrating with a variety of operating platforms and
communications standards.
SOLUTION. Galileo implemented our OpenBusiness solution to integrate its
travel services with new delivery and communications methods. Our OpenBusiness
Infrastructure Platform simplified the process of integrating Galileo's internal
applications before being extended over the Internet. Galileo has initially
utilized our solution to develop a new service offering that enables travelers
to view and modify flight reservations using wireless devices, including cell
phones, personal digital assistants and two way pagers. This new distribution
channel gives Galileo the ability to access incremental customers and derive
additional revenue. Galileo also intends to utilize our solution to integrate
its travel services with several application service providers and wireless
communications companies to further extend its potential base of new Internet
users.
SALES AND MARKETING
We primarily license our OpenBusiness products and market our services in
the United States through our direct sales organization. Our direct sales
organization consists of account executives who generate sales leads in their
assigned geographic territories. In general, our direct sales force targets
large multi-national companies and other organizations that we believe, because
of their extensive supply chains, represent attractive candidates for our
OpenBusiness products and our professional services.
We work closely with our targeted customers to analyze their B2Bi needs and
to propose an OpenBusiness solution. In many cases, our sales team works closely
with senior management to develop a solution. The sales cycle for our
OpenBusiness solution often ranges from three to six months.
We have direct sales offices in our Dallas, Texas headquarters and our
offices in New York, New York; San Francisco, California; Atlanta, Georgia;
Reston, Virginia; Chicago, Illinois; Seattle, Washington and Cleveland, Ohio. We
intend to expand our domestic direct sales organization by opening additional
sales offices and adding sales personnel in our existing offices.
We are in the early stages of expanding our presence in international
markets by developing relationships with additional international distributors,
establishing foreign direct sales offices and creating strategic alliances with
international system integrators. Our sales strategy also uses both our
strategic relationships with system integrators, value-added resellers,
independent software vendors and our existing customer relationships to gain new
customers. In April 2000, we opened our first international office in London,
England.
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We focus our marketing efforts on developing awareness of our OpenBusiness
products and professional services and generating new sales opportunities. Our
marketing activities include:
- participating in seminars, conferences and trade shows;
- creating joint marketing campaigns with our existing business partners;
- advertising in industry and other publications; and
- creating new strategic relationships.
We intend to significantly increase our sales and marketing expenses to
increase awareness of our OpenBusiness products and professional services.
STRATEGIC ALLIANCES
To promote market penetration and enhance development of our products, we
have formed the following strategic alliances:
SYSTEM INTEGRATION ALLIANCES. To increase market penetration of our
products, we have established strategic relationships with several professional
services organizations and system integrators, including EDS, Origin Technology
in Business and Perot Systems. These non-exclusive relationships provide us with
an indirect channel to market our OpenBusiness products to a substantial number
of potential customers and access to broad-based technical expertise. These
system integrators also give us feedback on our products, which we use to
improve subsequent releases. We are pursuing additional relationships with
system integrators who offer us opportunities to expand into geographic or
industry markets more rapidly or who provide us with additional market or
technological expertise.
TECHNOLOGY ALLIANCES. To make use of standards in the areas of business
data interchange, e-commerce transaction support, distributed computing security
and authentication, we continue to maintain relationships with key technology
providers, such as HP, Microsoft, Novell and Sun Microsystems.
COMPETITORS
The market for Internet-based B2Bi solutions is new and evolving, highly
competitive and subject to rapid technological change. We believe the market for
these solutions will become more competitive in the future. Increased
competition could significantly reduce our future revenue and increase our
operating losses due to price reductions, lower gross margins or lost market
share. We are subject to current or potential competition from other B2Bi
vendors, internal information technology departments, EAI software vendors and
other software vendors.
B2BI VENDORS. We face direct competition from other B2Bi solution providers
who focus on various aspects of B2B integration. These vendors include
Extricity, OnDisplay and webMethods.
INTERNAL INFORMATION TECHNOLOGY DEPARTMENTS. Potential customers' internal
information technology departments may have developed or be in the process of
developing software that solves some of the same problems that our OpenBusiness
products solve. In those cases, we may have difficulties licensing our
OpenBusiness products to them.
EAI SOFTWARE VENDORS. While EAI software vendors generally do not compete
directly with us, they may in the future expand their products or add
functionality to their existing products which could put them in competition
with our OpenBusiness products. These vendors include New Era of Networks,
Software Technologies Corporation and Vitria Technology.
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OTHER SOFTWARE VENDORS. We may face future competition from large, well
established software vendors, such as Microsoft and Oracle, if they decide to
develop products that compete with our products or acquire one of our existing
or future competitors.
Many of our existing and potential competitors have better brand
recognition, longer operating histories, larger customer bases and greater
financial, technical, marketing and other resources than us. As a result, they
may be able to use these advantages to take market share from us. They may also
be able to respond more effectively than we can to changing technologies,
conditions or customer demands, especially during market downturns.
We believe the principal competitive factors in the B2Bi solutions market
include:
- interoperability with existing applications, hardware platforms, operating
systems and communications standards;
- product functionality, quality, performance and price;
- speed and ease of implementation;
- support for emerging XML standards; and
- quality and breadth of professional services.
Although we believe our OpenBusiness solution generally competes favorably
in these areas, the Internet-based B2Bi solutions market is new and rapidly
evolving. Therefore, we may not be able to maintain our competitive position
against existing and future competitors, especially those that have greater
financial, technical, marketing and other resources than us.
PROPRIETARY RIGHTS
Our success is dependent upon protecting our proprietary technology. To do
this, we rely on a combination of contractual provisions and copyright, trade
secret, trademark and patent laws. We also maintain confidentiality procedures
to protect our proprietary information and intellectual property rights. As part
of our confidentiality procedures, we generally enter into non-disclosure
agreements with our employees, contractors and strategic partners.
We also enter into license agreements for our technology, documentation and
other proprietary information. Our customer licenses are generally
non-transferable, perpetual and prohibit reverse engineering our products. Our
OEM licenses are generally non-transferable, last from one to three years and
prohibit reverse engineering our products.
A few of our agreements contain provisions that, under some circumstances,
would allow third parties to obtain the source code for our software. A limited
number of our agreements allow third parties to license the source code for our
software. We have entered into an agreement with Tivoli, a subsidiary of IBM,
that grants Tivoli the right of first refusal to buy a portion of our object and
source code that is included in our OpenBusiness Infrastructure Platform, with
subsequent enhancements and error connections for that code. This agreement
could inhibit us from selling ObjectSpace or that code to a third party.
We hold a trademark registration in the United States for the name
ObjectSpace and have applied for a trademark registration in the United States
for the name OpenBusiness. As of July 31, 2000, we also have 17 pending patent
applications for technology related to our OpenBusiness product line. While we
are not aware that our products, trademarks, copyrights or other proprietary
rights infringe the proprietary rights of third parties, it is possible that our
patents, copyrights or trademarks could be challenged and invalidated.
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We expect that software companies will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. Occasionally, we hire or retain employees or consultants who have
worked for independent software vendors or other companies developing products
similar to those offered by us. Those prior employers may claim that our
products are based on their products and that we have misappropriated their
intellectual property. Any claims of that variety, with or without merit, could:
- cause a significant diversion of management attention;
- result in costly and protracted litigation;
- cause product shipment delays; and
- require us to enter into royalty or licensing agreements.
Those royalty or licensing agreements, if required, may not be available on
terms acceptable to us or at all, which would have a material adverse affect on
our business.
Policing unauthorized use of our products is difficult, particularly because
the global nature of the Internet makes it difficult to control the ultimate
destination or security of software or other data transmitted. Further, existing
copyright, trade secret, trademark and patent laws afford only limited
protections. Effective protection of intellectual property rights may be
unavailable or limited in some countries, because the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States.
While we are unable to determine the extent to which piracy of our software
exists, we expect software piracy to be a persistent problem. It is also
possible that our competitors will adopt product or service names similar to
ours, which could hinder our ability to protect our intellectual property and
possibly lead to customer confusion. Overall, the protection of our proprietary
rights may not be adequate and our competitors may independently develop similar
technology.
EMPLOYEES
As of July 31, 2000, we employed 224 full-time employees in our operations,
including 53 in sales and marketing, 86 in professional services, 44 in research
and development and 41 in administration and finance. We also employ varying
numbers of independent contractors and consultants to support our professional
services and research and development activities. Our future success will depend
in part on our ability to attract, retain and motivate highly qualified
technical and management personnel, for whom competition is intense. None of our
employees are represented by a collective bargaining agreement, and we have
never experienced a strike or similar work stoppage. We consider our relations
with our employees to be good.
FACILITIES
Our principal executive and corporate offices occupy approximately 60,000
square feet in Dallas, Texas under leases expiring in March 2003. We also
maintain offices for sales and support personnel in New York, New York; San
Francisco, California; Atlanta, Georgia; Reston, Virginia; Chicago, Illinois;
Seattle, Washington; Cleveland, Ohio and London, England. These offices are
leased for various terms and generally consist of less than 1,000 square feet of
office space. We believe our facilities are adequate through March 2001. We are
negotiating leases for additional space, which we believe we can obtain on
commercially acceptable terms, although we may be unable to do so.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
OFFICERS AND DIRECTORS
The following table presents information about our officers and directors as
of July 31, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
David Norris................................... 36 Chairman of the Board, Chief Executive Officer
and President
Paul Lipari.................................... 52 Vice President, Chief Financial Officer and
Secretary
James Canter................................... 36 Vice President, Engineering
Bruce Flory.................................... 49 Vice President, Marketing
Alan Fudge..................................... 40 Senior Vice President, Worldwide Sales
Alan Larson.................................... 44 Vice President, Professional Services
John Mecke..................................... 39 Vice President, Business Development
John Bentley................................... 40 Director
Grant Dove..................................... 71 Director
Graham Glass................................... 37 Director
Eugene Lowenthal............................... 55 Director
David Near..................................... 41 Director
R. Stephen Polley.............................. 49 Director
</TABLE>
EXECUTIVE OFFICERS
DAVID NORRIS is a co-founder of ObjectSpace and has served as a member of
our board of directors since August 1992, our president since March 1997, our
chief executive officer since December 1997 and our chairman of the board since
March 2000. Before founding ObjectSpace, from 1984 to 1992, Mr. Norris designed
and built distributed software systems for companies including Casco Signal, DSC
Communications, EDS, Frito-Lay, General Signal, IBM, Intellicall, International
Paper and Toccata Systems. Mr. Norris holds his B.S. in computer science from
the University of Texas.
PAUL LIPARI has served as our vice president, chief financial officer and
secretary since September 1999. From September 1996 to February 1999,
Mr. Lipari served as chief financial officer for DSET Corporation, a software
tools company specializing in telecommunications applications. From May 1995 to
August 1996, Mr. Lipari served as vice president and chief financial officer of
Chamberlain Phipps North America, a manufacturer and distributor of footware and
footware components. From December 1993 to April 1995, Mr. Lipari was the vice
president, finance and operations, and chief financial officer of NetLink, a
hardware and software networking solutions manufacturer. Mr. Lipari holds his
B.S. in accounting from the University of Akron and is a certified public
accountant in the State of New York.
JAMES CANTER has served as our vice president, engineering since
August 1999. From September 1998 to August 1999, Mr. Canter was vice president,
Software Engineering for ADAC Laboratories, a nuclear medicine biomedical
systems company. From April 1998 to July 1998, Mr. Canter served as vice
president of Systems Engineering and General Manager of Artecon, a fault
tolerant storage subsystems company. From February 1994 through April 1998,
Mr. Canter held various positions at Storage Dimensions, a fault tolerant
storage subsystems company, including vice president of engineering, vice
president of software engineering and director of software engineering.
Mr. Canter holds his B.S. in microbiology from Arizona State University and his
M.B.A. from the University of Phoenix.
BRUCE FLORY has served as our vice president, marketing since October 1999.
From May 1998 to October 1999, Mr. Flory served as vice president, marketing for
Sterling Software, an enterprise
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software company. From August 1993 to December 1998, Mr. Flory served as vice
president of marketing for Liant Software, a software application development
tool company. Mr. Flory holds his B.A. in marketing and his M.B.A. from St.
Edward's University in Austin, Texas.
ALAN FUDGE has served as our senior vice president, worldwide sales since
April 2000. From April 1996 to April 2000, Mr. Fudge served in various
capacities, including as the vice president and general manager of the Americas
for Tivoli Systems, a subsidiary of IBM. From January 1984 to March 1996, Mr.
Fudge served as in various sales and sales management capacities with IBM.
Mr. Fudge holds his B.A. in computer science/accounting from St. Edward's
University in Austin, Texas.
ALAN LARSON has served as our vice president, professional services since
March 2000. From July 1999 to March 2000, Mr. Larson was vice president,
professional services, western area for Interworld Corporation, a software
company specializing in Internet commerce applications. From November 1998 to
June 1999, Mr. Larson served as vice president, product management for EXE
Technologies, a supplier of supply chain execution software. From February 1998
to November 1998, Mr. Larson was the director of professional services for the
Central United States and Latin America for Siebel Systems, a developer of
enterprise application software for sales, marketing and call center operations.
From July 1997 to February 1998, Mr. Larson served as area manager for EMC
Corporation, a manufacturer of enterprise class disk storage systems. From
March 1993 to July 1997, Mr. Larson held the positions of area director for
powersoft educational services and district manager for worldwide professional
services for Sybase, a software developer specializing in the computer client/
server marketplace. Mr. Larson holds his B.S. in industrial management from the
University of Wyoming and his M.B.A. from the University of
Wisconsin-Whitewater.
JOHN MECKE has served as our vice president, business development since
June 2000. From December 1994 to April 2000, Mr. Mecke served in various
capacities with Sterling Software, including group vice president, business
development. From November 1992 to December 1994, Mr. Mecke served in various
sales positions with KnowledgeWare, which was acquired by Sterling Software.
From September 1985 to November 1992, Mr. Mecke served as manager, strategic
planning practice for Computer & Engineering Consultants, which was acquired by
KnowledgeWare.
DIRECTORS
JOHN BENTLEY has served as a director since December 1998. Mr. Bentley
co-founded Cornerstone Equity Partners, a private equity company, in 1995.
Mr. Bentley is also the manager of Ironwood Capital, LLC, the general partner of
Ironwood Capital Fund I, L.P., a private venture fund. From February 1989 to
February 1995, Mr. Bentley held several positions, including a partner, in the
merchant banking group of Banc One Capital Corporation. From July 1985 to
January 1989, Mr. Bentley served as chief financial officer of R. J. Moran, a
diversified holding company. Mr. Bentley is also a director of New Century
Financial Corporation and NetPro Computing. Mr. Bentley received his B.A. in
business administration from Baylor University.
GRANT DOVE has served as a director since December 1998. Mr. Dove has served
as managing partner of Technology Strategies & Alliances, an investment banking
firm specializing in the technology industry, since 1992. Mr. Dove is also a
director of Microelectronics and Computer Technology Corporation, MediaOne
Group, Cooper Cameron Corporation, Netpliance, Spotcast Communications, Inet
Technologies, Control Systems International and InterVoice-Brite. From 1987 to
1991, Mr. Dove was chairman and chief executive officer of Microelectronics and
Computer Technology. Before joining Microelectronics and Computer Technology,
Mr. Dove spent 28 years with Texas Instruments, retiring as executive vice
president. Mr. Dove received his B.S.E. in electrical engineering from Virginia
Polytechnic Institute and State University.
GRAHAM GLASS is a co-founder of ObjectSpace and has served as a director
since August 1992. Mr. Glass also served as our chief technical officer from
December 1997 to January 2000. From 1990 to
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1992, he was the founder and president of ObjectLesson, an object oriented
training company. From 1987 to 1989, Mr. Glass was a senior lecturer at the
University of Texas at Dallas. Mr. Glass holds his B.S. in mathematics and
computer science from the University of Southampton and a M.S. in computer
science from the University of Texas at Dallas.
EUGENE LOWENTHAL has served as a director since June 1998. Since
January 2000, Mr. Lowenthal has been a general partner with Sanchez Capital
Partners, a venture capital firm which focuses on early-stage, high-technology
companies. Mr. Lowenthal currently serves on the board of directors of several
privately owned technology companies. From June 1994 to December 1999,
Mr. Lowenthal was an employee of Growth Capital Partners, a regional investment
banking firm. From October 1989 to May 1994, Mr. Lowenthal served in several
positions with LIM International, including chairman of the board of directors
and executive vice president, business development. From May 1989 to
February 1993, Mr. Lowenthal served as vice president of cooperative computing.
Mr. Lowenthal holds his B.A. in mathematics from the University of Chicago and a
Ph.D. in computer science from the University of Texas.
DAVID NEAR has served as a director since March 2000. Mr. Near has served as
senior vice president, Internet and eCommerce of Galileo, a provider of global
distribution services to the travel industry. Before assuming these
responsibilities, Mr. Near served as senior vice president, subscriber
marketing, senior vice president of intuitive products and interactive services
and as director of car, hotel, leisure and advertising product management for
Galileo. Before joining Galileo in 1987, Mr. Near held a number of management
positions at United Airlines and B.F. Goodrich. Mr. Near is a director of
several Galileo International subsidiaries, Uniglobe.com, QuixData Systems and
IGT Travel Solutions. Mr. Near holds a B.A. from Cornell University and an
M.B.A. from Purdue University.
R. STEPHEN POLLEY has served as a director since June 1998. Since March
2000, Mr. Polley has served as president of Trinity eVentures, a wholly owned
subsidiary of Trinity Industries specializing in Internet e-commerce ventures.
From March 1999 to February 2000, Mr. Polley was chairman, chief executive
officer and president of cozone.com, a wholly owned subsidiary of CompUSA
specializing in the online retailing of computer and electronics products. From
November 1993 to March 1999, Mr. Polley was chief executive officer and chairman
of the board of Interphase Corporation, a computer networking company.
Mr. Polley remains chairman of the board for Interphase. Mr. Polley holds his
B.A. in business from the University of Texas at Austin and an M.B.A. from
George Washington University.
BOARD COMPOSITION
Following this offering, our board of directors will consist of seven
directors. Our certificate of incorporation provides that the members of our
board of directors are divided into three staggered classes, members of which
serve for a three-year term. Following this offering, our board of directors
will consist of three class I directors, Messrs. Bentley, Lowenthal and Near,
two class II directors, Messrs. Dove and Polley, and two class III directors,
Messrs. Norris and Glass. At each annual meeting of stockholders, a class of
directors will be elected for a three-year term to succeed the directors of the
same class whose terms are then expiring. The terms of the class III directors
expire at the 2000 annual meeting, the terms of the class I directors expire at
the 2001 annual meeting and the terms of the class II directors expire at the
2002 annual meeting.
Each officer serves at the discretion of the board of directors and holds
office until the officer's successor is elected or until the officer's earlier
resignation or removal. There are no family relationships among any of our
directors or executive officers.
BOARD COMMITTEES
We have established an audit committee and a compensation committee.
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<PAGE>
COMPENSATION COMMITTEE. The compensation committee of our board of
directors is currently composed of Messrs. Bentley, Dove and Lowenthal. The
compensation committee reviews and recommends to our board of directors the
compensation and benefits of our executive officers and administers our stock
option and compensation plans.
AUDIT COMMITTEE. The audit committee of our board of directors is composed
of Messrs. Dove, Lowenthal and Polley. The audit committee is governed by a
charter that requires each member of the committee to be independent. The
charter also identifies the roles and responsibilities of this committee, which
include:
- oversight of the audit process performed by our independent auditors;
- review of the scope and the results of the audit process;
- oversight of the integrity and accuracy of our internal and external
financial reporting; and
- review of our financial statements with our independent auditors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Since February 1999, our compensation committee has been composed of
Messrs. Bentley, Dove and Lowenthal. Before February 1999, our board of
directors and Mr. Norris, our chief executive officer, addressed compensation
issues. None of our executive officers has served on the board of directors or
compensation committee of any entity that has one or more executive officers
serving on our board of directors or compensation committee. None of the members
of our compensation committee is employed by ObjectSpace.
During 1998, we paid $170,421 to GCP Securities, a regional investment
banking firm, for investment banking services related to our sale of 571,429
shares of preferred stock and our obtaining $3.0 million of debt financing.
During 1999, we paid GCP Securities $150,355 for investment banking services
related to our sale of 2,702,703 shares of our preferred stock. In
December 1998, we issued Growth Capital Partners, an affiliate of GCP
Securities, a warrant to purchase 234,595 shares of common stock, at an exercise
price of $1.32 per share. Mr. Lowenthal, a director, was an employee of Growth
Capital Partners from 1994 to 1999. In addition, entities affiliated with
Mr. Bentley have purchased shares of our preferred stock and have registration
rights related to their shares.
DIRECTOR COMPENSATION
Directors who are not employees of ObjectSpace receive $1,000 for each board
meeting they attend, and all board members are reimbursed for expenses incurred
in attending board or committee meetings.
We have occasionally granted non-employee directors options to purchase
shares of our common stock. In June 1998, we granted both Messrs. Polley and
Lowenthal an option to purchase 42,000 shares of our common stock at an exercise
price of $1.43 per share. In December 1998, we granted Mr. Dove an option to
purchase 42,000 shares of our common stock at an exercise price of $1.43 per
share. In February 1999, we granted each of Messrs. Dove, Lowenthal and Polley
an option to purchase 28,000 shares of our common stock at an exercise price of
$1.43 per share. All of these options vest ratably over two years from the date
of their grant. In March 2000, we established our non-employee director stock
option plan, under which non-employee directors will receive automatic grants of
stock options.
EXECUTIVE COMPENSATION
EXECUTIVE OFFICER COMPENSATION. The following table summarizes the
compensation we paid during 1999 to our chief executive officer and our three
other most highly compensated executive officers whose salary and bonus for 1999
equaled or exceeded $100,000. The summary compensation table
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<PAGE>
excludes compensation in the form of perquisites and other personal benefits
earned by these officers in 1999 if these benefits are less than $50,000 and 10%
of the total salary and bonus earned by these officers. We refer to these
officers elsewhere in this prospectus as the named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
<S> <C> <C> <C> <C> <C>
David Norris.................................. 1999 $175,000 -- -- --
Chairman of the board, president and chief
executive officer
Stewart Bush(1)............................... 1999 111,442 $72,881(2) 420,000 $80,027(3)
Vice president, sales
Graham Glass(4)............................... 1999 175,000 -- -- --
Chief technology officer
Kenneth J. Overton(5)......................... 1999 143,750 78,125 -- --
Vice president, enterprise solutions
</TABLE>
--------------------------
(1) Mr. Bush became our vice president, sales in April 1999. His current annual
salary is $150,000.
(2) Includes $16,250 in bonus and $56,631 in commissions.
(3) Represents reimbursement for relocation expenses.
(4) Mr. Glass resigned from his position effective January 2000.
(5) Mr. Overton resigned from his position effective February 2000.
EXECUTIVE OFFICER OPTION GRANTS. The following table presents information
about stock options granted during 1999 to our named executive officers. The
exercise price per share of each option granted was equal to the fair market
value of our common stock on the date of grant, as determined by our board of
directors. All these options vest over a four-year period. The percentage of
total options granted to employees in the last fiscal year is based on options
granted during 1999 to purchase an aggregate of 3,610,958 shares.
The following table shows amounts that may be realized upon exercise of
these options immediately before the expiration of their term, assuming 5% and
10% compound rates of appreciation on the market value of the common stock on
the date of option grant over the term of the options. These numbers are
calculated based on rules of the Securities and Exchange Commission and do not
reflect our estimate of future stock price growth. Actual gains, if any, on
stock option exercises and common stock holdings depend on the timing of
exercise and the future performance of our common stock. We cannot assure you
that the rates of appreciation assumed in this table can be achieved or that the
amounts reflected will be received by the individuals.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM(1)
OPTIONS FISCAL PRICE EXPIRATION -----------------------
GRANTED(#) YEAR ($/SH) DATE 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
David Norris......................... -- -- -- -- -- --
Stewart Bush......................... 420,000 11.6% $0.66 4/30/09 $518,140 $990,313
Graham Glass......................... -- -- -- -- -- --
Ken Overton.......................... -- -- -- -- -- --
</TABLE>
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<PAGE>
UNEXERCISED OPTIONS HELD BY EXECUTIVE OFFICERS. The following table
presents information about unexercised options held as of December 31, 1999 by
our named executive officers. None of the named executive officers exercised
stock options during 1999.
There was no public trading market for our common stock as of December 31,
1999. As a result, these values have been calculated on the basis of the initial
public offering price of $10.00 per share, less the applicable exercise price
per share, multiplied by the number of shares underlying the options.
AGGREGATE FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END(#) OPTIONS AT FY-END($)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
David Norris........................ -- -- -- --
Stewart Bush........................ -- 420,000 -- $3,922,800
Graham Glass........................ -- -- -- --
Ken Overton......................... 70,000 210,000 $599,900 $1,799,700
</TABLE>
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
None of the named executive officers has an employment agreement for any
specified term. These officers may resign or we may terminate their employment
at any time.
AGREEMENT WITH MR. NORRIS. We entered into an employment agreement with
Mr. Norris in December 1998 and an amendment to this agreement in March 2000.
The agreement provides for an annual base salary of $175,000, subject to
increase, and expires in December 2003. Under this agreement, Mr. Norris will
continue to receive his base salary, bonuses and all benefits for one year if he
resigns for specified reasons, including a reduction or change in his duties, or
generally if he is terminated for reasons other than:
- an act of dishonesty that results in substantial personal gain by
Mr. Norris at our expense;
- fraud, misappropriation or embezzlement or willful and material damage to
our property or business;
- a determination by a majority of our board of directors that Mr. Norris
has exhibited a pattern of willful disregard of his duties as our
employee;
- a felony conviction; or
- the disability of Mr. Norris.
The agreement also provides that during Mr. Norris's employment and for one
year after his employment terminates, he may not:
- own, have an interest in or be an executive, agent or consultant for, any
company that manufactures, distributes or sells products in North America
that compete with the products that we provided during his employment; or
- solicit business in competition with us from our customers or potential
customers with whom he had contact during the year before the termination
of his employment.
For two years following the termination of Mr. Norris' employment, the
agreement generally prohibits him from soliciting for employment our employees
and our customers' employees with whom he had contact during his employment.
AGREEMENT WITH MR. GLASS. In December 1998, we entered into an employment
agreement with Mr. Glass that was scheduled to expire in December 2003.
Mr. Glass voluntarily terminated his employment with us effective in
January 2000. In February 2000, we entered into a consulting agreement with
Mr. Glass.
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<PAGE>
AGREEMENT WITH MR. LIPARI. In August 1999, we entered into a letter
agreement with Mr. Lipari. The agreement provides Mr. Lipari will continue to
receive his base salary, bonuses and all benefits for six months if we terminate
his employment for any reason other than:
- performance;
- an act of dishonesty that results in substantial personal gain by
Mr. Lipari at our expense;
- fraud, misappropriation, embezzlement or willful and material damage to
our property or business;
- a good faith determination by a majority of our board of directors that
Mr. Lipari has exhibited a pattern of willful disregard of his duties as
our employee;
- a felony conviction; or
- a material violation of the agreement.
If Mr. Lipari's employment is terminated because of a change of control of
ObjectSpace, he will continue to receive his base salary, bonuses and all
benefits for one year.
OPTION PLANS. Our 1998 stock option plan and non-employee director stock
option plan provide that outstanding options will become fully vested upon a
change in control of ObjectSpace.
STOCK OPTION PLANS
1994 STOCK OPTION PLAN
GENERAL. Our board of directors adopted the 1994 restricted stock and stock
option plan in September 1994 and amended and restated it in March 1997. This
plan provided for the grant of non-qualified stock options or restricted stock
to our employees. As of August 8, 2000, 109,469 shares were issued upon the
exercise of stock options granted under the plan and 938,991 shares were subject
to outstanding options. We made no grants of restricted stock under this plan.
We no longer grant stock or options to purchase stock under this plan.
ADMINISTRATION. The compensation committee of our board of directors
administers this plan and determines who is granted options and the terms of
options granted, including the number of shares subject to individual option
awards, the option exercise price and vesting period.
MERGER, CONSOLIDATION OR SALE. If we are not the surviving corporation in a
merger or consolidation, then the company that does survive may substitute new
option rights on terms substantially similar to the options granted under this
plan. If the surviving corporation in a merger or consolidation does not assume
the obligations under this plan or we sell all or substantially all of our
assets, then we may set a date at least 20 days before the merger, consolidation
or sale on which all of the options outstanding under this plan will vest. If
this occurs, all of the options granted under this plan will terminate and be
void after the merger, consolidation or sale.
TRANSFER. A holder of options granted under this plan may not transfer his
options other than by will or the laws of descent and distribution, and only the
holder or the holder's attorney in fact may exercise the options during the
lifetime of the holder.
TERM. The term of all options granted under this plan may not exceed ten
years. This plan terminates in September 2004, unless the board of directors
terminates the plan earlier.
1998 STOCK OPTION PLAN
GENERAL. Our board of directors adopted our 1998 stock option plan in
June 1998 as the successor to our 1994 stock option plan. This plan provides for
the grant of incentive or non-qualified
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<PAGE>
stock options or direct stock grants to our employees. We have reserved
8,400,000 shares of common stock for issuance under this plan. As of August 8,
2000, 347,645 shares were issued upon the exercise of stock options, 4,588,692
shares were subject to outstanding options and 3,463,663 shares were available
for future grant.
The exercise price for incentive stock options granted under this plan may
not be less than 100% of the fair market value of our common stock on the option
grant date. However, if we grant an option to an employee who owns greater than
10% of the combined voting power of all of our common stock, the exercise price
of the options may not be less than 110% of the fair market value of our common
stock on the option grant date and the maximum term of the option may not exceed
five years. The term of all other options granted under this plan may not exceed
ten years.
ADMINISTRATION. The compensation committee of our board of directors
administers this plan and determines who is granted options and the terms of
options granted, including the number of shares subject to individual option
awards, the option exercise price and the vesting period of options.
CONSOLIDATION, LIQUIDATION OR SALE. If we are the surviving corporation in
any merger, consolidation or share exchange, any outstanding stock options
granted under this plan will apply to the securities, cash, property or assets
that our holders of common stock receive. If we undergo a merger, consolidation
or share exchange in which we are not the surviving corporation or we dissolve,
liquidate or sell all or substantially all of our assets, the holder of an
option under this plan will be entitled to receive, upon the exercise of his
options, the securities or other assets that are distributed to the holders of
our common stock. However, we may cancel all options granted under this plan
upon a reorganization, merger, consolidation or share exchange in which we are
not the surviving corporation or upon a dissolution or liquidation of
ObjectSpace, subject to each option holder's right to purchase the common stock
underlying his options for a period of 30 days immediately preceding the
effective date of the event.
CHANGE OF CONTROL. An option under this plan will generally become fully
vested upon a change of control of ObjectSpace. A change in control generally
includes:
- a consolidation, merger or share exchange in which we are not the
surviving corporation, unless the holders of our common stock will hold
the same proportion of common stock of the surviving corporation as they
held in ObjectSpace before the transaction;
- a sale, lease or other transfer of all or substantially all of our assets;
- approval by our stockholders of a plan to liquidate or dissolve
ObjectSpace;
- the cessation of control of directors who were either directors at the
time of the adoption of this plan or were nominated by at least two-thirds
of the directors then in office who were directors at the date of the
adoption of this plan or whose election or nomination for election was
previously so approved;
- an acquisition of 20% of the voting power of our outstanding voting
securities by a person or group who owned less than 15% of our voting
securities on the date this plan was adopted;
- an acquisition of an additional 5% of the voting power of our outstanding
voting securities by a person or group who owned at least 15% of our
voting securities on the date this plan was adopted; or
- a bankruptcy proceeding.
TRANSFER. A holder of an option under this plan may not transfer the option
other than by will or the laws of descent and distribution, and only the holder
or the holder's attorney in fact may exercise the option during the lifetime of
the holder. Under this plan, a holder may transfer non-qualified stock
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<PAGE>
options to immediate family members, to a trust or family partnership for the
sole benefit of immediate family members, to a tax exempt entity under
section 501(c)(3) of the federal tax code or to a split interest trust or pooled
income fund as described in section 2522(c)(2) of the federal tax code. The
recipient of any transfer is bound to the terms of the stock option agreement
being transferred and to the terms of this plan.
AMENDMENT AND TERM. Our board of directors may discontinue or amend this
plan at any time, subject to any required stockholder approval. This plan will
terminate in April 2008, unless the board of directors terminates the plan
earlier.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
GENERAL. We adopted our 2000 non-employee director stock option plan in
March 2000 and have reserved a total of 700,000 shares of common stock for
issuance under this plan. This plan provides for the grant of non-qualified
stock options to our directors who:
- are not employed by us and have not been employed by us for three years
before their election or appointment; and
- are not, and have not been for three years before their election or
appointment, a director, officer or employee of an entity that owns more
than 5% of any class of our common stock when considered with that
entity's affiliates.
Under this plan, we automatically grant these directors an option to
purchase 42,000 shares of our common stock on the date on which the person first
becomes a director and an option to purchase 28,000 shares of our common stock
on the date on which the person is re-elected to the board of directors. The
exercise price of options under this plan will be equal to the fair market value
of the common stock on the date of grant. The maximum term of the options
granted under this plan is ten years. The options become exercisable in two
equal installments on the first and second anniversary of the date of grant. As
of July 31, 2000, we had not granted any stock options under this plan. The
compensation committee of the board of directors administers this plan.
CONSOLIDATION, LIQUIDATION OR SALE. If we are the surviving corporation in
any merger, consolidation or share exchange, any outstanding stock options
granted under this plan will apply to the securities, cash, property or assets
that our holders of common stock receive. In the event we undergo a merger,
consolidation or share exchange in which we are not the surviving corporation or
we dissolve, liquidate or sell all or substantially all of our assets, the
holder of an option under this plan will be entitled to receive, upon the
exercise of his options, the securities or other assets that are distributed to
the holders of our common stock. However, we may cancel all options granted
under this plan upon a reorganization, merger, consolidation or share exchange
in which we are not the surviving corporation or upon a dissolution or
liquidation of our company, subject to each option holder's right to purchase
the common stock underlying his options for a period of 30 days immediately
preceding the effective date of the event.
CHANGE OF CONTROL. An option under this plan will generally become fully
vested upon a change of control of our company. A change in control generally
includes:
- a consolidation, merger or share exchange in which we are not the
surviving corporation, unless the holders of our common stock will hold
the same proportion of common stock of the surviving corporation as they
held in our company before the transaction;
- a sale, lease or other transfer of all or substantially all of our assets;
- approval by our stockholders of a plan to liquidate or dissolve our
company;
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<PAGE>
- the cessation of control of our board of directors by directors who were
either in office at the time of the adoption of this plan or were
nominated by at least two-thirds of the directors then in office who were
directors at the date of the adoption of this plan or whose election or
nomination for election was previously so approved;
- an acquisition of 20% of the voting power of our outstanding voting
securities by a person or group who owned less than 15% of our voting
securities on the date this plan was adopted;
- an acquisition of an additional 5% of the voting power of our outstanding
voting securities by a person or group who owned at least 15% of our
voting securities on the date this plan was adopted; or
- a bankruptcy proceeding.
TRANSFER. A holder of an option under this plan may not transfer the option
other than by will or the laws of descent and distribution, and only the holder
or the holder's attorney in fact may exercise the option during the lifetime of
the holder. Under this plan, a holder may transfer non-qualified stock options
to immediate family members, to a trust or family partnership for the sole
benefit of immediate family members, to a tax exempt entity under
section 501(c)(3) of the federal tax code or to a split interest trust or pooled
income fund as described in section 2522(c)(2) of the federal tax code. The
recipient of any transfer is bound to the terms of the stock option agreement
being transferred and to the terms of this plan.
AMENDMENT AND TERM. Our board of directors may discontinue or amend the
director plan at any time, subject to any required stockholder approval. This
plan will terminate in March 2010 unless the board of directors terminates the
plan earlier.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation requires us to indemnify our directors and
officers to the fullest extent permitted by Delaware law, as it now exists and
may in the future be amended. Our certificate of incorporation also limits the
liability of directors to the maximum extent permitted by Delaware law. Delaware
law provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for:
- any breach of their duty of loyalty to ObjectSpace or its stockholders;
- acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies, including injunctive relief or rescission.
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<PAGE>
RELATED PARTY TRANSACTIONS
Since December 31, 1996, we have not been a party to any transaction or
series of transactions involving $60,000 or more and in which any director,
executive officer or holder of more than 5% of our capital stock had a material
interest, other than the transactions described below.
CONSULTING AGREEMENT
In February 2000, we entered into a consulting agreement with Mr. Glass, a
director and our former chief technology officer. Under this agreement,
Mr. Glass receives $14,583 per month for providing us consulting and advisory
services on technology issues. The agreement terminates on January 31, 2001.
The agreement also provides that until January 2001, Mr. Glass may not:
- own, have an interest in or be an executive, agent or consultant for, any
company that manufactures, distributes or sells products in North America
that compete with the products that we provided at the time that the
consulting agreement was entered into; or
- solicit business in competition with us from our customers or potential
customers with whom he had contact during the year before the date that he
entered into the consulting agreement.
The agreement also generally prohibits Mr. Glass from soliciting for
employment our employees and our customers' employees with whom he had contact
during his employment with us until January 31, 2002.
PROMISSORY NOTES
LOANS TO MR. LIPARI. In December 1999 and January 2000, our board of
directors approved two $50,000 loans to Mr. Lipari, our chief financial officer.
Both loans bear interest at the rate of 6% per year. Accrued interest on the
loans is due quarterly beginning March 2000, and the principal is due on the
third anniversary of the loan. Mr. Lipari used the proceeds of the loans to
purchase 63,000 shares of our common stock from third parties. As of July 31,
2000, the principal amount outstanding on these loans was $100,000.
LOANS TO MR. GLASS AND MR. NORRIS. In December 1998, our board of directors
approved a $150,000 loan to Mr. Norris, our chairman of the board, president and
chief executive officer, and a $150,000 loan to Mr. Glass, a director and our
former chief technology officer. The principal and accrued interest on each loan
are due in three annual installments, beginning 270 days after the effective
date of the registration statement containing this prospectus. As of July 31,
2000, the entire principal amount of each loan was outstanding and the effective
interest rate for each loan was 6.11%.
PUT RIGHTS
We entered into an agreement in August 1996 with David Cook, who was then an
owner of more than 5% of our stock, under which Mr. Cook has the right to
require us to repurchase shares of his common stock at $3.57 per share. As of
July 31, 2000, Mr. Cook had the right to require us to repurchase up to
1,144,433 shares of common stock. However, under the Agreement, Mr. Cook can
only cause us to repurchase each quarter a number of shares equal to 2.5% of our
total net revenue in the prior quarter divided by $3.57 per share. Mr. Cook has
required us to repurchase the following shares under this agreement:
<TABLE>
<CAPTION>
YEAR NUMBER OF SHARES AGGREGATE PURCHASE PRICE PAID
<S> <C> <C>
1998................................ 82,471 $294,536
1999................................ 122,293 436,765
2000................................ 50,803 181,440
</TABLE>
Mr. Cook's right to require us to repurchase shares expires upon the
completion of this offering.
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<PAGE>
RELATIONSHIP WITH GALILEO INTERNATIONAL
In December 1998, we sold 1,351,352 shares of Series B preferred stock to
Magellen Technologies, which will automatically convert into approximately 10.0%
of our common stock upon the closing of this offering. In 1999, we provided
professional services and licensed our OpenBusiness products to Galileo
International, which is affiliated with Magellen Technologies. We received
$1.6 million from Galileo International in 1999 and $3.6 million in the period
from January 1, 2000 through August 8, 2000. Paul Bristow, a director until
March 2000, was senior vice president of Magellen Technologies. Mr. Near, a
director, is the senior vice president, Internet and eCommerce of Galileo, the
parent company of Galileo International.
PREFERRED STOCK ISSUANCES AND REGISTRATION RIGHTS
The following table summarizes the sales of preferred stock to our executive
officers, directors and principle stockholders, and persons affiliated with
them, since our founding.
<TABLE>
<CAPTION>
INVESTOR SERIES A SERIES B
<S> <C> <C>
Novell...................................................... 571,429 --
Magellen Technologies....................................... -- 1,351,352
Cornerstone Equity Partners................................. -- 27,027
Cornerstone Fund I.......................................... -- 658,784
Venture Fund I.............................................. -- 152,027
</TABLE>
In September 1998, we sold shares of Series A preferred stock to Novell for
a purchase price of $3.50 per share. In December 1998, we sold shares of
Series B preferred stock to Magellen Technologies, whose senior vice president
at the time was Paul Bristow. Mr. Bristow was a member of our board of directors
before his resignation in March 2000. Also, Mr. Near, a director since
March 2000, is the senior vice president, Internet and eCommerce of Galileo, an
affiliate of Magellen Technologies. In December 1998, we also sold shares of
Series B preferred stock to Cornerstone Equity Partners, Cornerstone Fund I and
Venture Fund I, of which Mr. Bentley, a director, is the managing director. The
purchase price for the Series B preferred stock was $3.70 per share.
The preferred stockholders listed above have entered into agreements
entitling them to registration rights on the shares of our common stock issuable
upon the conversion of their preferred stock after this offering.
WARRANT ISSUANCE
In December 1998, we issued a warrant to Growth Capital Partners to purchase
234,595 shares of our common stock at an exercise price of $1.32 per share. The
warrant is fully vested and immediately exercisable and will expire in
December 2003. Mr. Lowenthal, a director, has a 10% beneficial interest in the
warrant and was an employee of Growth Capital Partners until December 1999.
OPTION GRANTS
We have granted options to some of our directors and executive officers, and
we intend to grant additional options to them in the future.
Also, in October 1999, our board of directors approved the grant of a stock
option for 448,000 shares of our common stock to Paul Lipari, our chief
financial officer. Half of this option vests upon the effectiveness of the
registration statement containing this prospectus. The remainder of the option
vests over a four year period, with 25% vesting on each anniversary of the award
date.
INDEMNIFICATION AGREEMENT
In August 2000, we entered into an indemnification agreement with
Mr. Fudge, our senior vice president of sales. Under this agreement, we have
agreed to indemnify Mr. Fudge in the event he is
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<PAGE>
required to repay any of the $564,551 in gain he received from exercising IBM
stock options. IBM, the parent company of Tivoli, Mr. Fudge's former employer,
has claimed that we are a competitor and that Mr. Fudge has performed actions
that have harmed IBM's business and, as a result, that Mr. Fudge is required to
repay these gains under the terms of Mr. Fudge's IBM stock option agreements.
CONFLICT OF INTEREST POLICY
All future transactions between us and our officers, directors and 10%
stockholders will be on terms no less favorable to us than could be obtained
from unaffiliated third parties. These transactions must be approved by a
majority of our independent and disinterested directors if the amount involved
in the transaction exceeds $50,000 or the aggregate amount per director, officer
or 10% stockholder exceeds $100,000.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents information known to us about the beneficial
ownership of our common stock as of June 30, 2000, by:
- each person or entity whom we know to own beneficially more than 5% of our
common stock;
- each of the named executive officers;
- each of our directors; and
- all of our directors and executive officers as of June 30, 2000 as a
group.
The number and percentage of shares beneficially owned is determined under
the rules of the Securities and Exchange Commission and is not necessarily
indicative of beneficial ownership for any other purpose. Under these rules,
beneficial ownership includes any shares for which a person has sole or shared
voting power or investment power and also any shares of common stock underlying
options or warrants that are exercisable by that person within 60 days of
June 30, 2000. However, shares underlying options or warrants are not treated as
outstanding for the purpose of computing the percentage ownership of any other
person or entity.
Unless otherwise indicated in the footnotes, each person listed in the
following table has sole voting and investment power over the shares shown as
beneficially owned by that person. Percentage of beneficial ownership before the
offering is based on 30,364,726 shares of common stock outstanding as of
June 30, 2000, assuming the conversion of all outstanding shares of our
preferred stock into shares of common stock. Percentage of beneficial ownership
after the offering also assumes 7,500,000 shares of common stock are issued in
this offering and no exercise of the underwriters' over-allotment option to
purchase up to an aggregate of 1,125,000 additional shares.
Unless otherwise indicated, the address for each listed person or entity is
c/o ObjectSpace, Inc., 14850 Quorum Drive, Suite 500, Dallas, Texas 75240.
<TABLE>
<CAPTION>
SHARES SHARES BENEFICIALLY
BENEFICIALLY OWNED OWNED AFTER THE
BEFORE THE OFFERING OFFERING
--------------------- ----------------------
NUMBER PERCENT NUMBER PERCENT
<S> <C> <C> <C> <C>
5% STOCKHOLDERS:
Antonio R. Sanchez(1)................ 1,750,000 5.8% 1,750,000 4.6%
Novell(2)............................ 1,600,001 5.3 1,600,001 4.2
Magellen Technologies(3)............. 3,783,785 12.5 3,783,785 10.0
Cornerstone Equity Partners(4)....... 2,345,945 7.8 2,345,945 6.2
DIRECTORS AND NAMED EXECUTIVE
OFFICERS:
David Norris......................... 8,226,400 27.1 8,226,400 21.7
Stewart Bush (5)..................... 166,250 * 166,250 *
Ken Overton(6)....................... 14,000 * 14,000 *
John C. Bentley(4)................... 2,345,945 7.8 2,345,945 6.2
Grant A. Dove(6)..................... 35,000 * 35,000 *
Graham Glass......................... 8,314,600 27.4 8,314,600 22.0
Eugene Lowenthal(7).................. 79,460 * 79,460 *
David Near(8)........................ -- -- -- --
R. Stephen Polley(6)................. 56,000 * 56,000 *
All directors and executive officers
as a group (13 persons)(9)......... 19,120,405 63.0% 19,344,405 51.1%
</TABLE>
------------------------
* Represents less than one percent of the total.
58
<PAGE>
(1) The address for Mr. Sanchez is 1920 Sandman, Laredo, Texas 78041.
(2) Consists of 571,429 shares of Series A preferred stock and assumes the
conversion of each share of Series A preferred stock into 2.8 shares of
common stock. The address for Novell is 1555 N. Technology Way, Orem, Utah
84097.
(3) Consists of 1,351,352 shares of Series B preferred stock and assumes the
conversion of each share of Series B preferred stock into 2.8 shares of
common stock. The address for Magellen Technologies is 9700 West Higgins
Road, Rosemont, Illinois 60018.
(4) Consists of 27,027 shares of Series B preferred stock held of record by
Cornerstone Equity Partners, 658,784 shares of Series B preferred stock held
of record by Cornerstone Fund I and 152,027 shares of Series B preferred
stock held of record by Venture Fund I and assumes the conversion of each
share of Series B preferred stock into 2.8 shares of common stock. The
address for Cornerstone Equity Partners, Cornerstone Fund I and Venture Fund
I is 5050 North 40th Street, Suite 310, Phoenix, Arizona 85018.
Mr. Bentley is the manager of Cornerstone Equity Partners. Mr. Bentley
shares the power to vote and to dispose of the shares held by Cornerstone
Equity Partners with Sherman I. Chu.
Cornerstone Equity Partners is the manager of Cornerstone Fund I and Venture
Fund I. Cornerstone Equity Partners has the power to vote the shares held of
record by Cornerstone Fund I and Venture Fund I and shares the power to
dispose of these shares with the Foundation Companies and New Church
Ventures.
(5) Includes 61,250 shares underlying options.
(6) Consists of shares underlying options.
(7) Consists of 56,000 shares underlying options held by Mr. Lowenthal and
23,460 shares underlying a warrant held by Growth Capital Partners.
(8) Does not include shares held by Magellen. Mr. Near disclaims beneficial
ownership of shares held by Magellen.
(9) Only includes shares beneficially owned by directors and executive officers
as of June 30, 2000 as a group. Includes 371,000 shares underlying options,
224,000 shares of which underlie options held by Mr. Lipari that vest upon
the effectiveness of the registration statement containing this prospectus.
Also includes Mr. Lowenthal's interest in 23,460 shares underlying a warrant
held by Growth Capital Partners.
DESCRIPTION OF CAPITAL STOCK
Following this offering, our authorized capital stock will consist of
95,000,000 shares of common stock, par value $0.01 per share, and 5,000,000
shares of preferred stock, par value $1.00 per share. The following summary of
material provisions of the common stock and the preferred stock is not complete
and is qualified by our certificate of incorporation and bylaws and by the
provisions of applicable law.
COMMON STOCK
As of June 30, 2000, assuming conversion of all shares of convertible
preferred stock into common stock, there would have been 30,364,726 shares of
common stock outstanding held by 112 stockholders of record. There will be
37,864,726 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options or
warrants, after giving effect to the sale of common stock in this offering and
the automatic conversion of all of our outstanding preferred stock into shares
of common stock.
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<PAGE>
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders and do not have cumulative voting
rights. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of outstanding shares of common stock are entitled
to receive dividends out of assets legally available at times and in amounts as
the board may determine. Upon our liquidation, dissolution or winding up, the
holders of our common stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights of
any preferred stock then outstanding. Upon the completion of this offering, the
common stock will have no preemptive or conversion rights or other subscription
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 upon completion of
this offering will be fully paid and nonassessable. The rights, preferences and
privileges of the holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock that we may designate in the future.
PREFERRED STOCK
Upon the closing of this offering, each share of our outstanding Series A
preferred stock and Series B preferred stock will automatically convert into 2.8
shares of common stock. Under the terms of our certificate of incorporation, the
board of directors is authorized, subject to legal limitations, without
stockholder approval, to issue shares of preferred stock in one or more series.
The board of directors would have the power to determine the rights and
privileges of each series, including voting rights, dividend rights, conversion
rights, redemption privileges and liquidation preferences. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of holders of any preferred stock that may be issued in the future.
Issuance of preferred stock, while providing desirable flexibility with possible
acquisitions and for other corporate purposes, could have the effect of making
it more difficult for a party to acquire, or of discouraging a party from
attempting to acquire, a majority of our outstanding voting stock.
WARRANTS
As of August 8, 2000, three warrants were outstanding to purchase an
aggregate of 434,795 shares of our common stock. We also had an outstanding
warrant to purchase a number of shares of common stock equal to $2.5 million
divided by the offering price of the common stock in this offering.
In June 1998, as part of our securing a revolving credit facility, we issued
a warrant to Silicon Valley Bank to purchase up to 196,000 shares of common
stock at a purchase price of $.01 per share. The warrant vested and became
exercisable immediately. This warrant expires on June 16, 2005.
In December 1998, as part of financing transactions, we issued a warrant to
Growth Capital Partners to purchase 234,595 shares of common stock at an
exercise price of $1.32 per share. The warrant is fully vested, immediately
exercisable and will expire in December 2003.
In December 1999, as part of one of our licensing and professional services
transactions, we issued a warrant to General Motors to purchase that number of
shares of common stock equal to $2.5 million divided by the offering price of
the common stock in this offering. The warrant is fully vested and immediately
exercisable, expires one year after the date of this prospectus and has an
exercise price per share equal to the initial public offering price.
In January 2000, as part of our obtaining services from a consultant, we
issued a warrant to Avision to purchase up to 4,200 shares of common stock at a
purchase price of $8.57 per share. The warrant is fully vested, exercisable and
expires in January 2002.
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<PAGE>
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION
Our certificate of incorporation provides for the division of the board of
directors into three classes as nearly equal in size as possible with staggered
three-year terms. Our certificate of incorporation provides that a director may
be removed only by the affirmative vote of the holders of a majority of the
shares of our capital stock entitled to vote if:
- a court has convicted the director of a felony and the conviction is not
subject to direct appeal;
- a court has found the director liable for gross negligence or misconduct
in the performance of his duties to ObjectSpace or in a matter of
substantial importance to ObjectSpace; or
- the director has missed twelve consecutive meetings of the Board of
Directors.
The likely effect of the classification of the board of directors and the
limitations on the removal of directors is an increase in the time required for
the stockholders to change the composition of the board of directors.
Upon the effectiveness of this offering, our certificate of incorporation
will provide that all stockholder actions must be taken at a duly called meeting
and will prohibit stockholder action by written consent. Our bylaws provide that
special meetings of the stockholders may only be called by a resolution approved
by at least a majority of the board of directors or by holders of record of at
least 25% of the outstanding shares of capital stock that are entitled to vote
at the meeting. Our bylaws further provide that for a stockholder to bring
business to be voted upon at an annual or special meeting or to nominate a
director, the stockholder must provide advance notice to us.
These provisions could delay until the next stockholders' meeting actions
which are favored by the holders of a majority of our outstanding voting
securities. These provisions may also discourage a tender offer for our common
stock, because anyone acquiring our voting securities would only be able to take
stockholder action at a duly called stockholders' meeting and not by written
consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or bylaws, unless
a corporation's certificate of incorporation or bylaws requires a greater
percentage. Our certificate of incorporation requires the affirmative vote of
the holders of at least two-thirds of the shares of our capital stock that are
issued and outstanding and entitled to vote to amend or repeal various
provisions of our certificate of incorporation. Our bylaws may generally be
amended or repealed by a vote of two-thirds of the board of directors and may
also be amended or repealed by the affirmative vote of the holders of at least
two-thirds of the outstanding shares of each class of stock that is entitled to
vote. Also, a separate class vote might be required under the terms of preferred
stock that might be issued in the future.
DELAWARE TAKEOVER STATUTE
We are subject to section 203 of the General Corporation Law of the State of
Delaware, which, in general, prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years following the date of the transaction in which the person or entity became
an interested stockholder. A business combination includes mergers, asset sales
and other transactions resulting in a financial benefit to the interested
stockholder. An interested stockholder is any entity or person, alone or with
affiliates and associates, who owns, or within the last three years has owned,
15% or more of the outstanding voting stock. This provision could discourage
anti-takeover attempts not approved by our board of directors, including
attempts that might result in a premium over the market price for shares of
common stock by our stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock will be American Stock
Transfer and Trust Company.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, assuming no exercise of the underwriters'
over-allotment option or of outstanding options or warrants, we will have an
aggregate of 37,876,530 shares of common stock outstanding. Of these shares, the
7,500,000 shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless the shares
are purchased by our affiliates under Rule 144 of the Securities Act.
SALES OF RESTRICTED SHARES
The remaining 30,364,726 shares of common stock, which includes the shares
of common stock issuable upon conversion of outstanding shares of preferred
stock, were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. As a result, these shares are
restricted shares and may only be sold in the public market if registered under
the Securities Act or if they can be sold under Rule 144.
LOCK-UP AGREEMENTS
Of the restricted shares, will be subject to lock-up agreements
providing that the stockholder will not offer, sell or otherwise dispose of any
of the shares of common stock owned by them for a period of 180 days after the
date of this offering.
However, holders of restricted shares who have not been officers, directors
or affiliates on or since the date of this prospectus may offer, sell or
otherwise dispose of up to 25% of their shares on the earlier of:
- 90 days after the date of this offering; or
- on the second trading day after the first public release of our quarterly
results, if the last recorded sale price on the Nasdaq National Market for
20 of the 30 trading days ending on that date is at least twice the price
per share in this offering.
These stockholders may also offer, sell or otherwise dispose up to an additional
25% of their shares 135 days after the date of this offering if the price per
share of common stock has achieved the same target level.
Donaldson, Lufkin & Jenrette may in its sole discretion, at any time without
notice, release all or any portion of the shares subject to lock-up agreements.
Donaldson, Lufkin & Jenrette has approved pledges of up to 3,609,446 shares of
common stock to secure loans. If a default occurs under a loan, the lender may
foreclose upon and sell the pledged shares.
Upon expiration of the lock-up agreements, approximately shares will
become eligible for sale under Rule 144(k), approximately shares will become
eligible for sale under Rule 144 and approximately shares will become
eligible for sale under Rule 701.
RULE 144
In general, under Rule 144, a person, including an affiliate, who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 378,765 shares immediately after this offering; or
- the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 for the sale.
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<PAGE>
Sales under Rule 144 are generally subject to manner of sale provisions, notice
requirements and the availability of current public information about us.
RULE 144(K)
Under Rule 144(k), a person who:
- was not our affiliate at any time during the three months preceding a
sale; and
- has beneficially owned the shares proposed to be sold for at least two
years, including the holding period of any prior owner other than an
affiliate,
is entitled to sell the shares without complying with the manner of sale, public
information, volume limitation or notice filing provisions of Rule 144.
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us under a compensatory stock
or option plan or other written agreement before the effective date of this
offering may resell these shares 90 days after the effective date of this
offering. Securities issued in reliance on Rule 701 are restricted securities
and, subject to lock-up agreements, may be sold:
- by persons other than affiliates subject only to the manner of sale
provisions of Rule 144; and
- by affiliates under Rule 144 without compliance with its one year minimum
holding period requirement.
REGISTERED SALES
After the completion of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act to register all of the shares of
common stock issued or reserved for future issuance under our stock option
plans. Based upon the number of shares subject to outstanding options as of
July 31, 2000 and currently reserved for issuance under these plans, this
registration statement would cover approximately 9,954,328 shares. Shares
registered under the registration statement will generally be available for sale
in the open market immediately after the lock-up agreements expire.
WARRANTS
As of July 31, 2000, we had outstanding warrants currently exercisable for a
total of 434,795 shares of common stock. We also had an outstanding warrant to
purchase a number of shares of common stock equal to $2.5 million divided by the
offering price of the common stock in this offering. All of these shares are
restricted by the terms of the lock-up agreements.
REGISTRATION RIGHTS
After this offering, the holders of 12,957,999 shares of common stock and
warrants to purchase common stock will be entitled to registration rights. Also,
the holders of a warrant to purchase that number of shares of common stock equal
to $2.5 million divided by the offering price of the common stock on the
effective date of this prospectus will be entitled to registration rights. If we
propose to register any of our securities under the Securities Act, either for
our own account or for the account of other security holders exercising
registration rights, we must notify these security holders and these security
holders may be entitled to include all or part of their shares in the
registration. Further, the holders of these registration rights may require us
to file additional registration statements on Form S-3. The holders of 9,363,567
shares of common stock and warrants to purchase common stock have demand
registration rights under which they may require us to use our best efforts or
63
<PAGE>
commercially reasonable efforts to register shares of their common stock. All of
these registration rights are subject to various conditions and limitations,
including:
- the right of underwriters to limit the number of shares included in a
registration;
- our right to refuse to start a requested registration following an
offering of our securities, including this offering, for a period of time
that ranges from 120 days to 180 days depending on the registration rights
agreement;
- in some circumstances, a minimum number of shares that must be included in
a request for registration; and
- in some circumstances, the requirement that a demand registration be
underwritten.
64
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated
, 2000, the underwriters named below, who are represented by Donaldson,
Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co. Inc., Dain
Rauscher Incorporated, UBS Warburg LLC and DLJDIRECT Inc. have severally agreed
to purchase from ObjectSpace the number of shares of common stock shown opposite
their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Bear, Stearns & Co. Inc.....................................
Dain Rauscher Incorporated..................................
UBS Warburg LLC.............................................
DLJDIRECT Inc.
---------
Total..................................................... 7,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered by this prospectus are subject to the approval by their counsel of legal
matters and other conditions. The underwriters must purchase and accept delivery
of all of the shares of common stock offered by this prospectus, other than
those shares covered by the over-allotment option described below, if any are
purchased.
The underwriters propose initially to offer some of the shares of common
stock directly to the public at the public offering price on the cover page of
this prospectus and some of these shares of common stock to dealers, including
the underwriters, at the public offering price less a concession not in excess
of $ per share. The underwriters may allow, and these dealers may re-allow, a
concession not in excess of $ per share on sales to other dealers. After the
initial offering of the common stock to the public, the representatives of the
underwriters may change the public offering price and other selling terms.
We have granted to the underwriters an option, exercisable within 30 days
after the date of this prospectus, to purchase up to 1,125,000 additional shares
of common stock at the initial public offering price less underwriting discounts
and commissions. The underwriters may exercise this option solely to cover
over-allotments, if any, made in connection with the offering. To the extent
that the underwriters exercise this option, each underwriter will become
obligated, under conditions specified in the underwriting agreement, to purchase
its pro rata portion of the additional shares based on that underwriter's
percentage underwriting commitment as indicated in the preceding table.
The following table shows the underwriting fees to be paid by us in this
offering. These amounts are shown assuming both no exercise and full exercise of
the underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share .................................................. $ $
Total.......................................................
</TABLE>
We will pay the offering expenses, estimated to be $ .
65
<PAGE>
We, our officers and directors and substantially all of our stockholders
have agreed, for a period of 180 days after the date of this prospectus, without
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation, not to:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant for the sale of or otherwise dispose of or transfer directly or
indirectly any shares of common stock or any securities convertible into
or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences of ownership of the common stock, whether any
such transaction described above is to be settled by delivery of common
stock or other securities, in cash or otherwise.
The underwriting agreement contains limited exceptions to these lock-up
agreements.
However, holders of shares who have not been employees since the date of
this prospectus may offer, sell or otherwise dispose of:
- 25% of the shares they own on the date of this prospectus if at end of the
90-day period after the date of this prospectus or the second trading day
following the first public release of our quarterly results after the date
of this prospectus, whichever is later, the reported last sale price of
the common stock on the Nasdaq National Market has been at least twice the
price per share in this offering for 20 of the 30 trading days ending on
the last trading day of such applicable period; and
- an additional 25% of those shares if at the end of the 135-day period
after the date of this prospectus the reported last sale price of the
common stock on the Nasdaq National Market is at least twice the price per
share in this offering for 20 of the 30 trading days ending on the last
trading day of this 135-day period.
In addition, during this 180-day period, we have also agreed not to file any
registration statement for, and each of our executive officers, directors and
stockholders have agreed not to make any demand for, or exercise any right for,
the registration of any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock without the prior written
consent of Donaldson, Lufkin & Jenrette Securities.
An electronic prospectus is available on the Web site maintained by
DLJDIRECT Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation.
We have agreed to indemnify the underwriters against specified civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the underwriters may be required to make because of these
liabilities.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol OBSP upon official notification of issuance.
At our request, certain of the underwriters have reserved for sale at the
initial public offering price up to 500,000 shares of common stock offered by
this prospectus for sale to our employees, directors and other persons
designated by us. The number of shares available for sale to the general public
will be reduced to the extent that any reserved shares are purchased. Any
reserved shares not so purchased will be offered by the underwriters on the same
basis as the other shares offered through this prospectus.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over-allot the offering by
making short sales. Short sales involve the sales by the underwriters of a
greater number of shares than they are required to purchase. There are two types
of short sales. Covered short
66
<PAGE>
sales are sales made in an amount not greater than the amount of shares the
underwriters can purchase pursuant to their over-allotment option. Naked short
sales are sales in excess of their over-allotment option. A naked short position
is more likely to be created if the underwriters are concerned that there may be
downward pressure on the trading price of shares in the open market that could
affect investors who purchase shares in the offering. The underwriters may
reduce or close out their covered short position either by exercising the
over-allotment option or by purchasing shares in the open market. In determining
which of these alternatives to pursue, the underwriters will consider, among
other things, the price at which shares are available for purchase in the open
market as compared to the price at which they may purchase shares by exercising
their over-allotment option. Any naked short position, however, will be closed
out by purchasing shares in the open market. Purchases to cover a short position
may have the effect of preventing or retarding a decline in the market price of
the stock following this offering. As a result, the price of the stock may be
higher than the price that might otherwise exist in the open market. The
underwriters may also bid for and purchase shares of common stock in the open
market to stabilize the price of the common stock. In addition, the underwriting
syndicate may reclaim selling concessions if the syndicate repurchases
previously distributed common stock in syndicate covering transactions, in
stabilization transactions or in some other way or if Donaldson, Lufkin &
Jenrette Securities Corporation receives a report that indicated clients of such
syndicate members have flipped the common stock. These activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities, and may
end any of these activities at any time.
Other than in the United States, no action has been taken by us, the selling
shareholders or the underwriters that would permit a public offering of the
shares of common stock offered by this prospectus in any jurisdiction where
action for that purpose is required. The shares of common stock offered by this
prospectus may not be offered or sold, directly or indirectly, nor may this
prospectus or any other offering material or advertisements associated with the
offer and sale of any the shares of common stock offered through this prospectus
be distributed or published in any jurisdiction, except under circumstances that
will result in compliance with the applicable rules and regulations of that
jurisdiction. You should inform yourself and observe any restrictions relating
to the offering of the common stock and the distribution of this prospectus.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any shares of common stock offered in this prospectus in any
jurisdiction in which an offer or a solicitation is unlawful.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Haynes and Boone, LLP, Dallas, Texas. Legal matters affecting the
offering will be passed upon for the underwriters by Brobeck, Phleger & Harrison
LLP, Austin, Texas.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1999 and 1998, and for each of the three years in the
period ended December 31, 1999, as set forth in their report. We've included our
financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
67
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WHERE YOU CAN FIND MORE INFORMATION
This prospectus constitutes a part of a registration statement on Form S-1,
which we have filed with the Securities and Exchange Commission with respect to
the common stock offered in this prospectus. This prospectus does not contain
all of the information in the registration statement. For further information
about us and our securities, see the registration statement and its amendments,
supplements, schedules and exhibits. This prospectus contains a description of
the material terms and features of some material contracts, reports or exhibits
to the registration statement. However, as the descriptions are summaries of the
contracts, reports or exhibits, we urge you to refer to the copy of each
material contract, report and exhibit attached to the registration statement.
Copies of the registration statement and the exhibits to the registration
statement, as well as the periodic reports, proxy statements and other
information we will file with the Securities and Exchange Commission, may be
examined without charge in the public reference section of the Securities and
Exchange Commission, 450 Fifth Street, N.W. Room 1024, Washington, DC 20549, and
the Securities and Exchange Commission's regional offices located at 500 West
Madison Street, Suite 1400, Chicago, IL 60661, and 7 World Trade Center, 13th
Floor, New York, NY 10048 or on the Internet at http://www.sec.gov. You can get
information about the operation of the public reference room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. Copies of all or a portion
of the registration statement can be obtained from the public reference section
of the Securities and Exchange Commission upon payment of their fees.
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934 and will be
required to file periodic reports, proxy statements and other information with
the Securities and Exchange Commission. We will send an annual report to
stockholders and any additional reports or statements required by the Securities
and Exchange Commission. The annual report to stockholders will contain
financial information that has been examined and reported on, with an opinion
expressed by an independent public accountant. The Securities and Exchange
Commission maintains a website which provides online access to periodic reports,
proxy and information statements and other information regarding registrants
that file electronically with the Securities and Exchange Commission at the
address http://www.sec.gov.
68
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets as of December 31, 1998 and 1999 and
June 30, 2000 (unaudited)................................. F-3
Statements of Operations for the years ended December 31,
1997, 1998 and 1999 and for the six months ended June 30,
1999 and 2000 (unaudited)................................. F-4
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1997, 1998 and 1999 and for the six
months ended June 30, 2000 (unaudited).................... F-5
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999 and for the six months ended June 30,
1999 and 2000 (unaudited)................................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
ObjectSpace, Inc.
We have audited the accompanying balance sheets of ObjectSpace, Inc. (the
Company) as of December 31, 1998 and 1999, and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ObjectSpace, Inc., at
December 31, 1998 and 1999, and the results of its operations and its 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.
ERNST & YOUNG LLP
Dallas, Texas
March 30, 2000
F-2
<PAGE>
OBJECTSPACE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
AS OF DECEMBER 31, JUNE 30, JUNE 30,
-------------------------- ------------ ------------
1998 1999 2000 2000
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $11,326,740 $ 1,669,745 $ 69,724 $ 69,724
Marketable securities available for sale.................. -- 3,001,082 8,270,333 8,270,333
Accounts receivable, less allowance of $71,000, $238,000
and $312,000, respectively.............................. 2,193,218 9,046,487 7,043,046 7,043,046
Prepaid expenses.......................................... 122,084 272,069 717,134 717,134
Net assets held for sale.................................. -- 1,140,596 -- --
----------- ------------ ------------ ------------
Total current assets.................................... 13,642,042 15,129,979 16,100,237 16,100,237
Property and equipment, net................................. 1,813,979 1,801,199 1,762,189 1,762,189
Notes receivable from officers and common stockholders...... 150,000 350,000 400,000 400,000
Other assets................................................ 198,667 261,778 600,248 600,248
----------- ------------ ------------ ------------
Total assets............................................ $15,804,688 $ 17,542,956 $ 18,862,674 $ 18,862,674
=========== ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 43,815 $ 507,169 $ 1,139,993 $ 1,139,993
Accrued liabilities....................................... 1,881,432 2,744,335 4,582,173 4,582,173
Notes payable............................................. 20,680 -- -- --
Unearned revenue and customer deposits.................... 607,541 3,525,600 2,257,378 2,257,378
Current portion of long-term debt and capital lease
obligations............................................. 198,946 3,482,004 2,424,243 2,424,243
----------- ------------ ------------ ------------
Total current liabilities............................... 2,752,414 10,259,108 10,403,787 10,403,787
Long-term debt.............................................. 2,813,925 -- 892,438 892,438
Long-term unearned revenue.................................. -- 916,000 447,415 447,415
Capital lease obligations................................... 288,318 176,738 111,770 111,770
----------- ------------ ------------ ------------
Total liabilities....................................... 5,854,657 11,351,846 11,855,410 11,855,410
Commitments and contingencies
REDEEMABLE STOCK AND PUT WARRANTS TO PURCHASE COMMON STOCK:
Redeemable common stock (1,317,529 shares at December 31,
1998, 1,195,236 shares at December 31, 1999 and
1,144,433 shares at June 30, 2000 (unaudited)) and put
warrants to purchase common stock....................... 1,440,942 1,901,155 4,342,389 --
Redeemable convertible Series A preferred stock,
$2,000,002 aggregate liquidation value, $1.00 par value:
571,429 shares authorized, issued and outstanding....... 1,932,771 2,738,151 3,140,841 --
Redeemable convertible Series B preferred stock,
$10,000,001 aggregate liquidation value, $1.00 par
value: 2,702,703 shares authorized, issued and
outstanding............................................. 9,556,842 13,329,794 15,216,272 --
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $1.00 par value: shares
authorized--1,725,868; shares issued and
outstanding--none.
Common stock, $0.01 par value: shares
authorized--95,000,000; shares issued and
outstanding--19,633,656 at December 31, 1998, 19,685,032
at December 31, 1999 and 20,052,726 shares at June 30,
2000 (unaudited) and 30,364,726 shares pro forma at
June 30, 2000 (unaudited)............................... 196,337 196,850 200,527 303,647
Additional paid-in capital................................ 3,230,294 291,707 -- 22,596,382
Deferred stock compensation............................... -- (1,699,566) (1,922,908) (1,922,908)
Accumulated deficit....................................... (6,407,155) (10,560,185) (13,985,921) (13,985,921)
Accumulated other comprehensive income (loss)............. -- (6,796) 16,064 16,064
----------- ------------ ------------ ------------
Total stockholders' equity (deficit).................... (2,980,524) (11,777,990) (15,692,238) 7,007,264
----------- ------------ ------------ ------------
Total liabilities and stockholders' equity (deficit).... $15,804,688 $ 17,542,956 $ 18,862,674 $ 18,862,674
=========== ============ ============ ============
</TABLE>
The accompanying notes to the financial statements are
an integral part of these financial statements.
F-3
<PAGE>
OBJECTSPACE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUE:
License (Note 16)...................................... $ 1,547,312 $ 908,196 $ 5,250,425 $ 1,230,938 $ 5,548,231
Service................................................ 10,069,779 10,897,098 14,895,536 6,437,766 10,532,822
----------- ----------- ----------- ----------- -----------
Total net revenue.................................... 11,617,091 11,805,294 20,145,961 7,668,704 16,081,053
COST OF REVENUE:
License................................................ 967,659 713,629 924,179 467,431 382,514
Service................................................ 6,808,356 7,421,755 10,447,514 4,451,432 7,184,968
----------- ----------- ----------- ----------- -----------
Total cost of revenue................................ 7,776,015 8,135,384 11,371,693 4,918,863 7,567,482
----------- ----------- ----------- ----------- -----------
Gross profit............................................. 3,841,076 3,669,910 8,774,268 2,749,841 8,513,571
OPERATING EXPENSE:
Sales and marketing.................................... 2,863,025 3,711,615 6,773,116 3,119,636 7,190,587
Research and development............................... 1,801,774 1,811,149 4,074,915 1,610,230 2,755,188
General and administrative............................. 2,964,973 2,808,197 3,955,983 1,821,535 2,251,439
Noncash stock compensation expense..................... -- -- 232,051 55,973 342,176
----------- ----------- ----------- ----------- -----------
Total operating expense.............................. 7,629,772 8,330,961 15,036,065 6,607,374 12,539,390
----------- ----------- ----------- ----------- -----------
Operating loss from continuing operations................ (3,788,696) (4,661,051) (6,261,797) (3,857,533) (4,025,819)
Interest expense......................................... 55,749 249,056 641,609 299,438 2,446,417
Interest income and other, net........................... (21,162) (56,463) (256,102) (180,662) (147,637)
----------- ----------- ----------- ----------- -----------
Loss from continuing operations before income taxes...... (3,823,283) (4,853,644) (6,647,304) (3,976,309) (6,324,599)
Income tax expense (benefit)............................. (214,041) -- -- -- 66,667
----------- ----------- ----------- ----------- -----------
Loss from continuing operations.......................... (3,609,242) (4,853,644) (6,647,304) (3,976,309) (6,391,266)
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations, net of
income taxes of $0 for 1997, 1998 and 1999........... 1,317,238 491,896 (73,210) (21,073) --
Gain on sale of discontinued operations, net income
taxes of $0 for 1997, 1998 and 1999.................. -- -- 2,567,484 -- 4,442,878
----------- ----------- ----------- ----------- -----------
Income (loss) from discontinued operations........... 1,317,238 491,896 2,494,274 (21,073) 4,442,878
----------- ----------- ----------- ----------- -----------
Net loss................................................. (2,292,004) (4,361,748) (4,153,030) (3,997,382) (1,948,388)
Accretion of redeemable preferred stock and common
stock.................................................. -- 210,303 5,424,584 2,709,306 2,727,718
----------- ----------- ----------- ----------- -----------
Net loss attributable to common stockholders............. $(2,292,004) $(4,572,051) $(9,577,614) $(6,706,688) $(4,676,106)
=========== =========== =========== =========== ===========
Basic and diluted loss per common share:
Loss from continuing operations........................ $ (0.18) $ (0.26) $ (0.61) $ (0.34) $ (0.46)
Income (loss) from discontinued operations............. 0.06 0.03 0.12 -- 0.23
----------- ----------- ----------- ----------- -----------
Net loss............................................... $ (0.12) $ (0.23) $ (0.49) $ (0.34) $ (0.23)
=========== =========== =========== =========== ===========
Weighted average number of common shares outstanding..... 19,624,401 19,632,121 19,640,120 19,635,073 19,912,369
=========== =========== =========== =========== ===========
Pro forma basic and diluted net loss per common share:
Loss from continuing operations........................ $ (0.22) $ (0.21)
Income from discontinued operations.................... 0.08 0.15
----------- -----------
Net loss............................................... $ (0.14) $ (0.06)
=========== ===========
Shares used in computing pro forma basic and diluted net
loss per common share.................................. 30,075,998 30,224,369
=========== ===========
</TABLE>
The accompanying notes to the financial statements are
an integral part of these financial statements.
F-4
<PAGE>
OBJECTSPACE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED EARNINGS OTHER
------------------------ PAID-IN STOCK (ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT) INCOME (LOSS)
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1996.... 19,606,300 $ 3,619,012 $ -- $ -- $ 246,597 $ --
Reincorporation of Company in
Delaware....................... -- (3,422,949) 3,422,949 -- -- --
Exercise of employee stock
options........................ 20,328 203 7,057 -- -- --
Tax benefit of employee stock
option exercise................ -- -- 7,623 -- -- --
Net loss......................... -- -- -- -- (2,292,004) --
---------- ----------- ---------- ----------- ------------ --------
Balance as of December 31, 1997.... 19,626,628 196,266 3,437,629 -- (2,045,407) --
Exercise of employee stock
options........................ 7,028 71 2,968 -- -- --
Accretion of redeemable common
stock.......................... -- -- (210,303) -- -- --
Net loss......................... -- -- -- -- (4,361,748) --
---------- ----------- ---------- ----------- ------------ --------
Balance as of December 31, 1998.... 19,633,656 196,337 3,230,294 -- (6,407,155) --
Exercise of employee stock
options........................ 51,376 513 59,659 -- -- --
Deferred compensation--employee
stock options.................. -- -- 2,036,338 (2,036,338) -- --
Amortization of deferred
compensation................... -- -- -- 336,772 -- --
Issuance of warrants............. -- -- 390,000 -- -- --
Accretion of redeemable common
stock.......................... -- -- (840,278) -- -- --
Accretion of redeemable preferred
stock.......................... -- -- (4,584,306) -- -- --
Net unrealized losses on
marketable securities.......... -- -- -- -- -- (6,796)
Net loss......................... -- -- -- -- (4,153,030) --
---------- ----------- ---------- ----------- ------------ --------
Balance as of December 31, 1999.... 19,685,032 196,850 291,707 (1,699,566) (10,560,185) (6,796)
Exercise of employee stock
options (unaudited)............ 360,274 3,603 376,069 -- -- --
Deferred compensation--employee
stock options (unaudited)...... -- -- 688,212 (565,518) (122,694) --
Amortization of deferred
compensation (unaudited)....... -- -- -- 342,176 -- --
Issuance of common stock and
warrants in exchange for
services (unaudited)........... 7,420 74 17,076 -- -- --
Accretion of redeemable common
stock (unaudited).............. -- -- (228,480) -- (210,070) --
Accretion of redeemable preferred
stock (unaudited).............. -- -- (1,144,584) -- (1,144,584) --
Net unrealized gains on
marketable securities
(unaudited).................... -- -- -- -- -- 22,860
Net loss (unaudited)............. -- -- -- -- (1,948,388) --
---------- ----------- ---------- ----------- ------------ --------
Balance at June 30, 2000
(unaudited)...................... 20,052,726 $ 200,527 $ -- ($1,922,908) ($13,985,921) $ 16,064
========== =========== ========== =========== ============ ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY COMPREHENSIVE
(DEFICIT) LOSS
<S> <C> <C>
Balance as of December 31, 1996.... $ 3,865,609
Reincorporation of Company in
Delaware....................... --
Exercise of employee stock
options........................ 7,260
Tax benefit of employee stock
option exercise................ 7,623
Net loss......................... (2,292,004) $(2,292,004)
------------ -----------
Balance as of December 31, 1997.... 1,588,488 $(2,292,004)
===========
Exercise of employee stock
options........................ 3,039
Accretion of redeemable common
stock.......................... (210,303)
Net loss......................... (4,361,748) $(4,361,748)
------------ -----------
Balance as of December 31, 1998.... (2,980,524) $(4,361,748)
===========
Exercise of employee stock
options........................ 60,172
Deferred compensation--employee
stock options.................. --
Amortization of deferred
compensation................... 336,772
Issuance of warrants............. 390,000
Accretion of redeemable common
stock.......................... (840,278)
Accretion of redeemable preferred
stock.......................... (4,584,306)
Net unrealized losses on
marketable securities.......... (6,796) $ (6,796)
Net loss......................... (4,153,030) (4,153,030)
------------ -----------
Balance as of December 31, 1999.... (11,777,990) $(4,159,826)
===========
Exercise of employee stock
options (unaudited)............ 379,672
Deferred compensation--employee
stock options (unaudited)...... --
Amortization of deferred
compensation (unaudited)....... 342,176
Issuance of common stock and
warrants in exchange for
services (unaudited)........... 17,150
Accretion of redeemable common
stock (unaudited).............. (438,550)
Accretion of redeemable preferred
stock (unaudited).............. (2,289,168)
Net unrealized gains on
marketable securities
(unaudited).................... 22,860 $ 22,860
Net loss (unaudited)............. (1,948,388) (1,948,388)
------------ -----------
Balance at June 30, 2000
(unaudited)...................... ($15,692,238) ($1,925,528)
============ ===========
</TABLE>
The accompanying notes to the financial statements are
an integral part of these financial statements.
F-5
<PAGE>
OBJECTSPACE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- --------------------------
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss................................................. $(2,292,004) $(4,361,748) $(4,153,030) $ (3,997,382) $(1,948,388)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 642,009 690,534 817,734 359,665 458,404
Amortization of debt discount and put warrant
adjustments........................................... -- (89,471) 132,392 72,144 2,196,739
Noncash stock compensation expense & other noncash
charges............................................... -- -- 232,051 55,973 359,326
Provision for bad debts................................ 41,375 63,421 166,851 -- 80,000
Tax benefit of employee stock option exercise.......... 7,623 -- -- -- --
(Income) loss from discontinued operations............. (1,317,238) (491,896) 73,210 21,073 --
Gain on sale of discontinued operation................. -- -- (2,567,484) -- (4,442,878)
Deferred income taxes.................................. (215,601) -- -- -- --
Changes in operating assets and liabilities:
Accounts receivable.................................. 253,933 738,823 (6,582,154) (2,119,938) 1,923,441
Prepaid expenses..................................... (127,539) 115,593 (129,132) (79,111) (445,064)
Other assets......................................... (30,811) (24,033) (119,778) 9,581 (338,471)
Accounts payable..................................... 26,239 (46,356) 456,050 90,582 632,824
Accrued liabilities.................................. 403,690 915,961 454,931 189,424 1,516,180
Unearned revenue and customer deposits............... 1,032,467 (782,039) 2,021,707 257,048 (1,268,222)
Long-term unearned revenue........................... -- -- 916,000 -- (468,585)
----------- ----------- ----------- ------------ -----------
Net cash used in operating activities...................... (1,575,857) (3,271,211) (8,280,652) (5,140,941) (1,744,694)
Net cash provided by (used in) discontinued operations..... 907,313 1,033,693 494,106 (795,728) 21,571
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment......................... (1,000,215) (495,069) (1,304,304) (657,660) (419,395)
Notes receivable from officers and common stockholders..... -- (150,000) (200,000) (200,000) (50,000)
Proceeds from sale of discontinued operations.............. -- -- 2,931,000 -- 5,883,562
Purchase of marketable securities.......................... -- -- (3,007,878) (3,786,779) (5,246,391)
----------- ----------- ----------- ------------ -----------
Net cash provided by (used in) investing activities........ (1,000,215) (645,069) (1,581,182) (4,644,439) 167,776
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on capital leases................................. (205,487) (175,670) (243,414) (81,232) (191,167)
Proceeds from issuance of notes payable and long-term
debt..................................................... 225,318 3,000,000 437,753 437,753 1,500,000
Payments on notes payable and long-term debt............... (30,063) (189,149) (101,039) (15,149) (1,551,739)
Payments for redemption of redeemable stock................ -- (294,536) (436,765) (105,445) (181,440)
Proceeds from issuance of preferred stock.................. -- 11,489,613 -- -- --
Issuance costs related to preferred stock and debt
offerings................................................ -- (170,000) (5,974) (5,974) --
Proceeds from exercise of stock options.................... 7,260 3,039 60,172 1,790 379,672
----------- ----------- ----------- ------------ -----------
Net cash provided by (used in) financing activities........ (2,972) 13,663,297 (289,267) 231,743 (44,674)
----------- ----------- ----------- ------------ -----------
Net increase (decrease) in cash and cash equivalents....... (1,671,731) 10,780,710 (9,656,995) (10,349,365) (1,600,021)
Cash and cash equivalents at beginning of period........... 2,217,761 546,030 11,326,740 11,326,740 1,669,745
----------- ----------- ----------- ------------ -----------
Cash and cash equivalents at end of period................. $ 546,030 $11,326,740 $ 1,669,745 $ 977,375 $ 69,724
=========== =========== =========== ============ ===========
Cash paid during the period for interest................... $ 55,749 $ 338,532 $ 452,551 $ 211,234 $ 221,064
=========== =========== =========== ============ ===========
NON CASH INVESTING AND FINANCING ACTIVITIES
Assets acquired under capital lease........................ $ 658,128 $ -- $ 167,881 $ -- $ --
=========== =========== =========== ============ ===========
</TABLE>
The accompanying notes to the financial statements are
an integral part of these financial statements.
F-6
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
ObjectSpace, Inc. (the Company), was incorporated under the laws of the
State of Texas on August 17, 1992. The Company was reincorporated under the laws
of the State of Delaware on November 24, 1997. As part of this reincorporation,
the Company recapitalized its common stock to a $0.01 par value and authorized
the issuance of one million shares of preferred stock.
The Company provides business-to-business, or B2Bi, software products that
enable organizations to easily and rapidly integrate business applications
within and across organizations over the Internet. The Company's OpenBusiness
software allows organizations to link their business processes, sharing
services, conducting transactions and exchanging information in real-time, with
customers, suppliers and other trading partners. The Company expects a
substantial portion of its license and service revenue to be generated from its
OpenBusiness products for the year 2000 and beyond.
STOCK DIVIDEND
On January 14, 2000, the Company's Board of Directors authorized a 100%
stock dividend for stockholders of record at the close of business on
January 14, 2000. On March 11, 2000, the Company's Board of Directors authorized
a 40% stock dividend for stockholders of record at the close of business on
March 30, 2000. All share and per-share amounts in the accompanying financial
statements have been restated to give effect to these stock dividends.
Additionally, the Company increased the common shares authorized to 95,000,000
effective March 30, 2000.
INTERIM FINANCIAL INFORMATION
The interim financial information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited but, in the opinion of management,
includes all adjustments which are of a normal recurring nature and are
necessary for a fair presentation of the financial position and results of
operations for the periods presented. Results of operations for the six months
ended June 30, 2000 are not necessarily indicative of results of operations to
be expected for the entire fiscal year.
PRO FORMA BALANCE SHEET AND EARNINGS (LOSS) PER SHARE INFORMATION
The pro forma balance sheet information as of June 30, 2000 reflects:
1) the automatic conversion of each share of Series A and Series B redeemable
convertible preferred stock outstanding as of June 30, 2000 into 2.8 shares of
the Company's common stock (See Note 12), and 2) the elimination of rights one
of the Company's common stockholders has to require the Company to repurchase
certain shares of the Company's common stock (See Note 12) both of which will
occur upon the closing of an initial public offering. The pro forma loss per
share information for the year ended December 31, 1999 and six months ended
June 30, 2000 reflect the conversion of the Series A and Series B redeemable
preferred stock (the Conversion) and the elimination of the right one of the
common shareholders has to require the Company to repurchase certain shares (the
Termination) as if the Conversion and Termination occurred at the beginning of
each period for which pro forma loss per share has been presented.
F-7
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Software license revenue is recognized upon execution of a contract and
delivery of software, provided that the license fee is fixed and determinable;
no significant production, modification, or customization of the software is
required; collection is considered probable by management; and vendor-specific
objective evidence exists to allow the allocation of the total fee to elements
of the arrangement. In December 1998, the AICPA issued SOP 98-9, "Software
Revenue Recognition with Respect to Certain Arrangements." This SOP requires
recognition of revenue using the "residual method" in a multiple element
arrangement when fair value does not exist for one or more of the delivered
elements in the arrangement. Under the "residual method," the total fair value
of the undelivered elements is deferred and subsequently recognized in
accordance with SOP 97-2. The Company adopted the provisions of this SOP
effective January 1, 1999. The Company did not have a material change to its
accounting for revenue as a result of the provisions of SOP 98-9. License
revenue from resale of our products by third parties is recognized at the time
the third party delivers the product to their customer. We do not provide
customer acceptance rights or rights of return to these third parties. For
arrangements with multiple elements, the Company allocated revenue to each
element of the arrangement based on objective evidence of its fair value, which
is specific to the Company, or for products not being sold separately, the price
established by management.
Revenue for consulting services performed under fixed-price contracts, which
are in excess of six months in duration, is recognized on a
percentage-of-completion method. Revenue from these contracts is recognized in
the proportion that labor hours incurred to date bear to total estimated labor
hours at completion. Anticipated losses on fixed-price contracts are recognized
when estimable. Revenue generated from consulting services performed under time
and materials agreements is recognized as services are performed and includes
reimbursement of expenses incurred in connection with the performance of
service. Maintenance contract revenue is recognized ratably over the term of the
related contract.
ADVERTISING COSTS
Advertising costs are expensed upon first showing. Amounts expensed were
approximately $552,000, $743,000 and $1.0 million in 1997, 1998 and 1999,
respectively.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments with a maturity period of
three months or less at the date of purchase. Cash equivalents are stated at
cost, which approximates fair value.
MARKETABLE SECURITIES
As of December 31, 1999, marketable securities consisted of investments in
corporate and government bond mutual funds. These securities are classified as
"available for sale" since management intends to hold the securities for an
indefinite period of time and may sell the securities prior to their maturity.
The marketable securities are carried at aggregate fair value based on the
specific
F-8
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
identification method. Available for sale securities that are reasonably
expected by management to be sold within one year from the balance sheet date
are classified as current assets.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Equipment acquired under
capital leases is stated at the lower of the present value of minimum future
lease payments or fair value of the equipment at the inception of the lease.
Amortization of equipment acquired under capital lease is included in
depreciation expense. Depreciation of property and equipment, other than
leasehold improvements, is provided over the estimated useful lives of the
respective assets (ranging from three to seven years) using the straight-line
method. Leasehold improvements are amortized on a straight-line basis over the
shorter of the respective lease term or estimated useful life of the asset.
OTHER ASSETS
Other assets consist primarily of costs to obtain patents and trademarks.
The Company amortizes these costs over a period of 5 years using the
straight-line method beginning when the patent or trademark is issued.
Previously capitalized costs related to abandoned or denied patent applications
are expensed in the period when the application is abandoned or denied.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the recoverability of its long-lived assets on an
annual basis or whenever adverse events or changes in circumstances or business
climate indicate that expected undiscounted future cash flows related to such
long-lived assets may not be sufficient to support the net book value of such
assets. If undiscounted cash flows are not sufficient to support the recorded
assets, an impairment is recognized to reduce the carrying value of the
long-lived assets to the estimated fair value. Cash flow projections, although
subject to a degree of uncertainty, are based on trends of historical
performance and management's estimate of future performance, giving
consideration to existing and anticipated competitive and economic conditions.
Additionally, in conjunction with the review for impairment, the remaining
estimated lives of certain of the Company's long-lived assets are assessed.
SOFTWARE DEVELOPMENT COSTS
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards No. 86 (SFAS 86), "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed." Under SFAS 86,
capitalization of software development costs begins upon the establishment of
technological feasibility and is subject to net realizable value considerations.
To date, such capitalizable costs have not been material as the establishment of
technological feasibility of the Company's products and general release of such
software have substantially coincided. Accordingly, the Company has charged all
such costs to research and development expense. Future capitalized costs, if
any, will be amortized on a straight-line basis over the estimated lives of the
F-9
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
products or by the ratio of current revenue to the total of current and
anticipated future revenue, whichever expense is greater.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related
interpretations in accounting for its employee stock options and to follow the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB 25, compensation expense is based on the difference, if
any, on the date of grant, between the estimated fair value of the Company's
shares and the exercise price of options to purchase that stock.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences of temporary differences and income tax credits. Temporary
differences are primarily the result of the differences between the tax bases of
assets and liabilities and their financial reporting amounts. Deferred tax
assets and liabilities are measured by applying enacted statutory tax rates
applicable to the future years in which deferred tax assets or liabilities are
expected to be settled or realized. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
The Company has provided a full valuation allowance against its net deferred tax
assets as of December 31, 1998 and 1999.
NET LOSS PER SHARE
Basic net loss per share is computed based on the weighted average number of
outstanding shares of common stock during each period. The diluted per share
amount is computed using the weighted average number of common stock shares
outstanding and the common equivalent shares consisting of convertible preferred
stock, stock options, warrants and redeemable common stock using the treasury
stock and reverse treasury stock methods, if dilutive. Diluted net loss per
share is the same as basic net loss per share for all periods presented because
the effects of such items were anti-dilutive as the Company had a loss from
continuing operations for all periods presented. Options outstanding to purchase
1,762,180; 3,394,634; 4,860,928 and 5,549,457 shares of the Company's common
stock as of December 31, 1997, 1998, 1999 and June 30, 2000, respectively, were
not included in the computation of diluted net loss per share as the effect
would be antidilutive. Series A and Series B redeemable convertible preferred
stock and redeemable common stock were not included in the computation of
diluted net loss per share as the effect would be antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements
F-10
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
SEGMENT REPORTING
The Company operates as a single segment and will evaluate additional
segment disclosure requirements as it expands its operations.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting comprehensive income and its components in financial statements.
The Company's comprehensive loss is comprised of the net loss and elements of
other comprehensive income such as unrealized gains or losses on
available-for-sale securities.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).
SFAS 133, as amended, is effective for quarters beginning after June 15, 2000.
We do not currently utilize derivative financial instruments. Therefore, we do
not expect that the adoption of SFAS 133 will have a material impact on our
results of operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101) which summarizes certain of the staff's
view in applying generally accepted accounting principles to revenue recognition
in financial statements. The effective date of SAB 101 for the Company is the
quarter ended December 31, 2000. The Company continues to evaluate the impact
that SAB 101 will have on the timing of revenue recognition in future periods.
Based on its initial evaluation, the Company believes SAB 101 will not have a
material impact on its future results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" (the Interpretation). The Interpretation was effective July 1,
2000, but certain conclusions in the Interpretation cover specific events that
occur after either December 15, 1998, or January 12, 2000. The Company does not
expect the Interpretation to have a material impact on its results of operations
or financial position.
3. MARKETABLE SECURITIES
As of December 31, 1999, the Company's marketable securities available for
sale consisted of investments in mutual funds which invest in corporate and
government bonds. The securities had a cost basis of $3,007,878 and a market
value, as of December 31, 1999 of $3,001,082 resulting in an unrealized loss of
$6,796. The securities are reflected in the balance sheet at their fair market
value.
F-11
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
3. MARKETABLE SECURITIES (CONTINUED)
The gross unrealized losses for the year ended December 31, 1999 have been
recorded as a separate component of stockholders' equity (deficit). There were
no marketable securities during 1997 or 1998.
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1998 1999
<S> <C> <C>
Computer equipment and accessories.......................... $ 1,693,713 $ 1,935,547
Equipment acquired under capital leases..................... 893,216 998,709
Purchased software.......................................... 266,993 407,505
Office equipment............................................ 81,954 67,841
Office furniture............................................ 262,528 261,315
Leasehold improvements...................................... 342,656 241,278
----------- -----------
3,541,060 3,912,195
Less -- Accumulated depreciation and amortization........... (1,727,081) (2,110,996)
----------- -----------
$ 1,813,979 $ 1,801,199
=========== ===========
</TABLE>
Accumulated amortization of assets under capital leases amounted to $353,887
and $454,191 at December 31, 1998 and 1999, respectively.
5. RELATED PARTY TRANSACTIONS
In December 1998 our board of directors approved $150,000 in loans to two of
our officers and directors. The principal and accrued interest on these loans
are due in three equal annual installments beginning 270 days after a qualifying
initial public offering of our common stock and bear interest at the rate of
6.11% per year.
In each of December 1999 and January 2000 our board of directors approved a
$50,000 loan to an officer of the Company. These loans mature in December 2002
and January 2003 and bear interest at the rate of 6% per year. The interest on
these loans is due quarterly.
As of December 31, 1999 and June 30, 2000 the entire principal amount of
each note was outstanding. None of these loans were originated in connection
with the issuance of the Company's common stock.
In February 2000, the Company entered into a consulting agreement with
Graham Glass, our former Chief Technology Officer and a holder of more than 10%
of its common stock. Under this agreement, Mr. Glass receives $14,583 per month
for providing consulting and advisory services on technology issues. The
agreement terminates on January 31, 2001.
F-12
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
6. INCOME TAXES
The tax effected temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1998 1999
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................... $ 2,431,984 $ 3,841,931
Depreciation of fixed assets.............................. 66,223 30,226
Reserve for assets held for sale.......................... -- 6,919
Allowance for doubtful accounts........................... 26,249 87,834
Stock options and warrants................................ -- 229,972
Accrued expenses.......................................... 176,146 127,072
Timing of revenue recognition............................. 96,193 --
Research and development credit........................... 134,622 327,415
Other, net................................................ -- 462
----------- -----------
Total deferred tax assets................................... 2,931,417 4,651,831
Valuation allowance for deferred tax assets................. (2,427,954) (4,009,154)
----------- -----------
Deferred tax assets, net of valuation allowance............. 503,463 642,677
Deferred tax liabilities:
Cash to accrual adjustment................................ (470,543) (221,049)
Capitalization of patent costs............................ (21,095) (56,864)
Deferred losses from discontinued operations.............. -- (362,455)
Prepaid expenses.......................................... (11,825) (2,309)
----------- -----------
Total deferred tax liabilities.............................. (503,463) (642,677)
----------- -----------
Deferred income tax assets, net of deferred tax
liabilities............................................... $ -- $ --
=========== ===========
</TABLE>
F-13
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
6. INCOME TAXES (CONTINUED)
The Company has federal net operating loss carryforwards of approximately
$10.4 million at December 31, 1999, which, if not utilized, will begin to expire
in 2009. Of this amount approximately $6.3 million is subject to limitation
under Internal Revenue Code Section 382. In addition, the Company has
approximately $10.5 million of state net operating loss carryforwards as of
December 31, 1999. Also, the Company has approximately $327,000 of research and
development credit carryforwards at December 31, 1999. Approximately $229,000 of
the research and development credits are subject to limitation under Internal
Revenue Code Section 383.
At December 31, 1997, 1998 and 1999, and at June 30, 2000 the Company has
recorded a valuation allowance against its net deferred tax assets because
management believes that, after considering all the available objective
evidence, the realization of the assets are not reasonably assured.
The differences between the actual income tax benefit and the amount
computed by applying the statutory federal tax rate to the loss from continuing
operations before income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Provision (benefit) computed at federal statutory
rate........................................... $(1,299,916) $(1,650,239) $(2,260,083)
State income tax benefit, net of federal tax
effect at state statutory rate................. (67,313) (127,185) (127,529)
Research and development credit.................. (37,084) (55,666) (98,743)
Change in valuation allowance.................... 1,187,993 1,809,677 2,437,244
Other............................................ 2,279 23,413 49,111
----------- ----------- -----------
Total.......................................... $ (214,041) $ -- $ --
=========== =========== ===========
</TABLE>
Significant components of the provision (benefit) for income taxes on loss
from continuing operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Current:
Federal................................................. $ -- $ -- $ --
State................................................... 1,560 -- --
--------- ---- ----
Total current............................................. 1,560 -- --
Deferred:
Federal................................................. (180,425) -- --
State................................................... (35,176) -- --
--------- ---- ----
Total deferred............................................ (215,601) -- --
--------- ---- ----
Total..................................................... $(214,041) $ -- $ --
========= ==== ====
</TABLE>
Income tax expense during the six month period ended June 30, 2000
represents taxes withheld by a foreign government on a sale to a foreign
customer.
F-14
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
7. LEASES
The Company is obligated under various capital leases and noncancelable
operating lease agreements for facilities and equipment. The significant capital
leases contain bargain purchase options. During 1997, the Company entered into
four leases for office space in Dallas and Austin, all of which include rent
escalation clauses. A summary of future minimum lease payments as of
December 31, 1999, is as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
<S> <C> <C>
2000........................................................ $262,173 $1,630,278
2001........................................................ 127,657 1,607,064
2002........................................................ 72,327 1,623,862
2003........................................................ -- 500,838
-------- ----------
Total payments due.......................................... 462,157 $5,362,042
==========
Less amounts representing interest.......................... 50,426
--------
Present value of minimum lease payments..................... 411,731
Less current portion........................................ 234,993
--------
Noncurrent portion.......................................... $176,738
========
</TABLE>
Rental expense under noncancelable operating leases for facilities and
equipment approximated $1.1 million, $1.5 million and $1.4 million for the years
ended December 31, 1997, 1998 and 1999, respectively.
8. ACCRUED LIABILITIES
Accrued liabilities consisted of:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1998 1999
<S> <C> <C>
Accrued payroll-related expenses............................ $ 825,068 $1,657,561
Accrued property-related expenses........................... 104,837 297,525
Other accruals.............................................. 951,527 789,249
---------- ----------
$1,881,432 $2,744,335
========== ==========
</TABLE>
9. DEBT AND PUT WARRANTS TO PURCHASE COMMON STOCK
As of December 31, 1999 and June 30, 2000, the Company had an outstanding
balance of $357,394 and $288,136, respectively, under a 36-month note (the Term
Loan) in the original amount of $437,753 entered into in June 1999. This
fixed-term borrowing, which has an interest rate of approximately 11.0%, is
being repaid in monthly installments over the term of the loan.
On June 16, 1998, the Company issued a $3.0 million Senior Subordinated Note
(the Note) to a bank which matures on June 16, 2001, along with 196,000
seven-year detachable warrants to purchase common stock at $.01 per share. The
proceeds from the Note were allocated between the Note and the warrants based on
their relative fair market values at the time of issuance. A discount of
$227,075 was
F-15
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
9. DEBT AND PUT WARRANTS TO PURCHASE COMMON STOCK (CONTINUED)
recorded against the face value of the Note which represented the estimated fair
value of the warrants on the date of issuance. The carrying value of the Note at
December 31, 1998 and 1999, was $2,813,925 and $2,889,617, respectively, which
is net of the unamortized discount of $186,075 and $110,383, respectively. The
discount is being amortized until the maturity of the Note, resulting in an
effective interest rate of 15.2%. The principal of the Note is payable at
maturity and interest is payable monthly based on a 12% interest rate. The Note
is secured by all the assets of the Company, but is subordinate to the Revolver
and contains the same nonfinancial covenants as the Revolver. As of June 30,
2000 the outstanding balance of the Note was $2,250,000. The Company intends to
use a portion of the proceeds of this offering to repay the Note and therefore
considers the carrying value to approximate fair value.
The noteholder has the option to sell the warrants back to the Company (Put
Warrants to Purchase Common Stock) on either August 16, 2001, or on the
occurrence of other specified events at an amount per warrant equal to the
Company's fair value per share at the put date less the exercise price. The
option to sell the warrants back to the Company terminates upon specified events
which include the first sale of the Company's common stock pursuant to a
registration statement with and declared effective by the Securities and
Exchange Commission which results in gross proceeds of at least $10,000,000. The
Company expects the put feature of the warrants to expire as a result of this
offering. The fair value of the warrants is included in redeemable common stock
and put warrants to purchase common stock in the accompanying balance sheets.
Changes in the fair value of the warrants are reflected as adjustments to
interest expense in the accompanying statement of operations. The value of the
warrants is reflected at the estimated fair value of the warrants, based on an
independent appraisal commissioned by the Company.
The Company has a Loan and Security Agreement with a bank that provides the
Company with a $5 million revolving line of credit (the Revolver). As of
June 30, 2000 the outstanding balance of the Revolver was $750,000. The Company
may elect to borrow under the Revolver on a revolving or fixed-term basis.
Borrowings under the Revolver bear interest at the bank's prime rate plus .75%,
are secured by all the assets of the Company and are due on the maturity date of
the Revolver (November 7, 2001). Borrowings under the Revolver are limited to a
borrowing base equal to 80% of eligible trade receivables less any letters of
credit outstanding. As of December 31, 1999, there were $446,622 in letters of
credit outstanding which expire at various times during the year 2000. These
letters of credit were primarily used in lieu of security deposits on certain
operating and capital leases. The Company must also comply with certain
financial ratio and other nonfinancial covenants, including a prohibition on the
payment of dividends. As of December 31, 1999 the Company was not in compliance
with one of the covenants. The Note and the Term Loan contain cross-default
provisions to the Revolver. As a result, all three were reclassified to current
liabilities as of December 31, 1999. The Company has modified and amended the
covenants of the Revolver as of June 30, 2000 and is in compliance with all
covenants. As a result, the outstanding balance of the Revolver and the Term
Loan are reflected as long-term debt at June 30, 2000. As the Note matures in
June 2001, the entire outstanding balance is presented as current portion of
long-term debt.
10. EMPLOYEE RETIREMENT PLAN
The Company's 401(k) plan (PIE Investment Plan) provides retirement benefits
to eligible employees. Under the PIE Investment Plan, employees are eligible to
participate after one year of service. Participants are permitted to make salary
reduction contributions of up to 15% of their eligible compensation. While the
plan provides for discretionary contributions by the Company, no such
contributions have been made.
F-16
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
11. RESTRICTED STOCK AND STOCK OPTION PLAN
The Company has a 1994 Restricted Stock and Stock Option Plan (the 1994
Plan) and a 1998 Stock Option Plan (the 1998 Plan) under which shares are
available for grant of restricted stock and stock options to employees. The 1994
Plan provides for the granting of a maximum of 2,800,000 shares of stock or
stock options with no more than 560,000 to any one employee in a single year. At
December 31, 1999, the 1998 Plan provides for the granting of a maximum of
5,180,000 shares of stock options with no limitations on grants to individual
employees. Under each plan, the stock option exercise price per share is equal
to the fair market value on the date of grant, as determined by the Board of
Directors. Options vest pursuant to vesting schedules as determined by the Board
of Directors (ranging from one to five years) and expire, if unexercised, ten
years from the date of grant. In addition, the Company issued 126,000 and 84,000
options to its nonemployee directors during 1998 and 1999, respectively. These
options have an exercise price of $1.43, vest over 2 years and have a 10 year
life. These options were issued outside of the Company's option plans.
Stock option transactions in the Company's plans are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1998 1999
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF OPTIONS PRICE OF OPTIONS PRICE OF OPTIONS PRICE
<S> <C> <C> <C> <C> <C> <C>
Options outstanding-beginning of year.......... 1,180,133 $0.36 1,762,180 $0.86 3,268,634 $1.20
Options granted................................ 986,272 1.43 2,329,550 1.43 3,610,958 0.79
Options forfeited.............................. (383,897) 0.78 (816,068) 1.12 (2,177,288) 1.29
Options exercised.............................. (20,328) 0.36 (7,028) 0.36 (51,376) 1.17
--------- --------- ----------
Options outstanding--end of year............... 1,762,180 0.86 3,268,634 1.20 4,650,928 0.84
========= ========= ==========
Options exercisable at end of year............. 298,900 $0.36 421,618 $0.47 846,888 $0.79
========= ========= ==========
Weighted average grant date fair value of
options granted during the year.............. $0.44 $0.39 $0.65
</TABLE>
The following summarizes information about the Company's stock options
outstanding:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
--------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
<C> <C> <S> <C> <C> <C>
$0.36 559,748 5.6 years $0.36 503,418 $0.36
0.66 2,800,750 9.6 years 0.66 -- --
1.43 1,290,430 8.2 years 1.43 343,470 1.43
--------- -------
4,650,928 8.7 years $0.84 846,888 $0.79
========= =======
</TABLE>
At December 31, 1999, there were 3,244,040 options available for future
issuance under the Company's plans.
F-17
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
11. RESTRICTED STOCK AND STOCK OPTION PLAN (CONTINUED)
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. The Company had no deferred stock compensation during 1997 and
1998. During 1999, in connection with options granted to employees to purchase
common stock, the Company recorded deferred stock compensation of $2,036,338 of
which $336,772 was recognized as expense. Of the amount recognized $104,721 was
charged to discontinued operations. This initial amount deferred represents the
difference between the fair value of the options on the date of grant, based on
an independent appraisal commissioned by the Company, and the exercise price of
the options. Although the Company's Board of Directors believed that the
exercise price per share assigned to stock options was equal to the fair value
on the date of grant, the Company concluded an independent appraisal was
necessary to validate the estimates of fair value due to the subjective nature
of such estimates. Therefore, the Company commissioned an independent appraisal
of its common stock as of October 31, 1999. The appraised value was used as a
basis to estimate stock compensation on option grants during 1999 and was also
used to determine the fair value of put warrants to purchase common stock
(Note 9). The deferred stock compensation is being amortized over the vesting
period of the related options, which is generally four years.
During the six months ended June 30, 2000 the Company granted 1,744,320
stock options to employees. Some of these options have exercise prices that are
less than the deemed fair value of the options as of the date of grant. As a
result, the Company recorded an additional deferred stock compensation charge of
approximately $1.0 million which will be recognized over the four year vesting
period of the options.
Information regarding pro forma net loss is required by SFAS 123 and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of SFAS 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
no volatility and the following assumptions: weighted average risk-free interest
rate of 6.23% in 1997, 5.35% in 1998, and 5.86% in 1999, no dividends, and a
weighted average expected life of the option of 6.0 years in 1997 and 1998, and
2.75 years in 1999.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
F-18
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
11. RESTRICTED STOCK AND STOCK OPTION PLAN (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Pro forma net loss attributable to common stockholders...... $(2,375,572) $(4,801,815) $(9,824,594)
=========== =========== ===========
Pro forma basic and diluted net loss per share.............. $ (0.12) $ (0.24) $ (0.50)
=========== =========== ===========
</TABLE>
The pro forma disclosures include only the effect of options granted
subsequent to December 31, 1994. Accordingly, the pro forma information does not
reflect the pro forma effect of all previous stock option grants of the Company,
and thus is not necessarily indicative of future amounts until SFAS 123 is
applied to all outstanding stock options.
12. REDEEMABLE STOCK
REDEEMABLE COMMON STOCK
Effective March 31, 1998, one of the Company's common stockholders received
the right to require the Company to repurchase up to 1,400,000 (less 204,764
shares repurchased as of December 31, 1999) of his shares at $3.57 per share
(Put Shares). The number of shares the Company could be required to repurchase
each quarter multiplied by $3.57 per share cannot exceed 2.5% of the preceding
quarter's revenue. The repurchase obligation of the Company terminates upon the
successful completion of an initial public offering with a pre-offering Company
valuation exceeding $100 million. The Company expects the redemption rights to
terminate upon the successful completion of this offering. With the issuance of
the Series B preferred stock, in order to conform the investor's put rights to
those of the newly issued series B preferred stock, the investor's right was
amended to, in addition to the rights described above, allow for all his Put
Shares then outstanding to be subject to repurchase at any time after
January 1, 2003, if a public offering has not occurred, or at any time that the
Series A or Series B preferred stockholders can exercise their put rights due to
the Company's breach of the preferred stockholder agreement. Additionally, the
Put Shares must still be repurchased at $3.57 per share and, upon exercise of
the amended right, the repurchase price payable shall be paid by the Company
through the issuance of a three-year note with a quarterly payment schedule and
at an interest rate of prime plus 1%. Since the repurchase of the shares is
outside of the control of the Company, the shares subject to repurchase are
treated as redeemable common stock and are presented outside of stockholders'
equity (deficit). Periodic accretions based on the straight-line method are
recorded such that the carrying value of the Put Shares will equal the $3.57
redemption value on January 1, 2003. Accretion to redemption value is recorded
as a charge to paid-in capital or retained earnings (accumulated deficit) and
credited to redeemable common stock.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company issued 571,429 shares of Series A redeemable convertible
preferred stock for gross proceeds of $2.0 million on September 4, 1998, and
2,702,703 shares of Series B redeemable convertible preferred stock for gross
proceeds of $10.0 million on December 30, 1998.
F-19
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
12. REDEEMABLE STOCK (CONTINUED)
DIVIDEND PREFERENCE:
The Series A and Series B preferred stockholders are entitled to receive
noncumulative dividends in preference to the common stockholders at the rate of
$0.28 and $0.30 per share (8% of the liquidation value), respectively, per annum
provided such dividends are declared.
VOTING RIGHTS:
Except as otherwise required by law, the Series A and Series B preferred
stockholders vote together with the common stockholders on all matters upon
which the common stockholders are entitled to vote. Each holder of preferred
stock is entitled to one vote for each share of common stock into which each
share of preferred stock could then be converted. In addition, the Series B
preferred stockholders are entitled to elect two directors to the Company's
Board of Directors.
CONVERSION RIGHTS:
Each share of preferred stock is convertible, at the stockholder's option,
at any time after issuance into 2.8 shares of common stock. The conversion
prices at December 31, 1999 are $1.25 and $1.32 for the Series A and Series B,
respectively.
The Series A preferred stock is automatically converted into common at the
then-applicable conversion rate (i) if the Series A stockholder holds at least
50% of the shares of Series A originally issued to it and it consents to such
conversion; (ii) if the Series A stockholder converts at least 50% of the
Series A shares originally issued to it into common stock; (iii) upon a
consolidation, merger, or sale of the Company at a price per Series A preferred
share of not less than $7.00; or (iv) upon the closing of an underwritten public
offering of shares of the Company at a per share public offering price (prior to
underwriter commission and expense) of not less than $7.00 per Series A
preferred share and for a total offering of more than $20 million.
The conversion price of the Series A preferred stock is subject to
adjustment proportionately for stock splits, stock dividends, recapitalization,
etc.
The Series B preferred stock is automatically converted into common stock at
the then-applicable conversion rate (i) upon a consolidation, merger, or sale of
all the outstanding capital stock of the Company for cash consideration of at
least two times the then-effective conversion rate or consideration payable in
registered securities of an issuer that is publicly traded and has a market
capitalization of at least $500 million post-acquisition or (ii) upon the
closing of an underwritten public offering that results in aggregate gross
proceeds of at least $20 million.
The conversion price of the Series B preferred stock is subject to
adjustment proportionately for stock splits, stock dividends, recapitalization,
etc. It is also subject to adjustment on a weighted average basis for sales by
the Company of its common stock at prices below the conversion price, and for
grants of stock options in excess of a specified amount prior to December 31,
2000.
REDEMPTION RIGHTS:
If at any time the Company materially breaches the respective stockholder
agreements or if at any time after January 1, 2003, the Company has not
consummated a qualifying public offering, the Series A and Series B preferred
stockholders have the right to require the Company to repurchase the
F-20
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
12. REDEEMABLE STOCK (CONTINUED)
preferred or common stock then owned by them. The repurchase price is equal to
the greater of the fair market value or a per share sale price defined as $7.40
per share plus a 10% annual return on the original purchase price (redemption
value of $9.02 per share for the Series A preferred stockholders and $9.12 per
share for the Series B preferred stockholders). The amount payable under the
repurchase rights shall be paid by the Company issuing a three-year note with a
quarterly payment schedule and at an interest rate of prime plus 1%. Accretion
towards the maximum redemption amount using the straight-line method is charged
against the Company's additional paid-in capital or retained earnings
(accumulated deficit) and credited to the redeemable preferred stock.
LIQUIDATION PREFERENCE:
In the event of the Company's dissolution, the preferred stockholders are
entitled to receive, prior to and in preference to any distribution of any of
the Company's assets and surplus funds to the common stockholders, liquidation
proceeds on a pro rata basis that is determined based on $3.50 per share plus
any declared but unpaid dividends for the Series A preferred stock and $3.70 per
share plus any declared but unpaid dividends for the Series B preferred stock.
In addition, having received their liquidation preference, the preferred
stockholders will share ratably with the common stockholders in the remaining
assets of the Company on a common share equivalent basis.
F-21
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
12. REDEEMABLE STOCK (CONTINUED)
The activity in the redeemable preferred stock and redeemable common stock
and warrants is as follows:
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE PREFERRED STOCK
----------------------------------------------- REDEEMABLE COMMON
SERIES A SERIES B STOCK AND WARRANTS
--------------------- ----------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996............... -- $ -- -- $ -- 1,400,000 $1,428,571
------- ---------- --------- ----------- --------- ----------
Balance at December 31, 1997............... -- -- -- -- 1,400,000 1,428,571
Issuance of Series A preferred stock..... 571,429 1,932,771 -- -- -- --
Issuance of Series B preferred stock..... -- -- 2,702,703 9,556,842 -- --
Issuance of put warrants................. -- -- -- -- -- 227,075
Accretion of redeemable common stock..... -- -- -- -- -- 210,303
Decretion of put warrants................ -- -- -- -- -- (130,471)
Shares repurchased from investor upon
exercise of put option................. -- -- -- -- (82,471) (294,536)
------- ---------- --------- ----------- --------- ----------
Balance at December 31, 1998............... 571,429 1,932,771 2,702,703 9,556,842 1,317,529 1,440,942
Shares repurchased from investor upon
exercise of put option................. -- -- -- -- (122,293) (436,765)
Accretion of put warrants................ -- -- -- -- -- 56,700
Accretion of redeemable common stock..... -- -- -- -- -- 840,278
Other.................................... -- -- -- (5,974) -- --
Accretion of preferred stock............. -- 805,380 -- 3,778,926 -- --
------- ---------- --------- ----------- --------- ----------
Balance at December 31, 1999............... 571,429 2,738,151 2,702,703 13,329,794 1,195,236 1,901,155
Shares repurchased from investor upon
exercise of put option (unaudited)..... -- -- -- -- (50,803) (181,440)
Accretion of put warrants (unaudited).... -- -- -- -- -- 2,184,124
Accretion of redeemable common stock
(unaudited).............................. -- -- -- -- -- 438,550
Accretion of preferred stock
(unaudited).............................. -- 402,690 -- 1,886,478 -- --
------- ---------- --------- ----------- --------- ----------
Balance at June 30, 2000 (unaudited)....... 571,429 $3,140,841 2,702,703 $15,216,272 1,144,433 $4,342,389
======= ========== ========= =========== ========= ==========
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
One of the Company's customers has the right of first refusal to purchase
certain elements of the Company's OpenBusiness software should the Company
contract for its sale.
The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. While management currently believes the amount
of ultimate liability, if any, with respect to these actions will not materially
affect the financial position, results of operations, or liquidity of the
Company, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur, the impact could be material to the Company.
F-22
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Two recently hired officers have received a letter from their former
employer demanding the officers to repay $866,647 in gain realized by the
officers from the exercise of stock options of the former employer. In August
2000, the Company agreed to indemnify the officers for amounts required to be
repaid by the officers as a result of the former employer's claim. The ultimate
outcome of this contingency is not known. The officers have denied any
wrongdoing and intend to vigorously defend any action taken by the former
employer. Were an unfavorable outcome to occur, the impact could be material.
14. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
During 1999, the Company sold its Educational Services division to a third
party for approximately $2.9 million in cash. The sale produced a pretax gain of
approximately $2.6 million.
In July 1999, the board of directors authorized the Company to sell its FAB
Solutions division. This date is considered the measurement date for the
disposal of FAB Solutions. In March 2000, the Company completed the sale of FAB
Solutions and received $5.8 million in proceeds, $800,000 of which is being held
in escrow for one year to satisfy the representations and warranties made during
the sale. As the Company realized a gain on the sale of FAB Solutions, the net
assets of FAB Solutions are recorded as Net Assets Held for Sale in the
December 31, 1999 balance sheet at their historical net book value plus
post-measurement date losses. Net Assets Held for Sale as of December 31, 1999,
is comprised of:
<TABLE>
<S> <C>
Accounts receivable......................................... $ 708,386
Prepaid expenses............................................ 47,110
Property and equipment, net................................. 434,270
Accounts payable............................................ (7,304)
Accrued liabilities......................................... (172,998)
Deferred Revenue............................................ (849,270)
Post-measurement date losses................................ 980,402
-----------
Net assets held for sale.................................... $ 1,140,596
===========
</TABLE>
Revenue from the Educational Services and FAB Solutions divisions
represented approximately $5.4 million in 1997, $5.1 million in 1998 and
$4.8 million in 1999. These revenue amounts have been eliminated from the
respective revenue lines in the accompanying statements of operations.
15. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains an allowance for
doubtful accounts based upon the expected collectibility of all trade accounts
receivable. The losses incurred by the Company with respect to trade receivables
have not exceeded management's expectations. Through December 31, 1999, the
Company has not written off any receivables other than $63,421 of receivables
written off during the year ended December 31, 1998.
F-23
<PAGE>
OBJECTSPACE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 AND AS OF JUNE 30, 2000 IS UNAUDITED)
15. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS (CONTINUED)
Revenue from certain of the Company's largest customers individually
exceeded 10% of the Company's revenue as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
CUSTOMER 1997 1998 1999
<S> <C> <C> <C>
A........................................................... 15% ** **
B........................................................... 19% 15% **
C........................................................... 14% ** **
D........................................................... 17% ** **
E........................................................... ** 21% 26%
F........................................................... ** ** 20%
</TABLE>
--------------------------
** Less than 10%.
16. WARRANTS
During December 1998, as partial payment of advisory serviced received in
connection with certain financing transactions, the Company issued a warrant to
purchase 234,595 shares of common stock at an exercise price of $1.32 per share.
The warrant is fully vested, immediately exercisable, nonforfeitable and will
expire in December 2003.
During December 1999, as a sales-inducement to one of its largest customers,
the Company agreed to issue warrants covering $2.5 million of common stock at
the Company's initial public offering price. The warrants are fully vested,
immediately exercisable upon completion of our initial public offering and
expire one year after closing the initial public offering. The Company
commissioned an independent appraisal of the warrants. Based on this appraisal,
the fair value of these warrants at the date of the agreement of $390,000, was
recorded in additional paid-in capital and as a reduction of license revenue in
1999.
17. SHARES RESERVED FOR FUTURE ISSUANCE
The Company has reserved common shares for issuance at December 31, 1999, as
follows:
<TABLE>
<S> <C>
Conversion of Series A preferred stock...................... 1,600,001
Conversion of Series B preferred stock...................... 7,567,566
Exercise of stock options................................... 8,104,968
Exercise of warrants........................................ 430,595
----------
Total reserved for issuance................................. 17,703,130
==========
</TABLE>
18. INITIAL PUBLIC OFFERING
On March 11, 2000, the Company's Board of Directors authorized the Company to
file a registration statement with the Securities and Exchange Commission for
the purpose of an initial public offering of the Company's common stock.
F-24
<PAGE>
---------------------------------------------------------
---------------------------------------------------------
, 2000
[LOGO]
7,500,000 SHARES OF COMMON STOCK
----------------
P R O S P E C T U S
-----------------
DONALDSON, LUFKIN & JENRETTE
BEAR, STEARNS & CO. INC.
DAIN RAUSCHER WESSELS
UBS WARBURG LLC
DLJDIRECT Inc.
---------------------------------------------------------
We have not authorized any dealer, sales person or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of ObjectSpace
have not changed since the date hereof.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Until , 2000, 25 days after the date of this prospectus, all dealers that
effect transactions in these securities may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as an underwriter in this offering or when selling previously unsold
allotments or subscriptions.
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by ObjectSpace, Inc.
("ObjectSpace") in connection with the sale of common stock being registered.
All amounts are estimates except the SEC registration fee, the NASD filing fee
and the Nasdaq listing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 30,360
NASD filing fee............................................. 12,000
Nasdaq National Market listing fee.......................... 90,000
Printing and engraving costs................................ 200,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 450,000
Blue Sky fees and expenses.................................. 1,000
Transfer Agent and Registrar fees........................... 30,000
Miscellaneous expenses...................................... 40,000
----------
Total....................................................... $1,153,360
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of ObjectSpace provides that the liability
of the directors of ObjectSpace to ObjectSpace or any of its stockholders for
monetary damages arising from acts of omissions occurring in their capacity as
directors shall be limited to the fullest extent permitted by the General
Corporation Law of the State of Delaware. This limitation does not apply with
respect to any action in which a director would be liable under Section 174 of
the General Corporation Law of the State of Delaware nor does it apply with
respect to any liability in which a director:
- breached his duty of loyalty to ObjectSpace or its stockholders;
- did not act in good faith or, in failing to act, did not act in good
faith;
- acted in a manner involving intentional misconduct or a knowing violation
of law or, in failing to act, shall have acted in a manner involving
intentional misconduct or a knowing violation of law; or
- derived an improper personal benefit.
ObjectSpace's Certificate of Incorporation requires ObjectSpace to indemnify
its directors, officers and employees and former directors, officers and
employees to the fullest extent permitted by the General Corporation Law of the
State of Delaware. Pursuant to the provisions of Section 145 of the General
Corporation Law of the State of Delaware, ObjectSpace has the power to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit or proceeding (other than an
action by or in the right of ObjectSpace) by reason of the fact that he is or
was a director, officer, employee or agent of ObjectSpace, against any and all
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with such action, suit or proceeding. The
power to indemnify applies only if such person acted in good faith and in a
manner he reasonably believed to be in the best interest, or not opposed to the
best interest, of ObjectSpace, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of
ObjectSpace as well, but only to the extent of defense and settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself and
with the further limitation that in such actions no indemnification
II-1
<PAGE>
shall be made in the event of any adjudication of negligence or misconduct
unless the court, in its discretion, believes that in light of all the
circumstances indemnification should apply.
The statute further specifically provides that the indemnification
authorized thereby shall not be deemed exclusive of any other rights to which
any such officer or director may be entitled under any bylaws, agreements, vote
of stockholders or disinterested directors, or otherwise.
Reference is made to the Form of Underwriting Agreement, to be filed as
Exhibit 1.1 to this registration statement, which provides for indemnification
by the underwriters under certain circumstances of the directors and officers of
ObjectSpace signing the registration statement and certain controlling persons
of ObjectSpace against certain liabilities, including those arising under the
Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling ObjectSpace
pursuant to the foregoing provisions, ObjectSpace has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the registrant has sold unregistered securities
to a limited number of persons as described below:
1. On June 16, 1998, the registrant issued and sold a warrant to Silicon Valley
Bank to purchase up to 196,000 shares of common stock at a purchase price of
$0.01 per share in connection with a financing transaction.
2. On September 4, 1998, the registrant issued and sold 571,429 shares of
Series A preferred stock to Novell for $3.50 per share, or an aggregate of
approximately $2.0 million.
3. On December 30, 1998, the registrant issued and sold an aggregate of
2,702,703 shares of Series B preferred stock to a total of 6 investors for
$3.70 per share, or an aggregate of approximately $10.0 million. The six
investors were Magellen Technologies, Inc., Cornerstone Fund I LLC, Venture
Fund I, LLC, Diamond Venture Capital I LLC, Cornerstone Equity Partners LLC
and Berthel SBIC L.L.C.
4. On December 30, 1998, the registrant issued and sold a warrant to Growth
Capital Partners to purchase 234,595 shares of common stock at a purchase
price of $1.32 per share in connection with certain financing transactions.
5. On December 23, 1999, in connection with one of our licensing and
professional services transactions, the registrant issued a warrant to
General Motors to purchase that number of shares of common stock equal to
$2.5 million divided by the offering price of the common stock in this
offering.
6. As of January 17, 2000, the registrant issued and sold a warrant to Avision,
Inc. to purchase up to 4,200 shares of common stock at a purchase price of
$8.57 per share in connection with the registrant's obtaining services from
a consultant.
7. On February 14, 2000, the registrant issued 7,420 shares of stock in
exchange for consulting services.
8. As of August 8, 2000, an aggregate of 457,114 shares of common stock had
been issued to employees and former employees of ObjectSpace upon exercise
of options under the registrant's stock option plans.
On January 14, 2000, the registrant effected a split of its common stock in
the form of a stock dividend of one share of common stock for each share of
common stock outstanding as of that date. On March 30, 2000, the registrant
effected a split of its common stock in the form of a stock dividend of 0.4
shares of common stock for each share of common stock outstanding as of that
date.
II-2
<PAGE>
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the registrant believes
that each transaction was exempt from the registration requirements of the
Securities Act of 1933, as amended, by virtue of Section 4(2) thereof,
Regulation D promulgated thereunder or Rule 701 promulgated under Section 3(b)
thereof, pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701. The recipients in such
transactions represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the registrant, to information
about the registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1** Form of Underwriting Agreement.
2.1* Asset Purchase Agreement dated as of March 8, 2000 by and
between ObjectSpace, Inc. and KLA-Tencor Corporation.
2.2* Stock Purchase Agreement dated as of September 23, 1999 by
and between ObjectSpace, Inc. and Valtech, S.A.
3.1* Certificate of Incorporation.
3.2** Amended and Restated Bylaws.
3.3* Certificate of Amendment to Certificate of Incorporation
filed on August 20, 1998.
3.4* Certificate of Amendment to Certificate of Incorporation
filed on March 30, 2000.
3.5* Certificate of Amendment to Certificate of Incorporation
filed on March 30, 2000.
4.1* Specimen common stock certificate.
5.1** Opinion of Haynes and Boone, LLP, counsel to the registrant.
10.1* Master Services Agreement dated as of August 6, 1999 by and
between ObjectSpace, Inc. and Galileo International,
L.L.C.
10.2* Master Escrow Agreement dated as of November 11, 1998 by and
between ObjectSpace, Inc. and Data Securities
International, Inc.
10.3*+ License Agreement dated as of October 28, 1997 by and
between ObjectSpace, Inc. and Tivoli Systems, Inc.
10.4* Lease Agreement dated as of April 29, 1997 by and between
ObjectSpace, Inc. and CarrAmerica Realty, L.P.
10.5* First Amendment to Lease Agreement dated as of September 23,
1999 by and between ObjectSpace, Inc. and CarrAmerica
Realty, L.P.
10.6* Office Lease Agreement dated as of May 30, 1997 by and
between ObjectSpace, Inc. and 14850 Quorum Associates,
Ltd.
10.7* Office Lease Agreement dated as of September 5, 1997 by and
between ObjectSpace, Inc. and Brookdale Investors, L.P.
10.8* Amended and Restated 1994 Restricted Stock and Stock Option
Plan.
10.9* 1998 Stock Option Plan.
10.10* Amendment No. 3 to 1998 Stock Option Plan dated as of
March 30, 2000.
10.11* Non-Employee Director Stock Option Plan.
10.12** First Amended and Restated Loan and Security Agreement dated
as of May 17, 2000 by and between ObjectSpace, Inc. and
Silicon Valley Bank.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.13* Senior Subordinated Loan and Security Agreement dated as of
June 16, 1998 by and between ObjectSpace, Inc. and Silicon
Valley Bank.
10.14* Employment Agreement dated as of December 30, 1998 by and
between ObjectSpace, Inc. and David Norris.
10.15* Amendment to Employment Agreement of David Norris, dated as
of March 28, 2000.
10.16* Consulting Agreement dated as of February 1, 2000 by and
between ObjectSpace, Inc. and Graham Glass.
10.17*+ Amendment No. 1 to License Agreement dated as of
September 30, 1999 by and between ObjectSpace, Inc. and
Tivoli Systems, Inc.
10.18** Intellectual Property Security Agreement dated as of
May 17, 2000 by and between ObjectSpace, Inc. and Silicon
Valley Bank.
10.19** Amendment to Senior Subordinated Loan and Security Agreement
by and between Objectspace, Inc. and Silicon Valley Bank.
10.20** Indemnification Agreement by and between ObjectSpace, Inc.
and Alan Fudge.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
23.2** Consent of Haynes and Boone, LLP, counsel to the registrant.
23.3* Consent of Galileo International, L.L.C.
23.4* Consent of OnStar Corporation.
24.1*** Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
------------------------
* Filed herewith.
** To be supplied by amendment.
*** Previously filed.
+ Certain confidential portions of this exhibit have been omitted and filed
separately with the Securities and Exchange Commission.
b) FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules are not listed because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions referenced in
Item 14 of this registration statement or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933, 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 a director, officer or controlling person in
connection with the securities being registered hereunder, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
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 of 1933 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.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Second Amendment to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Dallas, State of Texas, on the 14th day of August, 2000.
<TABLE>
<S> <C> <C>
OBJECTSPACE, INC.
By: /s/ DAVID NORRIS
-----------------------------------------
David Norris
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Second Amendment to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated below.
<TABLE>
<CAPTION>
TITLE DATE
----- ----
<C> <S> <C>
/s/ DAVID NORRIS Chairman of the Board,
------------------------------------------- President and Chief August 14, 2000
David Norris Executive Officer
/s/ PAUL A. LIPARI* Chief Financial Officer
------------------------------------------- (principal financial and August 14, 2000
Paul A. Lipari accounting officer)
/s/ JOHN C. BENTLEY*
------------------------------------------- Director August 14, 2000
John C. Bentley
/s/ GRANT A. DOVE*
------------------------------------------- Director August 14, 2000
Grant A. Dove
/s/ GRAHAM GLASS*
------------------------------------------- Director August 14, 2000
Graham Glass
/s/ EUGENE LOWENTHAL*
------------------------------------------- Director August 14, 2000
Eugene Lowenthal
/s/ R. STEPHEN POLLEY*
------------------------------------------- Director August 14, 2000
R. Stephen Polley
/s/ DAVID NEAR*
------------------------------------------- Director August 14, 2000
David Near
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ DAVID NORRIS
--------------------------------------
David Norris August 14, 2000
(AS ATTORNEY-IN-FACT
FOR EACH PERSON INDICATED)
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1** Form of Underwriting Agreement.
2.1* Asset Purchase Agreement dated as of March 8, 2000 by and
between ObjectSpace, Inc. and KLA-Tencor Corporation.
2.2* Stock Purchase Agreement dated as of September 23, 1999 by
and between ObjectSpace, Inc. and Valtech, S.A.
3.1* Certificate of Incorporation.
3.2** Amended and Restated Bylaws.
3.3* Certificate of Amendment to Certificate of Incorporation
filed on August 20, 1998.
3.4* Certificate of Amendment to Certificate of Incorporation
filed on March 30, 2000.
3.5* Certificate of Amendment to Certificate of Incorporation
filed on March 30, 2000.
4.1* Specimen common stock certificate.
5.1** Opinion of Haynes and Boone, LLP, counsel to the registrant.
10.1* Master Services Agreement dated as of August 6, 1999 by and
between ObjectSpace, Inc. and Galileo International,
L.L.C.
10.2* Master Escrow Agreement dated as of November 11, 1998 by and
between ObjectSpace, Inc. and Data Securities
International, Inc.
10.3*+ License Agreement dated as of October 28, 1997 by and
between ObjectSpace, Inc. and Tivoli Systems, Inc.
10.4* Lease Agreement dated as of April 29, 1997 by and between
ObjectSpace, Inc. and CarrAmerica Realty, L.P.
10.5* First Amendment to Lease Agreement dated as of September 23,
1999 by and between ObjectSpace, Inc. and CarrAmerica
Realty, L.P.
10.6* Office Lease Agreement dated as of May 30, 1997 by and
between ObjectSpace, Inc. and 14850 Quorum Associates,
Ltd.
10.7* Office Lease Agreement dated as of September 5, 1997 by and
between ObjectSpace, Inc. and Brookdale Investors, L.P.
10.8* Amended and Restated 1994 Restricted Stock and Stock Option
Plan.
10.9* 1998 Stock Option Plan.
10.10* Amendment No. 3 to 1998 Stock Option Plan dated as of
March 30, 2000.
10.11* Non-Employee Director Stock Option Plan.
10.12** First Amended and Restated Loan and Security Agreement dated
as of May 17, 2000 by and between ObjectSpace, Inc. and
Silicon Valley Bank.
10.13* Senior Subordinated Loan and Security Agreement dated as of
June 16, 1998 by and between ObjectSpace, Inc. and Silicon
Valley Bank.
10.14* Employment Agreement dated as of December 30, 1998 by and
between ObjectSpace, Inc. and David Norris.
10.15* Amendment to Employment Agreement of David Norris, dated as
of March 28, 2000.
10.16* Consulting Agreement dated as of February 1, 2000 by and
between ObjectSpace, Inc. and Graham Glass.
10.17*+ Amendment No. 1 to License Agreement dated as of
September 30, 1999 by and between ObjectSpace, Inc. and
Tivoli Systems, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.18** Intellectual Property Security Agreement dated as of
May 17, 2000 by and between ObjectSpace, Inc. and Silicon
Valley Bank.
10.19** Amendment to Senior Subordinated Loan and Security Agreement
by and between Objectspace, Inc. and Silicon Valley Bank.
10.20** Indemnification Agreement by and between ObjectSpace, Inc.
and Alan Fudge.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
23.2** Consent of Haynes and Boone, LLP, counsel to the registrant.
23.3* Consent of Galileo International, L.L.C.
23.4* Consent of OnStar Corporation.
24.1*** Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
------------------------
* Filed herewith.
** To be supplied by amendment.
*** Previously filed.
+ Certain confidential portions of this exhibit have been omitted and filed
separately with the Securities and Exchange Commission.
