<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 1999
REGISTRATION NO. 333-79629
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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OPENSITE TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
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<S> <C> <C>
DELAWARE 7389 56-1990869
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
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2800 MERIDIAN PARKWAY
DURHAM, NORTH CAROLINA 27713
(919) 544-1993
(Address, Including Zip Code and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------------
MR. KIP A. FREY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
OPENSITE TECHNOLOGIES, INC.
2800 MERIDIAN PARKWAY
DURHAM, NORTH CAROLINA 27713
(919) 544-1993
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------------
COPIES TO:
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<S> <C> <C>
JOHN C. YATES, ESQ. FRED D. HUTCHISON, ESQ. JOHN B. TEHAN, ESQ.
GRANT W. COLLINGSWORTH, ESQ. J. ROBERT TYLER, III, ESQ. SIMPSON THACHER & BARTLETT
MORRIS, MANNING & MARTIN, L.L.P. HUTCHISON & MASON, PLLC 425 LEXINGTON AVENUE
1600 ATLANTA FINANCIAL CENTER 4011 WESTCHASE BOULEVARD NEW YORK, NEW YORK 10017
3343 PEACHTREE ROAD, N.E. SUITE 400
ATLANTA, GEORGIA 30326 RALEIGH, NORTH CAROLINA 27607
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3)
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value.................... 4,159,070 shares $12.00 $49,908,840 $13,874
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(1) Includes 477,270 shares subject to the underwriters' over-allotment option.
(2) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457 under the Securities Act of 1933, as amended.
(3) Includes $12,510 that has been previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JULY 26, 1999
PROSPECTUS
3,681,800 SHARES
OPENSITE LOGO
COMMON STOCK
This is an initial public offering of common stock by OpenSite
Technologies, Inc. The estimated initial public offering price is between $10.00
and $12.00 per share.
-------------------------
We have applied to have the common stock approved for quotation on the
Nasdaq National Market under the symbol OPNS.
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to OpenSite, before expenses....................... $ $
</TABLE>
Of the 3,681,800 shares offered in this offering, we are selling 500,000
shares directly to CNET, Inc., an existing stockholder, at a price of $
per share, and the underwriters will not receive underwriting discounts or
commissions with respect to these shares. Accordingly, these shares have been
excluded from the table. The total proceeds to OpenSite, before expenses,
including these shares is $ . This prospectus will also be used in
connection with the direct sale by us to CNET, Inc. See "Direct Sale."
We have granted the underwriters an option for a period of 30 days to
purchase up to 477,270 additional shares of common stock.
-------------------------
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HAMBRECHT & QUIST
THE ROBINSON-HUMPHREY COMPANY
SOUNDVIEW TECHNOLOGY GROUP
WACHOVIA SECURITIES, INC.
, 1999
<PAGE> 3
[ARTWORK DEPICTED IN PROSPECTUS]
1. Inside front page portrays the following:
The title bar at the top of the page reads as follows: "The Auction
Starts Here"
In the center of the page is the Company's logo.
On the left side of the page and centered vertically is the following
text:
"OpenSite Technologies is a provider of online auction
software solutions. According to International Data Corporation, we
have approximately a 50% market share of online auction sites.
Our family of software products and related consulting,
education, and technical support services enables merchants to set up
and conduct Web-based auctions and provides them with increasingly
sophisticated functionality as they grow.
In addition, our BidStream.com Web site aggregates the content
of OpenSite-powered auctions, providing Internet users with a central
location from which to access and search multiple Web auction sites.
Our mission is to provide software, services, and content that
set the standard for branded, Web auction sites."
At the bottom left corner of the page is the word "OpenSite" and below
it is the following text: "The auction starts here."
At the bottom right corner of the page are boxes that contain the
following text:
top box: "internet world" and beneath it is the text "Best of
Show Fall 1998"
second box from the top: at the top is "PCWEEKLABS" and
beneath it is the text "Analyst's Choice" with the word "Analyst"
covering the top portion of a star.
third box from the top: centered at the top of the box is the
text "The Internet Open." In the center of the box is an object
representing a trophy. At the bottom of the box is the word "ICE."
Beneath the word "ICE" is the text "Internet Commerce Expo."
The bottom box contains the word "E-Commerce" at the top.
Beneath the word E-Commerce are five stars going across the page.
Beneath the stars is the word "Guide" which is underlined. At the
bottom of the box is the word "internet.com."
2. At the top of the front gate fold is the following text: "OpenSite
Technologies: Enabling Dynamic Pricing for Online Merchants."
On the left side of the page and centered vertically are three
paragraphs including the following text: "The Internet enables online auctions
to offer more products to more people - all without geographic limitation and in
real time.
Our combination of applications, services, and site aggregation
provides a self-reinforcing, full spectrum of dynamic pricing solutions for Web
merchants of all sizes.
By bringing together buyers and sellers in a dynamic relationship, our
products help individuals and businesses create new sales channels, manage
inventory, attract new customers, introduce new products, and enhance customer
interaction."
In the left center section of the page is the screen shot of a web page
for BidStream.com. Beneath the web page is the following text: "BidStream.com
provides bidders with a central point for locating items for sale on
participating OpenSite-powered auction sites. By aggregating the content from
these sites, we provide a way for our customers to generate increased site
traffic without costly marketing campaigns."
In the center of the of the page are words formed in a circle which are
"Site Aggregation," "Applications" and "Services."
At the bottom right center section of the page is a screen shot of a
web page for Buildscape. To the left of the web page is the following text: "Our
Customer Services organization provides a broad range of services to assist our
customers in successfully implementing Web-based auctions using our products.
For example, the services we have provided to Buildscape included developing the
auction site shown here. Buildscape has accounted for less than one percent of
our revenue in 1999. No services customer has accounted for more than one
percent of our revenue in 1999."
At the top right corner of the page is the screen shot of a web page
for VerticalNet. Beneath the web page is the following text: "Our products allow
customers to control their auction sites rather than list their products in a
person-to-person Internet auction community. OpenSite Auction 4.0, our core
product, automates the process of implementing, running and maintaining
real-time auctions over the Internet. For example, VerticalNet uses OpenSite
Auction 4.0 to create auctions on its vertical portal sites. VerticalNet has
accounted for less than three percent of our revenue in 1999. No product
licensee has accounted for more than five percent of our revenue in 1999."
At the bottom right corner of the page is the word "OpenSite" and
beneath it are the words "The auction starts here."
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Forward-Looking Statements.................................. 18
Use of Proceeds............................................. 18
Dividend Policy............................................. 19
Capitalization.............................................. 20
Dilution.................................................... 22
Selected Financial Data..................................... 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Business.................................................... 40
Management.................................................. 60
Related Party Transactions.................................. 64
Principal Stockholders...................................... 65
Description of Capital Stock................................ 67
Shares Eligible for Future Sale............................. 71
Underwriting................................................ 73
Direct Sale................................................. 75
Legal Matters............................................... 75
Experts..................................................... 75
Change in Accountants....................................... 76
Where You Can Find More Information......................... 76
Index to Financial Statements............................... F-1
</TABLE>
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"OpenSite" and "AuctionWatch" are registered trademarks of OpenSite, and
AuctionNow, AuctionRate, BidStream.com, Concierge and MagicBid are trademarks of
OpenSite. This prospectus also includes trademarks, service marks and trade
names of other companies.
<PAGE> 5
PROSPECTUS SUMMARY
The following is only a summary. You should carefully read the more
detailed information contained in this prospectus, including our financial
statements and accompanying notes appearing elsewhere in this prospectus. Our
business involves significant risks. You should carefully consider the
information under the heading "Risk Factors."
OpenSite provides online auction software solutions and has an installed
base of over 300 auction sites. According to International Data Corporation, we
have approximately a 50% market share of online auction sites. Our solutions,
which include a variety of cost-effective software and services, enable small,
medium and large merchants to create branded, Internet-based auctions on their
own Web sites. Our solutions automate the process of installing, running and
maintaining real-time auctions over the Internet. By bringing together buyers
and sellers, our solutions help businesses create new sales channels, manage
inventory, attract new customers, introduce new products and strengthen customer
and other business relationships.
Dynamic pricing, in which prices are determined by buyers and sellers on a
transaction-by-transaction basis, is becoming more accepted as a form of
electronic commerce. The Internet enables market information to be disseminated
more quickly, in greater quantity and to a wider audience than has been possible
with traditional forms of media. Also, the interactive nature of the Internet
and its ability to transmit information on a real-time basis have caused
Internet users to become more comfortable with continuous market refinement of
pricing. Auctions are among the most well known forms of dynamic pricing.
Forrester Research projects that the value of goods sold through Internet
auctions will increase from $10.1 billion in 1998 to $64.9 billion in 2002, a
59% compound annual growth rate.
The OpenSite Auction family of software products, available in
Professional, Merchant and Corporate versions, enables merchants of all sizes to
set up and conduct auctions on the Internet and provides them with the ability
to gain more sophisticated functionality as they grow. We also provide related
consulting, education and technical support services. Our Concierge service
enables our customers to outsource completely to us the process of running
Internet auctions, including development, deployment, maintenance and hosting.
In addition, our BidStream.com Web site, which was launched in April 1999,
aggregates the content of OpenSite-powered auction Web sites and is designed to
generate increased traffic to these Web sites while providing Internet users
with a central location from which to access the items put up for auction.
Currently, participation in Bidstream.com is free to our customers. However, we
intend to charge a fee for participation in the future.
Our customers operate in a wide variety of industries and include Beverly
Hills Country Club, Cheapfares.com, CNET, Currans Select Auctions, The Sharper
Image, VerticalNet and Winebid.com. OpenSite Auction won a Best of Show Award
for e-commerce applications at Fall Internet World 1998 and a Best of Class
Award for Web-based selling at Fall Internet Commerce Expo 1998. OpenSite
Auction also earned an Analyst's Choice Award from PC Week magazine and received
a five-star rating from online magazine Internet.com. A description of the
criteria and other information regarding these awards can be found under
"Business -- Products and Services."
We commenced operations and introduced our first auction software product
in 1996. In 1998, we recognized total revenue of $1.3 million and incurred net
losses of $2.4
<PAGE> 6
million. For the six months ended June 30, 1999, we recognized total revenue of
$2.6 million and incurred net losses of $4.2 million.
We are incorporated under the laws of the State of Delaware, and our
executive offices are located at 2800 Meridian Parkway, Durham, North Carolina
27713. Our telephone number is (919) 544-1993. Our World Wide Web address is
www.opensite.com.
2
<PAGE> 7
THE OFFERING
Common stock we are offering.......... 3,681,800 shares
Common stock to be outstanding after
this offering......................... 16,868,511 shares
Underwriters' over-allotment option... 477,270 shares
Use of proceeds....................... We intend to use the net proceeds from
the offering primarily for expansion
of our business, including sales and
marketing activities, product
development, possible future
acquisitions and for general corporate
purposes, including working capital.
See "Use of Proceeds."
Direct sale........................... The shares offered include the direct
sale of 500,000 shares by us to CNET.
See "Direct Sale."
Proposed Nasdaq National Market
symbol................................ OPNS
The number of shares of our common stock to be outstanding immediately
after the offering is based on the number of shares outstanding at July 23,
1999. This number does not take into account 786,905 shares of our common stock
subject to options outstanding under our stock option plan at July 23, 1999 and
93,455 shares of common stock subject to outstanding warrants.
Unless otherwise noted, all information in this prospectus assumes: (1) the
conversion of all outstanding shares of our preferred stock into 9,639,847
shares of common stock upon the closing of this offering, (2) an assumed initial
public offering price of $11.00 per share and a price to CNET of $10.34 per
share, and (3) no exercise by the underwriters of the over-allotment option.
3
<PAGE> 8
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following financial data is a summary of the more complete financial
information provided in our financial statements and accompanying notes
appearing elsewhere in this prospectus. See Note 2 of Notes to Financial
Statements for an explanation of basic and diluted net income (loss) per common
share and the weighted average shares used in computing basic and diluted net
income (loss) per common share. The "pro forma as adjusted" balance sheet data
gives effect to the conversion of all outstanding shares of mandatorily
redeemable convertible preferred stock into common stock upon the closing of the
offering and is adjusted to give effect to (1) our sale of 3,181,800 shares of
common stock offered at an assumed initial public offering price of $11.00 per
share, (2) our sale of 500,000 shares of common stock to CNET at an assumed
price of $10.34 per share, and (3) the receipt of the estimated net proceeds
from the sales.
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<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.......... $ 12 $ 340 $ 1,281 $ 584 $ 2,586
Gross profit........... 11 312 1,132 559 2,073
Operating income
(loss).............. 0 128 (2,404) (68) (4,417)
Net income (loss)...... 0 130 (2,361) (59) (4,176)
------- ------- ------- ------- --------
Basic and diluted net
income (loss) per
common share........ $ 0.00 $ 0.03 $ (0.66) $ (0.03) $ (13.31)
------- ------- ------- ------- --------
Weighted average shares
used in computing
basic and diluted
net income (loss)
per common share.... 3,579 3,877 4,106 3,977 3,461
------- ------- ------- ------- --------
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<CAPTION>
JUNE 30, 1999
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PRO FORMA
AS
ACTUAL ADJUSTED
-------- ---------
(UNAUDITED)
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BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 19,324 $ 56,099
Working capital........................................ 16,660 53,435
Total assets........................................... 21,856 58,631
Mandatorily redeemable convertible preferred stock..... 69,204 --
Total stockholders' equity (deficit)................... (51,244) 54,735
</TABLE>
4
<PAGE> 9
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. You should also refer to the other information in this
prospectus, including our financial statements and accompanying notes appearing
elsewhere in this prospectus. The risks and uncertainties described below are
those that we currently believe may materially affect our company.
This prospectus also contains forward looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
prospectus.
OUR EVOLVING BUSINESS MODEL AND MARKETS MAKE FORECASTING FUTURE PERFORMANCE
DIFFICULT.
We commenced operations and introduced our first auction software product
in 1996. Our business model has evolved considerably since that time. For
example, we introduced our indirect sales channel in 1998 and BidStream.com in
1999. We expect this evolution to continue in response to the rapidly changing
market for Internet products. Our revenue currently is generated primarily from
the sale of auction software products. In the future, we expect to generate
revenue from multiple sources, including BidStream.com and business services.
For us, this business model is unproven. We will be successful only if consumers
and merchants purchase our software products and actively use BidStream.com and
our other business services. It is impossible to predict the degree to which
consumers and merchants will purchase our software products or use these
services.
As a result of our limited operating history and the emerging nature of the
online auction software market, we are unable to accurately forecast our
revenue. Additionally, our current sales cycle, the time between when a sales
lead is generated and when the sale is completed, is relatively short. A shorter
sales cycle results in fewer pending sales at any given time, which makes
forecasting revenue more difficult and uncertain. Our expenses are to a large
extent fixed and based predominantly on our operating plans and estimates of
future revenue. We may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, a failure to meet
our revenue projections could have an immediate and negative impact on
profitability. We are aware that some media reports about us have included
revenue projections for 1999. We cannot be certain that any of these revenue
projections will be accurate.
WE ANTICIPATE INCURRING CONTINUED LOSSES FOR THE FORESEEABLE FUTURE.
We incurred net losses of $2.4 million in 1998, representing 184% of total
revenue. We incurred net losses of $4.2 million in the six months ended June 30,
1999, representing 161% of total revenue. As of June 30, 1999, we had incurred
cumulative net losses of $6.4 million. We expect our losses to increase
significantly. We cannot be certain that we will increase revenue sufficiently
to ever achieve profitability or generate a positive cash flow in the future. As
part of our strategy to achieve profitability, we intend to expend significant
financial and management resources on:
- developing our OpenSite and BidStream.com brands;
- developing new products and services;
5
<PAGE> 10
- increasing marketing and promotional activities;
- establishing and expanding our direct and indirect sales channels;
- establishing business relationships; and
- acquiring complementary businesses and products.
As a result, we expect to incur substantial operating losses and continued
negative cash flow from operations for the foreseeable future. If our losses
continue for an extended period or are greater than projected, we may be forced
to raise additional capital in order to continue implementing our business
strategy. This could result in dilution to our stockholders. If we are unable to
raise additional capital, we may not have sufficient resources to carry out our
business strategy or achieve profitability.
FLUCTUATIONS IN OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT OUR STOCK PRICE.
We expect that our quarterly operating results will fluctuate significantly
due to many factors, including:
- the level of demand for online auction software;
- the development of the electronic commerce market;
- increasing competition;
- performance of resellers;
- timely release of new products and product upgrades;
- management of our growth; and
- risks associated with potential acquisitions.
Many of these factors are beyond our control, such as the level of demand
for online auction software, the development of the electronic commerce market,
increasing competition and the performance of resellers. These factors may
impact our long-term results as well as our operating results in any particular
quarter. Our quarterly operating results have fluctuated in the past. For
example, our revenue fluctuated an average of 102% from quarter to quarter in
1998. Due to these historical trends, we believe that period-to-period
comparisons of our operating results are not meaningful. In addition, it is
likely that in one or more future quarters our operating results will fall below
the expectations of securities analysts and investors. If this happens, the
trading price of our common stock would almost certainly be materially and
adversely affected.
IF THE MARKET FOR ONLINE AUCTIONS DOES NOT CONTINUE TO GROW, OUR BUSINESS MAY
SUFFER.
Our success is highly dependent upon the widespread acceptance and use of
the Internet for electronic commerce. In particular, the continued adoption by
buyers and sellers of online auctions and other dynamic pricing models on the
Internet is critical to the continued growth in sales of our products. Use of
the Internet to conduct auctions is at an early stage of development. We cannot
be certain that acceptance of online auctions will continue to develop. Any
material reduction in the growth of acceptance and use of
6
<PAGE> 11
online auctions could have a material adverse effect on our business. The
continued growth of online auctions is dependent upon a number of factors,
including the following:
- continued growth in the number of buyers and sellers who use electronic
commerce services;
- continued market demand for dynamic pricing by buyers and sellers;
- continued growth in the number of merchants who desire online auction
capabilities;
- continued development of transaction security technology; and
- continued development of electronic commerce technology.
OUR BUSINESS MAY SUFFER IF OPENSITE AUCTION IS NOT ACCEPTED BY NEW CUSTOMERS.
We cannot be certain that OpenSite Auction will continue to achieve market
acceptance. We derive a majority of our revenue from sales of OpenSite Auction.
We expect this to continue for the foreseeable future. As a result, our future
operating results depend upon the continued market acceptance of OpenSite
Auction. Any material reduction in demand for OpenSite Auction could have a
material adverse effect on our business. Factors that could adversely affect
sales of OpenSite Auction include:
- failure of buyers and sellers to adopt online auctions as a method of
doing business;
- competitive products that obtain greater market acceptance;
- failure to adapt OpenSite Auction to new technologies and computing
platforms; and
- failure to adapt OpenSite Auction to address changing customer and
reseller needs.
BIDSTREAM.COM IS A NEW BUSINESS MODEL THAT WE CANNOT BE CERTAIN WILL SUCCEED.
We launched the BidStream.com Web site in April 1999. The continued
development and market acceptance of BidStream.com is a key element of our
business strategy. Due to its recent introduction, we cannot be certain that
BidStream.com will be successful. The participation of OpenSite-powered auction
sites in BidStream.com is essential to its success. Currently, participation in
BidStream.com is free to our customers. However, we intend to charge a fee to
participating Web sites in the future. We cannot be certain that our customers
will be willing to pay a fee to participate in BidStream.com. Also, the value of
BidStream.com to our customers is the potential for directing additional traffic
to their auction sites. We cannot be certain that Internet users will be
attracted to BidStream.com. If BidStream.com fails to attract a sufficient
number of potential bidders, whether due to lack of content that is attractive
to bidders or for other reasons, BidStream.com will be less valuable to our
customers. We intend to expend considerable resources in developing, maintaining
and promoting BidStream.com. In addition, system interruptions could cause
BidStream.com to be unavailable for extended periods, which could reduce its
attractiveness to merchants and bidders. The failure of BidStream.com to be a
commercial success could have a material adverse effect on our business.
7
<PAGE> 12
IF WE DO NOT SUCCESSFULLY MARKET THE OPENSITE BRAND, OUR BUSINESS MAY SUFFER.
We believe that maintaining and enhancing the OpenSite brand is critical to
increasing our product sales. There are a number of companies that offer
competing products, and we expect our competition to increase. We believe that
increased competition makes promoting the OpenSite brand more imperative as a
competitive advantage. Increased competition may make promoting our brand
significantly more expensive. Promotion of the OpenSite brand will depend
largely on expanding our sales and marketing capabilities and providing a
high-quality product. We intend to use a portion of the proceeds of this
offering to expand our sales and marketing activities and further our product
development efforts. We cannot be certain that we will be successful in
establishing the OpenSite brand. If we are unable to successfully promote our
brand, or if we incur substantial expenses in attempting to do so, our business
could be materially and adversely affected.
COMPETITION COULD REDUCE OUR MARKET SHARE AND ADVERSELY AFFECT OUR OPERATING
RESULTS.
The online auction software market is a new, rapidly evolving and intensely
competitive market. We expect this competition to intensify in the future.
Increased competition may result in increased pricing pressures, reduced sales
and reduced operating margins, as well as loss of market share and brand
recognition. Our competition includes the following:
- dynamic pricing software providing entry-level solutions that compete
with OpenSite Auction Professional, including Auction Broker, Beyond
Solutions and Emaze;
- enterprise-level auction software that competes with OpenSite Auction
Merchant and OpenSite Auction Corporate, including IBM's Net.commerce
product, Moai Technologies, Trading Dynamics and WebVision;
- Web sites that feature auction aggregation that compete with
BidStream.com, including Bidder Network, Bidder's Edge and BidFind;
- person-to-person online auction communities, including those operated by
Amazon.com, Auction Universe, eBay, ONSALE and uBid; and
- outsourced auction-hosting services that compete with our Concierge
service as well as our OpenSite Auction products, including Bidder
Network and FairMarket.
As the online auction software market grows, we expect other companies to
develop software that competes with our products. Many of our competitors and
potential competitors have longer operating histories, greater brand recognition
and greater financial, marketing and other resources than we do. Some
competitive products and services may be priced lower than ours. In addition,
new technologies and the expansion of existing technologies may increase
competitive pressures. We cannot be certain that we will be able to compete
successfully against current and future competitors. These competitive pressures
could have a material adverse effect on our business.
LARGER, BETTER KNOWN AND MORE ESTABLISHED COMPANIES MAY ENTER OUR MARKET, WHICH
COULD INCREASE COMPETITIVE PRESSURES.
In addition to our current competitors, our market may attract new
competition. For example, companies that operate person-to-person online auction
communities, such as
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<PAGE> 13
eBay and Amazon.com, may expand to offer auction solutions that compete with our
products and services or acquire one of our existing or future competitors.
These companies have significant resources and brand recognition in the online
auction market. In addition, software developers, such as Microsoft, may add
auction functionality to, or expand the existing auction functionality of, their
existing products. The barriers to entry in the market for online auction
solutions are relatively low, particularly for companies that currently offer a
form of online auction functionality. Any of these events could greatly increase
our competitive pressures and have a material adverse effect on our business.
ESTABLISHING INDIRECT SALES CHANNELS IS IMPORTANT TO INCREASING PRODUCT SALES.
We are making an effort to increase distribution of our products through
various indirect channels of distribution, including systems integrators, value
added resellers, distributors and Internet Service Providers. We have entered
into contractual arrangements with these resellers, which provide for
commission-based compensation. The failure to attract and retain a sufficient
number of these resellers could have a material adverse effect on our business.
In addition, we cannot predict the extent to which any of these resellers will
be successful in marketing, distributing or implementing our products. It may
also be more difficult for us to forecast revenues generated by these resellers.
Many of these resellers also market and sell competitive products and services.
We may not be able to effectively manage potential conflicts between our
resellers and us or prevent them from devoting greater resources to supporting
the products of other companies.
In addition, we rely on our resellers to inform us of opportunities to
develop new products that serve end user demands. If our resellers do not
present us with market opportunities early enough for us to develop products to
meet end user needs in a timely fashion or if resellers fail to anticipate end
user needs at all, we may fail to develop new products or modify our existing
products for our target markets. In addition, if our resellers fail to
accurately anticipate end user demands, we may spend resources on products that
are not commercially successful.
ESTABLISHING AND MAINTAINING BUSINESS RELATIONSHIPS IS IMPORTANT TO OUR
BUSINESS.
The establishment of business relationships is an element of our marketing
strategy. We intend to seek relationships with:
- providers of complementary technology for the purpose of ensuring product
compatibility;
- portal sites for the purpose of increasing the value of BidStream.com;
and
- ancillary service providers for the purpose of providing opportunities
for complementary services.
We may experience competition from other auction solution providers for
these relationships. We cannot be certain that we will be able to establish a
sufficient number of relationships to carry out our marketing strategy. In
addition, we intend to invest financial and management resources in developing
these relationships. If we do not generate additional revenue through these
relationships to offset our investment, our business could be materially and
adversely affected.
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<PAGE> 14
LONGER SALES CYCLES MAY ADVERSELY AFFECT OUR BUSINESS.
Increasing sales of higher-end auction solutions, particularly OpenSite
Auction Corporate, is an element of our business strategy. As we sell more
sophisticated solutions to larger organizations, we expect the time from initial
contact to sale completion to lengthen. Currently, our typical sales cycle is
approximately 30 days. We expect our typical sales cycle to expand to as many as
90 days. During this sales cycle, we may expend substantial funds and management
resources without any corresponding revenue. If sales are delayed or do not
occur, our operating results for a particular period may be adversely affected.
Our sales are subject to delays over which we have little or no control,
including the following:
- potential customers' budgetary constraints;
- potential customers' internal approval processes;
- seasonal and other timing effects; and
- cancellation or delay of auction projects by customers.
OUR SUCCESS DEPENDS UPON OUR ABILITY TO ADAPT OUR PRODUCTS AND SERVICES TO
CHANGING MARKET CONDITIONS.
Changes in the electronic commerce industry generally, and the online
auction industry specifically, could render our products and services obsolete.
We must continually improve the performance, features and reliability of our
products and services, particularly in response to our competition. For example,
OpenSite Auction will need to be updated periodically to accommodate changes in
Internet technology as well as electronic commerce standards. A failure to
update OpenSite Auction to adapt to technological changes or competitive
pressures could adversely affect sales of this product. We must also introduce
new and expanded products and services in order to attract more buyers and
sellers to our online auction products and services. We cannot be certain that
we will be able to offer these products or services in a cost-effective or
timely manner or that markets will develop for our new or expanded products and
services. Our success will depend, in part, on our ability to:
- enhance our existing products and services;
- successfully anticipate changing market demand;
- integrate our products with our customers' existing IT systems;
- develop new services and technologies that address the increasingly
sophisticated and varied needs of our target markets; and
- respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
If we are unable to adapt to changing market conditions or buyer
requirements, our business could be materially and adversely affected.
PRODUCT PERFORMANCE FAILURES COULD RESULT IN LIABILITY TO OUR CUSTOMERS AND
OTHER ADVERSE IMPACTS.
Performance failures of our products could result in a loss of current and
potential customers, adverse publicity and damage to the OpenSite brand. Any of
these results could have a material adverse effect on our business. In addition,
our products typically are
10
<PAGE> 15
critical to generating revenue for our customers. Performance failures of our
products could impair our customers' revenues and consequently could result in a
claim for substantial damages against us. We cannot be certain that the
liability limitations included in our customer agreements will be enforceable in
all instances or will otherwise protect us from liability for damages. We cannot
be certain that our general liability insurance coverage will be available in
sufficient amounts to cover one or more large claims or that our insurer will
not disclaim coverage for any future claim. Any successful claim against us that
exceeds available insurance coverage requirements could have a material adverse
effect on our business.
WE MAY NOT BE SUCCESSFUL IN EXPANDING INTO INTERNATIONAL MARKETS.
We are expanding internationally. We began the international introduction
of our products through our United Kingdom office in March 1999. We intend to
accelerate our investment in international sales and to add new features and
functionality to our products to accommodate accounting, customs, currency and
tax requirements of foreign countries. In addition, we have retained Protege
Software, Ltd. to provide sales and marketing services for our European
expansion. As we continue to expand outside the United States, we are subject to
risks of doing business internationally, including the following:
- management and other resources spread over various countries;
- difficulties in staffing and managing foreign operations;
- longer payment cycles, different accounting practices and difficulties in
collecting accounts receivable;
- seasonal reductions in business activity;
- potentially adverse tax consequences;
- administrative burdens in collecting local taxes, including value-added
taxes;
- compliance with a variety of foreign laws and regulations;
- foreign currency exchange rate fluctuations; and
- regional economic conditions.
We may not be successful in expanding into international markets or in
generating revenues from foreign operations.
WE MUST EFFECTIVELY MANAGE THE GROWTH OF OUR BUSINESS TO BE SUCCESSFUL.
We are rapidly expanding our operations. In particular, we have
significantly expanded our sales and marketing departments since 1998 in an
effort to increase sales and revenue growth. We have also expanded our
management and administration to support this growth. We expect this expansion
to continue at an accelerated rate. This expansion has placed a significant
strain on our management and on our operational and financial resources, which
we expect will continue. If we are unable to manage our growth effectively, our
business could be materially and adversely affected. To successfully manage our
future growth, we will need to upgrade our resources and systems as well as
expand our employee base. Our future performance will depend, in part, on our
ability to integrate our newly hired executive officers effectively into our
management team. Our executive officers, who have worked together for only a
short time, may not be successful in carrying out their duties or running our
company. We cannot be certain that our
11
<PAGE> 16
management, operational and financial resources will be adequate to support our
future operations.
OUR SUCCESS DEPENDS UPON ATTRACTING AND RETAINING KEY EMPLOYEES.
A key factor to our success is the continued services and performance of
our executive officers and other key personnel. If we lose the services of any
of our executive officers, our business could be materially and adversely
affected. We also depend on our ability to identify, hire and retain other
highly skilled technical, managerial and marketing personnel. We cannot be
certain of our ability to identify, hire and retain sufficiently qualified
personnel. For example, we may encounter difficulties in attracting a sufficient
number of qualified software developers. Furthermore, we intend to transition
our product development office in Buffalo, New York to our Durham, North
Carolina headquarters by December 31, 1999. This office is primarily engaged in
developing product updates to OpenSite Auction and currently employs 16 people.
Although we have offered continued employment to these developers in our Durham,
North Carolina office, we cannot be certain that any of them will be willing to
relocate. In connection with this office closing, we will incur a related
charge. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview." Failure to identify, hire and retain
necessary technical, managerial and marketing personnel could have a material
adverse effect on our business.
THE FAILURE TO INTEGRATE SUCCESSFULLY OTHER BUSINESSES THAT WE ACQUIRE COULD
ADVERSELY AFFECT OUR BUSINESS.
An element of our strategy is to broaden the scope and content of our
auction software products and services through the acquisition of existing
auction software products, technologies, services and businesses in the online
auction market. We have no current agreements or binding commitments regarding
any potential acquisitions. If we complete any acquisitions in the future, we
would be exposed to increased risks, including:
- the integration of new operations, products, services and personnel;
- the diversion of resources from our existing businesses, sites and
technologies;
- the inability to generate revenues from new products and services
sufficient to offset associated acquisition costs;
- the maintenance of uniform standards, controls, procedures and policies;
- accounting effects that adversely affect our financial results;
- the impairment of employee and customer relations as a result of any
integration of new management personnel; and
- dilution to existing stockholders from the issuance of equity securities.
In addition, liabilities or other problems associated with an acquired
business could have a material adverse effect on our business.
THE REGULATION OF ONLINE COMMERCE IS UNCERTAIN AND SUBJECT TO CHANGE.
There are currently few laws and regulations directly applicable to the
Internet and online auctions. The adoption of additional laws or regulations may
decrease the growth of online auctions, which could, in turn, decrease the
demand for our products and services.
12
<PAGE> 17
Additional regulation could also increase our cost of doing business. We expect
that additional regulation may be adopted covering issues such as user privacy,
pricing, content, copyrights, antitrust and characteristics and quality of
products and services. Taxation of Internet use, or other charges imposed by
government agencies or by private organizations for accessing the Internet, may
also be imposed. In addition, the growth and development of electronic commerce
may prompt calls for more stringent laws applying to the solicitation,
collection or processing of personal or consumer information. Such laws may
impose additional burdens on those companies conducting business online.
WE HAVE A LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY.
We rely on a combination of trade secrets, copyright and trademark laws,
license agreements, nondisclosure and other contractual provisions and technical
measures to protect our proprietary rights. Currently, our most important
proprietary rights are those embodied in our OpenSite Auction product and
BidStream.com Web site. Our software technology is not patented and existing
copyright laws offer only limited practical protection. We cannot guarantee that
the legal protections that we rely on will be adequate to prevent
misappropriation of our intellectual property. Also, these protections may not
prevent independent third-party development of competitive products or services.
We cannot guarantee that third parties will not assert infringement claims
against us in the future or that any such assertion will not require us to enter
into a license agreement or royalty agreement or financial settlement with the
party asserting a claim. Even the successful defense of an infringement claim
could result in substantial costs and diversion of our management's efforts that
could have a material adverse effect on our business.
In addition, effective copyright and trademark protection may be
unenforceable or limited in certain countries, and the global nature of the
Internet makes it impossible to control all of the jurisdictions in which our
intellectual property is used. The laws of many countries do not honor the
protections of proprietary rights that are available in the United States.
Litigation to protect intellectual property rights outside the United States
could be very expensive and have uncertain results. Such litigation, whether or
not successful, is likely to be time-consuming and costly to prosecute, require
the use of substantial management attention and resources and could have a
material adverse effect on our business.
CONCERNS FOR PRIVACY ON THE INTERNET MAY ADVERSELY AFFECT OUR BUSINESS.
Increased regulation of privacy poses a potential risk to our business. The
information that we obtain from auction participants could make it easier to
target advertisements to users in specific demographic groups. Advocates of
privacy rights have voiced concern over the implications of this type of
technology. The resolution of privacy issues could adversely affect the growth
both of online auctions and of our business. The effectiveness of our products
and the success of our business model would be severely limited by any reduction
or limitation in the use of user information.
OUR BUSINESS MAY BE HARMED BY THE USE OF OUR PRODUCTS FOR ILLEGAL PURPOSES.
We do not attempt to limit or regulate the types of auction sites that are
established using our products. Some customers may use our products to auction
items that are subject to regulation by local, state or federal authorities,
such as firearms, alcohol and tobacco. We cannot be certain that unlawful goods
will not be sold using our products.
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<PAGE> 18
The law relating to the liability of software providers for the activities of
their users is unclear. We could be subject to civil or criminal claims for
unlawful activities carried out by our customers. Any successful claims could
have a material adverse effect on our business. Even the defense of a frivolous
or other unsuccessful claim could result in substantial costs and diversion of
our management's efforts that could have a material adverse effect on our
business.
POTENTIAL YEAR 2000 PROBLEMS COULD ADVERSELY AFFECT OUR BUSINESS.
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These systems cannot
reliably distinguish dates beginning on January 1, 2000 from dates prior to the
Year 2000. Many companies' software and computer systems may need to be upgraded
or replaced in order to correctly recognize and process dates beginning in 2000.
Significant uncertainty exists in the software industry and in many other
industries concerning the potential effects of Year 2000 non-compliance.
Our internally developed software for sale has been designed to accept only
four digit entries in order to resolve Year 2000 ambiguities. However, our
products operate with third-party equipment and software that may not be Year
2000 compliant. In addition, we cannot guarantee that the systems of our
suppliers or service providers will be Year 2000 compliant.
The failure of our internal systems, the products or systems of third
parties upon which we rely or the hardware or software upon which our products
and services rely could result in:
- our inability to effectively manage sales leads, which in turn could
result in fewer sales and lower revenue;
- the failure of our products to function properly, which in turn could
result in our incurring significant costs, and diverting significant
human resources, in our efforts to comply with obligations under warranty
and/or service agreements;
- our inability to properly invoice and process payments from our customers
and others with whom we have business relationships; and
- errors or omissions in accounting and/or financial data;
any of which could have a material adverse effect on our business.
In addition, the computer systems necessary to maintain the viability of
the Internet or any of the Web sites that direct buyers to our Web sites may not
be Year 2000 compliant. We believe that the Year 2000 issue may adversely affect
buyers and potential buyers. The computers of potential buyers may not be Year
2000 compliant, thus preventing such buyers from accessing our customers' Web
sites or BidStream.com. In addition, many companies are expending significant
resources to address the Year 2000 issue in their current software systems that
may reduce the amount of funds available to purchase our products. To the extent
that our potential customers experience Year 2000 difficulties, our business
could be materially and adversely affected.
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<PAGE> 19
WE MAY NOT BE ABLE TO PROTECT OUR DOMAIN NAMES.
We currently hold the Internet domain names "opensite.com" and
"bidstream.com," as well as various other related names. Domain names generally
are regulated by Internet regulatory bodies. The regulation of domain names in
the United States and in foreign countries is subject to change. Regulatory
bodies could establish additional top-level domains, appoint additional domain
name registrars or modify the requirements for holding domain names. As a
result, we may not be able to acquire or maintain all of the desired variations
of the "OpenSite" and "BidStream" names in all of the countries in which we
conduct business. The presence of similar domain names may create confusion
among potential customers and bidders and direct traffic away from our Web
sites.
The relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is unclear. Therefore, we
could be unable to prevent third parties from acquiring domain names that
infringe or otherwise decrease the value of our trademarks and other proprietary
rights.
OUR BUSINESS GOALS MAY NOT BE ACHIEVED IF THE PROCEEDS OF THIS OFFERING ARE NOT
USED EFFECTIVELY.
The net proceeds from the sale of our common stock will become part of our
general working capital upon completion of this offering. The failure of
management to apply these proceeds effectively could materially and adversely
affect our business. We may use these funds to expand our business, including
increasing our sales and marketing activities, increasing our product
development, possible future acquisitions and for general corporate purposes,
including working capital. We will have considerable discretion in the
application of the net proceeds of this offering to these uses. The net proceeds
may be used for corporate purposes that do not increase our profitability or
market value. Pending application of the proceeds, they may be placed in
investments that do not produce income or that lose value. The timing of our use
of the net proceeds will depend on a number of factors, including the amount and
timing of our future cash flows.
TRADING IN OUR COMMON STOCK MAY BE LIMITED.
We cannot predict the extent to which investor interest in OpenSite will
lead to the development of a trading market for our common stock or how liquid
that market might become. The initial public offering price for our common stock
has been determined by negotiations between the underwriters and us and may not
be indicative of prices that will prevail in the trading market. If you purchase
shares of common stock, you may not be able to resell those shares at or above
the initial public offering price.
SIGNIFICANT FLUCTUATION IN THE MARKET PRICE OF OUR COMMON STOCK COULD RESULT IN
SECURITIES CLASS ACTION CLAIMS AGAINST US.
Significant price and volume fluctuations have occurred with respect to the
securities of Internet-related companies. Our common stock price is likely to be
volatile in the future. In the past, following periods of downward volatility in
the market price of a company's securities, class action litigation has often
been pursued against companies. If such litigation were pursued against us, it
could result in substantial costs and a diversion of our management's attention
and resources.
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<PAGE> 20
SHARES ELIGIBLE FOR FUTURE SALE COULD ADVERSELY AFFECT STOCK PRICE IN THE
FUTURE.
Sales of substantial amounts of our common stock in the public market after
this offering, or the perception that such sales may occur, could materially
affect prevailing market prices of our common stock and our ability to raise
equity capital in the future. A substantial amount of our common stock will be
eligible for sale in the public market after this offering.
Upon completion of this offering, we will have outstanding an aggregate of
16,868,511 shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
the 3,681,800 shares sold in this offering will be freely tradable without
restriction or registration under the Securities Act, unless such shares are
purchased by our affiliates. The remaining 13,186,711 shares of common stock are
held by existing stockholders. These shares, as well as any shares sold in this
offering that are purchased by one of our affiliates, are restricted securities
that may be sold in the public market only if registered or if they qualify for
an exemption from registration under the Securities Act. Up to 5,714,285 shares
of restricted securities may be eligible for sale in the public market in
accordance with the requirements of Rule 144 under the Securities Act beginning
on March 30, 2000, and up to 105,263 shares of restricted securities may be
eligible for sale in the public market in accordance with the requirements of
Rule 144 under the Securities Act beginning on April 23, 2000. Up to an
additional 7,367,163 shares of restricted securities may be eligible for sale in
the public market in accordance with the requirements of Rule 144. See
"Description of Capital Stock -- Registration Rights" and "Shares Eligible for
Future Sale."
Upon completion of this offering, the holders of 9,639,847 shares of our
common stock, or their transferees, will be entitled to rights with respect to
the registration of such shares under the Securities Act. After such a
registration, these shares become freely tradable without restriction under the
Securities Act.
NEW INVESTORS IN OPENSITE WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price is expected to be substantially higher
than the net tangible book value of each outstanding share of common stock. If
you purchase common stock in this offering, you will incur immediate and
substantial dilution in net tangible book value per share in the amount of
$7.76. There are also a large number of outstanding stock options to purchase
our common stock with exercise prices significantly below the estimated initial
public offering price of the common stock. To the extent that these options are
exercised, there will be further dilution.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND DELAWARE LAW COULD MAKE AN
ACQUISITION BY A THIRD PARTY MORE DIFFICULT.
Some provisions of our certificate of incorporation and bylaws and
provisions of Delaware law may deter or prevent a takeover attempt, including an
attempt that might result in a premium over the market price for our common
stock. Even in the absence of a takeover attempt, these could adversely affect
the market price of our common stock. These provisions include:
STOCKHOLDER PROPOSALS. Our stockholders must follow an advance
notification procedure for stockholder nominations of candidates for our board
of directors and for
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<PAGE> 21
other business to be conducted at any stockholders' meeting. These requirements
could inhibit a change of control.
SUPERMAJORITY VOTING. Our certificate of incorporation and bylaws provide
that a director may be removed from office only with cause by the affirmative
vote of at least 75% of all shares voting on the removal. In addition, the
provisions of our certificate of incorporation that relate to the election and
removal of directors and the prohibition on the calling of special meetings by
stockholders and actions by stockholders by written consent may only be amended
by a vote of 75% of our outstanding shares of voting stock. Our bylaws may only
be amended by our board of directors or by 75% of our outstanding shares of
voting stock.
PREFERRED STOCK. Our certificate of incorporation authorizes our board of
directors to issue up to 10,000,000 shares of preferred stock having such rights
as may be designated by our board of directors, without stockholder approval. An
issuance of preferred stock could inhibit a change in control.
DELAWARE ANTITAKEOVER STATUTE. Delaware law restricts business
combinations with interested stockholders upon their acquiring 15% or more of
our common stock. This law may have the effect of inhibiting a non-negotiated
merger or other business combination.
OUR COMMON STOCK PRICE IS LIKELY TO BE VOLATILE.
The market for Internet-related and technology companies has been highly
volatile in the past. Accordingly, the market price of our common stock is
likely to be highly volatile. You may not be able to resell your shares of our
common stock following periods of volatility because of the market's adverse
reaction to such volatility. We cannot assure you that our stock will trade at
the same levels as other Internet stocks or that Internet stocks in general will
sustain their current market prices.
Factors that could cause such volatility may include, among other things:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- introduction of competing products or services;
- changes in financial estimates by securities analysts or our failure to
meet analysts' performance expectations;
- conditions or trends in the Internet industry;
- changes in the market valuations of other Internet companies;
- announcements by us or our competitors of significant acquisitions or
joint ventures;
- capital commitments;
- additions or departures of key personnel; and
- sales of our common stock.
Many of these factors are beyond our control. These factors may materially
adversely affect the market price of our common stock, regardless of our
operating performance.
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FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus contain forward-looking
information. These statements are found in the sections entitled "Prospectus
Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business." They
include statements concerning:
- our business strategy;
- liquidity and capital expenditures;
- use of proceeds of the offering;
- future sources of revenues;
- future profitability;
- expansion of our products and services;
- trends in Internet activity generally and trends in online auctions in
particular;
- development of BidStream.com;
- development of indirect sales channels and strategic alliances;
- expansion of international operations;
- trends in acceptance of dynamic pricing methods;
- trends in government regulation; and
- payment of dividends.
You can identify these statements by forward-looking words such as
"expect," "believe," "goal," "plan," "intend," "estimate," "may" and "will" or
similar words. You should be aware that these statements are subject to known
and unknown risks, uncertainties and other factors, including those discussed in
the section entitled "Risk Factors," that could cause the actual results to
differ materially from those suggested by the forward-looking statements.
USE OF PROCEEDS
Our net proceeds from the sale of the 3,681,800 shares of common stock in
this offering are estimated to be approximately $36,775,000 ($41,657,000 if the
underwriters exercise their over-allotment option in full), assuming an initial
public offering price of $11.00 per share and after deducting estimated
underwriting discounts and commissions and estimated expenses payable by us in
connection with this offering.
We intend to use the net proceeds from the offering primarily for expansion
of our business, including sales and marketing activities, product development,
possible future acquisitions and for general corporate purposes, including
working capital. We have not yet determined the specific amount of proceeds to
be used for each purpose. The amounts we actually use for each purpose may vary
significantly and are subject to change at our discretion depending upon factors
such as economic or industry conditions, changes in the competitive environment
and strategic opportunities that may arise. In addition, we believe that it is
important to create a public market for our common stock to facilitate future
access to public market funds and provide the availability of a publicly traded
stock if we decide to issue common stock in connection with future acquisitions.
We have no specific agreements, commitments or understandings with respect to
any acquisitions. Pending
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application of the net proceeds as described above, we intend to invest the net
proceeds of the offering in short-term, investment-grade, interest-bearing
securities.
DIVIDEND POLICY
We do not anticipate declaring or paying any cash dividends for the
foreseeable future. We currently expect to retain all earnings, if any, for
investment in our business. Our board of directors has broad discretion as to
whether to pay dividends. Any determination whether to pay dividends will depend
on a number of factors, including our results of operations, financial position
and capital requirements, general business conditions, restrictions imposed by
financing arrangements, if any, legal and regulatory restrictions on the payment
of dividends and other factors that our board of directors deems relevant.
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<PAGE> 24
CAPITALIZATION
The following table sets forth the capitalization of OpenSite as of June
30, 1999 (1) on an actual basis, (2) on a pro forma basis giving effect to the
conversion of all outstanding shares of mandatorily redeemable preferred stock
into common stock upon the closing of the offering, and (3) on a pro forma as
adjusted basis to reflect the sale of 3,181,800 shares of common stock offered
at an assumed initial public offering price of $11.00 per share and the sale of
500,000 shares of common stock to CNET at an assumed price of $10.34 per share,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us. This information should be read in conjunction
with our financial statements and accompanying notes appearing elsewhere in this
prospectus.
The amounts below exclude 1,314,285 shares of common stock presently
reserved for issuance upon exercise of options granted under our stock option
plan, of which options to purchase 786,905 shares were outstanding as of July
23, 1999 at a weighted average exercise price of $5.49 per share. The amounts
below also exclude 93,455 shares of common stock subject to warrants outstanding
as of July 9, 1999 at an exercise price of $0.44 per share.
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
<S> <C> <C> <C>
Capital lease obligations, net of
current portion....................... $ 30,359 $ 30,359 $ 30,359
------------ ------------ ------------
Mandatorily redeemable preferred stock,
$.01 par value, 21,175,439 shares
authorized:
Series A -- 1,544,610 shares issued
and outstanding actual, none issued
and outstanding pro forma and pro
forma as adjusted.................. 19,468,291 -- --
Series B -- 2,380,952 shares issued
and outstanding actual, none issued
and outstanding pro forma and pro
forma as adjusted.................. 24,990,188 -- --
Series C -- 5,714,285 shares issued
and outstanding actual, none issued
and outstanding pro forma and pro
forma as adjusted.................. 24,745,487 -- --
------------ ------------ ------------
Total mandatorily redeemable
preferred stock............ 69,203,966 -- --
------------ ------------ ------------
</TABLE>
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<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
<S> <C> <C> <C>
Stockholders' equity (deficit):
Common stock, $.01 par value,
75,000,000 shares authorized,
4,434,250 shares issued and
outstanding actual; 14,074,098 shares
issued and outstanding pro forma; and
17,755,898 shares issued and
outstanding pro forma as adjusted..... 44,342 140,740 177,558
Additional paid-in capital.............. -- 69,107,568 105,845,564
Deferred compensation................... (108,079) (108,079) (108,079)
Treasury stock, cost (887,388 shares)... (2,795,274) (2,795,274) (2,795,274)
Accumulated other comprehensive
income................................ 466 466 466
Accumulated deficit..................... (48,306,746) (48,306,746) (48,306,746)
Notes receivable from stockholders...... (78,500) (78,500) (78,500)
------------ ------------ ------------
Total stockholders' equity
(deficit).................. (51,243,791) 17,960,175 54,734,989
============ ============ ============
Total capitalization.......... $ 17,990,534 $ 17,990,534 $ 54,765,348
============ ============ ============
</TABLE>
21
<PAGE> 26
DILUTION
As of June 30, 1999, the pro forma net tangible book value of OpenSite was
approximately $17,960,175, or $1.36 per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible assets
less total liabilities, divided by the number of shares of common stock
outstanding, after giving effect to the conversion of all mandatorily redeemable
securities. After giving effect to the sale of 3,181,800 shares of common stock
in this offering at an assumed initial public offering price of $11.00 per share
and the sale of 500,000 shares of common stock to CNET at an assumed price of
$10.34 per share, and the receipt of the estimated net proceeds, the pro forma
net tangible book value of OpenSite at June 30, 1999, would have been
approximately $54.7 million, or $3.24 per share of common stock. This represents
an immediate increase in net tangible book value of $1.88 per share to existing
stockholders and an immediate decrease in net tangible book value of $7.76 per
share to new investors. The following table illustrates this unaudited per share
dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $ 11.00
Pro forma net tangible book value per share at June 30,
1999................................................... $ 1.36
Increase attributable to the offering..................... 1.88
-------
Pro forma adjusted net tangible book value per share after the
offering........................................................... 3.24
-------
Net tangible book value dilution per share to new investors in the
offering........................................................... $ 7.76
=======
</TABLE>
The following table summarizes, as of June 30, 1999, on the pro forma basis
described above, the total number of shares sold by us, the consideration paid
to us for those shares and the average price per share paid by the existing
stockholders and by new investors purchasing 3,181,800 shares of common stock in
the offering at an assumed initial public offering price of $11.00 per share and
500,000 shares of common stock at an assumed price of $10.34 (before deducting
the estimated underwriting discounts and commissions and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders
(1).................. 13,186,711 78.2 $ 24,383,578 37.8 $ 1.85
---------- ----- ------------ ----- ------
New investors.......... 3,681,800 21.8 40,169,800 62.2 10.91
---------- ----- ------------ ----- ------
Total........ 16,368,511 100.0% $ 64,553,378 100.0% $ 3.83
========== ===== ============ ===== ======
</TABLE>
- -------------------------
(1) The consideration received from existing stockholders excludes accretion on
mandatory redeemable convertible securities of $42,233,371.
Assuming full exercise of the underwriters' over-allotment option, the
percentage of shares held by existing stockholders would be 76.0% of the total
number of shares of common stock to be outstanding after the offering, and the
number of shares held by new stockholders would be increased to 4,159,070
shares, or 24.0% of the total number of shares of common stock to be outstanding
after the offering.
These computations are based on the number of shares of common stock
outstanding as of June 30, 1999 and exclude:
- 1,314,285 shares of common stock presently reserved for issuance upon
exercise of options granted under our stock option plan, of which options
to purchase
22
<PAGE> 27
786,905 shares were outstanding as of July 23, 1999 at exercise prices
ranging from $0.21 to $10.50 per share and a weighted average exercise
price of $5.49 per share; and
- 93,455 shares of common stock presently reserved for issuance upon
exercise of warrants outstanding as of July 23, 1999 at an exercise price
of $0.44 per share.
The exercise of these options and warrants will have the effect of
increasing the net tangible book value dilution of new investors in this
offering.
23
<PAGE> 28
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data set forth below should be read in conjunction
with our financial statements and accompanying notes appearing elsewhere in this
prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The statement of operations data for the period from
inception (July 24, 1996) to December 31, 1996 and the years ended December 31,
1997 and 1998, and the balance sheet data as of December 31, 1997 and 1998, are
derived from, and are qualified by reference to, our financial statements, which
have been audited by PricewaterhouseCoopers LLP and are included elsewhere in
this prospectus. The balance sheet data as of December 31, 1996 is derived from
audited financial statements not included in this prospectus. The statement of
operations data for the six months ended June 30, 1998 and 1999, and the balance
sheet data as of June 30, 1999 are derived from our unaudited financial
statements appearing elsewhere in this prospectus. In the opinion of our
management, the unaudited financial statements have been prepared on a basis
consistent with our audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the financial position and results of operations for these unaudited periods.
Historical results are not necessarily indicative of results to be expected in
the future.
Pro forma as adjusted balance sheet data gives effect to the conversion of
all outstanding shares of mandatorily redeemable preferred stock into common
stock upon the closing of the offering and is adjusted to give effect to our
sale of 3,181,800 shares of common stock offered at an assumed initial public
offering price of $11.00 per share, our sale of 500,000 shares of common stock
to CNET at an assumed price of $10.34 per share and the receipt of the estimated
net proceeds from the sale.
24
<PAGE> 29
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 24,
1996) YEAR ENDED SIX MONTHS ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, ----------------- -------------------
1996 1997 1998 1998 1999
-------------- ------ ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software licenses..... $ 11 $ 177 $ 1,072 $ 499 $ 2,234
Services and other.... 1 163 209 85 352
------ ------ ------- ------ -------
Total
revenue.... 12 340 1,281 584 2,586
------ ------ ------- ------ -------
Cost of revenue:
Cost of software
licenses........... -- 9 18 7 20
Cost of services and
other.............. 1 19 131 18 493
------ ------ ------- ------ -------
Total cost of
revenue.... 1 28 149 25 513
------ ------ ------- ------ -------
Gross profit............ 11 312 1,132 559 2,073
------ ------ ------- ------ -------
Operating expense:
Sales and marketing... -- 43 1,918 210 3,429
Product development... -- 105 695 172 1,310
General and
administrative..... 11 36 923 245 1,751
------ ------ ------- ------ -------
Total
operating
expense.... 11 184 3,536 627 6,490
------ ------ ------- ------ -------
Operating income
(loss)................ 0 128 (2,404) (68) (4,417)
Interest, net........... -- 2 43 9 241
------ ------ ------- ------ -------
Net income (loss)....... $ 0 $ 130 $(2,361) $ (59) $(4,176)
====== ====== ======= ====== =======
Basic and diluted net
income (loss) per
common share.......... $ 0.00 $ 0.03 $ (0.66) $(0.03) $(13.31)
------ ------ ------- ------ -------
Shares used in computing
basic and diluted net
income (loss) per
share................. 3,579 3,877 4,106 3,977 3,461
------ ------ ------- ------ -------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
DECEMBER 31, ----------------------
-------------------- PRO FORMA
1996 1997 1998 ACTUAL AS ADJUSTED
---- ---- ------ -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 1 $151 $2,276 $ 19,324 $ 56,099
Working capital (deficit)............. (1) 141 1,780 16,660 53,435
Total assets.......................... (2) 210 3,070 21,856 58,631
Long-term debt and capital lease
obligations, net of current
portion............................. -- 17 43 30 30
Mandatorily redeemable convertible
preferred stock..................... -- -- 4,818 69,204 --
Total stockholders' equity
(deficit)........................... -- 159 (2,707) (51,244) 54,735
</TABLE>
25
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and accompanying notes which appear elsewhere in this prospectus. The
following discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including
those discussed below and elsewhere in this prospectus, particularly under the
heading "Risk Factors."
OVERVIEW
OpenSite provides online auction software solutions and has an installed
base of over 300 auction sites. According to International Data Corporation, we
have approximately a 50% market share of online auction sites. We commenced
operation and introduced our first auction software product in 1996. The
OpenSite Auction family of software products, available in Professional,
Merchant and Corporate versions, enables merchants of all sizes to set up and
conduct auctions on the Internet and provides them with the ability to gain more
sophisticated functionality as they grow. We have historically sold our software
directly to our customers, but are increasing the proportion that is sold
through resellers. We also provide related consulting, education and technical
support services. Our Concierge service enables our customers to outsource
completely to us the process of running Internet auctions, including
development, deployment, maintenance and hosting. In addition, BidStream.com is
a Web site owned and operated by OpenSite that aggregates the items for bid on
participating OpenSite-powered auction sites. While we have derived minimal
revenue from BidStream.com, we anticipate it to contribute a growing portion of
revenue in the future. As of June 30, 1999, we had 78 full-time employees.
OpenSite's revenue is currently derived primarily from software license
fees and support and maintenance fees. Historically, the predominant portion of
our software license revenue and support and maintenance revenue was generated
by our direct sales force. However, due to the initiation of sales through
resellers in late 1998, we expect that a sizeable portion of our revenue in 1999
will result from sales generated by our resellers. Our resellers do not maintain
an inventory of our software.
While software license revenue and support and maintenance revenue will
continue to be the majority of our revenue for the next several years, we expect
to generate an increasing portion of our revenue from BidStream.com and OpenSite
Concierge service in future years. Revenue from BidStream.com will consist of
advertising fees and fees charged to participating auction sites. We expect that
BidStream.com will begin to generate advertising fees by the end of 1999 and
participation fees in 2000. OpenSite Concierge service began generating fees in
the second quarter of 1999. These fees consist of monthly service fees for
auction site creation, hosting and administration services.
We intend to transition our product development efforts from our Buffalo,
New York office to our Durham, North Carolina headquarters by December 31, 1999.
In connection with this closing of the Buffalo, New York office, we expect to
incur a charge of approximately $450,000 in the third quarter of 1999 primarily
relating to severance and other compensation expense.
Software license revenue is generated through the licensing of our software
products to end users and resellers. We sell three levels of our OpenSite
Auction software product
26
<PAGE> 31
with increasingly sophisticated functionality. The current prices for our
auction software products range from $5,000 to $50,000 based on the level of the
software. Software license revenue is recognized upon shipment of the software
product and fulfillment of the acceptance terms, if any. In instances where the
support and maintenance fee and the license fee are included in the same sales
arrangement, the support and maintenance revenue is unbundled in an amount that
equals the charge for support and maintenance when support and maintenance
services are sold separately from the software license. The remaining portion of
the revenue for the sale is recognized as software license revenue as discussed
above.
Services and other revenue include support and maintenance, consulting and
education services. Support and maintenance services are generally provided over
a twelve month period in accordance with our support and maintenance agreements.
The annual fees for support and maintenance services vary from $1,000 to $15,000
based on the level of the software product sold and the level of support
selected. Support and maintenance fees initially are deferred and recognized
ratably over the period of the support and maintenance agreement. Revenue from
consulting and education services is charged on a time and materials basis and
is recognized as the services are provided.
Cost of software license revenue consists primarily of personnel costs
related to downloading software to our customers' Web sites and costs of product
media and manuals. Cost of services and other revenue consists primarily of
costs of consulting and customer support and maintenance, including personnel,
travel and occupancy and maintenance of the BidStream.com web site.
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed." Under the
standard, capitalization of software development costs begins upon the
establishment of technological feasibility, subject to net realizable value
considerations. To date, the period between achieving technological feasibility
and the general availability of such software has substantially coincided.
Therefore, software development costs qualifying for capitalization have been
immaterial. Accordingly, we have not capitalized any software development costs
and charged all such costs to product development expense in the period
incurred.
27
<PAGE> 32
RESULTS OF OPERATIONS
The following table sets forth our historical operating information as a
percentage of total revenue for the periods indicated.
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
INCEPTION YEAR ENDED ENDED
(JULY 24, 1996) DECEMBER 31, JUNE 30,
TO DECEMBER 31, -------------- --------------
1996 1997 1998 1998 1999
--------------- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software licenses............. 93.1% 52.2% 83.7% 85.5% 86.4%
Services and other............ 6.9 47.8 16.3 14.5 13.6
-------- ----- ------ ----- ------
Total revenue......... 100.0 100.0 100.0 100.0 100.0
-------- ----- ------ ----- ------
Cost of revenue:
Cost of software licenses..... 0.0 2.6 1.4 1.2 0.8
Cost of services and other.... 9.7 5.6 10.2 3.1 19.1
-------- ----- ------ ----- ------
Total cost of
revenue............ 9.7 8.2 11.6 4.3 19.9
-------- ----- ------ ----- ------
Gross Profit.................... 90.3 91.8 88.4 95.7 80.1
-------- ----- ------ ----- ------
Operating Expense:
Sales and marketing........... 0.0 12.8 149.8 35.8 132.6
Product development........... 0.0 30.9 54.3 29.5 50.6
General and administrative.... 94.0 10.5 72.1 42.0 67.7
-------- ----- ------ ----- ------
Total operating
expense............ 94.0 54.2 276.2 107.3 250.9
-------- ----- ------ ----- ------
Operating income (loss)......... (3.7) 37.6 (187.8) (11.6) (170.8)
Interest, net................... 0.0 0.6 3.4 1.5 9.3
-------- ----- ------ ----- ------
Net income (loss)............... (3.7)% 38.2% (184.4)% (10.1)% (161.5)%
======== ===== ====== ===== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUE
Total revenue increased by 343% to $2,586,000 in the six months ended June
30, 1999 from $584,000 in the six months ended June 30, 1998.
Software license revenue increased by 348% to $2,234,000 in the six months
ended June 30, 1999 from $499,000 in the six months ended June 30, 1998. The
number of software licenses sold increased to 184 in the six months ended June
30, 1999 from 47 in the six months ended June 30, 1998. As a percentage of total
revenue, software license revenue increased to 86.4% in the six months ended
June 30, 1999 from 85.5% in the six months ended June 30, 1998. These increases
were a result of our increased sales and marketing efforts combined with the
market acceptance and popularity of auctions on the Internet.
Services and other revenue increased by 316% to $353,000 in the six months
ended June 30, 1999 from $85,000 in the six months ended June 30, 1998. As a
percentage of total revenue, services and other revenue decreased to 13.6% in
the six months ended June 30, 1999 from 14.5% in the six months ended June 30,
1998. The dollar increase was a result of the licensed software customers
increasing to 384 at June 30, 1999 from 129 at
28
<PAGE> 33
June 30, 1998. The decrease as a percentage of total revenue was due to the
significant increase in software license revenue.
COST OF REVENUE
Cost of software license revenue increased by 182% to $20,000 in the six
months ended June 30, 1999 from $7,000 in the six months ended June 30, 1998. As
a percentage of software license revenue, cost of software license revenue
decreased to 0.8% in the six months ended June 30, 1999 from 1.2% in the six
months ended June 30, 1998. The dollar increase resulted primarily from the
increase in software licensing activity. The percentage decrease was a result of
the significant increase in software license revenue.
Cost of services and other revenue increased by 2,645% to $493,000 in the
six months ended June 30, 1999 from $18,000 in the six months ended June 30,
1998. As a percentage of services and other revenue, cost of services and other
revenue increased to 140.1% in the six months ended June 30, 1999 from 21.2% in
the six months ended June 30, 1998. These increases resulted primarily from the
increase in the number of employees providing support and maintenance to 16 at
June 30, 1999 from two at June 30, 1998. Cost of services and other revenue
increased at a greater rate than services and other revenue as we expanded the
infrastructure for our support and maintenance group in advance of recognizing
corresponding services and other revenue.
SALES AND MARKETING
Sales and marketing expense consists primarily of compensation for sales
and marketing personnel, advertising, trade shows and other promotional costs
and, to a lesser extent, fees for outside professional advisors and overhead
costs. Sales and marketing expense increased by 1,538% to $3,429,000 in the six
months ended June 30, 1999 from $210,000 in the six months ended June 30, 1998.
As a percentage of total revenue, sales and marketing expense increased to
132.6% in the six months ended June 30, 1999 from 35.8% in the six months ended
June 30, 1998. Sales and marketing expense increased by $607,000 as a result of
the number of sales and marketing employees increasing to 25 at June 30, 1999
from six at June 30, 1998, and by $2,612,000 due to expenditures for marketing
and advertising.
PRODUCT DEVELOPMENT
Product development expense consists primarily of compensation for product
development staff and overhead costs. We expense product development costs as
they are incurred. Product development expense increased by 661% to $1,310,000
in the six months ended June 30, 1999 from $172,000 in the six months ended June
30, 1998. As a percentage of total revenue, product development expense
increased to 50.6% in the six months ended June 30, 1999 from 29.5% in the six
months ended June 30, 1998. Product development expense increased primarily as a
result of the number of employees in the product development group increasing to
25 at June 30, 1999 from eleven at June 30, 1998. The increase in the number of
product development employees was primarily the result of hiring additional
software engineers and quality assurance personnel to support our additional
product development and testing activities.
29
<PAGE> 34
GENERAL AND ADMINISTRATIVE
General and administrative expense consists primarily of compensation for
personnel and, to a lesser extent, fees for outside professional advisors and
overhead costs. General and administrative expense increased by 615% to
$1,751,000 in the six months ended June 30, 1999 from $245,000 in the six months
ended June 30, 1998. As a percentage of total revenue, general and
administrative expense increased to 67.7% in the six months ended June 30, 1999
from 42.0% in the six months ended June 30, 1998. General and administrative
expense increased as a result of the number of general and administrative
employees increasing to 12 at June 30, 1999 from three at June 30, 1998, and due
to expense of $269,000 related to a put feature of the redeemable common stock
warrant, as described in Note 10 to the accompanying Notes to Financial
Statements, in the six months ended June 30, 1999. The increase in the number of
general and administrative personnel was a result of the addition of new members
to the management team during the second half of 1998 and early 1999 as well as
development of an administrative infrastructure to support our growth.
INTEREST INCOME, NET
Interest income, net of interest expense, increased by 2,686% to $241,000
in the six months ended June 30, 1999 from $9,000 in the six months ended June
30, 1998. As a percentage of total revenue, interest income, net of interest
expense, increased to 9.3% in the six months ended June 30, 1999 from 1.5% in
the six months ended June 30, 1998. The increases were a result of the interest
income generated by our increased cash and cash equivalents resulting from the
sale of our mandatorily redeemable preferred stock during the fourth quarter of
1998 and the first and second quarters of 1999. Interest expense was
insignificant in both periods.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE
Total revenue increased by 277% to $1,281,000 in the year ended December
31, 1998 from $340,000 in the year ended December 31, 1997.
Software license revenue increased by 505% to $1,072,000 in the year ended
December 31, 1998 from $177,000 in the year ended December 31, 1997. As a
percentage of total revenue, software license revenue increased to 83.7% in the
year ended December 31, 1998 from 52.2% in the year ended December 31, 1997. The
number of software licenses sold increased to 118 in the year ended December 31,
1998 from 82 in the year ended December 31, 1997. These increases were a result
of our increased sales and marketing efforts combined with the market acceptance
and popularity of Internet auctions.
Services and other revenue increased by 28% to $209,000 in the year ended
December 31, 1998 from $163,000 in the year ended December 31, 1997. As a
percentage of total revenue, services and other revenue decreased to 16.3% in
the year ended December 31, 1998 from 47.8% in the year ended December 31, 1997.
The dollar increase was a result of the licensed software customers increasing
to 200 at December 31, 1998 from 82 at December 31, 1997. The decrease as a
percentage of total revenue was a result of the significant increase in software
license revenue in the year ended December 31, 1998.
30
<PAGE> 35
COST OF REVENUE
Cost of software license revenue increased by 95% to $18,000 in the year
ended December 31, 1998 from $9,000 in the year ended December 31, 1997. As a
percentage of software license revenue, cost of software license revenue
decreased to 1.6% in the year ended December 31, 1998 from 5.1% in the year
ended December 31, 1997. The dollar increase resulted primarily from the
increase in software licensing activity. This decrease as a percentage of total
revenue resulted primarily from the significant increase in total revenue in the
year ended December 31, 1998.
Cost of services and other revenue increased by 589% to $131,000 in the
year ended December 31, 1998 from $19,000 in the year ended December 31, 1997.
As a percentage of services and other revenue, cost of services and other
revenue increased to 62.8% in the year ended December 31, 1998 from 11.7% in the
year ended December 31, 1997. These increases were primarily a result of
increasing the number of employees providing support and maintenance to five at
December 31, 1998 from two at December 31, 1997.
SALES AND MARKETING
Sales and marketing expense increased by 4,304% to $1,918,000 in the year
ended December 31, 1998 from $43,000 in the year ended December 31, 1997. As a
percentage of total revenue, sales and marketing expense increased to 150% in
the year ended December 31, 1998 from 12.8% in the year ended December 31, 1997.
These increases resulted primarily from the number of sales and marketing
employees increasing to 15 at December 31, 1998 from two at December 31, 1997,
as well as increased expenditures as part of our marketing and advertising
efforts.
PRODUCT DEVELOPMENT
Product development expense increased by 562% to $695,000 in the year ended
December 31, 1998 from $105,000 in the year ended December 31, 1997. As a
percentage of total revenue, product development expense increased to 54.3% in
the year ended December 31, 1998 from 30.9% in the year ended December 31, 1997.
Product development expense increased primarily as a result of the number of
employees in the product development group increasing to 20 at December 31, 1998
from three at December 31, 1997. The increase in the number of product
development employees was primarily the result of hiring additional software
engineers and quality assurance personnel to support our additional product
development and testing activities.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased by 2,491% to $923,000 in the
year ended December 31, 1998 from $36,000 in the year ended December 31, 1997.
As a percentage of total revenue, general and administrative expense increased
to 72.1% in the year ended December 31, 1998 from 10.5% in the year ended
December 31, 1997. General and administrative expense increased primarily as a
result of the number of general and administrative employees increasing to seven
at December 31, 1998 from two at December 31, 1997. This increase in the number
of administrative personnel is a result of the addition of new members to the
management team during the second half of 1998 as well as development of an
administrative infrastructure to support our growth.
31
<PAGE> 36
INTEREST INCOME, NET
Interest income, net of interest expense, increased by 1,738% to $43,000 in
the year ended December 31, 1998 from $2,000 in the year ended December 31,
1997. As a percentage of total revenue, interest income, net of interest
expense, increased to 3.4% in the year ended December 31, 1998 from 0.6% in the
year ended December 31, 1997. This increase was a result of the interest income
generated by our increased cash and cash equivalents on hand resulting from the
sale of mandatorily redeemable preferred stock in the year ended December 31,
1998. Interest expense was immaterial during both periods.
PERIOD FROM INCEPTION (JULY 24, 1996) TO DECEMBER 31, 1996 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1997
REVENUE
Total revenue increased by 2,626% to $340,000 in the year ended December
31, 1997 from $12,000 in the year ended December 31, 1996.
Software license revenue increased by 1,428% to $177,000 in the year ended
December 31, 1997 from $12,000 in the year ended December 31, 1996. As a
percentage of total revenue, software license revenue decreased to 52.2% in the
year ended December 31, 1997 from 93.1% in the year ended December 31, 1996. The
increase in software license revenue was due to the introduction of our auction
software products in the year ended December 31, 1997. The decrease in software
license revenue as a percentage of total revenue was due primarily to revenue
from customer support and maintenance fees in the year ended December 31, 1997,
which was not generated in the year ended December 31, 1996.
Services and other revenue increased by 18,726% to $163,000 in the year
ended December 31, 1997 from $1,000 in the year ended December 31, 1996. As a
percentage of total revenue, services and other revenue increased to 47.8% in
the year ended December 31, 1997 from 6.9% in the year ended December 31, 1996.
The increase in services and other revenue as a percentage of total revenue
resulted from our introduction of support and maintenance services in the year
ended December 31, 1997.
COST OF REVENUE
Cost of software license revenue increased to $9,000 in the year ended
December 31, 1997 from $0 in the year ended December 31, 1996. As a percentage
of software license revenue, cost of software license revenue increased to 5.1%
in the year ended December 31, 1997 from 0.0% in the year ended December 31,
1996. These increases resulted from the significant increase in software license
revenue in the year ended December 31, 1997.
Cost of services and other revenue increased by 1,472% to $19,000 in the
year ended December 31, 1997 from $1,000 in the year ended December 31, 1996. As
a percentage of services and revenue, cost of services decreased to 11.7% in the
year ended December 31, 1997 from 140.1% in the year ended December 31, 1996.
The increase in cost of services and other revenue was due primarily to an
increase in the number of support and maintenance employees to two at December
31, 1997 from zero at December 31, 1996.
32
<PAGE> 37
SALES AND MARKETING
Sales and marketing expense increased to $44,000 in the year ended December
31, 1997 from $0 in the year ended December 31, 1996. As a percentage of total
revenue, sales and marketing expense increased to 12.8% in the year ended
December 31, 1997 from 0.0% in the year ended December 31, 1996. The increase in
sales and marketing expense was due primarily to an increase in the number of
sales and marketing employees to two at December 31, 1997 from zero at December
31, 1996.
PRODUCT DEVELOPMENT
Product development expense increased to $105,000 in the year ended
December 31, 1997 from $0 in the year ended December 31, 1996. As a percentage
of total revenue, product development expense increased to 30.9% in the year
ended December 31, 1997 from 0.0% in the year ended December 31, 1996. The
increase in product development expense was due primarily to an increase in the
number of product development employees to three at December 31, 1997 from zero
at December 31, 1996, due to the development of our auction software products,
which occurred primarily in the year ended December 31, 1997.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased by 204% to $36,000 in the year
ended December 31, 1997 from $12,000 in the year ended December 31, 1996. As a
percentage of total revenue, general and administrative expense decreased to
10.5% in the year ended December 31, 1997 from 94.0% in the year ended December
31, 1996. The increase in general and administrative expense resulted from the
addition of two general and administrative employee in the year ended December
31, 1997.
INTEREST INCOME, NET
Interest income, net of interest expense, increased to $2,000 in the year
ended December 31, 1997 from $0 in the year ended December 31, 1996. As a
percentage of total revenue, interest income, net of interest expense, increased
to 0.6% in the year ended December 31, 1997 from 0.0% in the year ended December
31, 1996.
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<PAGE> 38
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth a summary of our unaudited quarterly
operating results for each of the ten quarters in the period ended June 30,
1999, as well as results expressed as a percentage of total revenue for the
periods indicated. This information has been derived from unaudited interim
financial statements that, in the opinion of management, have been prepared on a
basis consistent with the financial statements contained elsewhere in this
prospectus and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such information when read in
conjunction with financial statements and accompanying notes appearing elsewhere
in this prospectus. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Software licenses....... $ 3 $ 50 $ 56 $ 68 $ 179 $ 321 $ 177 $ 396
Services and other...... 8 25 65 64 38 46 48 76
------ ------ ------ ------ ------ ------ ------- -------
Total revenue... 11 75 121 132 217 367 225 472
------ ------ ------ ------ ------ ------ ------- -------
Cost of revenue:
Cost of software
licenses.............. -- 3 3 3 3 4 3 8
Cost of services and
other................. -- -- 2 16 5 14 36 77
------ ------ ------ ------ ------ ------ ------- -------
Total cost of
revenue....... -- 3 5 19 8 18 39 85
------ ------ ------ ------ ------ ------ ------- -------
Gross profit............ 11 72 116 113 209 349 186 387
------ ------ ------ ------ ------ ------ ------- -------
Operating expense:
Sales and marketing..... 2 5 14 24 62 147 679 1,029
Product development..... -- 3 35 66 56 116 223 300
General and
administrative........ 4 8 2 21 97 148 158 520
------ ------ ------ ------ ------ ------ ------- -------
Total operating
expense....... 6 16 51 111 215 411 1,060 1,849
------ ------ ------ ------ ------ ------ ------- -------
Operating income
(loss)................ 5 56 65 2 (6) (62) (874) (1,462)
Interest, net........... -- -- 1 1 5 4 1 33
------ ------ ------ ------ ------ ------ ------- -------
Net income (loss)....... $ 5 $ 56 $ 66 $ 3 $ (1) $ (58) $ (873) $(1,429)
====== ====== ====== ====== ====== ====== ======= =======
<CAPTION>
THREE MONTHS ENDED
-------------------
MAR. 31, JUNE 30,
1999 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Software licenses....... $ 921 $ 1,313
Services and other...... 129 223
------- -------
Total revenue... 1,050 1,536
------- -------
Cost of revenue:
Cost of software
licenses.............. 8 12
Cost of services and
other................. 158 336
------- -------
Total cost of
revenue....... 166 348
------- -------
Gross profit............ 884 1,188
------- -------
Operating expense:
Sales and marketing..... 1,052 2,376
Product development..... 534 776
General and
administrative........ 810 941
------- -------
Total operating
expense....... 2,396 4,093
------- -------
Operating income
(loss)................ (1,512) (2,905)
Interest, net........... 18 223
------- -------
Net income (loss)....... $(1,494) $(2,682)
======= =======
</TABLE>
34
<PAGE> 39
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL
REVENUE:
Revenue:
Software licenses.... 25.5% 67.3% 46.1% 51.5% 82.3% 87.4% 78.7% 83.9%
Services and other... 74.5 32.7 53.9 48.5 17.7 12.6 21.3 16.1
----- ----- ----- ----- ----- ----- ------ ------
Total revenue........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ------ ------
Cost of revenue:
Cost of software
license............ 0.0 3.4 2.7 2.4 1.3 1.1 1.3 1.6
Cost of services and
other.............. 3.1 0.4 1.8 12.2 2.1 3.7 15.9 16.4
----- ----- ----- ----- ----- ----- ------ ------
Total cost of
revenue............ 3.1 3.8 4.5 14.6 3.4 4.8 17.2 18.0
----- ----- ----- ----- ----- ----- ------ ------
Gross profit......... 96.9 96.2 95.5 85.4 96.6 95.2 82.8 82.0
----- ----- ----- ----- ----- ----- ------ ------
Operating expense:
Sales and marketing.. 14.3 6.3 11.3 17.8 28.9 40.0 302.4 218.0
Product development.. 2.9 4.5 28.8 50.2 25.8 31.7 99.5 63.4
General and
administrative..... 37.2 10.9 1.8 15.9 44.6 40.3 70.3 110.1
----- ----- ----- ----- ----- ----- ------ ------
Total operating
expense............ 54.4 21.7 41.9 83.9 99.3 112.0 472.2 391.5
----- ----- ----- ----- ----- ----- ------ ------
Operating income
(loss)............. 42.5 74.5 53.6 1.5 (2.7) (16.8) (389.4) (309.5)
Interest income,
net................ 0.0 0.6 0.4 1.0 2.2 1.0 0.5 7.0
----- ----- ----- ----- ----- ----- ------ ------
Net income (loss).... 42.5% 75.1% 54.0% 2.5% (0.5)% (15.8)% (388.9)% (302.5)%
===== ===== ===== ===== ===== ===== ====== ======
<CAPTION>
THREE MONTHS ENDED
-------------------
MAR. 31, JUNE 30,
1999 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
AS A PERCENTAGE OF TO
REVENUE:
Revenue:
Software licenses.... 87.7% 85.5%
Services and other... 12.3 14.5
------ -------
Total revenue........ 100.0 100.0
------ -------
Cost of revenue:
Cost of software
license............ 0.8 0.8
Cost of services and
other.............. 15.0 21.8
------ -------
Total cost of
revenue............ 15.8 22.6
------ -------
Gross profit......... 84.2 77.4
------ -------
Operating expense:
Sales and marketing.. 100.3 154.6
Product development.. 50.8 50.5
General and
administrative..... 77.1 61.3
------ -------
Total operating
expense............ 228.2 266.4
------ -------
Operating income
(loss)............. (144.0) (189.0)
Interest income,
net................ 1.8 14.4
------ -------
Net income (loss).... (142.2)% (174.6)%
====== =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations using proceeds from the
issuance of preferred stock to private equity investors. To date, we have
received $28,368,000 in proceeds, net of issuance costs, from issuances of
preferred stock. At June 30, 1999, our primary source of liquidity was
$19,324,000 in cash and cash equivalents.
Net cash used in operating activities was $2,003,000 in the six months
ended June 30, 1999. Net cash used in operating activities was $1,774,000 in the
year ended December 31, 1998. Net cash provided by operating activities was
$160,000 in the year ended December 31, 1997. Net cash provided by operating
activities was $2,000 in the period from inception (July 24, 1996) to December
31, 1996.
Net cash used in investing activities was $329,000 in the six months ended
June 30, 1999. Net cash used in investing activities was $388,000 in the year
ended December 31,
35
<PAGE> 40
1998. Net cash used in investing activities was $39,000 for the year ended
December 31, 1997. Net cash used in investing activities was less than $1,000 in
the period from inception (July 24, 1996) to December 31, 1996. The cash used in
investing activities was primarily for purchases of software for customer call
support, computer equipment and office furniture.
Net cash provided by financing activities in the six months ended June 30,
1999 was $19,380,000. Net cash provided by financing activities was $4,286,000
in the year ended December 31, 1998. Net cash provided by financing activities
was $30,000 in the year ended December 31, 1997. No net cash was provided by
financing activities in the period from inception (July 24, 1996) to December
31, 1996. The 1998 financing activities consisted primarily of issuances of
preferred stock. In January 1998, we completed a private placement of Series A
preferred stock, totaling 1,544,610 shares, resulting in gross proceeds of
$600,000. In August and September 1998, we completed a private placement of
2,380,952 shares of Series B preferred stock, resulting in gross proceeds of
$4,000,000. In March and April 1999, we completed a private placement of
5,714,285 shares of Series C preferred stock, resulting in gross proceeds of
$24,000,000. The Series A preferred stock, Series B preferred stock and Series C
preferred stock will be converted into shares of common stock automatically upon
completion of this offering.
We have experienced a substantial increase in our capital expenditures,
which is consistent with our growth in operations and staffing. We anticipate
that capital expenditures will continue to increase for the foreseeable future.
Additionally, we will evaluate possible investments in our business, technology
and products. We believe our existing liquidity and capital resources, and the
proceeds resulting from the sale of common stock in this offering, will be
sufficient to satisfy our cash requirements for the next 24 months. These cash
requirements are expected to consist primarily of the costs of developing and
expanding our European operations, expanding our sales and marketing departments
in the United States and increasing advertising expenses. If adequate funds are
not available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of unanticipated opportunities or otherwise respond to
competitive pressure would be significantly limited. There can be no assurance
that we will be able to raise such funds on favorable terms or at all.
The primary objective of our investment strategy is to preserve principal
while maximizing the income we receive from investments without significantly
increasing risk. To minimize this risk, to date we have maintained our portfolio
of cash equivalents in short-term and overnight investments that are not subject
to market risk as the interest paid on such investments fluctuates with the
prevailing interest rates. All of our cash equivalents mature in less than one
year. Our exposure to foreign currency exchange rate fluctuations is minimal as
we do not have any revenues denominated in foreign currencies. Additionally, we
have not engaged in any derivative or hedging transactions to date.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). This statement requires
companies to report information about operating segments in annual financial
statements. It also requires segment disclosures about products and services,
geographic areas and major customers. The disclosures prescribed by SFAS No. 131
are effective for fiscal years beginning after
36
<PAGE> 41
December 15, 1997. Management has determined that OpenSite does not have any
separately reportable operating segments as of December 31, 1998 or June 30,
1999.
In March 1998, the AICPA issued Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,"
("SOP No. 98-1") which provides guidance regarding when software developed or
obtained for internal use should be capitalized. SOP No. 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998. The
adoption of SOP No. 98-1 did not have a material impact on our financial
condition or results of operations.
In December 1998, the AICPA issued SOP No. 98-9, "Modification of SOP No.
97-2, Software Revenue Recognition, With Respect to Certain Transactions," ("SOP
No. 98-9"). SOP No. 98-9 amended SOP No. 97-2 to require recognition of revenue
using the "residual method" in circumstances outlined in SOP No. 97-2. Under the
residual method, revenue is recognized as follows: (1) the total fair value of
undelivered elements, as indicated by Vendor Specific Objective Evidence
("VSOE"), is deferred and subsequently recognized in accordance with the
relevant sections of SOP No. 97-2 and (2) the difference between the total
arrangement fee and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements.
SOP No. 98-9 is effective for fiscal years beginning after March 15, 1999.
Also, the provisions of SOP No. 97-2 that were deferred by Statement of Position
98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software
Revenue Recognition," ("SOP No. 98-4") will continue to be deferred until the
date SOP No. 98-9 becomes effective. We do not expect that the adoption of SOP
No. 98-9 will have a material impact on our financial condition or results of
operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
is effective for financial statements for all fiscal quarters of all fiscal
years beginning after June 15, 1999. We intend to adopt SFAS No. 133 when
required; however, SFAS No. 133 is not expected to have a material impact on our
financial position or results of operations.
IMPACT OF YEAR 2000 COMPUTER ISSUES
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year without specifying the century.
As a result, date-sensitive software may recognize a date of "00" as the year
1900 rather than the Year 2000. Year 2000 issues impact OpenSite both on an
external basis in connection with the products and services we offer to end
users, as well as on an internal basis as to our own operations and information
technology systems. We also face risks relating to the potential Year 2000 non-
compliance with vendors that provide products and services to us.
YEAR 2000 PROJECT TEAM. We have assembled a Year 2000 Project Team
composed of OpenSite employees from our management. This team consults with
employees from our product management, product development, technical support,
internal information technology, accounting and facilities management working
groups. We have recently hired a Director of Corporate Technology, in part to
ensure Year 2000 readiness. Our Year 2000 Project Team has identified software,
equipment and systems supplied to us by third party vendors that are material to
our business and have verified all internal systems to be Year
37
<PAGE> 42
2000 compliant. We are in the process of reviewing and testing our products to
determine their ability to correctly process date changes from 1999 through
2000. The goals of the Project Team are to minimize any Year 2000-related impact
to our customers and their customers; maintain Year 2000 readiness as a top
business priority; and work closely with our internal and external business
partners to achieve Year 2000 readiness. To date, we have not become aware of
any material Year 2000 compliance problems resulting from our internal or
external software, equipment or systems. We will continue to test and evaluate
our internal and external software, equipment or systems through 1999 and into
the year 2000. Management believes the costs related to Year 2000 compliance
have not been material to date and will not grow to have a material adverse
effect on our business.
OPENSITE PRODUCTS. We designed the most recent versions of our products to
be Year 2000 compliant. To date, Year 2000 remediation efforts to our products
were minor due to our awareness of Year 2000 issues when our products were
developed. We have begun the process of testing our products in test
environments intended to emulate a Year 2000 environment. To date, no
significant problems have been detected as a result of this testing. Actual
costs to date for testing existing OpenSite software products have been less
than $5,000. We do not expect any additional costs for testing Year 2000
compliance of our products. We anticipate testing to be completed by August 31,
1999.
YEAR 2000 EXTERNAL EFFORTS AND ISSUES. We have substantially completed the
replacement, modification or retirement of hardware or software components for
our products and services that were identified by the Year 2000 Project Team to
be vital to our core business processes and at risk for Year 2000 failures. In
addition, we have requested that our customers, vendors and other third parties
participate in our readiness efforts and update us on their Year 2000 progress.
Many of our computer systems and business operations are provided and/or
maintained by outside suppliers. Our key vendors and suppliers have been asked
to demonstrate sufficient Year 2000 readiness. Where feasible, we have tested
vendor supplied products that are critical to our operations. Approximately 70%
of our significant vendors and suppliers have provided us with written
assurances that they are Year 2000 compliant, and the rest of our significant
vendors and suppliers have provided us with written assurances that they are
continuing to test for Year 2000 compliance. All of our significant vendors and
suppliers have provided us with written assurances that they will be Year 2000
compliant in advance of December 31, 1999.
YEAR 2000 INTERNAL EFFORTS AND ISSUES. Our Year 2000 Project Team has
completed corporate-wide inventory of our internal application and system
software and of our computers and other equipment to determine if this equipment
uses embedded computer chips that may be date sensitive. Based on this analysis,
we have, where required, upgraded hardware and software deemed vital to our
on-going business by the Year 2000 Project Team to versions or releases
identified by our vendors as Year 2000 ready or compliant, implemented computer
code changes for non-critical issues not affecting Year 2000 compliance and
substantially completed remediation of identified Year 2000 issues in "mission
critical" systems or systems that are vital to the successful continuance of
core business activities. Actual costs of Year 2000 compliance for our internal
systems to date have been approximately $2,500. Total costs of Year 2000
compliance for our internal systems are not expected to exceed $7,500 for
testing, compliance and monitoring.
CONTINGENCY PLANNING. To date, we have not developed any formalized
contingency plans to address the risk that our products, systems, customers,
vendors or other business partners may fail to be or become Year 2000 compliant.
To the extent that we identify
38
<PAGE> 43
third party or other Year 2000 compliance issues that may not be capable of
remediation on a timely basis, we will rapidly seek to develop contingency plans
in order to minimize our risks.
REASONABLY LIKELY WORST CASE SCENARIO. The failure of our internal
systems, the products or systems of third parties upon which we rely or the
hardware or software upon which our products and services rely could result in:
- our inability to effectively manage sales leads, which in turn could
result in fewer sales and lower revenue;
- the failure of our products to function properly, which in turn could
result in our incurring significant costs and diverting significant human
resources in our efforts to comply with obligations under warranty and/or
service agreements;
- our inability to properly invoice and process payments from our customers
and others with whom we have business relationships; and
- errors or omissions in accounting and/or financial data;
any of which could have a material adverse effect on our business.
39
<PAGE> 44
BUSINESS
OVERVIEW
OpenSite provides online auction software solutions and has an installed
base of over 300 auction sites. According to International Data Corporation, we
have approximately a 50% market share of online auction sites. Our solutions,
which include a variety of cost-effective software products and services, enable
small, medium and large merchants to create branded, Internet-based auctions on
their own Web sites. Our solutions automate the process of installing, running
and maintaining real-time auctions over the Internet. By bringing together
buyers and sellers, our products and services help individuals and businesses
create new sales channels, manage inventory, attract new customers, introduce
new products and strengthen relationships with existing partners and customers.
Our customers operate in a wide variety of industries and include Beverly Hills
Country Club, Cheapfares.com, CNET, Currans Select Auctions, The Sharper Image,
VerticalNet and WineBid.com. OpenSite Auction won a Best of Show Award for
e-commerce applications at Fall Internet World 1998 and a Best of Class Award
for Web-based selling at Fall Internet Commerce Expo 1998. OpenSite Auction also
earned an Analyst's Choice Award from PC Week magazine and received a five-star
rating from online magazine Internet.com.
To date, we have derived substantially all of our revenue from the sale of
software products and related services. However, our business as a software
developer has evolved since our inception in 1996. For example, we introduced
our indirect sales channel in 1998 and BidStream.com in 1999. As of June 30,
1999, we had 78 full-time employees.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND THE RISE OF ELECTRONIC COMMERCE
The Internet has rapidly emerged as an important medium for communicating,
obtaining information and conducting commerce. International Data Corporation
estimates that the number of Internet users making online purchases will grow
from 31 million in 1998 to approximately 183 million in 2003. The Internet
possesses unique and commercially powerful characteristics that differentiate it
from traditional forms of media, including freedom from geographical or temporal
limitations, real-time access to dynamic interactive content and instantaneous
connections between merchants and consumers. International Data Corporation
estimates that worldwide commerce over the Internet will exceed approximately $1
trillion by 2003.
EMERGENCE OF DYNAMIC PRICING
Dynamic pricing, in which prices are determined by buyers and sellers on a
transaction-by-transaction basis, is becoming more accepted as a form of
electronic commerce. Certain characteristics of traditional commerce, such as
multi-tiered distribution, costly product delivery requirements and limited
ability to collect and process real-time pricing information, have led to fixed
pricing as the dominant transactional format. The Internet, however, has enabled
market information to be disseminated more quickly, in greater quantity and to a
wider audience than was historically possible. It has also streamlined the
process of production and distribution of goods. These factors have reduced the
need to adhere to fixed pricing of goods and services. Additionally, consumers
and merchants are increasingly utilizing the Internet to buy and sell goods and
services.
40
<PAGE> 45
The interactive nature of the Internet, especially as embodied by real-time
updates of information, has also given Internet users an increasing sense of
confidence about continuous market refinement of pricing.
INTERNET FACILITATION OF AUCTIONS
Auctions are among the most well known forms of dynamic pricing. Prior to
the Internet, auctions faced critical shortcomings, including location and time
constraints, which limited the degree to which buyers and sellers could
interact. When information is more difficult to obtain, pricing is a less
efficient process. Even in cases where intermediaries such as auction houses
become involved to mitigate some of these problems, their fees often reduce the
practicality and attractiveness of an auction marketplace. The Internet
alleviates many of these problems. It has no geographic or time boundaries and
allows large quantities of information to be transmitted instantaneously.
Accordingly, online auctions can offer more products to more people over a wider
geographic area, providing a better pricing mechanism for both buyers and
sellers. Forrester Research projects that the value of goods sold through
Internet auctions will increase from $10.1 billion in 1998 to $64.9 billion in
2002, a 59% compound annual growth rate.
BENEFITS OF ONLINE AUCTIONS
The needs of both merchants and consumers are served by online auctions.
Merchants benefit from the following:
- alternative transaction models;
- cost-effective methods for liquidating overstock, outdated or
perishable inventory;
- efficient price discovery mechanisms for new products;
- the ability to collect marketing data on existing and potential
buyers; and
- the ability to attract additional traffic to merchant Web sites.
Benefits to online bidders include the following:
- greater flexibility in the timing and pricing of purchases;
- access to a broader range of items for bid without geographical
limitations;
- the ability to capitalize on real time market conditions which may
produce temporary price advantages;
- the ability to find rare or collectible items to which they might
not otherwise be exposed; and
- the formation of enthusiast communities, chat rooms and newsletters
which make online auctions a participatory and enjoyable interactive
experience.
THE CURRENT LANDSCAPE FOR ONLINE AUCTIONS
As a result of these benefits, a growing number of merchants are seeking
Internet auction capabilities. Online auction solutions currently can be divided
into two categories.
41
<PAGE> 46
The first category consists of person-to-person Internet auction communities.
These communities provide a convenient and popular destination for individuals
who wish to trade with each other or for merchants seeking a simple way to
auction a limited number of items. These communities, however, generally
preclude merchants from maintaining their own brands on the Internet,
controlling the online experience of bidders or retaining data on the activity
of their bidders. The second category is comprised of applications that allow
merchants to control and maintain their own branded online auction sites. These
merchants have choices ranging from developing their own online auction
capabilities to purchasing online auction applications from third party vendors.
Custom built applications are typically expensive and time consuming. Many
applications from third party software vendors are difficult to customize, are
burdensome to implement and often lack a wide range of features. In addition,
these vendors typically do not provide a complete package of ancillary services.
We believe that a large and growing number of online merchants will seek
auction solutions that enable them to create and maintain their own brand
images, control their customers' online experience and collect bidder activity
data, all in a manner that is simple to implement, quickly operational and
facilitates targeted interaction with visitors to their sites. Since Internet
auctions are both a relatively new phenomenon and an increasingly critical
capability, many companies require a full range of related services to ensure
the rapid and effective implementation of an online auction solution. Finally,
since traffic is such an important element of successful electronic commerce,
merchants are likely to gravitate towards a solution which possesses the ability
to attract more bidders to their own auction sites.
THE OPENSITE SOLUTION
We are the market share leader in online auction software solutions, with
an installed base of over 300 auction sites. Our solutions, which include a
variety of cost-effective software products and services, enable small, medium
and large merchants to create branded, Internet-based auctions on their own Web
sites. Our solutions automate the process of installing, running and maintaining
real-time auctions over the Internet. By bringing together buyers and sellers,
our solutions help businesses create new sales channels, manage inventory,
attract new customers, introduce new products and strengthen customer and other
business relationships.
The OpenSite Auction family of products is designed to provide a full range
of dynamic pricing functionality and to allow our customers a flexible solution
based on their changing needs. Additionally, we provide a range of related
services including consulting, implementation and hosting to enable any merchant
to launch Internet auctions quickly and easily. We also provide ancillary
products to enable auction participants to track and monitor their activity,
facilitate proxy bidding and notify them of new items being put up for bid.
Launched in April 1999, BidStream.com is a Web site owned and operated by
OpenSite that aggregates the items for bid on participating OpenSite-powered
auction sites. We intend to establish BidStream.com as the central point for
locating items for bid at participating OpenSite-powered auction sites. Our
proprietary search engine indexes all items for sale at these sites.
BidStream.com is designed to provide the general Internet user an effective and
time-efficient way to find auction items on which to bid and provides our
customers with additional visitors to their Web sites.
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<PAGE> 47
Our solutions have the following benefits:
INCREASED REVENUE OPPORTUNITIES THROUGH DYNAMIC PRICING. Our products and
services facilitate new online revenue opportunities for our customers by easily
and efficiently enabling branded Internet auctions. Through our online auction
technology, merchants can
- manage inventory levels more effectively by quickly liquidating
overstocks;
- achieve improved product prices by stimulating demand;
- conduct price discovery by offering new products for bid;
- manage perishable inventory by finding buyers in real-time; and
- build communities of collectors and enthusiasts.
CONTROL OF BRAND EQUITY. Our products allow customers to control their
auction sites rather than list their products in a person-to-person Internet
auction community. This enables them to control and expand the presence of their
brand equity on the Internet while increasing sales.
INCREASED SITE TRAFFIC; AGGREGATION OF MARKETING DATA. BidStream.com
provides bidders with a central point for locating items for sale on
participating OpenSite-powered auction sites. By aggregating the content from
these sites, we provide a way for our customers to generate increased site
traffic without costly marketing campaigns. Additionally, BidStream.com collects
data about visitors to auction sites, which our customers may use to reach more
qualified customers and more effectively market products to targeted customers.
EASE OF USE AND RAPID DEPLOYMENT. Our solutions are designed to enable
customers to quickly and easily create sophisticated online auctions, in some
cases in as little as two days. Our solutions include pre-designed Web page
templates to speed site development. These templates can be easily customized,
edited and branded using our template and style editors. Our Concierge service
lets businesses establish an online auction almost immediately without an
up-front investment in software or hardware.
FLEXIBLE AND SCALABLE SOLUTIONS. Unlike some other Internet auction
software providers, which offer a single product solution, we provide a flexible
and scalable growth path for merchants wishing to expand their auction
capabilities over time. Our software is offered as a three-tiered product
family -- Professional, Merchant and Corporate -- created to meet a wide array
of needs. Thus, customers new to online auctions may start with an entry-level
product which requires a modest initial investment in time and resources, while
customers who are more experienced, or have more complex needs, have the option
of a more advanced level of our software. Our products are designed so that the
growth path from one level to the next is a relatively seamless and simple
process.
BIDDER EMPOWERMENT. Our solutions provide information, tools and services
designed to increase bidders' success at online auctions. For example,
AuctionWatch Desktop is an application that allows users to manage their bidding
activity more effectively, including multiple bids on multiple sites, from a
single screen.
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STRATEGY
Our goal is to maintain and strengthen OpenSite's position as a leader in
online auction solutions. Our strategies to achieve this goal include the
following:
USE OUR MARKET LEADERSHIP TO BUILD BRAND AWARENESS. We are the market
share leader in online auction software solutions, with an installed base of
over 300 auction sites. We believe that OpenSite is the first significant vendor
of a complete Internet auction solution and the first to enhance the value
proposition to customers through aggregation of auction content from disparate
customer sites. We expect to aggressively increase the market impact of the
OpenSite brand by expanding our sales and marketing organization and investing
significantly in both online and offline advertising. The development and
promotion of BidStream.com as a tool for bidders to locate items for bid on our
customers' auction sites is a key component of this strategy.
CONTINUE TO ENHANCE OUR SOLUTIONS. Our family of products and services is
designed to provide a full range of auction functionality. As the market for
online auctions matures, we believe that the demands of merchants and bidders
will grow and become more sophisticated. We intend to continue to invest in our
product development resources and to develop new auction solutions to meet these
growing demands. We believe that our market share leadership, reflected in an
installed base of over 300 auction sites, provides us with a unique advantage in
understanding the needs of online auctioneers. We have recently introduced
BidStream.com as service to increase traffic to our customers' auction sites. We
also intend to release three new products in 1999 that are designed for the
needs of specific target markets.
AGGREGATE CONTENT THROUGH DEVELOPMENT OF BIDSTREAM.COM. Through
BidStream.com, we aggregate the content from participating OpenSite-powered
auction sites into a single Web site. BidStream.com enables a user to search
multiple OpenSite-powered auction locations for specific items. BidStream.com is
designed to increase traffic to our customers' auction sites, thus increasing
the value we provide to our customers. BidStream.com also allows us to obtain
information regarding auction participants and their bidding patterns. We
believe that our significant market share gives us an advantage in aggregating
substantial quantities of auction content as compared to our competitors with
less market share. Although only recently launched, BidStream.com has initially
experienced positive customer acceptance and currently aggregates over 90
auction sites containing over 90,000 items for bid. We expect the number of
participants to increase as we further promote and educate our customers about
the benefits of BidStream.com.
INCREASE SALES OF HIGH-END SOLUTIONS. As the market for auction technology
matures, we intend to target our sales and marketing efforts increasingly
towards larger merchants requiring enterprise-level auction solutions. We
believe that OpenSite Auction Corporate and other products under development
will be attractive as the need for more sophisticated solutions increases. In
addition, by increasing our sales of high-end solutions to larger merchants, we
expect to sustain revenue growth and increase the quantity of content aggregated
on BidStream.com. To support this effort, we intend to accelerate our
development of scalable, dynamic pricing solutions capable of integration into
widely used IT systems, such as enterprise resource planning and supply-chain
management. We also believe that our indirect sales channels will provide us
with greater access to this target market.
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DEVELOP INDIRECT SALES CHANNELS. We have developed an indirect sales
channel comprised of resellers, systems integrators, Internet Service Providers
and others. These channels are designed to reach new and larger target markets,
particularly larger merchants, more efficiently than our direct sales force.
Established in 1998, our indirect sales channel now consists of 63 resellers. To
support these sales efforts, we are developing OpenSite AuctionNow, which is
targeted to Internet Service Providers and e-commerce software providers to
enable them to embed auction functionality into their product and service
offerings. We expect to introduce OpenSite AuctionNow by the end of 1999.
EXPAND INTERNATIONALLY. Online auctions have the ability to reach
potential buyers throughout the world. We believe that a considerable market for
our products exists outside the United States. We intend to accelerate our
investment in international sales and to add new features and functionality to
our products to accommodate accounting, customs, currency and tax requirements
of foreign countries. We intend to use our indirect sales channel to accelerate
our international marketing efforts. In addition, we have retained Protege
Software Ltd. to provide sales and marketing services for our European
expansion.
PRODUCTS AND SERVICES
OPENSITE AUCTION 4.0. OpenSite Auction 4.0, our core product, automates
the process of implementing, running and maintaining real-time auctions over the
Internet. OpenSite Auction 4.0 is designed to simplify for merchants the process
of installing and maintaining an auction site with features such as:
- remote installation to permit rapid deployment;
- various predesigned Web page styles and templates with editors to
facilitate easy editing to create a customized look and feel;
- security features such as digital certification, automatic database
encryption and multi-level administration authentication;
- statistic generation tools and log file viewers to view and analyze
auction data; and
- Web browser interfaces, configuration and invoice menus, automated winner
calculations, email notification and database archiving designed to
simplify the auction management process and monitor auction activity.
OpenSite Auction 4.0 offers the following features to enhance the auction
experience for bidders:
- monitoring of bidding;
- notification of new items;
- facilitation of proxy bidding; and
- enabling simultaneous bidding on multiple items.
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We offer the following three levels of OpenSite Auction 4.0. Each level is
designed to address the unique needs of specific types of customers. Our family
of software products is also designed to allow our customers to grow with easy
migration paths to increasing levels of functionality.
- OPENSITE AUCTION PROFESSIONAL, our entry-level version, allows customers
to build and operate their own online auctions and to begin operation
quickly and economically with modest initial financial and time
investment.
- OPENSITE AUCTION MERCHANT, our mid-level version, enables our customers
to allow outside sellers to post items on their auction sites. Customers
are also able to place an online store, banner advertisements and
classified advertisements on their auction sites. The Merchant level also
includes consignment auctions as an additional option for customers and
AuctionRate, a participant rating system of bidders and sellers.
- OPENSITE AUCTION CORPORATE, our premium version, is designed for
enterprise level merchants who desire an auction solution that provides
more system flexibility and an open database architecture for integration
into third party applications. Version 4.0 of the Corporate level enables
customers to integrate their online auctions with Oracle databases. The
Corporate level offers a wider variety of auction types, including
reverse, sealed bid and modified English auctions.
OpenSite Auction 4.0 was released in the first quarter of 1999.
Enhancements include the ability to integrate with Oracle databases, additional
auction types, private auctions, notification of new items for bid and enhanced
user and administrator interfaces. We continue to develop our products to meet
the growing needs of the marketplace. Development plans for the remainder of
1999 include releases relating to automated transaction processing, Oracle
support on UNIX platforms and multiple database support.
OpenSite Auction won a Best of Show Award for e-commerce applications at
Fall Internet World 1998. Judging guidelines for this award placed a priority on
a product's ability to work with existing standards and the degree to which it
contributes to the development of future Internet products and services.
OpenSite Auction also won a Best of Class Award for Web-based selling at Fall
Internet Commerce Expo 1998. Over 65 companies participated in this program. The
criteria for this award included technical/business innovation,
user-friendliness, user-efficiency, security attributes and platform
flexibility. OpenSite Auction also earned an Analyst's Choice Award from PC Week
magazine and received a five-star rating from online magazine Internet.com, in
addition to several other positive product reviews from a variety of industry
publications.
AUCTIONWATCH DESKTOP. AuctionWatch Desktop is an application that allows
bidders to use one central interface to simultaneously track and bid on multiple
items from any auction site on the Internet. AuctionWatch Desktop is currently
available as a free download to registered users of BidStream.com. From the
central interface the user can bid on items, monitor those bids throughout the
auction, or just watch items of interest. Sellers can use the application to
track the items they are selling. Using the MagicBid feature, participants can
bid on items at preset times while away from their computers. The program
includes numerous tools for bidders to track information about items of interest
both during and after an auction such as closing price, payment status and
shipping status. An address book keeps track of names and addresses, email
addresses, identification numbers and passwords.
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BIDSTREAM.COM. Launched in April 1999, BidStream.com is a Web site owned
and operated by OpenSite that aggregates the items for bid on participating
OpenSite-powered auction sites. Although only recently launched, BidStream.com
has initially experienced positive customer acceptance and currently aggregates
over 90 auction sites containing over 90,000 items for bid. We expect the number
of participants to increase as we further promote and educate our customers
about the benefits of BidStream.com. BidStream.com is intended to be the central
point for locating items for bid at participating OpenSite-powered auction sites
and indexes all items for auction at these sites. BidStream.com provides the
general Internet user an effective and time-efficient way to find auction items
on which to bid and provides our customers with additional visitors to their Web
sites.
We intend to generate additional site traffic to BidStream.com through a
marketing campaign that will include Internet, print and radio advertising as
well as affiliate programs and relationships with other Web publishers. For
example, BidStream.com will be co-branded with other shopping sites such as CNET
to provide links between BidStream.com searches, OpenSite-powered auction sites
and focused content sites. We believe these affiliates will direct traffic to
BidStream.com, while also providing a category-specific auction page with
relevant content and context.
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BidStream.com, as illustrated by the homepage shown below, contains the
following features:
1. Central searching of OpenSite Auction customer sites;
2. Highlighting of key auction categories such as Art & Antiques,
Travel, Collectibles and Technology;
3. Registration as a member of BidStream.com, for site personalization
and special offers;
4. Site categorization and browsing by site type; and
5. Download of AuctionWatch Desktop.
(GRAPH)
OPENSITE CONCIERGE. Our Concierge service includes set-up, software
rental, hosting, site design and auction maintenance (adding items, maintaining
auctions and creating winners lists). The customer simply provides us with item
data and then bills winners and ships products. Once a Concierge site is up and
running, the customer can move the site to its own server at any time and
administer auctions itself.
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The following table summarizes our current products and services.
<TABLE>
<CAPTION>
PRODUCTS DESCRIPTION
<S> <C>
OpenSite Auction Professional - An entry level auction solution
- Rapid deployment through remote installation
- Quick installation through a full set of Web page
templates
- Simplified editing through template, style and
variable editors
- Automatic database encryption and multi-level
administration authentication security features
- Monitors auction data through statistic generation
tools and log file viewer
- Auction administration tools include automated
winner calculations and email notification and
database archiving
- Provides hardware and operating system flexibility
- Monitors bidding/selling activity
- Notifies users of new items
- Facilitates proxy bidding
- Allows simultaneous bidding on multiple items at a
time
OpenSite Auction Merchant - Includes all Professional level features
- Allows auction host to include third party auctions
- Includes a participant rating system of bidders and
sellers
- Allows auction host to include an online store,
banner advertisements and classified advertisements
- Allows consignment auctions
OpenSite Auction Corporate - Includes all Professional and Merchant level
features
- Adds security and flexibility through dynamic pages
option and access privileges
- Enables auction host to integrate their online
auctions with Oracle databases
- Include reverse, sealed bid and modified English
auctions
AuctionWatch Desktop - Enables auction participants to use one central
interface to monitor and manage all bidding activity
- Can be downloaded from BidStream.com
</TABLE>
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<TABLE>
<CAPTION>
SERVICES DESCRIPTION
<S> <C>
BidStream.com - Web site owned and operated by OpenSite that
aggregates items for bid on participating
OpenSite-powered auction sites
- Central point for locating items for bid at
participating OpenSite-powered auction sites and
indexes all items for auction at these sites
- Provides general Internet users an effective and
time-efficient way to find auction items on which to
bid and provides our customers with additional
visitors to their Web sites
- Enables auction participants to monitor multiple
auction sites through AuctionWatch Desktop
OpenSite Concierge - Offers the auction functionality of OpenSite Auction
Corporate
- Includes set-up, software, rental, hosting, site
design and auction maintenance by OpenSite
- Permits auction implementation without developing
internal infrastructure
- Enables sellers to test the auction solution within
their business model
- Natural upgrade path to OpenSite Auction products
</TABLE>
CUSTOMER SERVICES AND SUPPORT
Our Customer Services organization of 16 people provides a broad range of
services to assist customers in successfully implementing Web-based auctions
using our products. These include Professional Services, Technical Support and
Education Services.
PROFESSIONAL SERVICES. Our Professional Services group provides complete
product installation and configuration, template customization and technical
assistance with integrating our products with third party applications.
Professional Services consulting is generally offered on a time and materials
basis. This group also includes the Concierge auction site creation and hosting
service. Concierge customers are generally billed a one-time setup fee and a
monthly maintenance fee based on the volume of business on the site.
TECHNICAL SUPPORT. Our Technical Support group provides basic product
support to our licensees. Subscribers use email to ask questions and request
assistance of the support staff. Issues are then resolved via email or telephone
as appropriate. Technical Support services are generally paid for in advance
through annual fixed-fee maintenance fees.
EDUCATION SERVICES. Our Education Services group designs the curricula and
develops the materials for training customers to install, administer and
maintain auction sites based on our products. Educational materials are designed
for use in both self-paced online and instructor-led learning. Our Education
Services will be made available during the third quarter of 1999. Pricing for
Education Services offerings is still under consideration at this time.
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CUSTOMERS
We have an installed base of over 300 auction sites in a wide variety of
categories. The following table lists some of our customers. Those customers
marked with an asterisk participate in BidStream.com.
TECHNOLOGY
AuctionComp*
CNET*
Graham Dorian, Inc.*
NextBid.com*
PCAuctioneer*
Upost
RETAIL/CATALOG
Daddy's Junky Music*
The Sharper Image*
BUSINESS SERVICES
Better Agricultural Goals Corporation*
Buildscape*
BusinessHere.Com LLC*
Dexpo Inc.*
Ecsale Inc.*
Holbrook Incorporated*
Norman Levy Associates Inc.
Private Business, Inc.
SciQuest.com*
Telecom Auction*
Tucker Electronics Company*
VerticalNet
COLLECTIBLES
The BOTB Company*
The Bradford Exchange
Carlisle Productions*
Click and Bid*
CollectEx*
CollectibleMarkets.com*
Colonial Management Ltd.*
Cyber City Auctions*
Express Auction Services, Inc.*
Funtime Auction Classifieds*
Heartland America
Krause Publications*
Market Perceptions Inc.*
Rarex Holdings LLC*
Royal Auctions*
Stein Auction*
Up4Auction.com*
Web Technologies*
Weston/Sachs*
Williams Gallery*
SPORTING GOODS/MEMORABILIA
Basketball Bonanza*
Cannondale Corporation*
Currans Select Auctions*
The Mountain Zone*
Sporting Auction*
SportsCards Center*
ART AND ANTIQUES
American Fine Arts Online Inc.*
Art Auction 1*
ArtNet Worldwide*
Asian Collectibles*
Biddingtons*
Dargate Auction Galleries*
Export Tyre Holding Co.*
The Globe Gallery
The Home Page Factory*
Retro Galleries*
COINS AND STAMPS
AwardMasters Philatelics*
Glen Johnson U.S. Currency*
Gregory Deeter Philatelic Services
BOOKS AND MOVIES
American Booksellers Foundation for Free
Expression
BooksbyBid*
Mole-Richardson
Pacific Book Auctions Galleries Inc.*
JEWELRY AND GEMSTONES
Galaxy Gold (Sugal Manufacturing)*
Gem Auction G. Inc.*
Gem Shopping Network*
CHARITIES
Afundraiser.com*
Beverly Hills Country Auction*
Cape Cod Auction
FOOD AND BEVERAGE
Brentwood Wine Co.*
Winebid.com*
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MISCELLANEOUS
American Society of Association Executives*
Arizona Internet Auctions*
Auctions Online, LLC*
Cyberhorse.com*
Fastalk*
OAC LLC*
PushKart Global Internet Marketing*
RH Communications*
The Sale Barn.com, Inc.
The Shopping Channel
ThinkAuction Inc.*
Vitalogy Soft*
TRAVEL AND VACATION
Cheapfares.com
Holiday Resale Homes*
Magical Holiday*
Wholesalebid.com*
AUTOMOBILES AND MOTORCYCLES
Austweb*
British Only Motorcycle and Parts*
David A. Enterprises
Mobilia Magazine*
Salvage Direct*
TECHNOLOGY
Our technology is designed to operate on a variety of hardware and software
platforms and to meet the business needs of our customers. We followed an
efficient cross-platform development strategy to allow for broad platform
support from a single code base. In addition, the software provides the
necessary interface capabilities to enable content aggregation by BidStream.com.
BROAD PLATFORM SUPPORT. OpenSite Auction 4.0 is supported on a variety of
the most common hardware and software platforms used for e-commerce. NT Server
4.0, BSD 3.1, BSD 4.0, Linux RedHat 5.x, Linux Debian and Linux Slackware 3.6
are all supported on Intel hardware. Solaris 2.6 is supported on SPARC hardware.
The software is designed to run in conjunction with the Internet Information
Server (IIS) on NT 4.0, and in conjunction with the Netscape Enterprise Server
on all other operating systems.
CROSS-PLATFORM ARCHITECTURE. OpenSite Auction 4.0 is built as a collection
of Common Gateway Interface routines to avoid the necessity of development for
Web server-dependent interfaces. The user interface components are constructed
with Hypertext Markup Language (HTML) and JavaScript based templates for ease of
customization.
STANDARD PROGRAMMING LANGUAGES. OpenSite Auction 4.0 was developed using
the ANSI Standard C and C++ programming languages to provide maximum
cross-platform portability across operating systems.
COMPATIBILITY WITH DATABASE MANAGEMENT SYSTEMS. We offer two options for
back-end database management. Our proprietary database provides an efficient
database solution with reporting and management enabled through the
administrative interface at no additional cost. OpenSite Auction 4.0 Corporate
features Oracle database support designed to allow a more robust database and
more scalable system solution for larger customers. This solution also allows
reporting and analysis via third party tools.
ADHERENCE TO INDUSTRY STANDARDS. We have invested considerable resources
in creating a product architecture that conforms to the standards that are
broadly accepted for Internet commerce applications. The products use the Common
Gateway Interface (CGI) and Hypertext Transfer Protocol (HTTP) for Internet
access, the Secure Socket Layer (SSL) for secure network transmissions, the
Information Server Application
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Programming Interface (ISAPI) for access to Microsoft's Internet servers and
HTML and JavaScript templates for representing user interface content.
INTEGRATION WITH BIDSTREAM.COM. OpenSite Auction 4.0 incorporates design
features which allow for the extraction and transmission of auction item data to
provide BidStream.com with timely updates on the status of all of the items on
participating auction sites. The aggregated content base represented by
BidStream.com has the potential of attracting more bidders and sellers to our
customers' auctions. This increased bidder and seller base in turn makes the
deployment of an auction with our products even more attractive. As more
OpenSite licenses are sold, the content aggregated by BidStream.com increases,
repeating the cycle on a larger scale.
OBJECT-ORIENTED PARADIGM. We are developing the Enterprise Auction Toolkit
on which the AuctionNow products will be constructed, as an object-oriented
interface. The implementation is being done in ANSI standard C++.
N-TIER ARCHITECTURE. With the Enterprise Auction Toolkit and the
AuctionNow products, we will provide auction system components that are tailored
for use in enterprise N-tier systems, which minimally provide for a user
interface tier (typically a Web server), a business rules tier (the auction
engine) and a database tier. The auction engine is built with a distributed
object interface, employing CORBA on Solaris or DCOM on NT. The interface to the
user interface tier is constructed as an in-process server, using the Web
Application Interface (WAI) to the Netscape Enterprise Server (NES) and the
ISAPI to Microsoft's IIS. The interface to the database tier is via OCI for the
Oracle database, or via the ODBC abstraction for other select database products.
Automatic email notifications are accomplished via the Simple Mail Transfer
Protocol (SMTP).
PRODUCT DEVELOPMENT
Our product development organization of 27 people is responsible for
developing the architecture, designing, implementing and testing the software
and tools, and developing the end user documentation for our products. Our
product development organization efforts reflect the combined experience of
interacting with and solving problems for over 300 customers.
Most of our development efforts are directed toward producing a more
scalable auction solution for large enterprises, whether they deploy the auction
on their own behalf or do so for their customers as an auction service bureau.
Our product development organization consists of three product groups, a
documentation group and a quality assurance group. Each of the development
groups follows a process of product requirement definition, resource planning
and scheduling, design, implementation, test, final acceptance testing, release
and maintenance. Appropriate documents are generated and reviewed at each phase
of the product development process, including product specification, design
specification, development plan, schedule, test plan and quality assurance plan
documents. Industry accepted third party tools and systems are used in all
phases of development for document creation and control, source and object code
creation, source code maintenance and control, project tracking, test automation
and defect resolution.
Our product development expenses were approximately $0 in 1996, $105,000 in
1997, $695,000 in 1998 and $1,310,000 in the six months ended June 30, 1999.
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FUTURE PRODUCTS
We expect to introduce the following products by the end of 1999. These
products are currently being tested at selected customer sites. Further
development of these products is expected to be required prior to their release.
OPENSITE AUCTION 4.1 will contain enhancements such as Oracle database
support on Solaris/Netscape, integrated via WAI for scalability. The target
market will be merchants that desire a premium auction solution with the
flexibility to connect to many different business applications.
OPENSITE AUCTIONNOW ISP will (1) enable Internet Service Providers to offer
auction functionality to their customers through a virtual hosting environment,
(2) enable management of multiple auctions from a single database and (3) allow
easy installation and configuration with simplified Web browser menus.
OPENSITE AUCTIONNOW TX is a version of OpenSite AuctionNow ISP that is
designed to address the specific needs of Internet Service Providers that have
adopted Open Market as their electronic commerce standard. This solution will be
sold through the Open Market sales force.
OPENSITE ENTERPRISE AUCTION TOOLKIT is a software developer's kit that will
provide an Application Programming Interface (API) on which customers can build
highly custom extensible auction applications. This will offer (1) system
flexibility with a variety of database options and auction types, including
private auctions, and (2) integration capabilities enabled through an open
object-oriented architecture. The target market will be large enterprises which
want to integrate auction functionality within their current infrastructure.
SALES & MARKETING
SALES
Our sales philosophy is to combine direct selling and indirect channel
sales in order to maximize our sales efforts. The sales organization currently
has a staff of 13 people, which we expect to expand significantly.
We initially marketed our products exclusively through a direct sales
organization. This direct sales group achieved its results by pursuing inquiries
generated from online banner advertising, trade show attendance and contact
requests from our Web site. The sales organization is located primarily at our
corporate headquarters in Durham, North Carolina. We also maintain a sales
office in the United Kingdom.
At the end of 1998, we modified our sales strategy to move toward a
combination of direct sales and indirect sales through resellers. At that time,
we began recruiting a reseller channel to optimize market coverage. Our
resellers, most of which are value-added resellers providing systems integration
and Web site design services, allow us to obtain incremental sales opportunities
and provide a natural service extension to our customers. Worldwide channel
recruitment efforts have yielded 63 resellers to date. The median period that
these resellers have been with us is just over one month, and we have added over
49 new customers through these resellers. We currently have three sales
professionals dedicated to establishing and developing reseller relationships.
We plan to continue the expansion of this group.
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We are currently creating a sales group that will concentrate on specific
national accounts within targeted industry segments, the first of which will be
technology, travel/hospitality, media and retail. These sales representatives
are expected to be located in the San Francisco, New York, Chicago and Boston
areas.
The sales support staff includes a sales engineer, a pre-sales group, an
account management group and a sales coordinator. The sales engineer helps in
the more technical sales opportunities. The pre-sales group is responsible for
screening all inquiries and introducing those prospects to the proper sales
person as expediently as possible. Account managers are assigned to customers to
provide continuity and enhance customer satisfaction. Our sales coordinator
helps coordinate the knowledge and information flow throughout the organization.
MARKETING
Our marketing effort is focused on product positioning, brand awareness and
lead generation. Our marketing group consists of 12 people and is divided into
the following areas:
PRODUCT MANAGEMENT. Product managers are responsible for developing and
positioning market driven products and services. Their duties include providing
direction for product development as well as new product concept planning.
Product managers are also responsible for segmenting the marketplace and
refining the target customer base for our products.
MARKET RESEARCH. The Director of Market Research is responsible for
monitoring industry analyst reports, fielding primary research studies and
managing our beta testing program and customer panels. We emphasize the
importance of listening to customers and resellers, monitoring our competition
and using this information in our product management process.
MARKETING PROGRAMS. The Marketing Programs group is responsible for
building brand awareness, generating leads, channel marketing and maintaining
consistency in the look and feel of the OpenSite brand image. This group's
responsibilities include management of participation in targeted trade shows and
conferences, print advertising and online marketing, targeted direct mail
efforts and daily updating of the corporate Web site. This group also develops
sales tools such as our corporate brochure and product sheets, white papers and
case studies as well as our industry guides -- The Web Auction Guide and The Web
Auction Security Guide. Every program has measurement tools in place to measure
the return on investment and determine which activities are the most effective
and efficient, allowing us to constantly work toward optimizing our marketing
program mix.
PUBLIC RELATIONS. Our Public Relations group is supplemented by an outside
public relations firm. We communicate with industry analysts and targeted trade,
channel, vertical and business press on a regular basis through a combination of
phone briefings, in-person tours and trade show appointments.
BUSINESS RELATIONSHIPS
We believe that a key to the successful execution of our marketing strategy
is to establish strategic application, aggregation and service relationships.
These relationships can
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help us achieve brand awareness and revenue goal attainment, as well as assist
us in developing customer solutions and optimizing product compatibility.
RELATIONSHIPS WITH APPLICATION PROVIDERS. To ensure compatibility of our
products with the infrastructure of customers' IT assets, we plan to proactively
establish relationships with companies that have complementary technology. These
include: (1) e-commerce applications, (2) infrastructure applications and (3)
platform vendors.
RELATIONSHIPS WITH CONTENT AGGREGATORS. To maximize the value of
BidStream.com, we will attempt to match open auction categories with portal
sites. The initial list of categories that we are actively pursuing includes
computer/technology, travel/hospitality, collectibles and sporting items/sports
memorabilia. Currently, we have secured a relationship with CNET for the
computer and technology category and are in discussions concerning other
potential relationships. CNET has also agreed to purchase 500,000 shares of our
common stock in this offering.
RELATIONSHIPS WITH PROVIDERS OF ANCILLARY SERVICES. To enhance bidders'
auction experience, increase consumer confidence and simplify on-line
transactions, we intend to establish relationships with companies that provide
ancillary services that would allow us to augment our existing revenue stream,
foster goodwill with our customers and their customers and strengthen our market
position.
INTERNATIONAL OPERATIONS
We believe that markets outside the United States will provide an
increasing portion of our revenues in the future. In April 1999 we opened our
first international office in London. We entered into an agreement with Protege
Software Ltd., a United Kingdom-based company that provides outsourced support
for Internet companies wishing to establish a European business presence.
Our agreement requires Protege to provide a General Manager to our European
operation and to equip and staff an office of sales and marketing professionals
as business needs demand. Other than the General Manager, all European hires
will be employees of OpenSite's European subsidiary and will be supported by
back-office employees of Protege.
COMPETITION
We face competition in a number of areas, including application,
aggregation, auction hosting and other services.
APPLICATION. Our direct competitors include other software providers,
application service providers and system integrators who create unique solutions
suited to a specific customer as well as solutions developed in-house at
individual organizations.
The number of dynamic pricing software providers is increasing every
quarter. These providers can be segmented into entry and enterprise level. The
entry-level providers tend to offer solutions for companies who desire easy
entry into the auction market without a large financial investment. Most
software is relatively inexpensive (less than $10,000), and price and ease of
use are often the deciding factor in this target market. Competitors in this
arena include Auction Broker, Beyond Solutions and Emaze.
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Another category of application competitors focuses on enterprise-level
solutions. The target market for these competitors is larger businesses that
desire system flexibility and integration into back-end ERP and supply-chain
systems. Functionality and a desire for an open architecture are key decision
criteria for this target market. Competitors in the enterprise-level market
include IBM's Net.commerce product, Moai Technologies, Trading Dynamics and
Webvision.
AGGREGATION. A number of aggregation sites exist today, including the
Bidder Network, Bidder's Edge and BidFind. In addition to these aggregation
sites, there are other person-to-person online auction community sites that
contain a large number of auction items, including Amazon.com, Auction Universe,
eBay, OnSale and uBid. These large content sites have significant brand
recognition and large amounts of site traffic.
AUCTION HOSTING. We believe that the outsourced Internet technology model
will become increasingly popular in the auction space. Currently, only two
competitors offer outsourced auction-hosting services similar to our Concierge
product. They are the Bidder Network and FairMarket.
SERVICES. We also believe that some business consultants currently provide
auction-related services and solutions in the course of their work. As the
acceptance of online auctions grows, we believe that more consultants will
develop expertise in the area of online auctions. These competitors include
Andersen Consulting and iXL.
LICENSING, INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Protection of our technology and other proprietary assets and respect for
the intellectual property rights of others are among our highest priorities. We
rely heavily on various types of intellectual property for our success and
competitive positioning. We use trademarks, copyrights, trade secrets and the
laws pertaining to them as well as contractual provisions to protect our
intellectual property. Currently, our most important proprietary rights are
those embodied in our OpenSite Auction product and BidStream.com Web site.
However, no combination of intellectual property protections can provide
complete assurance of the value of intellectual property or a guarantee of its
continued availability. We believe that our knowledge of the marketplace, new
product development, enhancements to existing products and the technical and
creative abilities of our employees are equally important to the establishment
and maintenance of our strong market position in a rapidly changing and evolving
competitive and technological landscape.
Creation and/or implementation of our technology, business model, marketing
research and plans, lead generation activities, customer lists, alliance plans
and similar proprietary assets are all protected at their inception and
throughout their economic lifetimes by confidentiality and proprietary rights
agreements which each of our employees is required to execute contemporaneously
with commencement of employment. We also rely on confidentiality agreements
entered into with contractors and vendors.
All proprietary aspects of our licensed software are protected principally
by the contractual provisions found in our standard confidentiality agreement.
Each prospective customer is required to execute a confidentiality agreement
before access to our products is granted, whether via a demonstration or
directly. We also require execution of a standard comprehensive license
agreement before unsupervised access to our products is granted. These licenses
typically grant nonexclusive, nontransferable and perpetual access to the
software at a single designated location on a single central processing unit by
trained
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<PAGE> 62
users. Misuse of the software or violation of a contractual provision is grounds
for revocation of the license.
We also protect the source code for our proprietary software as a trade
secret and a copyrighted work. We maintain a source code escrow arrangement with
an independent third party. Some of our customers have limited access to the
source code through this escrow under certain conditions, principally where we
fail to support or maintain the software pursuant to our contractual obligations
or where we cease doing business. This limited accessibility of our source code
may increase the possibility of its misappropriation by third parties.
There can be no assurance that we will be successful in protecting our
proprietary technologies or that our competitors will not develop similar
technology independently. Any failure to protect our intellectual property
assets sufficiently could have a material adverse effect on our business.
We own the registered trademarks "OpenSite," "AuctionWatch" and two other
marks and have applications pending with the US Patent and Trademark Office for
registration of seven additional trademarks and service marks. We also claim
rights in other unregistered marks. We also rely on these marks to protect our
principal domain names. We police unauthorized use of our trademarks and service
marks and take such action as may be necessary and advisable to protect them.
Litigation may be required in the future to enforce our trademark rights.
We do not presently integrate proprietary third party software into our
products. Certain products currently under development are, however, likely to
have embedded software. We expect that such software would be acquired pursuant
to license agreements and would be supported by annual maintenance and support
agreements with the software vendor. If we cannot obtain licenses to these
technologies or obtain continued support from the providers, development and
delivery of our planned software releases could be delayed until functionally
equivalent software could be obtained or developed and integrated into our
products. Such a possibility could have a material adverse effect on our
business.
We are actively seeking to expand our market reach to include a number of
countries outside North America. The laws of many countries do not honor the
protections of proprietary rights that are available in the United States.
Litigation to protect intellectual property rights outside the United States
could be very expensive and have uncertain results. Such litigation, whether or
not successful is likely to be time-consuming and costly to prosecute, require
the use of substantial management attention and resources and could have a
material adverse effect on our business.
Over the past few years, several software patents have been issued to
companies providing various products and services related to auctions and
dynamic pricing applications. In addition, many patent applications have
reportedly been filed. Some of those patents issued are currently the subject of
litigation in the federal courts. To date, we are not aware of any judicial
pronouncements that would establish precedent in this area. We have not been
notified that our products infringe on the proprietary rights of any third
party. With the growth in the number of Web-based software products and services
available from new and existing companies striving for a competitive advantage,
claims of infringement of the intellectual property rights within this and
related industry segments are expected to rise. Such claims, whether or not they
have merit, are likely to be time-
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<PAGE> 63
consuming and costly to defend, require the use of substantial management
attention and resources and could result in the need to enter into royalty or
licensing arrangements, which may not be available on acceptable terms. Our
inability to successfully defend a claim of product infringement coupled with an
inability to license the subject technology or to develop non-infringing
technology could have a material adverse effect on our business.
LAW AND GOVERNMENTAL REGULATION
We are subject to various laws and regulations affecting our business.
While there are relatively few laws that actually exist to regulate
Internet-related companies and electronic commerce in general, the sizeable
growth of Internet usage and electronic commerce transactions has prompted many
governmental bodies to commence consideration of legislation in such areas as
pricing, content, data protection, privacy protection, intellectual property
protection, taxation and consumer protection. Enactment of laws or regulations
in these areas could place burdens on us, either directly or as a burden to
electronic commerce in general.
Laws applicable to electronic commerce and Internet communications are
becoming more common. Congress has recently passed legislation concerning
on-line copyright protection and Congress continues to consider laws relating to
Internet taxation. The European Union has recently enacted regulations relating
to on-line privacy protections. These laws and regulations are very recent and
their impact on us and our industry is yet to be determined. This could include
litigation which, whether or not successful, would be likely to be
time-consuming and costly and require the use of substantial management
attention and resources. The application of these laws and regulations and
others that may be enacted affecting the Internet and electronic commerce, could
have a material adverse effect on our business.
EMPLOYEES
As of June 30, 1999, we had 78 full-time employees, of which 41 were in
product development and customer services, 25 in sales and marketing and 12 in
administration and other departments. None of our employees are covered by a
collective bargaining agreement. We consider our relations with our employees to
be good.
FACILITIES
Our principal administrative, sales, marketing, support and research and
development facility is located in approximately 25,000 square feet in Durham,
North Carolina. We also maintain a product development and quality assurance
office located in Buffalo, New York, which will be consolidated with our Durham,
North Carolina facilities by December 31, 1999, and a sales office in the United
Kingdom. We believe our facilities are adequate for our current requirements and
will meet future growth needs.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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<PAGE> 64
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers and their ages as of the date of this
prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Kip A. Frey.................................. 40 President, Chief Executive Officer
and Director
Douglas B. Kubel............................. 41 Senior Vice President, Technology
Timothy K. Oakley............................ 37 Senior Vice President and Chief
Financial Officer
Roger R. Edgar............................... 35 Vice President, Corporate Development
and Strategy
James R. Ford................................ 45 Vice President, Finance and
Operations
Thomas F. Hanlon, III........................ 35 Vice President, Sales and Business
Development
Grace Ueng Trombetta......................... 33 Vice President, Marketing
Richard E. Widin............................. 43 Vice President, Business and Legal
Affairs
Justin Hall-Tipping (1)...................... 42 Director
Roger Hurwitz (2)............................ 34 Director
Mark Jauquet................................. 32 Director
Ross B. Kenzie (1)........................... 67 Director
Mitchell M. Mumma (2)........................ 39 Director
Alan J. Taetle (1)........................... 35 Director
</TABLE>
- -------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
KIP A. FREY has served as our President and a director of OpenSite since
August 1998 and Chief Executive Officer since March 1999. From January 1998 to
June 1998, Mr. Frey served as President of Accipiter, Inc., an Internet software
company, which was acquired by CMGI in April 1998. From June 1994 to December
1997, Mr. Frey was Executive Vice President of Ventana Communications Group, a
division of International Thomson Publishing, a multimedia and software
publisher. Prior to that, Mr. Frey held various executive and legal positions at
Turner Broadcasting System and practiced law with Parker, Poe, Adams &
Bernstein. Mr. Frey is a Visiting Lecturer at Duke University's Sanford
Institute for Public Policy Studies and received a J.D. from Duke University and
an A.B. from the University of Southern California. Mr. Frey's employment
agreement provides that Mr. Frey will serve as a member of our board of
directors.
DOUGLAS B. KUBEL has served as our Senior Vice President, Technology since
April 1999. From October 1994 to March 1999, Mr. Kubel served as Vice President,
Engineering and Technology at Interactive Magic, an entertainment software
company. From September 1987 to September 1994, Mr. Kubel served as a Senior
Manager for Sun Microsystems, a computer workstation and software vendor. Mr.
Kubel has completed the Program for Technology Managers at the University of
North Carolina at Chapel Hill's Kenan-Flagler School of Business and received a
B.S. in Electrical Engineering from North Carolina State University.
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<PAGE> 65
TIMOTHY K. OAKLEY has served as our Senior Vice President and Chief
Financial Officer since July 1999. From April 1998 to July 1999, Mr. Oakley
served as Vice President, Chief Financial Officer, Secretary and Treasurer for
Strategic Technologies, Inc., a systems integration company. From April 1996 to
March 1998, Mr. Oakley was Vice President, Chief Financial Officer, Secretary
and Treasurer for Broadband Technologies, Inc., a publicly-held provider of
telecommunications software and equipment. From October 1990 to March 1996, Mr.
Oakley held various executive positions at MCI Communications, a
telecommunications service provider, with his last position being Controller of
the Consumer and Small Business Operating Unit and Director. Mr. Oakley is a CPA
and received an M.B.A. from Emory University and a B.S.B.A. from East Carolina
University.
ROGER R. EDGAR has served as our Vice President, Corporate Development and
Strategy since March 1999 and as our Director of Business Development from
September 1998 to March 1999. From January 1998 to September 1998, Mr. Edgar
served as Director of Business Development at Accipiter, Inc. From December 1995
to December 1997, Mr. Edgar was Product Manager and Business Development Manager
at HAHT Software, Inc., an Internet development tools company. From July 1994 to
December 1995, Mr. Edgar was a director at Jumpstart Development Corporation, a
consulting firm. Mr. Edgar received an M.B.A. from Duke University and a B.S. in
Finance from Babson College.
JAMES R. FORD has served as our Vice President, Finance and Operations
since October 1998. From January 1998 to October 1998, Mr. Ford served as the
Controller for Research and Development of the Mobile Phones and Terminals
division at Ericsson, a telecommunications products company. From December 1993
to January 1998, Mr. Ford served as Controller for Ventana Communications, an
Internet software developer and publisher. Mr. Ford received an M.B.A. from
Florida State University and a B.S. in Accounting and Finance from Gardner-Webb
College.
THOMAS F. HANLON, III has served as our Vice President, Sales and Business
Development since March 1999 and as our Director of Sales from May 1998 to March
1999. From January 1995 to April 1998, Mr. Hanlon served as Regional District
Manager at Ultimate Software Group, a human resource and payroll software
company. From November 1989 to December 1994, Mr. Hanlon served as Regional
Sales Manager for ADP, Inc., a payroll and administrative services company. Mr.
Hanlon received a B.S. in Business Management with a concentration in Finance at
the State University of New York at Buffalo.
GRACE UENG TROMBETTA has served as our Vice President, Marketing since
March 1999. From October 1998 to March 1999, Ms. Trombetta served as our
Director of Marketing. From October 1996 to September 1998, Ms. Trombetta served
as Director of Business Development for Interactive Magic. From September 1994
to September 1996, Ms. Trombetta served as Product Line Manager for The Learning
Company, a children's educational software company. Ms. Trombetta received an
M.B.A. from Harvard Business School and a B.S. in Management Science from
Massachusetts Institute of Technology.
RICHARD E. WIDIN has served as our Vice President, Business and Legal
Affairs since March 1999. From March 1997 to March 1999, Mr. Widin served as
Vice President and Director at A.M. Pappas & Associates, a venture capital and
transaction services firm. From May 1995 to October 1996, Mr. Widin served as
Senior Vice President, Planning and Administration for Imonics, a software and
systems integration company. From 1991 to
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May 1995, Mr. Widin served as Vice President and General Counsel for Encompass,
G.P., a logistics software company. Prior to that, Mr. Widin held various
positions with CSX, General Electric and White & Case. Mr. Widin received a
Master of Laws in Taxation from Georgetown University and both a J.D. and a B.S.
in Accounting from Villanova University.
JUSTIN HALL-TIPPING has served as a director of OpenSite since March 1999.
Mr. Hall-Tipping is Managing Director of SG Capital Partners LLC. From 1995 to
1997, Mr. Hall-Tipping served as Director of the Data Intelligence Group for
Reuters plc. From 1992 to 1995, Mr. Hall-Tipping founded and served as CEO of
Heartbeat Corp. Mr. Hall-Tipping received an M.B.A. from Harvard Business School
and a B.Sc. in International Finance and Banking from City University, London.
ROGER HURWITZ has served as a director of OpenSite since March 1999. Mr.
Hurwitz is currently a Vice President of GE Capital Equity Capital Group, Inc.,
the private equity division of General Electric Capital Corporation, and has
been with GE Capital since March 1996. From July 1995 to March 1996, Mr. Hurwitz
worked in Corporate Finance at Chase Manhattan Bank. From 1993 to 1995, Mr.
Hurwitz attended the Wharton School at the University of Pennsylvania where he
received an M.B.A. Mr. Hurwitz received a B.S. in Accounting from Syracuse
University.
MARK JAUQUET, co-founder of OpenSite, has served as a director of OpenSite
from our inception until March 1999 and from May 1999 to the present. Mr.
Jauquet has served as our Chief Scientist since May 1999 and as our Vice
President, Technology from May 1997 to April 1999. From October 1996 to May
1997, Mr. Jauquet served as an analyst for Health Care Plan, an HMO. From August
1994 to June 1996, Mr. Jauquet served as an analyst for Fonorola, a Canadian
telecommunications company. Mr. Jauquet received an M.B.A. from the University
of Buffalo and a B.S. from Lafayette College.
ROSS B. KENZIE has served as a director of OpenSite since January 1998.
Prior to his retirement in 1989, Mr. Kenzie served as the Chairman of the Board
and Chief Executive Officer of Goldome, a publicly-held banking corporation.
Prior to joining Goldome in 1957, Mr. Kenzie served as Executive Vice President
and Director of Merrill Lynch & Co. and Merrill, Lynch, Pierce, Fenner & Smith.
Mr. Kenzie currently serves as a director of Rand Capital Corporation, a
publicly-held venture capital company and as a Manager of Auction Ventures, LLC,
a venture capital investor. Mr. Kenzie received a degree from the United States
Military Academy at West Point, New York.
MITCHELL M. MUMMA has served as a director of OpenSite since August 1998.
Mr. Mumma has served as a General Partner of Intersouth Partners, a venture
capital firm, since August 1989 and as a director for numerous other companies.
Prior to that, Mr. Mumma held various management positions with technology
companies. Mr. Mumma received a B.S. in Management Science from Duke University.
ALAN J. TAETLE has served as a director of OpenSite since August 1998. Mr.
Taetle has been a General Partner with Noro-Moseley Partners, a venture capital
firm, since May 1998. From March 1995 to April 1998, Mr. Taetle was Executive
Vice President of Marketing and Business Development for MindSpring Enterprises,
an Internet Service Provider. From November 1992 to March 1995, Mr. Taetle
served as Director of Operations and Product Management at CogniTech
Corporation, a developer of retail management software. Mr. Taetle received an
M.B.A. from Harvard Business School and a B.A. in Economics from the University
of Michigan.
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Our Board of Directors consists of a single class of directors. Each of our
directors serves for a term of one year. There are no family relationships
between any of the directors or executive officers of OpenSite.
COMMITTEES OF THE BOARD OF DIRECTORS
The members of the Audit Committee are Messrs. Hurwitz and Mumma. The Audit
Committee reviews the scope and timing of our audit services, the auditor's
report on our financial statements following completion of its audit and its
policies and procedures with respect to internal accounting and financial
control and any other services our independent auditor is asked to perform. In
addition, the Audit Committee makes annual recommendations to the board of
directors for the appointment of independent auditors for the following year.
The members of the Compensation Committee are Messrs. Kenzie (Chairman),
Hall-Tipping, and Taetle. The Compensation Committee reviews and evaluates the
compensation and benefits of all our officers, reviews general policy matters
relating to compensation and benefits of our employees and makes recommendations
concerning these matters to the board of directors. The Compensation Committee
also administers our stock option plans.
COMPENSATION OF DIRECTORS
Our directors currently do not receive any compensation for services
performed in their capacity as directors. We reimburse each director for
reasonable out-of-pocket expenses incurred in attending meetings of the board of
directors and any of its committees.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid by OpenSite
during 1998 for our Chief Executive Officer. No executive officer was paid total
annual salary and bonuses determined in excess of $100,000 during 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
----------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
--------------------------- ------- ------- ------------
<S> <C> <C> <C>
Michael Brader-Araje (1)........................ $69,308 $10,000 $2,379(2)
</TABLE>
- -------------------------
(1) Mr. Brader-Araje, OpenSite's founder, served as our Chief Executive Officer
until March 1999.
(2) Consists of matching contributions to a retirement savings plan.
STOCK OPTION PLAN. Our stock option plan became effective as of July 10,
1998. The aggregate number of shares reserved for issuance under the Stock
Option Plan is 1,666,666 shares. The purpose of the stock option plan is to
provide incentives for key employees, officers, consultants and directors to
promote our success and to enhance our ability to attract and retain the
services of such persons. Options granted under the stock option
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<PAGE> 68
plan may be either options intended to qualify as "incentive stock options"
under Section 422 of the Code or nonqualified stock options.
As of July 23, 1999, 352,380 shares of common stock had been issued under
the stock option plan and options to purchase 786,905 shares of common stock
were outstanding under the stock option plan at a weighted average exercise
price of $5.49 per share.
401(K) PROFIT SHARING PLAN. OpenSite maintains a 401(k) Profit Sharing
Plan which is intended to be a tax-qualified defined contribution plan under
Section 401(k) of the Code. In general, all employees of OpenSite are eligible
to participate. The 401(k) Plan includes a salary deferral arrangement pursuant
to which participants may contribute, subject to certain Code limitations, a
maximum of 15% of their first $66,666 in salary on a pre-tax basis. Subject to
certain Code limitations, OpenSite may make a matching contribution at a rate of
100% of the participant's contributions, up to 3% of the participant's salary. A
separate account is maintained for each participant in the 401(k) Plan. The
portion of a participant's account attributable to his or her own contributions
is 100% vested. The portion of the account attributable to OpenSite
contributions is 100% vested. Distributions from the 401(k) Plan may be made in
the form of a lump-sum cash payment or in installment payments.
EMPLOYMENT AGREEMENTS
In August 1998, OpenSite and Kip A. Frey entered into an Executive
Employment Agreement. Subsequently, effective as of July 8, 1999, OpenSite and
Mr. Frey entered into an Amended and Restated Executive Employment Agreement
pursuant to which Mr. Frey serves as the President, Chief Executive Officer, and
as a member of the board of directors of OpenSite. The agreement provides for an
annual salary of $150,000 through and including May 31, 1999, with an increase
in annual salary to $200,000 beginning as of June 1, 1999. The agreement also
provides for a bonus plan with a targeted bonus of up to 50% of the annual
salary based upon performance standards determined by the board of directors.
The initial term of this agreement expires on December 31, 2002 and, unless
terminated, the agreement will renew on an annual basis thereafter. If we
terminate Mr. Frey's employment without cause or as a result of a change of
control of OpenSite, Mr. Frey will be entitled to receive his then current base
salary, benefits and pro rata bonus for twelve months after termination. The
agreement contains provisions restricting Mr. Frey from competing with our
business or soliciting our customers during his employment and for a period of
one year thereafter.
RELATED PARTY TRANSACTIONS
In August 1998, OpenSite loaned Mr. Frey $65,000, which he used to purchase
shares of our common stock. These shares are subject to an Amended and Restated
Restricted Stock Agreement dated as of July 8, 1999, pursuant to which the
agreement states that the August 1998 note was cancelled and re-issued and
re-executed as of October 1998. This loan bears interest at a rate of 6% per
annum and is repayable on December 31, 2002. As of July 9, 1999, the total
principal and accrued interest under this loan was approximately $69,000.
In March 1999, OpenSite loaned Mr. Frey $300,000. This loan bears interest
at the rate of 6% per annum and is repayable upon the earlier of the termination
of Mr. Frey's employment with OpenSite or December 31, 2002. As of July 9, 1999,
the total principal and accrued interest under this loan was approximately
$303,000. Mr. Frey pledged his shares of common stock of OpenSite to secure this
loan.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of the date of this prospectus and as adjusted
to reflect the sale by OpenSite of common stock in this offering by: (1) each
director of OpenSite; (2) all executive officers and directors of OpenSite as a
group; and (3) all those known by OpenSite to be beneficial owners of more than
five percent of the outstanding shares of common stock. Unless otherwise set
forth herein, the street address of the named beneficial owner is 2800 Meridian
Parkway, Durham, North Carolina 27713.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED AFTER
PRIOR TO OFFERING(1) OFFERING
--------------------- -------------------
NAME SHARES PERCENT SHARES PERCENT
---- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Noro-Moseley Partners IV, L.P.......... 1,904,761(2) 14.4% 1,904,761 11.3%
9 North Parkway Square
4200 Northside Parkway, NW
Atlanta, Georgia 30327
Auction Ventures, LLC.................. 1,544,610 11.7 1,544,610 9.2
369 Franklin Street
Buffalo, New York 14202
SGC Partners I LLC..................... 1,488,095(3) 11.3 1,488,095 8.8
1221 Avenue of the Americas
New York, New York 10020
Michael Brader-Araje................... 1,352,053 10.3 1,352,053 8.0
Mark Jauquet........................... 1,352,053 10.3 1,352,053 8.0
GE Capital Equity Investments, Inc..... 1,190,476(4) 9.0 1,190,476 7.1
120 Long Ridge Road
Stamford, Connecticut 06927
Intersouth Partners IV, L.L.C.......... 1,160,714 8.8 1,160,714 6.9
One Copley Parkway, Suite 102
Morrisville, North Carolina 27713
Southeast Interactive Technology Fund
II, LLC.............................. 892,857 6.8 892,857 5.3
2525 Meridian Parkway, Suite 300
Durham, North Carolina 27713
Wakefield Group, II, LLC............... 744,047 5.6 744,047 4.4
1110 East Morehead Street
Charlotte, North Carolina 28204
CNET, Inc.............................. 714,285 5.4 1,214,285 7.2
150 Chestnut Street
San Francisco, California 94111
Kip A. Frey............................ 309,523 2.3 309,523 1.8
Justin Hall-Tipping.................... -- -- -- --
Roger Hurwitz.......................... -- -- -- --
Ross B. Kenzie......................... 1,544,610(5) 11.7 1,544,610 9.2
</TABLE>
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<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED AFTER
PRIOR TO OFFERING(1) OFFERING
--------------------- -------------------
NAME SHARES PERCENT SHARES PERCENT
---- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Mitchell M. Mumma...................... 1,160,714(6) 8.8 1,160,714 6.9
Alan J. Taetle......................... 1,904,761(7) 14.4 1,904,761 11.3
All directors and executive officers as
a group (13
persons)(2)(3)(4)(5)(6)(7)........... 6,314,518 47.9 6,314,518 37.4
</TABLE>
- -------------------------
(1) For purposes of calculating the percentage beneficially owned, the number of
shares of common stock deemed outstanding prior to this offering consists of
13,186,711 shares outstanding as of July 23, 1999. The number of shares of
common stock deemed outstanding after this offering includes an additional
3,681,800 shares that are being offered for sale by OpenSite in this
offering. Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission that deem shares to be beneficially
owned by any person or group who has or shares voting or investment power
with respect to such shares.
(2) Includes shares owned by Noro-Moseley Partners IV-B, L.P., a related entity.
(3) SGC Partners I LLC is a wholly owned subsidiary of SG Merchant Banking Fund
L.P. The general partner of SG Merchant Banking Fund L.P. is SG Capital
Partners L.L.C. SG Cowen Securities Corporation, a wholly owned subsidiary
of Societe Generale, is the managing member of SG Capital Partners L.L.C. As
a result of these relationships, SG Merchant Banking Fund L.P., SG Capital
Partners L.L.C., SG Cowen Securities Corporation and Societe Generale may
each be deemed to share beneficial ownership of these shares. Each of these
entities disclaims such beneficial ownership.
(4) GE Capital Equity Investments, Inc. ("GE Equity"), a wholly-owned subsidiary
of General Electric Capital Corporation ("GECC"), shares beneficial
ownership with GECC with respect to all of such shares held of record by GE
Equity.
(5) Consists of shares owned by Auction Ventures, LLC, of which Mr. Kenzie
serves as Manager. Mr. Kenzie disclaims beneficial ownership of such shares.
(6) Consists of shares owned by Intersouth Partners IV, L.L.C., of which Mr.
Mumma is a General Partner. Mr. Mumma disclaims beneficial ownership of such
shares.
(7) Consists of shares owned by Noro-Moseley Partners IV, L.P., of which Mr.
Taetle is a General Partner. Mr. Taetle disclaims beneficial ownership of
such shares.
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<PAGE> 71
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of (1) 75,000,000 shares of common
stock, $.01 par value per share, and (2) 10,000,000 shares of preferred stock,
$.01 par value per share. As of July 23, 1999, we had issued and outstanding
13,186,711 shares of common stock. The following description of our capital
stock is a summary and is qualified in its entirety by the provisions of our
certificate of incorporation and bylaws, copies of which have been filed as
exhibits to the registration statement of which this prospectus is a part.
COMMON STOCK
Holders of shares of our common stock are entitled to one vote per share
for the election of directors and all matters to be submitted to a vote of our
stockholders. Holders of shares of our common stock may not cumulate votes in
the election of directors. Subject to the rights of any holders of preferred
stock which may be issued in the future, the holders of shares of our common
stock are entitled to share ratably in such dividends as may be declared and
paid out of legally available funds. In the event of dissolution, liquidation or
winding up of OpenSite, holders of our shares of common stock are entitled to
share ratably in all assets remaining after payment of all liabilities and
liquidation preferences, if any. Holders of shares of our common stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of our common stock are, and the shares of common stock to be issued in
this offering will be, duly authorized, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
Our board of directors is authorized, subject to limitations prescribed by
law, without further stockholder approval, to issue from time to time up to an
aggregate of 10,000,000 shares of preferred stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions on the shares of each such series, including the
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series or
designations of such series. The issuance of our preferred stock may have the
effect of delaying, deferring or preventing a change of control of OpenSite.
There are no outstanding shares of preferred stock and no series have been
designated.
ANTITAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS
Under Delaware law, all stockholder actions must be effected at a duly
called annual or special meeting. Our bylaws provide that, except as otherwise
required by law, special meetings of the stockholders can only be called by the
board of directors or our Chief Executive Officer. In addition, our bylaws
establish an advance notice procedure for stockholder proposals to be brought
before an annual meeting of stockholders, including proposed nominations of
persons for election to the board. Stockholders at an annual meeting may only
consider proposals or nominations specified in the notice of meeting or brought
before the meeting by or at the direction of the board of directors or by a
stockholder who was a stockholder of record on the record date for the meeting,
who is entitled to vote at the meeting and who has delivered timely written
notice in proper form
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<PAGE> 72
to our Secretary of the stockholder's intention to bring such business before
the meeting. The holders of a majority of our outstanding shares will constitute
a quorum for the transaction of business. Each stockholder has one vote per
share of stock. Except as explained below or provided by Delaware law, approval
of a majority of those stockholders who are present is required to take any
action.
Our certificate of incorporation and bylaws provide that a director may be
removed from office only with cause by the affirmative vote of at least 75% of
all shares voting on the removal. Cause is defined as incompetence, mental or
physical incapacity, breach of fiduciary duty involving dishonesty, personal
profit, a failure to perform stated duties or a violation of law. In addition,
the provisions of our certificate of incorporation that relate to the election
and removal of directors and the prohibition on the calling of special meetings
by stockholders and actions by stockholders by written consent may only be
amended by a vote of 75% of our outstanding shares of voting stock. Our bylaws
may only be amended by our board of directors or by a vote of 75% of our
outstanding shares of voting stock.
These provisions of our certificate of incorporation and bylaws are
intended to discourage types of transactions that may involve an actual or
threatened change of control of OpenSite. Such provisions are designed to reduce
the vulnerability of OpenSite to an unsolicited acquisition proposal and,
accordingly, could discourage potential acquisition proposals and could delay or
prevent a change in control of OpenSite. Such provisions are also intended to
discourage tactics that may be used in proxy fights but could, however, have the
effect of discouraging others from making tender offers for our shares and,
consequently, may also inhibit fluctuations in the market price of our shares
that could result from actual or rumored takeover attempts. These provisions may
also have the effect of preventing changes in the management of OpenSite.
EFFECT OF DELAWARE ANTITAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law, or
the Antitakeover Law, which regulates corporate acquisitions. The Antitakeover
Law prevents certain Delaware corporations, including those whose securities are
listed for trading on the Nasdaq National Market, from engaging under certain
circumstances in a "business combination" with any "interested stockholder" for
three years following the date that such stockholder became an interested
stockholder. For purposes of the Antitakeover Law, a "business combination"
includes, among other things, a merger or consolidation involving OpenSite and
the interested stockholder and the sale of more than 10% of OpenSite's assets.
In general, the Antitakeover Law defines an "interested stockholder" as any
entity or person beneficially owning 15% or more of the outstanding voting stock
of OpenSite and any entity or person affiliated with or controlling or
controlled by such entity or person. A Delaware corporation may opt out of the
Antitakeover Law with an express provision in its original certificate of
incorporation or an express provision in its certificate of incorporation or
bylaws resulting from amendments approved by the holders of at least a majority
of the corporation's outstanding voting shares. We have not opted out of the
provisions of the Antitakeover Law.
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<PAGE> 73
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our bylaws and Section 145 of the Delaware General Corporation Law require
us to indemnify:
- a director who was wholly successful, on the merits or otherwise, in the
defense of any proceeding to which such director was a party because such
director was a director of OpenSite against reasonable expenses incurred
by the director in connection with the proceeding; and
- an individual who is made a party to a proceeding because such individual
is or was a director or officer of OpenSite against liability incurred by
such individual in the proceeding if the individual acted in a manner
believed in good faith to be in or not opposed to the best interests of
OpenSite and, in the case of any criminal proceeding, such individual had
no reasonable cause to believe such individual's conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers or other persons
controlling us pursuant to the foregoing provisions, we recognize 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.
LIMITATIONS OF DIRECTOR LIABILITY
Our certificate of incorporation limits personal liability for breach of
the fiduciary duty of our directors to the fullest extent provided by the
Delaware General Corporation Law. Such provisions provide that no OpenSite
director shall have personal liability to OpenSite or to its stockholders for
monetary damages for breach of fiduciary duty of care or other duty as a
director. However, such provisions shall not eliminate or limit the liability of
a director:
- for any breach of the director's duty of loyalty to OpenSite or its
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for voting or assenting to unlawful distributions; or
- for any transaction from which the director derived an improper personal
benefit.
Any amendment, modification or repeal of such provisions will not eliminate
or reduce the effect of such provisions in respect of any act or failure to act,
or any cause of action, suit or claim that would accrue or arise prior to any
amendment, repeal or adoption of such an inconsistent provision. If the Delaware
General Corporation Law is subsequently amended to provide for further
limitations on the personal liability of directors of corporations for breach of
duty of care or other duty as a director, then the personal liability of the
directors of OpenSite will be so further limited to the greatest extent
permitted by the Delaware General Corporation Law.
REGISTRATION RIGHTS
We have granted registration rights to some of our existing stockholders
covering 9,639,847 shares of our common stock and 93,455 shares of common stock
subject to an outstanding warrant. Subject to specified limitations,
approximately six months after the
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<PAGE> 74
date of this prospectus, holders of these securities may require that we
register all or part of these securities for sale under the Securities Act as
long as the offering value of the securities to be registered on any occasion is
in excess of $20,000,000. Until we are entitled to register our shares on Form
S-3 (a short form registration statement), these holders may only make four such
demands. Once we are entitled to use Form S-3, which may be as early as August
2000, these holders may make such demands on an unlimited number of occasions.
If we register any of our common stock, either for our own account or for
the account of other security holders, and the registration form to be used may
be used for the registration of the securities of the holders described above,
the holders are entitled to include their shares of common stock in the
registration. All of these holders have waived their rights to register
securities in connection with this offering.
In all cases, a holder's right to include shares in a registration is
subject: (1) to a registration priority arrangement and (2) in an underwritten
registration, to the ability of the underwriters to limit the number of shares
included in the offering. All fees, costs and expenses of all of the
registrations will be paid by us, and all selling expenses (e.g., underwriting
discounts, selling commissions and stock transfer taxes) will be paid by the
holders of the securities being registered.
LISTING
We have applied for trading and quotation of our common stock on the Nasdaq
National Market under the trading symbol "OPNS."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is BankBoston, N.A.
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<PAGE> 75
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
this offering, or the perception that such shares may occur, could materially
and adversely affect prevailing market prices of our common stock and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
16,868,511 shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
the 3,681,800 shares sold in this offering will be freely tradable without
restriction or registration under the Securities Act, unless such shares are
purchased by our affiliates. However, the 500,000 shares sold directly to CNET
will be subject to the lock-up agreements described below. The remaining
13,186,711 shares of our common stock are held by existing stockholders. Such
shares, as well as any shares sold in this offering that are purchased by one of
our affiliates, are restricted securities that may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rule 144 or 701 promulgated under the Securities Act, which rules are summarized
below.
As a result of the lock-up agreements described below and the provisions of
Rules 144 and 701, the shares sold to CNET and the restricted securities will be
available for sale in the public market as follows:
- 500,000 shares will be freely tradable without restriction or
registration under the Securities Act upon expiration of the lock-up
agreements;
- 7,367,163 shares may be eligible for sale in accordance with the
requirements of Rule 144 upon expiration of the lock-up agreements; and
- 5,714,285 shares may be eligible for sale in accordance with the
requirements of Rule 144 beginning on March 30, 2000, and 105,263 shares
may be eligible for sale in accordance with the requirements of Rule 144
on April 23, 2000.
LOCK-UP AGREEMENTS. All of our officers, directors and stockholders and
holders of most of our outstanding options have signed lock-up agreements under
which they have agreed that for a period 180 days following the date of this
prospectus, without the prior written consent of SG Cowen Securities
Corporation, they will not:
- directly or indirectly, offer, sell, assign, transfer, encumber, pledge,
contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise dispose of, other than by operation of law,
any shares of our common stock or any securities convertible into or
exercisable or exchangeable for our common stock (including, without
limitation, common stock which may be deemed to be beneficially owned in
accordance with the rules and regulations promulgated under the
Securities Act); or
- enter into any swap or other arrangement that transfers to another
person, in whole or in part, any of the economic consequences of
ownership of our common stock whether any such transaction described
above is to be settled by delivery of common stock or such other
securities, in cash or otherwise.
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<PAGE> 76
RULE 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date of this prospectus, a person (including an affiliate of
ours) 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
restricted securities that does not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately 169,000 shares immediately after this offering;
or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding such sale.
Such sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than one of our
affiliates, is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
RULE 701. In general, under Rule 701 of the Securities Act as currently in
effect, any of our employees, consultants or advisors who purchases shares from
us in connection with a compensatory stock or option plan or other written
agreement is eligible to resell such shares 90 days after the date of this
prospectus in reliance on Rule 144, but without compliance with restrictions.
Specifically, shares acquired pursuant to Rule 701 may be sold by nonaffiliates
without regard to the holding period, volume limitations or information or
notice requirements of Rule 144, and by our affiliates without regard to the
holding period requirement.
REGISTRATION RIGHTS. Upon completion of this offering, the holders of
9,639,847 shares of our common stock and the holder of 93,455 shares of our
common stock issuable upon the exercise of warrants outstanding as of July 23,
1999, or their transferees, will be entitled to rights with respect to the
registration of such shares under the Securities Act. See "Description of
Capital Stock -- Registration Rights." After such a registration, these shares
become freely tradable without restriction under the Securities Act.
STOCK OPTIONS AND WARRANTS. Options to purchase an aggregate of 33,273
shares of our common stock will be fully vested as of July 23, 1999. Of the
total shares issuable pursuant to these vested options, 10,615 are subject to
the 180-day lock-up agreements described above. As of July 23, 1999, options to
purchase an additional 753,632 shares of common stock were outstanding but
subject to future vesting and an additional 527,381 shares of common stock were
available for future grants under our stock option plan. In addition, 93,455
shares of common stock are issuable upon the exercise of warrants outstanding as
of July 23, 1999.
Following this offering, we intend to file one or more registration
statements on Form S-8 under the Securities Act to register all shares of common
stock subject to outstanding stock options and options issuable pursuant to our
stock option plan. Subject to the lock-up agreements, shares covered by these
registration statements will be eligible for sale in the public markets, other
than shares owned by our affiliates, which may be sold in the public market if
they qualify for an exemption from registration under Rule 144 or 701.
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<PAGE> 77
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, each of
the underwriters named below, for whom Hambrecht & Quist LLC, The
Robinson-Humphrey Company, LLC, SoundView Technology Group, Inc. and Wachovia
Securities, Inc. are acting as representatives, has agreed to purchase from
OpenSite the number of shares of common stock set forth opposite their names in
the table below. Generally, no underwriter is responsible for the obligations of
any other underwriter.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
Hambrecht & Quist LLC.......................................
The Robinson-Humphrey Company, LLC..........................
SoundView Technology Group, Inc.............................
Wachovia Securities, Inc....................................
---------
Total............................................. 3,181,800
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are conditional and may be terminated at their discretion based on
the occurrence of events specified in the underwriting agreement. The
underwriters have committed to purchase all shares of common stock reflected in
the above table if any of the shares are purchased.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by us in connection with 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>
PAID BY US
---------------------------
NO
EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share......................................
Total..........................................
</TABLE>
We will pay the offering expenses, estimated to be $890,000.
The underwriters propose to offer the shares of common stock which they
have agreed to purchase directly to the public at the initial public offering
price set forth on the cover page of this prospectus and to dealers at that
price less a concession not in excess of $ per share. The underwriters may
allow and these dealers may reallow a concession not in excess of $ per share
to other dealers. After the initial public offering of the shares, the offering
price and other selling terms may be changed by the underwriters. The
representatives have informed us that the underwriters do not intend to confirm
discretionary sales in excess of 5% of the shares of common stock offered
hereby.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to 477,270 additional
shares of common stock at the initial public offering price, less the
underwriting discount, set forth on the cover
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<PAGE> 78
page of this prospectus. To the extent that the underwriters exercise this
option, each of the underwriters will have a firm commitment to purchase
approximately the same percentage of the additional shares which the number of
shares of common stock to be purchased by it shown in the above table bears to
the total number of shares of common stock reflected in the above table. We will
be obligated, pursuant to the option, to sell shares to the underwriters to the
extent the option is exercised. The underwriters may exercise this option only
to cover over-allotments made in connection with the sale of common stock.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We have agreed to indemnify the underwriters against liabilities under the
securities laws arising out of or based upon untrue statements of material facts
or material omissions contained in the registration statement or the prospectus.
We have also agreed to contribute to payments that the underwriters may be
required to make in respect of those liabilities.
OpenSite, all of our directors, officers and existing stockholders, who
hold an aggregate of 16,368,571 shares, together with the holders of options to
purchase 561,904 shares of our common stock, have agreed with the underwriters
that for a period of 180 days following the date of this prospectus, without the
prior written consent of Hambrecht & Quist LLC, they will not (1) directly or
indirectly, offer, sell, assign, transfer, encumber, pledge, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, lend or otherwise dispose
of, other than by operation of law, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock (including
without limitation, common stock which may be deemed to be beneficially owned in
accordance with the rules and regulations promulgated under the Securities Act);
or (2) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common stock
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of common stock or such other securities, in cash or
otherwise.
There are persons participating in this offering that may over-allot or
effect transactions that stabilize, maintain or otherwise affect the market
price of the common stock at levels above those that might otherwise prevail in
the open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase for the purpose of pegging,
fixing or maintaining the price of the common stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting syndicate
or the effecting of any purchase to reduce a short position created in
connection with the offering. A penalty bid means an arrangement that permits
the underwriters to reclaim a selling concession from a syndicate member in
connection with this offering when shares of common stock sold by the syndicate
member are purchased in syndicate covering transactions.
These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise. This stabilizing, if commenced, may be
discontinued at any time.
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<PAGE> 79
Prior to the offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be determined
by negotiations among OpenSite and the underwriters. Among the factors to be
considered in determining the initial public offering price will be prevailing
market and economic conditions, revenues and results of operations of OpenSite,
market valuations of other companies engaged in activities similar to OpenSite's
activities, estimates of the business potential and prospects of OpenSite, the
present state of OpenSite's business operations, OpenSite's management and other
factors deemed relevant. The estimated initial public offering price range shown
on the cover of this preliminary prospectus is subject to change as a result of
changes in these factors.
At the request of OpenSite, the underwriters have reserved for sale, at the
initial public offering price, not more than five percent of the shares of
common stock reflected in the table above for designated individuals, including
officers and directors of OpenSite, who may express an interest in purchasing
shares in this offering. Any such persons may, as a condition to purchasing
these reserved shares, be required to agree not to offer, sell or otherwise
dispose of any such reserved shares for a period of 180 days following the date
of this prospectus without the prior written consent of Hambrecht & Quist LLC.
The number of shares of common stock available for sale to the general public
will be reduced to the extent that these persons purchase these reserved shares.
Any reserved shares that are not so purchased will be offered by the
underwriters to the general public on the same basis as other shares offered by
the underwriters.
DIRECT SALE
This prospectus is also being used in connection with the direct sale of
500,000 shares by us to CNET at a price equal to the initial public offering
price minus six percent. CNET has agreed to enter into a lock-up agreement on
terms substantially similar to those described in "Underwriting."
We have agreed to pay to the underwriters a financial advisory fee of
$55,000 in connection with the shares we are selling to CNET. The underwriters
will not receive underwriting discounts or commissions with respect to these
shares.
LEGAL MATTERS
The validity of the issuance of the shares of the common stock to be sold
in this offering will be passed upon for OpenSite by Morris, Manning & Martin,
L.L.P., Atlanta, Georgia, and Hutchison & Mason, PLLC, Raleigh, North Carolina.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Simpson Thacher & Bartlett, New York, New York.
EXPERTS
The financial statements of OpenSite as of December 31, 1997 and 1998 and
for the period from inception (July 24, 1996) to December 31, 1996 and the years
ended December 31, 1997 and 1998 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
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<PAGE> 80
CHANGE IN ACCOUNTANTS
On May 10, 1999, we dismissed KPMG LLP and engaged PricewaterhouseCoopers
LLP as our independent accountants. Our board of directors participated in and
approved the decision to change independent accountants. The report of KPMG LLP
on our financial statements for the two years in the period ended December 31,
1998 did not contain any adverse opinion or disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with its audit for the two years in the period ended December 31,
1998 and through May 10, 1999, there were no disagreements with KPMG LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements, if not resolved to the
satisfaction of KPMG LLP, would have caused them to make reference thereto in
their report on the financial statements for such years.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act, and the rules and regulations promulgated thereunder, with
respect to the shares of common stock offered by this prospectus. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits thereto. Statements contained in this prospectus as to the contents of
any contract or other document that is filed as an exhibit to the registration
statement are not necessarily complete and each such statement is qualified in
all respects by reference to the full text of such contract or document.
You may read and copy all or any portion of the registration statement and
the exhibits at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the SEC located at Seven
World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request
copies of these documents, upon payment of a duplication fee, by writing to the
SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the SEC's public reference rooms. Also, the SEC maintains a World
Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC.
As a result of this offering, we will become subject to the information and
periodic reporting requirements of the Exchange Act and, in accordance
therewith, will file periodic reports, proxy and information statements and
other information with the SEC. These periodic reports, proxy and information
statements and other information will be available for inspection and copying at
the public reference facilities, regional offices and SEC's Web site referred to
above.
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<PAGE> 81
OPENSITE TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets as of December 31, 1997 and 1998, and June
30, 1999.................................................. F-3
Statements of Operations for the period from inception (July
24, 1996) to December 31, 1996, the years ended December
31, 1997 and 1998, and the six months ended June 30, 1998
and 1999.................................................. F-4
Statements of Stockholders' Equity (Deficit) for the period
from inception (July 24, 1996) to December 31, 1996, the
years ended December 31, 1997 and 1998, and the six months
ended June 30, 1999....................................... F-5
Statements of Cash Flows for the period from inception (July
24, 1996) to December 31, 1996, the years ended December
31, 1997 and 1998, and the six months ended June 30, 1998
and 1999.................................................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 82
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
OpenSite Technologies, Inc.
The reverse stock split described in Note 2 to the financial statements has not
been consummated at July 26, 1999. When it has been consummated, we will be in a
position to furnish the following report:
"In our opinion, the accompanying balance sheets and the related
statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial
position of OpenSite Technologies, Inc. at December 31, 1997 and 1998,
and the results of its operations and its cash flows for the period
from inception (July 24, 1996) to December 31, 1996 and the years
ended December 31, 1997 and 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above."
/s/ PRICEWATERHOUSECOOPERS LLP
Raleigh, North Carolina
May 25, 1999
F-2
<PAGE> 83
OPENSITE TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
---------------------- JUNE 30, JUNE 30,
1997 1998 1999 1999
-------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $151,345 $ 2,276,031 $ 19,324,090 $ 19,324,090
Accounts receivable, net.................. 23,713 303,312 1,033,250 1,033,250
Prepaid expenses.......................... -- 61,591 168,018 168,018
-------- ----------- ------------ ------------
Total current assets............... 175,058 2,640,934 20,525,358 20,525,358
-------- ----------- ------------ ------------
Property and equipment, net................. 33,538 417,723 802,573 802,573
Note receivable from officer................ -- -- 300,000 300,000
Other assets................................ 1,838 11,032 227,867 227,867
-------- ----------- ------------ ------------
Total assets....................... $210,434 $ 3,069,689 $ 21,855,798 $ 21,855,798
======== =========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................... $ 19,502 $ 75,542 $ 148,581 $ 148,581
Accrued expenses.......................... 14,571 408,839 2,471,486 2,471,486
Deferred revenue.......................... -- 354,802 1,221,289 1,221,289
Capital lease obligations -- current
portion................................. -- 22,155 23,908 23,908
-------- ----------- ------------ ------------
Total current liabilities.......... 34,073 861,338 3,865,264 3,865,264
Note payable................................ 17,000 -- -- --
Capital lease obligations -- noncurrent
portion................................... -- 42,765 30,359 30,359
Redeemable common stock warrants............ -- 54,221 -- --
Mandatorily redeemable convertible preferred
stock..................................... -- 4,817,892 69,203,966 --
Commitments and contingencies (Note 11)
Stockholders' equity (deficit):
Common stock, $.01 par value, 40,000,000
shares authorized: 3,976,607, 4,328,987
and 4,434,250 shares issued and
outstanding at December 31, 1997 and
1998, and June 30, 1999, respectively;
14,074,097 shares pro forma............. 39,765 43,289 44,342 140,740
Additional paid-in capital................ 26,024 -- -- 69,107,568
Deferred compensation..................... -- -- (108,079) (108,079)
Treasury stock, at cost, 887,388 shares... -- -- (2,795,274) (2,795,274)
Accumulated other comprehensive income.... -- -- 466 466
Retained earnings (accumulated deficit)... 93,572 (2,671,316) (48,306,746) (48,306,746)
Notes receivable from stockholders........ -- (78,500) (78,500) (78,500)
-------- ----------- ------------ ------------
Total stockholders' equity
(deficit)........................ 159,361 (2,706,527) (51,243,791) 17,960,175
-------- ----------- ------------ ------------
Total liabilities and stockholders'
equity (deficit)................. $210,434 $ 3,069,689 $ 21,855,798 $ 21,855,798
======== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 84
OPENSITE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM INCEPTION
(JULY 24, YEAR ENDED SIX MONTHS ENDED
1996) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ---------------------- -------------------------
1996 1997 1998 1998 1999
-------------- -------- ----------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses............ $ 11,600 $177,234 $ 1,072,152 $ 499,030 $ 2,233,537
Services and other........... 863 162,469 208,393 84,686 352,582
---------- -------- ----------- ---------- ------------
Total revenue......... 12,463 339,703 1,280,545 583,716 2,586,119
---------- -------- ----------- ---------- ------------
Cost and operating expense:
Cost of software licenses.... -- 9,000 17,550 7,050 19,894
Cost of services and other... 1,209 19,010 130,939 17,978 493,496
Sales and marketing.......... -- 43,541 1,917,745 209,306 3,428,470
Product development.......... -- 105,054 695,282 172,088 1,309,826
General and administrative... 11,714 35,607 922,689 244,934 1,751,002
---------- -------- ----------- ---------- ------------
Total operating
expense............. 12,923 212,212 3,684,205 651,356 7,002,688
---------- -------- ----------- ---------- ------------
Operating income
(loss).............. (460) 127,491 (2,403,660) (67,640) (4,416,569)
---------- -------- ----------- ---------- ------------
Interest income (expense):
Interest income.............. 2 2,336 48,362 8,644 245,509
Interest expense............. (8) -- (5,419) -- (4,636)
---------- -------- ----------- ---------- ------------
Interest income
(expense), net........ (6) 2,336 42,943 8,644 240,873
---------- -------- ----------- ---------- ------------
Net income (loss)..... (466) 129,827 (2,360,717) (58,996) (4,175,696)
Distributions to preferred
stockholders................. -- -- (39,457) -- --
Accretion of preferred stock... -- -- (324,661) (54,076) (41,908,710)
---------- -------- ----------- ---------- ------------
Net income (loss)
available to common
stockholders........ $ (466) $129,827 $(2,724,835) $ (113,072) $(46,084,406)
========== ======== =========== ========== ============
Net income (loss) per common
share-basic and diluted...... $ 0.00 $ 0.03 $ (0.66) $ (0.03) $ (13.31)
========== ======== =========== ========== ============
Weighted average shares used in
basic and diluted net income
(loss) per common share
calculation.................. 3,578,947 3,877,465 4,106,066 3,976,608 3,461,142
========== ======== =========== ========== ============
Pro forma per common share data
(unaudited):
Pro forma net loss per common
share-basic and diluted.... $ (0.34) $ (0.38)
----------- ------------
Pro forma weighted average
basic and diluted shares
outstanding................ 6,885,824 10,863,771
----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 85
OPENSITE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NOTES ACCUMULATED
COMMON STOCK ADDITIONAL RECEIVABLE OTHER
------------------- PAID-IN DEFERRED FROM COMPREHENSIVE TREASURY
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS INCOME STOCK
--------- ------- ---------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at inception (July 24,
1996)......................... 3,578,946 $35,789 $ $ -- $ -- $ -- $ --
Net loss for the period from
inception (July 24, 1996) to
December 31, 1996............. -- -- -- -- -- -- --
--------- ------- --------- --------- -------- ---- -----------
Balance at December 31, 1996... 3,578,946 35,789 -- -- -- --
Issuance of common stock....... 397,661 3,976 26,024 -- -- -- --
Net income..................... -- -- -- -- -- -- --
--------- ------- --------- --------- -------- ---- -----------
Balance at December 31, 1997... 3,976,607 39,765 26,024 -- -- -- --
Dividends paid to S corporation
stockholders.................. -- -- -- -- -- -- --
Change from S-Corporation to
C-Corporation................. -- -- 93,572 -- -- -- --
Distribution to Series A
preferred stockholders........ -- -- -- -- -- -- --
Issuance of common stock....... 352,380 3,524 74,976 -- (78,500) -- --
Accretion of mandatorily
redeemable convertible
preferred stock............... -- -- (194,572) -- -- -- --
Net loss....................... -- -- -- -- -- -- --
--------- ------- --------- --------- -------- ---- -----------
Balance at December 31, 1998... 4,328,987 43,289 -- -- (78,500) -- --
Deferred compensation related
to grant of stock options
(unaudited)................... -- -- 118,450 (118,450) -- -- --
Amortization of deferred
compensation
Repurchase of common stock
(unaudited)................... -- -- -- -- (2,795,274)
Termination of put provision of
redeemable common stock
warrants (unaudited).......... -- -- 322,737 -- -- -- --
Exercise of warrants to
purchase common stock
(unaudited)................... 105,263 1,053 7,789 -- -- -- --
Accretion of mandatorily
redeemable convertible
preferred stock (unaudited)... -- -- (448,976) -- -- -- --
Net loss (unaudited)........... -- -- -- -- -- -- --
Other comprehensive income --
foreign currency translation
adjustment (unaudited)........ -- -- -- -- -- 466 --
--------- ------- --------- --------- -------- ---- -----------
Balance at June 30, 1999
(unaudited)................... 4,434,250 $44,342 $ -- $(108,079) $(78,500) $466 $(2,795,274)
========= ======= ========= ========= ======== ==== ===========
<CAPTION>
RETAINED TOTAL
EARNINGS STOCKHOLDERS'
(ACCUMULATED EQUITY
DEFICIT) (DEFICIT)
------------ -------------
<S> <C> <C>
Balance at inception (July 24,
1996)......................... $ (35,789) $ --
Net loss for the period from
inception (July 24, 1996) to
December 31, 1996............. (466) (466)
------------ ------------
Balance at December 31, 1996... (36,255) (466)
Issuance of common stock....... -- 30,000
Net income..................... 129,827 129,827
------------ ------------
Balance at December 31, 1997... 93,572 159,361
Dividends paid to S corporation
stockholders.................. (141,053) (141,053)
Change from S-Corporation to
C-Corporation................. (93,572) --
Distribution to Series A
preferred stockholders........ (39,457) (39,457)
Issuance of common stock....... -- --
Accretion of mandatorily
redeemable convertible
preferred stock............... (130,089) (324,661)
Net loss....................... (2,360,717) (2,360,717)
------------ ------------
Balance at December 31, 1998... (2,671,316) (2,706,527)
Deferred compensation related
to grant of stock options
(unaudited)................... -- --
Amortization of deferred
compensation
Repurchase of common stock
(unaudited)................... (2,795,274)
Termination of put provision of
redeemable common stock
warrants (unaudited).......... -- 322,737
Exercise of warrants to
purchase common stock
(unaudited)................... -- 8,842
Accretion of mandatorily
redeemable convertible
preferred stock (unaudited)... (41,459,734) (41,908,710)
Net loss (unaudited)........... (4,175,696) (4,175,696)
Other comprehensive income --
foreign currency translation
adjustment (unaudited)........ -- 466
------------ ------------
Balance at June 30, 1999
(unaudited)................... $(48,306,746) $(51,243,791)
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 86
OPENSITE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION YEAR ENDED SIX MONTHS ENDED
(JULY 24, 1996) DECEMBER 31, JUNE 30,
TO DECEMBER 31, ----------------------- -------------------------
1996 1997 1998 1998 1999
--------------- -------- ----------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................ $ (466) $129,827 $(2,360,717) $ (58,995) $ (4,175,696)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Bad debt expense............... -- 5,099 164,092 164,092 193,422
Depreciation expense........... 80 6,519 78,220 11,530 144,487
Deferred revenue............... -- -- 354,802 64,346 866,487
Non-cash consulting expense.... -- 17,000 54,221 -- 268,516
Amortization of deferred
compensation................. -- -- -- -- 10,371
Changes in operating assets and
liabilities:
Increase in accounts
receivable................ (863) (27,949) (443,691) (252,226) (923,360)
Increase (decrease) in
prepaid expenses and other
assets.................... -- (1,838) (70,785) (25,224) (323,262)
Increase (decrease) in
accounts payable.......... 2,949 16,553 56,040 53,889 73,039
Increase in accrued expenses
and taxes other than
income.................... -- 14,571 394,268 18,073 1,862,647
------ -------- ----------- --------- ------------
Net cash provided by (used in)
operating activities......... 1,700 159,782 (1,773,550) (24,515) (2,003,349)
------ -------- ----------- --------- ------------
Cash flows from investing
activities:
Purchases of property and
equipment...................... (715) (39,422) (387,610) (145,098) (329,337)
------ -------- ----------- --------- ------------
Net cash used in investing
activities................... (715) (39,422) (387,610) (145,098) (329,337)
------ -------- ----------- --------- ------------
Cash flows from financing
activities:
Repayment of note payable........ -- -- (17,000) (17,000) --
Principal payment on capital
lease obligation............... -- -- (9,875) -- (10,653)
Repurchase of common stock....... -- -- -- -- (2,795,274)
Repurchase of mandatorily
redeemable convertible
preferred stock................ -- -- -- -- (1,397,636)
Loan to officer.................. -- -- -- -- (300,000)
Dividends paid................... -- -- (180,510) (141,053) --
Proceeds from issuance of
mandatorily redeemable
convertible preferred stock,
net............................ -- -- 4,493,231 555,171 23,875,000
Proceeds from issuance of common
stock.......................... -- 30,000 -- -- --
Exercise of warrant to purchase
common stock................... 8,842
------ -------- ----------- --------- ------------
Net cash provided by financing
activities................... -- 30,000 4,285,846 397,118 19,380,279
------ -------- ----------- --------- ------------
Effect of changes in foreign
exchange currency on cash and
cash equivalents............. 466
------ -------- ----------- --------- ------------
Net increase in cash and cash
equivalents.................. 985 150,360 2,124,686 227,505 17,048,059
Cash and cash equivalents at
beginning of period.............. -- 985 151,345 151,345 2,276,031
------ -------- ----------- --------- ------------
Cash and cash equivalents at end of
period........................... $ 985 $151,345 $ 2,276,031 $ 378,850 $ 19,324,090
====== ======== =========== ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 87
OPENSITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND PRESENTATION
OpenSite Technologies, Inc. (the "Company") develops and markets Internet
auction technology that enables organizations to create branded, interactive,
real-time Internet auctions. The Company offers a range of products and services
including its OpenSite Auction software as well as its BidStream.com Web site.
The Company's predecessor was incorporated on July 24, 1996 in North Carolina
and was merged into OpenSite Technologies, Inc., a Delaware corporation, in
January 1998. All of the outstanding stock of the Company and its predecessor
were owned by the same group of stockholders at the date of the merger. The
individual stockholders owned the same percentage interest in the Company and
its predecessor before and after the merger. At the time of the merger, the
Company was non-operating and had no operating assets or liabilities.
Accordingly, this merger was accounted for in a manner similar to a pooling of
interests as the transaction represented a transfer of assets and liabilities
between entities under common control.
All of the Company's software licensing and services and other revenue
during the period from inception (July 24, 1996) through December 31, 1998 are
from sales transactions originating in the United States. Revenue from
international sales is insignificant for the six month period ended June 30,
1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements as of June 30, 1998 and 1999 and for the six month
periods then ended are unaudited and reflect all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of the Company's
management, necessary for a fair presentation of financial position, results of
operations and cash flows. All financial statement disclosures related to the
six month periods ended June 30, 1998 and 1999 are unaudited.
UNAUDITED PRO FORMA BALANCE SHEET
The board of directors has authorized the Company to file a registration
statement with the Securities and Exchange Commission permitting the Company to
sell shares of common stock in an initial public offering ("IPO"). If the IPO is
consummated as presently anticipated, all shares of the Series A, Series B, and
Series C convertible preferred stock will automatically convert into an equal
number of shares of common stock. The unaudited pro forma balance sheet reflects
the subsequent conversion of Series A, Series B, and Series C convertible
preferred stock into common stock as if such conversion had occurred as of June
30, 1999.
STOCK SPLIT
In August 1998, the Company declared a 6,959 for 1 stock split for all
common and preferred stockholders.
In July 1999, the Company approved a 1 for 2.1 reverse stock split which
will be effective upon the effective date of the Company's IPO. The financial
statements for all periods presented have been restated to reflect these
transactions.
F-7
<PAGE> 88
OPENSITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
BASIS OF CONSOLIDATION
The consolidated financial statements at June 30, 1999 include the accounts
of OpenSite Technologies, Inc. and its wholly-owned subsidiary, OpenSite Europe,
Ltd. All significant intercompany accounts and transactions have been
eliminated. Prior to April 1999, the Company had no subsidiaries.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less at date of purchase to be cash equivalents.
CASH FLOW
The Company had the following non-cash investing and financing activities
during 1998:
<TABLE>
<S> <C>
Non-cash investing and financing activities:
Capital lease obligations................................. $74,795
Issuance of common stock for notes receivable............. $78,500
</TABLE>
There were no non-cash financing and investing activities during the period
from inception (July 24, 1996) to December 31, 1996 or the year ended December
31, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, which are comprised of cash in demand
deposit accounts, accounts receivable, investments in short term commercial
paper and accounts payable, are carried at cost which approximates their fair
market value at December 31, 1997 and 1998.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Expenditures for maintenance and repairs are charged to
operations. Major expenditures for renewals and betterments are capitalized and
depreciated. Property and equipment under capital leases are initially recorded
at the present value of minimum lease payments at the inception of the lease.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the assets. Property and equipment held under capital leases and
leasehold improvements are amortized using the straight-line method over the
shorter of the estimated useful life of the asset or the lease term.
F-8
<PAGE> 89
OPENSITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation periods for property and equipment are as follows:
<TABLE>
<S> <C>
Computer equipment.......................................... 2-3 years
Furniture and fixtures...................................... 5 years
Leasehold improvements...................................... 1-3 years
Assets under capital leases................................. 1-3 years
</TABLE>
OTHER ASSETS
The costs of trademarks are capitalized and are amortized using the
straight-line method over the remaining lives of the trademarks from the date
the trademarks are purchased, which are up to ten years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its property and equipment and
other assets in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of,"
("SFAS No. 121"). SFAS No. 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the estimated
future undiscounted cash flows attributable to such assets or the business to
which such intangible assets relate. No impairments were required to be
recognized during the period from inception (July 24, 1996) to December 31, 1996
and the years ended December 31, 1997 and 1998 or the six month period ended
June 30, 1999.
INCOME TAXES
The Company accounts for income taxes using the liability method which
requires the recognition of deferred tax assets or liabilities for the temporary
differences between financial reporting and tax bases of the Company's assets
and liabilities and for tax carryforwards. A valuation allowance is recorded, if
necessary, to reduce net deferred tax assets to their realizable values if
management does not believe it is more likely than not that the net deferred tax
assets will be realized.
Prior to January 1, 1998, the Company had elected subchapter S status for
Federal income tax purposes and, accordingly, no income tax provision is
presented for periods prior to 1998 as income was taxable personally to the
stockholders.
REVENUE RECOGNITION
The Company's revenue is derived from software licenses as well as support
and maintenance, training and consulting services. The Company adopted American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") No. 97-2, "Software Revenue Recognition," as amended by SOP No. 98-4
effective January 1, 1998. The adoption did not have a material effect on the
timing of the Company's revenue recognition or cause changes to its revenue
recognition policies.
Revenue from software licenses is recognized when there is evidence of an
arrangement, the product has been shipped, fees are fixed and determinable and
collection of the related receivable is probable. Support and maintenance
revenue, which is included
F-9
<PAGE> 90
OPENSITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
in services and other revenue, is deferred and recognized ratably over the
service period. When software and services are sold under one contract, revenue
is allocated to each element based on their respective fair values, with these
fair values being determined using the price charged when that element is sold
separately. Partner fees, another component of services and other revenue, are
deferred and recognized ratably over a period of twelve months, which represents
the period of membership in the partnership program. At the end of each
partner's initial twelve months of membership, the Company has the ability to
unilaterally terminate a partner's participation in the program. Consulting and
training service revenue, which is also included in services and other revenue,
is deferred and recognized as the services are performed.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist of costs, including salaries and sales
commissions, of all personnel involved in the sales process. Sales and marketing
expenses also include costs of advertising, trade shows and certain indirect
costs.
SOFTWARE DEVELOPMENT COSTS
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed." Under the standard,
capitalization of software development costs begins upon the establishment of
technological feasibility, subject to net realizable value considerations. To
date, the period between achieving technological feasibility and the general
availability of such software has substantially coincided; therefore, software
development costs qualifying for capitalization have been immaterial.
Accordingly, the Company has not capitalized any software development costs and
has charged all such costs to product development expense.
ADVERTISING COSTS
All costs of advertising the services and products offered by the Company
are expensed as incurred. Advertising expense totaled $0, $16,475 and $200,713
for the period from inception (July 24, 1996) to December 31, 1996 and the years
ended December 31, 1997 and 1998, respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock based compensation based on the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB No. 25") which states that no compensation expense is recorded
for stock options or other stock-based awards to employees that are granted with
an exercise price equal to or above the estimated fair value per share of the
Company's common stock on the grant date. The Company has adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," ("SFAS No. 123") which requires compensation
expense to be recognized for disclosure purposes, based on the fair value of the
options granted at the date of the grant.
F-10
<PAGE> 91
OPENSITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
TRANSLATION OF FOREIGN FINANCIAL STATEMENTS
Assets and liabilities of foreign operations, where the functional currency
is the local currency, are translated into U.S. dollars at the rate of exchange
at each reporting date. Revenues and expenses are translated using the weighted
average exchange rate for the month in which the transactions occur. Gains and
losses from translating foreign currency financial statements are accumulated in
other comprehensive income.
SIGNIFICANT CUSTOMERS AND CREDIT RISK
The Company performs ongoing credit evaluations to reduce credit risk and
requires no collateral from its customers. Management estimates the allowance
for uncollectible accounts based on their credit evaluation.
NET LOSS PER COMMON SHARE
Historical
The Company computes net income (loss) per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
("SFAS No. 128") and SEC Staff Accounting Bulletin No. 98 ("SAB No. 98"). Under
the provisions of SFAS No. 128 and SAB No. 98, basic net income (loss) per
common share ("Basic EPS") is computed by dividing net income (loss) by the
weighted average number of common shares outstanding. Diluted net income (loss)
available to common stockholders per common share ("Diluted EPS") is computed by
dividing net income (loss) by the weighted average number of common shares and
dilutive common share equivalents then outstanding.
Pro forma (unaudited)
Pro forma net loss per common share is calculated assuming conversion of
all mandatorily redeemable convertible preferred stock which converts
automatically upon the completion of the initial public offering (see Note 9).
Therefore, accretion of mandatorily redeemable preferred stock of $324,661 and
$41,908,710 for the year ended December 31, 1998 and the six months ended June
30, 1999, respectively, and the distribution to preferred stockholders of
$39,457 during the year ended December 31, 1998 are excluded from the
calculation of pro forma net loss per common share. The calculations of pro
forma net loss per common share for the year ended December 31, 1998 and the six
months ended June 30, 1999 do not include 38,858 and 392,267 equivalent shares,
respectively, of common stock as their impact would be anti-dilutive.
COMPREHENSIVE INCOME (LOSS)
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130") effective January 1, 1998.
SFAS No. 130 requires the Company to display an amount representing
comprehensive income for the year in a financial statement which is displayed
with the same prominence as other financial statements. The Company had no items
of other comprehensive income (loss) during the years ended December 31, 1998
and 1997 and the period from inception
F-11
<PAGE> 92
OPENSITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(July 24, 1996) to December 31, 1996. The only item of other comprehensive
income during the six months ended June 30, 1999 is a foreign currency
translation adjustment.
SEGMENT DISCLOSURES
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). This statement requires
companies to report information about operating segments in annual financial
statements. It also requires segment disclosures about products and services,
geographic areas and major customers. The disclosures prescribed by SFAS No. 131
are effective for fiscal years beginning after December 15, 1997. Management has
determined that the Company does not have any separately reportable operating
segments as of December 31, 1998 or June 30, 1999.
SOFTWARE OBTAINED OR DEVELOPED FOR INTERNAL USE
In March 1998, the AICPA issued Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,"
("SOP No. 98-1") which provides guidance regarding when software developed or
obtained for internal use should be capitalized. SOP No. 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998.
Management expects that the adoption of SOP No. 98-1 will not have a material
impact on the Company's financial position or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the AICPA issued SOP No. 98-9, "Modification of SOP No.
97-2, Software Revenue Recognition, With Respect to Certain Transactions," ("SOP
No. 98-9"). SOP No. 98-9 amended SOP No. 97-2 to require recognition of revenue
using the "residual method" in circumstances outlined in SOP No. 97-2. Under the
residual method, revenue is recognized as follows: (1) the total fair value of
undelivered elements, as indicated by Vendor Specific Objective Evidence
("VSOE") is deferred and subsequently recognized in accordance with the relevant
sections of SOP No. 97-2 and (2) the difference between the total arrangement
fee and the amount deferred for the undelivered elements is recognized as
revenue related to the delivered elements.
SOP No. 98-9 is effective for fiscal years beginning after March 15, 1999.
Also, the provisions of SOP No. 97-2 that were deferred by Statement of Position
98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software
Revenue Recognition," ("SOP No. 98-4") will continue to be deferred until the
date SOP No. 98-9 becomes effective. The Company does not expect that the
adoption of SOP No. 98-9 will have a material impact on the Company's financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
is effective for financial statements for all fiscal quarters of all fiscal
years beginning after June 15, 1999. The
F-12
<PAGE> 93
OPENSITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company intends to adopt SFAS No. 133 when required; however, SFAS No. 133 is
not expected to have a material impact on the Company's financial position or
results of operations.
3. ACCOUNTS RECEIVABLE
Accounts receivable are presented net of an allowance for doubtful accounts
of $3,500, $108,500 and $276,182 at December 31, 1997 and 1998 and June 30,
1999, respectively.
Changes in the allowance for doubtful accounts consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS
------------------- ENDED
1997 1998 JUNE 30, 1999
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Allowance for doubtful accounts at beginning
of period................................. $ -- $ 3,500 $108,500
Additions charged to costs and expenses..... 5,099 164,092 193,422
Deductions.................................. (1,599) (59,092) (25,740)
------- -------- --------
Allowance for doubtful accounts at end of
period.................................... $ 3,500 $108,500 $276,182
======= ======== ========
</TABLE>
The Company had no allowance for doubtful accounts during 1996.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998 and June 30, 1999
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment....................... $34,139 $377,354 $ 650,885
Office furniture and equipment........... 5,998 87,944 133,624
Leasehold improvements................... -- 37,244 247,370
------- -------- ----------
40,137 502,542 1,031,879
Less accumulated depreciation............ (6,599) (84,819) (229,306)
------- -------- ----------
$33,538 $417,723 $ 802,573
======= ======== ==========
</TABLE>
F-13
<PAGE> 94
OPENSITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1997 1998 1999
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued compensation............................. $ -- $154,694 $ 318,280
Professional services............................ 3,000 96,532 623,502
Stock issuance costs............................. -- -- 43,061
New facility costs............................... -- -- 280,000
Marketing........................................ -- 116,264 1,131,385
Other............................................ 11,571 41,348 75,258
------- -------- ----------
$14,571 $408,838 $2,471,486
======= ======== ==========
</TABLE>
6. INCOME TAXES
There is no current income tax provision or benefit for the year ended
December 31, 1998 or the six months ended June 30, 1999 because the Company has
generated a net operating loss for which there is no carryback potential. There
is no deferred income tax provision or benefit recorded for the year ended
December 31, 1997 or the period from inception (July 24, 1996) to December 31,
1996 because prior to 1998, the Company had elected subchapter S status for
Federal income tax purposes. Therefore, the Company was not liable for income
taxes and all profit and loss was taxable to the shareholders.
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1998 consist of the following:
<TABLE>
<S> <C>
Deferred tax assets:
Domestic net operating loss carryforwards................. $709,084
Accounts receivable....................................... 42,261
Research and development credit........................... 37,783
Deferred revenue.......................................... 49,077
Compensation related items................................ 21,119
Other..................................................... 839
--------
Gross deferred tax assets.............................. 860,163
Less: Valuation allowance.............................. (859,698)
--------
Net deferred tax assets................................ 465
--------
Deferred tax liabilities:
Fixed and intangible assets............................... 465
--------
Total deferred tax liabilities.................... 465
--------
Net deferred tax asset (liability)..................... $ --
========
</TABLE>
For 1998, the Company has provided a full valuation allowance against its
net deferred tax assets since realization of these benefits could not be
reasonably assured. The increase in valuation allowance of $859,698 resulted
primarily from the generation of net operating loss carryforwards. There were no
deferred tax assets or liabilities for the year
F-14
<PAGE> 95
OPENSITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 1997 or the period ended December 31, 1996 because the
Company had elected subchapter S status prior to 1998.
As of December 31, 1998, the Company had Federal and state net operating
loss carryforwards of approximately $1,900,000. The net operating loss
carryforwards expire in various amounts starting in 2018 and 2013 for Federal
and state tax purposes, respectively. The utilization of the Federal net
operating loss carryforward may be subject to limitation under the rules
regarding a change in stock ownership as determined by the Internal Revenue
Code. If the Company's utilization of its net operating loss carryforwards is
limited, and the Company has taxable income which exceeds the permissible yearly
net operating loss carryforward, the Company would incur a Federal income tax
liability even though its net operating loss carryforwards exceed its taxable
income.
Taxes computed at the statutory Federal income tax rate of 34% are
reconciled to the provision for income taxes for the year ended December 31,
1998 as follows:
<TABLE>
<CAPTION>
% OF
PRETAX
AMOUNT LOSS
--------- ------
<S> <C> <C>
United States Federal tax at statutory rate................. $(753,344) (34)%
State taxes (net of federal benefit)........................ (62,301) (5)
Research and development credit............................. (37,783) (2)
Other, net.................................................. (6,270) (0)
Change in valuation allowance............................... 859,698 41
--------- ---
Provision for income taxes.................................. $ -- 0%
========= ===
</TABLE>
7. NOTE PAYABLE
During December 1997, the Company recorded a note payable to one of its
common stockholders for $17,000, related to the cost of terminating a consulting
agreement. This note accrued interest at 10% and was repaid in 1998.
8. CAPITAL STOCK
During the year ended December 31, 1998, the Company's Articles of
Incorporation were amended and restated to authorize 20,000,000 shares of common
stock with a par value of $0.01 and 9,175,439 shares of preferred stock with a
par value of $0.01, of which 4,175,439 were designated as Series A preferred
stock and 5,000,000 were designated as Series B preferred stock. In March 1999,
the Company's Articles of Incorporation were again amended and restated to
increase the number of authorized shares of common stock to 40,000,000, and to
authorize 12,000,000 shares of Series C preferred stock with a par value of
$0.01. At all times, the Company shall reserve a number of shares of unissued
common stock for the purpose of effecting the conversion of its issued and
outstanding shares of all series of preferred stock and the exercise of all
outstanding warrants and options to purchase the Company's common stock.
In August 1998, the Company issued 309,523 restricted shares of the
Company's common stock at a price of $0.21 per share to an employee of the
Company in exchange for a note payable to the Company of $65,000. In October
1998, the Company entered
F-15
<PAGE> 96
OPENSITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
into an agreement with another employee, whereby the employee was issued 42,857
restricted shares of common stock at a price of $0.32 per share in exchange for
a note payable to the Company of $13,500. If the employees are terminated for
"cause," as defined in their respective employment agreements, the Company has
the option to repurchase the shares at the original purchase price. If the
employees are terminated for "good reason," as defined in their respective
employment agreements, the Company has the option to repurchase the shares at
the greater of the original purchase price, or the fair value of the common
stock, according to the terms of the agreement. If the employees are terminated
"without cause," as defined in their respective employment agreements, the
employees have the right to sell the shares back to the Company at the greater
of the original purchase price or the fair market value of the stock, according
to the terms of the agreement.
At inception, the Company issued 3,578,946 shares of common stock to the
Company's founders. In April 1997, the Company sold 397,661 shares of common
stock in exchange for proceeds of $30,000.
9. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
In January 1998, the Company sold 1,988,304 shares of Series A preferred
stock in a private placement transaction in exchange for proceeds of $555,171,
net of issuance costs of $44,829. In August and September 1998, the Company sold
2,380,952 shares of Series B preferred stock in a private placement transaction
in exchange for proceeds of $3,938,060, net of issuance costs of $61,940.
In March 1999, the Company sold 5,119,047 shares of Series C preferred
stock in a private placement transaction for proceeds of $21,375,000, net of
issuance costs of $125,000. In April 1999, the Company sold an additional
595,238 shares of Series C preferred stock in a private placement transaction,
receiving proceeds of $2,500,000. Total proceeds from these transactions were
$23,875,000, net of issuance costs of $125,000.
In conjunction with the sale of the Series C preferred stock, the Company
repurchased, in March 1999, 887,388 shares of common stock at a purchase price
of $3.15 per share, 443,694 shares of Series A preferred stock at a purchase
price of $3.15 per share, and 26,845 warrants at a price of $3.15 per warrant,
less the exercise price of the warrant, for an aggregate purchase price of
$4,265,635.
As of December 31, 1998 and June 30, 1999, the Series A preferred stock had
an aggregate liquidation preference of $600,000 and the Series B preferred stock
had an aggregate liquidation preference of $4,000,000. As of June 30, 1999, the
Series C preferred stock had an aggregate liquidation preference of $32,250,000.
F-16
<PAGE> 97
OPENSITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
RIGHTS, PREFERENCES AND TERMS OF PREFERRED STOCK
The following is a summary of the rights, preferences, and terms of the
Company's outstanding series of preferred stock:
DIVIDENDS
The holders of the Series A, Series B, and Series C preferred stock shall
be entitled to receive dividends in any fiscal year in an amount determined by
the board of directors, when, and if declared by the board of directors in
accordance with Company's bylaws, as amended. No dividends may be paid to any of
the holders of shares of common stock or any of the individual series or holders
of the Company's Series A, Series B, or Series C preferred stock unless an
equivalent dividend has been declared and paid on all outstanding shares of the
Series A, Series B, and Series C preferred stock.
LIQUIDATION
In the event of any liquidation, dissolution, or winding up of the Company,
holders of Series C preferred stock are entitled to receive an amount equal to
$6.30 per share if such event were to occur prior to December 31, 1999, or an
amount equal to $8.40 per share if such event were to occur subsequent to
December 31, 1999. After payment has been made to the holders of Series C
preferred stock, the holders of Series A and Series B preferred stock are
entitled to receive an amount equal to $0.3018 and $1.68 per share,
respectively. In the event that assets of the Company are not sufficient to
provide payments to the holders of Series A and Series B preferred stock, any
remaining assets shall be distributed to holders of the Series A and Series B
preferred stock on a pro rata basis, based on their respective liquidation
preferences. After payments have been made to the holders of Series A, Series B,
and Series C preferred stock, the remaining assets of the Company will be
distributed to the holders of common stock.
CONVERSION
Each share of Series A, Series B, and Series C preferred stock is
convertible at the option of the holder into common shares of the Company at a
one to one conversion ratio, subject to certain adjustments as defined.
Conversion is automatic for holders of Series A, Series B, and Series C
preferred stock upon the closing of a firm commitment for an underwritten public
offering with net proceeds to the Company of at least $25,000,000. Conversion is
also automatic for any class of Series A, Series B, or Series C preferred stock
upon the election of holders of at least 75% of the total number of shares in
any class to convert their preferred shares into common shares.
VOTING
Holders of Series A, Series B, and Series C preferred shares have voting
rights on an as if converted basis.
REDEMPTION
In the event that the Series A, Series B, and Series C preferred stock has
not been converted into common stock prior to the fifth anniversary of the
issuance date of the
F-17
<PAGE> 98
OPENSITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Series C preferred stock, the Series A preferred shares or the Series B
preferred shares are redeemable at the option of at least a two-thirds vote of
the holders of the respective series, and the Series C preferred stock shall be
redeemable upon the written request of any holder of Series C preferred stock.
The redemption price for the Series A and Series B preferred stock shall be an
amount equal to the greater of the appraised per share value of the Company's
common stock, or an amount equal to the original purchase price plus an amount
equal to 12.5% per annum, less the aggregate amount of all dividends actually
paid since the issuance date. The redemption price for the Series C preferred
stock shall be two times the original purchase price.
As the redemption price of the Series A and Series B preferred stock is
variable in amount, its carrying value is adjusted to the redemption amount at
each balance sheet date. The Company recorded a charge to stockholders' equity
of $324,661 for the year ended December 31, 1998 and $41,908,710 for the six
months ended June 30, 1999 to reflect the Series A and Series B preferred stock
at its fair value.
10. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
In July 1998, the Company adopted a stock option plan (the "Plan") which
provided for the grant of up to 952,380 stock options. In May 1999, the Company
increased the number of options authorized under the Plan to 1,666,666. Stock
options granted under the Plan have exercise periods not to exceed ten years.
Options granted under the Plan during the year ended December 31, 1998 vest over
a period of four years.
The Company continues to apply APB No. 25 and related interpretations in
accounting for the Plan. Had compensation costs for the Plan been determined
based on the fair value at the grant dates for awards under the Plan consistent
with the methods of SFAS No. 123, the Company's net loss for the year ended
December 31, 1998 would have increased from $2,360,717 to $2,375,472. The
Company's net loss per share for the year ended December 31, 1998 would be the
same as reported under APB No. 25.
The fair value of each option is estimated on the grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the year ended December 31, 1998: risk free
interest of 5.5%, expected life of four years, dividend yield of 0%, and a
volatility factor of 0%.
F-18
<PAGE> 99
OPENSITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Plan as of December 31, 1998 and June 30,
1999 and changes during the year ended December 31, 1998 and the six months
ended June 30, 1999 is presented below:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
UNDERLYING EXERCISE
OPTIONS PRICE
---------- --------
<S> <C> <C>
Outstanding at December 31, 1997.......................... -- $ --
Granted................................................... 276,427 0.25
------- -----
Outstanding at December 31, 1998.......................... 276,427 0.25
Granted (unaudited)....................................... 342,381 6.82
Forfeited (unaudited)..................................... (7,141) .32
------- -----
Outstanding at June 30, 1999 (unaudited).................. 611,667 $3.93
======= =====
</TABLE>
The Company did not grant any stock options during the year ended December
31, 1997 or the period from inception (July 24, 1996) to December 31, 1996.
All options granted during the year ended December 31, 1998 were granted
with an exercise price equal to the fair value of the underlying common stock on
the grant date, as determined by the board of directors. During the six months
ended June 30, 1999, the Company recognized $118,450 in deferred compensation
related to options granted at an exercise price less than fair values. The
weighted average fair value of options granted during the year ended December
31, 1998 was $0.03. The following table summarizes information about the
Company's stock options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
AT DECEMBER 31, 1998
------------------------- OPTIONS EXERCISABLE
REMAINING --------------------------
NUMBER CONTRACTUAL DECEMBER 31, JUNE 30,
EXERCISE PRICE OUTSTANDING LIFE 1998 1999
- -------------- ----------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
$0.17........................ 126,666 9.5 years 9,365 29,265
$0.32........................ 149,761 10 years -- --
------- ----- ------
276,427 9,365 29,265
======= ===== ======
</TABLE>
WARRANTS
In August 1998, the Company entered into a consulting agreement with a
director of the Company. Pursuant to this agreement, the Company issued warrants
to purchase 120,300 shares of common stock at an exercise price of $0.44 per
share. These warrants expire on December 31, 2002. The Company also issued
warrants to this director to purchase 105,263 shares of common stock at an
exercise price of $0.10. The $0.10 warrants were subsequently exercised in April
1999. In the event that the holders of Series A preferred stock request the
redemption of their shares pursuant to the terms described in Note 9, this
director can elect to put any outstanding warrants back to the Company at the
per share redemption value of the Series A preferred stock, less the exercise
price of the warrants.
F-19
<PAGE> 100
OPENSITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended December 31, 1998 and the six months ended June 30,
1999, the Company recognized consulting expense of $54,221 and $268,516,
respectively, to reflect the increase in value of the put feature of these
warrants. In conjunction with the issuance of the Series C preferred stock and
the directors resignation from the board of directors in March 1999, the
warrants were amended such that the redemption provision expired on March 31,
1999. Accordingly, the carrying amount of the remaining outstanding warrants was
transferred to additional paid in capital as of that date.
11. COMMITMENTS
The Company entered into a capital lease for furniture and equipment that
expires in 2001. The gross amount of furniture and equipment and related
accumulated depreciation recorded under capital leases and included in property
and equipment was as follows at December 31, 1998:
<TABLE>
<S> <C>
Furniture and equipment..................................... $74,795
Less accumulated depreciation............................... (6,402)
-------
$68,393
=======
</TABLE>
There were no capital leases at December 31, 1997.
The Company also has several non-cancelable operating leases, primarily for
office space and office equipment, that extend through August 2001. Rental
expense, including maintenance charges, for operating leases during 1998 and
1997 was $72,295 and $7,227, respectively.
The future minimum lease payments under the non-cancelable lease agreements
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Year ending December 31:
1999..................................................... $ 30,588 $ 90,244
2000..................................................... 30,588 61,644
2001..................................................... 17,843 30,802
-------- --------
Total future minimum lease payments........................ 79,019 $182,690
========
Less amount representing interest.......................... (14,099)
--------
Present value of future minimum lease payments............. 64,920
Less current portion....................................... (22,155)
--------
Obligations under capital leases, excluding current
portion.................................................. $ 42,765
========
</TABLE>
In March 1999, the Company entered into an agreement with Protege Software
Limited ("Protege"), whereby Protege will provide a general manager for the
Company's European subsidiary, Opensite Europe Ltd., and will provide certain
back office and administrative functions. The initial term of the agreement is
an 18 month period beginning April 1, 1999. However, the agreement will be
automatically extended for a
F-20
<PAGE> 101
OPENSITE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
subsequent 12 month period unless the agreement is terminated by either Protege
or the Company.
The Company will pay Protege a fee of approximately $23,000 per month, plus
out-of-pocket costs, for these services. In addition, Protege can earn an
additional fee based on 7.5% of net revenue from support and maintenance
services and 15% of net revenue from software licensing related to sales within
Protege's territory, as defined in the agreement.
12. RELATED PARTY TRANSACTION
In March 1999, an officer of the Company borrowed $300,000 from the Company
in exchange for a promissory note due upon the earlier of the termination of the
officer's employment with the Company or December 31, 2002 with an interest rate
of 6% per annum. The promissory note is collateralized by 309,523 shares of
restricted stock owned by the officer.
13. SUBSEQUENT EVENT (UNAUDITED)
In July 1999, the Company determined that it would discontinue its product
development office in Buffalo, New York by December 31, 1999. In connection with
this office closing, the Company expects to incur a charge of approximately
$450,000 primarily related to severance and other compensation expense.
F-21
<PAGE> 102
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,681,800 SHARES
OPENSITE LOGO
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
HAMBRECHT & QUIST
THE ROBINSON-HUMPHREY COMPANY
SOUNDVIEW TECHNOLOGY GROUP
WACHOVIA SECURITIES, INC.
------------------------
, 1999
------------------------
You should rely only on information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any jurisdiction outside the United States. Persons who come
into possession of this prospectus in jurisdictions outside the United States
are required to inform themselves about and to observe any restrictions as to
this offering and the distribution of this prospectus applicable to that
jurisdiction.
Until , 1999, all dealers that buy, sell or trade in our
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This requirement is in addition to the dealers' obligation
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 103
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 12,510
National Association of Securities Dealers, Inc. fee........ 5,000
Nasdaq National Market listing fee.......................... 90,000
Accountants' fees and expenses.............................. 300,000*
Legal fees and expenses..................................... 250,000*
Blue Sky fees and expenses.................................. 5,000*
Transfer Agent's fees and expenses.......................... 20,000*
Printing and engraving expenses............................. 200,000*
Miscellaneous............................................... 7,490*
--------
Total Expenses.................................... $890,000*
========
</TABLE>
- -------------------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Restated Certificate of Incorporation limits personal liability for
breach of the fiduciary duty of its directors to the fullest extent provided by
the General Corporation Law of the State of Delaware. Such provisions provide
that no director of OpenSite shall have personal liability to us or to our
stockholders for monetary damages for breach of fiduciary duty of care or other
duty as a director. However, such provisions shall not eliminate or limit the
liability of a director
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for voting or assenting to unlawful distributions; or
- for any transaction from which the director derived an improper personal
benefit.
Any amendment, modification or repeal of such provisions will not eliminate
or reduce the effect of such provisions in respect of any act or failure to act,
or any cause of action, suit or claim that would accrue or arise prior to any
amendment, repeal or adoption of such an inconsistent provision. If the General
Corporation Law of the State of Delaware is subsequently amended to provide for
further limitations on the personal liability of directors of corporations for
breach of duty of care or other duty as a director, then the personal liability
of the directors of OpenSite will be so further limited to the greatest extent
permitted by the General Corporation Law of the State of Delaware.
Section 7 of the Underwriting Agreement filed as Exhibit 1.1 hereto also
contains certain provisions pursuant to which certain officers, directors and
controlling persons of the Company may be entitled to be indemnified by the
underwriters named therein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The share numbers presented below are provided with respect to our shares
of common stock and Series A preferred stock, Series B preferred stock and
Series C preferred stock and reflect (1) various stock splits and (2) the
recapitalization of the Series A preferred stock, Series B preferred stock and
Series C preferred stock into common stock, which will occur immediately prior
to completion of this offering.
II-1
<PAGE> 104
In January 1998, we sold an aggregate 1,544,610 shares of Series A
preferred stock to Auction Ventures, LLC for an aggregate offering price of
$600,000. This issuance of securities was deemed to be exempt from registration
under the Securities Act of 1933, as amended, in reliance on Section 4(2)
thereof.
In August 1998, we sold 309,523 shares of restricted common stock to Kip A.
Frey for an aggregate offering price of $65,000. This issuance of securities was
deemed to be exempt from registration under the Securities Act of 1933, as
amended, in reliance on Rule 701 promulgated hereunder.
In August 1998, we issued warrants to purchase an aggregate 198,719 shares
of common stock to Bandrowski Enterprises LLC in exchange for services. This
issuance of securities was deemed to be exempt from registration under the
Securities Act of 1933, as amended, in reliance on Section 4(2) thereof.
In August and September 1998, we sold an aggregate 2,380,952 shares of
Series B preferred stock to Intersouth Partners IV, L.P., Noro-Moseley Partners,
L.P., Southeast Interactive Technology Fund II, LLC, and Wakefield Group II, LLC
for an aggregate offering price of $4,000,000. This issuance of securities was
deemed to be exempt from registration under the Securities Act of 1933, as
amended, in reliance on Section 4(2) thereof.
In October 1998, we sold 42,857 shares of restricted common stock to James
R. Ford for an aggregate offering price of $13,500. This issuance of securities
was deemed to be exempt from registration under the Securities Act of 1933, as
amended, in reliance on Rule 701 promulgated hereunder.
In March and April 1999, we sold an aggregate 5,714,285 shares of Series C
preferred stock to CNET, Inc., GE Capital Equity Investments, Inc., Intersouth
Partners IV, L.P., Noro-Moseley Partners, IV, L.P., Noro-Moseley Partners IV B,
L.P., Societe Generale Capital Corporation, Southeast Interactive Technology
Fund II, LLC, and Wakefield Group II, LLC for an aggregate offering price of
$24,000,000. This issuance of securities was deemed to be exempt from
registration under the Securities Act of 1933, as amended, in reliance on
Section 4(2) thereof.
Recipients of securities in these transactions represented their intention
to acquire the securities for investment purposes only and not with a view to or
for the sale in connection with any distribution of those securities, and we
affixed appropriate legends to the share certificates issued in those
transactions. All recipients of these securities had adequate access, through
their relationships with us or otherwise, to information about us.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
1.1* -- Form of Underwriting Agreement.
3.1* -- Amended and Restated Certificate of Incorporation of the
Registrant.
3.3* -- Amended and Restated Bylaws of the Registrant.
4.1* -- See Exhibits 3.1 and 3.3 for provisions of the Amended and
Restated Certificate of Incorporation and Amended and
Restated Bylaws of the Registrant defining rights of the
holders of Common Stock of the Registrant.
4.2* -- Specimen Stock Certificate.
</TABLE>
II-2
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
5.1+ -- Opinion of Morris, Manning & Martin, L.L.P., Counsel to the
Registrant, as to the legality of the shares being
registered.
10.1* -- Office Space Lease dated May 15, 1998 by Ticon, Inc. and
OpenSite.
10.2* -- Office Space Lease dated August 31, 1998 by Ticon
Properties, LLC and OpenSite.
10.3* -- Commercial Lease (Office) dated October 26, 1998 by and
between K.K.G.R.H. Assoc. L.P. and OpenSite.
10.4* -- Office Space Lease dated February 16, 1999 by Ticon
Properties, LLC and OpenSite.
10.5* -- OpenSite Stock Option Plan.
10.6* -- Amendment No. 1 to OpenSite Stock Option Plan.
10.7* -- Amended and Restated Executive Employment Agreement dated as
of July 8, 1999 by and between OpenSite and Kip A. Frey.
10.8* -- Amended and Restated Restricted Stock Agreement dated as of
July 8, 1999 by and between OpenSite and Kip A. Frey.
10.9* -- Registration Rights Agreement dated as of March 30, 1999.
10.10* -- Agreement dated as of March 30, 1999, by and between
OpenSite and Kip A. Frey
10.11* -- Pledge Agreement, dated as of March 30, 1999, by and among
OpenSite, Kip A. Frey and Gross, Shuman, Brizdle &
Gilgillan, P.C.
10.12* -- Form of Indemnity Agreement.
10.13* -- Form of OpenSite Business Partner Agreement.
10.14* -- Form of OpenSite Concierge Auction Hosting and Services
Agreement.
10.15* -- Form of License Agreement.
10.16* -- Office Space Lease commencement date July 1, 1999 by CMD
Properties, Inc. and OpenSite.
16.1** -- Letter from KPMG LLP, dated July , 1999.
21.1* -- List of Subsidiaries.
23.1+ -- Consent of PricewaterhouseCoopers LLP.
23.2+ -- Consent of Morris, Manning & Martin, L.L.P. (included in
Exhibit 5.1).
24.1* -- Powers of Attorney (included on signature page).
27.1* -- Financial Data Schedule (for SEC use only).
</TABLE>
- -------------------------
+ Filed herewith.
* Previously filed.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and
II-3
<PAGE> 106
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(ii) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 107
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Raleigh, State of North
Carolina on the 26th day of July, 1999.
OPENSITE TECHNOLOGIES, INC.
By: /s/ KIP A. FREY
-----------------------------------
Kip A. Frey
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kip A. Frey and Richard E. Widin and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and any subsequent registration
statements pursuant to Rule 462 of the Securities Act and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorney-in-fact
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ KIP A. FREY President, Chief Executive July 26, 1999
- -------------------------------- Officer (Principal Executive
Kip A. Frey Officer) and Director
* Vice President and Chief July 26, 1999
- -------------------------------- Financial Officer (Principal
Timothy K. Oakley Financial and Accounting
Officer)
* Director July 26, 1999
- --------------------------------
Justin Hall-Tipping
* Director July 26, 1999
- --------------------------------
Roger Hurwitz
* Director July 26, 1999
- --------------------------------
Mark Jauquet
</TABLE>
II-5
<PAGE> 108
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director July 26, 1999
- --------------------------------
Ross B. Kenzie
Director
- --------------------------------
Mitchell Mumma
* Director July 26, 1999
- --------------------------------
Alan J. Taetle
*By: /s/ KIP A. FREY
- --------------------------------
Kip A. Frey,
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 109
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
1.1* -- Form of Underwriting Agreement.
3.1* -- Amended and Restated Certificate of Incorporation of the
Registrant.
3.3* -- Amended and Restated Bylaws of the Registrant.
4.1* -- See Exhibits 3.1 and 3.3 for provisions of the Amended and
Restated Certificate of Incorporation and Amended and
Restated Bylaws of the Registrant defining rights of the
holders of Common Stock of the Registrant.
4.2* -- Specimen Stock Certificate.
5.1+ -- Opinion of Morris, Manning & Martin, L.L.P., Counsel to the
Registrant, as to the legality of the shares being
registered.
10.1* -- Office Space Lease dated May 15, 1998 by Ticon, Inc. and
OpenSite.
10.2* -- Office Space Lease dated August 31, 1998 by Ticon
Properties, LLC and OpenSite.
10.3* -- Commercial Lease (Office) dated October 26, 1998 by and
between K.K.G.R.H. Assoc. L.P. and OpenSite.
10.4* -- Office Space Lease dated February 16, 1999 by Ticon
Properties, LLC and OpenSite.
10.5* -- OpenSite Stock Option Plan.
10.6* -- Amendment No. 1 to OpenSite Stock Option Plan.
10.7* -- Amended and Restated Executive Employment Agreement dated as
of July 8, 1999 by and between OpenSite and Kip A. Frey.
10.8* -- Amended and Restated Restricted Stock Agreement dated as of
July 8, 1999 by and between OpenSite and Kip A. Frey.
10.9* -- Registration Rights Agreement dated as of March 30, 1999.
10.10* -- Agreement dated as of March 30, 1999, by and between
OpenSite and Kip A. Frey
10.11* -- Pledge Agreement, dated as of March 30, 1999, by and among
OpenSite, Kip A. Frey and Gross, Shuman, Brizdle &
Gilgillan, P.C.
10.12* -- Form of Indemnity Agreement.
10.13* -- Form of OpenSite Business Partner Agreement.
10.14* -- Form of OpenSite Concierge Auction Hosting and Services
Agreement.
10.15* -- Form of License Agreement.
10.16* -- Office Space Lease commencement date July 1, 1999 by CMD
Properties, Inc. and OpenSite.
16.1** -- Letter from KPMG LLP, dated July , 1999.
21.1* -- List of Subsidiaries.
23.1+ -- Consent of PricewaterhouseCoopers LLP.
23.2+ -- Consent of Morris, Manning & Martin, L.L.P. (included in
Exhibit 5.1).
</TABLE>
<PAGE> 110
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
24.1* -- Powers of Attorney (included on signature page).
27.1* -- Financial Data Schedule (for SEC use only).
</TABLE>
- ------------------------------
+ Filed herewith.
* Previously filed.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 5.1
July 26, 1999
OpenSite Technologies, Inc.
2800 Meridian Parkway
Durham, North Carolina 27713
Re: Registration Statement on Form S-1
Gentlemen:
We have acted as counsel for OpenSite Technologies, Inc., a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended, pursuant to a Registration Statement on Form
S-1 (the "Registration Statement"), of a proposed offering of an aggregate of
3,681,800 shares of the Company's common stock, $.01 par value per share (the
"Company Shares"). In addition, the Company has granted to the underwriters an
option to purchase 477,270 shares of Common Stock to cover over-allotments, if
any (the "Over-Allotment Shares").
We have examined such documents, corporate records, and other instruments
as we have considered necessary and advisable for purposes of rendering this
opinion.
In making the foregoing examinations, we have assumed the genuineness of
all signatures and the authenticity of all documents submitted to us as
originals, and the conformity to original documents of all documents submitted
to us as certified or photostatic copies. As to various questions of fact
material to this opinion, we have relied, to the extent we deem reasonably
appropriate, upon representations or certificates of officers or directors of
the Company and upon documents, records and instruments furnished to us by the
Company, without independent check or verification of their accuracy.
Based upon and subject to the foregoing, we are of the opinion that the
Company Shares and any Over-Allotment Shares being sold by the Company, when
issued, sold and delivered as contemplated in the Registration Statement, will
be duly authorized and validly issued and fully paid and nonassessable.
We hereby consent to the filing of this Opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus contained in the Registration Statement.
Very truly yours,
MORRIS, MANNING & MARTIN
a Limited Liability Partnership
By: /s/ Grant W. Collingsworth
-------------------------------------
Grant W. Collingsworth, Partner
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated May 25, 1999 relating to the financial statements of OpenSite
Technologies, Inc., which appear in such Registration Statement. We also consent
to the references to us under the headings "Experts" and "Selected Financial
Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
July 26, 1999
