<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 8, 2000
REGISTRATION NO. 333-79629
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
OPENSITE TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<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>
------------------------
2800 MERIDIAN PARKWAY
DURHAM, NORTH CAROLINA 27713
(919) 287-0200
(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) 287-0200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
GRANT W. COLLINGSWORTH, ESQ. FRED D. HUTCHISON, ESQ. JOHN B. TEHAN, ESQ.
BRANDY A. BAYER, 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, 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 MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE REGISTRATION
SECURITIES REGISTERED OFFERING PRICE(1) FEE(2)
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<S> <C> <C>
Common Stock, $.01 par value $75,000,000 $19,800
- --------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457 under the Securities Act of 1933, as amended.
(2) Includes $13,874 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 PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.
THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN
OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE
IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED , 2000.
Shares
[OPENSITE LOGO]
Common Stock
------------------------
This is an initial public offering of shares of common stock of OpenSite
Technologies, Inc. All of the shares of common stock are being sold by
OpenSite.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price will be
between $ and $ per share. Application has been made for quotation of
the common stock on the Nasdaq National Market under the symbol "OPNS".
See "Risk Factors" beginning on page 6 to read about factors you should
consider before buying shares of our common stock.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to OpenSite...................... $ $
</TABLE>
To the extent that the underwriters sell more than shares of
common stock, the underwriters have the option to purchase up to an additional
shares from OpenSite at the initial public offering price less
the underwriting discount.
At our request, the underwriters have reserved for sale at the initial
public offering price up to an aggregate of shares in this
offering as follows:
- up to shares to The Chase Manhattan
Corporation;
- up to shares to CNET, Inc.;
- up to shares to Excite@Home;
- up to shares to InfoSpace.com, Inc.;
- up to shares to TransCosmos, Inc.; and
- up to shares to VerticalNet.
------------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
GOLDMAN, SACHS & CO.
CHASE H&Q
THE ROBINSON-HUMPHREY COMPANY
WIT SOUNDVIEW
------------------------
Prospectus dated , 2000.
<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: "Where Dynamic Commerce
Begins(TM)"
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(R) Technologies, a provider of online auction software and services, is
enabling the dynamic commerce revolution. Founded in 1996, OpenSite was the
first company to offer packaged online auction applications.
Our powerful scalable suite of products, outsourcing solutions and services
enable small, medium and large businesses to create branded, Internet-based
dynamic commerce sites. By having delivered over 600 licensed and outsourced
auction solutions to businesses worldwide, OpenSite brings together buyers and
sellers, helping businesses dynamically manage inventory, establish sales
channels, build dynamic marketplaces, attract customers, and test market new
products to create efficient markets for goods and services.
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 enabling software, services and content that create
the defacto standard for businesses offering branded, Web-based dynamic
commerce.
At the bottom left corner of the page is the word "OpenSite" and below it is
the following text: "Where Dynamic Commerce Begins."
2. At the top of the front gate fold is the following text: "OpenSite
Technologies: Enabling the Dynamic Commerce Revolution"
On the left side of the page and centered vertically are three paragraphs
including the following text: "The Internet enables online auctions and dynamic
commerce to offer more products to more people - all without geographic
limitations and in real time.
Our combination of software, outsourcing solutions, services and content
aggregation provides a self-reinforcing, full spectrum of dynamic commerce
solutions for leading corporations in a range of industries.
From easy entry into the online auction marketplace with an out-of-the-box
product, to fully outsourced turn-key services, to supporting enterprise needs
with customizable dynamic pricing applications, OpenSite offers a full range of
dynamic pricing solutions for businesses of all sizes."
In the left center section of the page is the screenshot 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 page are words formed in a circle which are "Software,"
"Services" and "Content Aggregation."
"At the top right corner of the page is the screen shot of a web page for
VerticalNet. Beneath the webpage is the following text: OpenSite provides a
full suite of dynamic pricing software products to customers, which range in
functionality, to support businesses with a variety of needs. From packaged
auction applications that are easy to use and fast to implement, to our Dynamic
Pricing Toolkit, which enables customers to build integrated and customized
dynamic pricing applications, OpenSite has a flexible product to meet a full
range of business needs. For example, VerticalNet uses OpenSite software to
create vertical net markets (or dynamic marketplaces) within its trading
communities."
"At the bottom right center section of the page is a screen shot of a web page
for [Seece & Company Machinefinder]. To the left of the web page is the
following text: "OpenSite offers comprehensive dynamic pricing services from
hosting to professional support. We act as an Application Service Provider
without OpenSite Concierge service provides an outsourced, turn-key option for
business wanting a customized, branded online auction with minimal upfront
investment ensuring fast time to market. In addition, we also offer integration
and application development through our Professional Services organization. For
example, Deere & Company utilizes OpenSite Concierge service to host
Machinefinderauction.com, which allows customers to bid on used equipment posted
for auction by Deere & Company dealers."
At the bottom right corner of the page is the word "OpenSite" and beneath it are
the words "Where Dynamic Commerce Begins."
<PAGE> 4
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." Unless otherwise stated, this
prospectus assumes no exercise of the underwriters' over-allotment option and
the conversion of all outstanding shares of our preferred stock into shares of
common stock upon the effectiveness of this offering.
OpenSite enables online auctions and other dynamic pricing solutions. By
having delivered over 600 licensed and outsourced auction solutions to
customers, we believe we have provided more solutions than any other auction
software or services provider. We provide a variety of cost-effective software
and services that enable businesses to create branded, Internet-based
business-to-business and business-to-consumer auctions on their own Web sites.
Our products and services automate the process of installing, running and
maintaining real-time Internet auctions. We believe we are the only company
offering dynamic pricing through licensed software, services and comprehensive
outsourcing solutions to a full range of small, medium and large businesses. 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.
We commenced operations and introduced our first auction software product
in 1996. In 1998, we recognized total revenue of $1.3 million and incurred a net
loss of $2.4 million. In 1999, we recognized total revenue of $7.9 million and
incurred a net loss of $12.2 million. As of December 31, 1999, our accumulated
deficit was $67.6 million, $53.5 million of which was attributable to accretion
on mandatorily redeemable preferred stock.
The Internet enables market information to be disseminated more quickly, in
greater quantity and to a wider audience than has previously 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 "dynamic commerce" -- the real-time
determination of the elements of a transaction, including price, quantity,
qualitative attributes and delivery terms. Dynamically priced auctions, in which
prices are determined by buyers and sellers on a transaction-by-transaction
basis, are among the most well known forms of dynamic commerce. The Internet
auction market initially gained acceptance in person-to-person transactions.
However, by 2003 Forrester Research expects that only $6.4 billion is expected
to be generated from online person-to-person online auction transactions, while
$12.6 billion is expected to be generated from business-to-consumer online
auction transactions. Forrester Research expects that business-to-business
electronic commerce as a whole will be $2.7 trillion in 2004. These sales will
occur through a variety of transaction mechanisms, many of them utilizing an
online auction or dynamic pricing model. A December 1999 Forrester Research
report estimates that 74% of the business-to-business electronic marketplaces in
which such sales occur will utilize more than one transaction mechanism,
including auctions, within two years. We plan to expand on our market position
in the online auction and dynamic pricing market by providing enabling
infrastructure for businesses to operate other forms of dynamic commerce,
including demand aggregation, online procurement, market making and other new
electronic commerce marketplace business models.
We provide businesses with a number of dynamic pricing product choices
based on their level of sophistication and their need to have a scalable, robust
solution that will integrate with other systems within their organizations. The
OpenSite family of software products, including OpenSite Auction, AuctionNow and
Dynamic Pricing Toolkit, as well as the OpenSite Concierge outsourcing and
hosting service, enables businesses of all sizes to set up and conduct auctions
1
<PAGE> 5
on the Internet. We also provide related consulting, education and technical
support services both directly and through our indirect sales channel. We act as
an Application Service Provider with our OpenSite Concierge service offering,
which 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.
BidStream.com also provides valuable customer profiling information for demand
analysis. 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 Nortel
Networks, John Deere, The Chase Manhattan Bank, Excite@Home, QVC, CNET,
Hewlett-Packard -- Asia (Regional Hub), The Sharper Image, British Airways and
VerticalNet. OpenSite and its products have received the following awards and
recognition: "Best of Show" for Outstanding E-commerce Applications -- Fall
Internet World 1999 and Fall Internet World 1998, "Software Company of the
Year" -- North Carolina Electronics and Information Technologies Association,
"Five Star Rating" -- Internet.com, "Analyst's Choice" -- PC Week magazine,
"Products to Watch" -- Fortune Tech Buyers Guide, "Honorable Mention" -- Spring
Internet Commerce Expo 1999 and "Best of Class" in Web-based Selling -- Fall
Internet Commerce Expo 1998. A description of the criteria and other information
regarding these awards can be found under "Business -- Products and Services."
We have entered into a letter of intent to acquire Bidder's Edge, Inc., a
leading auction portal with over 3 million page views per month that aggregates
over 5 million items from over 150 auction sites. BiddersEdge.com is a scalable
search engine that uses proprietary technology to create a single directory that
conveniently categorizes auction items. BiddersEdge.com also provides enhanced
content, including news, information and featured items for bid, to over 300,000
unique monthly auction users. If we complete our acquisition of Bidder's Edge,
we plan to incorporate our BidStream.com aggregated content into a combined
BiddersEdge.com product offering. We expect BidStream.com to significantly
enhance the business-to-business auction content of BiddersEdge.com and to
accelerate its position as a provider of aggregated content for businesses. We
believe that the acquisition of Bidder's Edge, if consummated, will accelerate
the strength of our business model by significantly expanding the content,
functionality, customer reach, time to market and market position of our
products and services.
In December 1999, we entered into an agreement with Excite@Home to jointly
create an auction network through its business-to-business sites, Work.com and
Excitestorebuilder.com. Under the agreement, Excite@Home will offer and
distribute auction and dynamic pricing functionality to its visitors through its
business-to-business sites using our AuctionNow software. We will also produce
co-branded BidStream.com Web sites. Benefits from the alliance consist of
multi-year technology license fees from Excite@Home, recurring auction
application service fees from Excite@Home, advertising from the auction network
and co-branded pages, as well as aggregation of Excite@Home's customers' auction
items into BidStream.com. As part of this relationship, we have also agreed to
purchase advertising and services from Excite@Home in escalating annual amounts
ranging from $4 million to $6 million over three years, subject to specified
exceptions, to our achievement of minimum annual revenues from the arrangement.
During the second half of 1999, OpenSite entered into merger negotiations
with InfoSpace.com, Inc., an Internet information infrastructure company that
provides enabling technologies and Internet services for Web sites and Internet
appliances. In October 1999, it was announced that instead of a merger, the two
companies would enter into discussions regarding a potentially broad ranging
business and technology relationship. To date, no definitive agreement
2
<PAGE> 6
between the two companies has been reached. InfoSpace has indicated an interest
in participating in our directed shares program.
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) 287-0200. Our World Wide Web address is
www.opensite.com.
"OpenSite" and "AuctionWatch" are registered trademarks of OpenSite, and
"AuctionNow," "Dynamic Pricing Toolkit," "Dynamic Pricing Engine," "OpenSite
Auction," "BidStream," "OpenSite Concierge" and "Where Dynamic Commerce Begins"
are trademarks of OpenSite. This prospectus also includes trademarks, service
marks and trade names of other companies.
THE OFFERING
Shares offered by OpenSite.......... shares
Shares to be outstanding after the
offering............................ shares
Use of proceeds..................... We intend to use the net proceeds from
the offering primarily for expansion of
our business and for general corporate
purposes. See "Use of Proceeds."
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 as of December
31, 1999. This number does not take into account 1,813,622 shares of our common
stock subject to options outstanding under our stock option plan and 196,257
shares of common stock subject to outstanding warrants as of December 31, 1999.
3
<PAGE> 7
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following financial data at December 31, 1999 and for the years ended
1997, 1998 and 1999 is a summary of the more complete financial information
provided in our financial statements and accompanying notes appearing elsewhere
in this prospectus. The statement of operations data for the period from
inception to December 31, 1996 has been derived from our audited financial
statements, which are not included 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 statement of
operations for the year ended December 31, 1999 gives effect to our proposed
acquisition of Bidder's Edge as if such transaction had been consummated on
January 1, 1999 using the pooling-of-interests method of accounting. This
statement of operations is presented for illustrative purposes only and is not
necessarily indicative of what our results of operations would have been had
this transaction been consummated on January 1, 1999 or our future results of
operations. The pro forma balance sheet data gives effect to the proposed
acquisition of Bidder's Edge as if the transaction had been consummated as of
December 31, 1999 and accounted for as a pooling-of-interests and the conversion
of all outstanding shares of mandatorily redeemable convertible preferred stock
into common stock. The pro forma as adjusted balance sheet is adjusted to give
effect to:
- our sale of shares of common stock offered at an assumed
initial public offering price of $ per share; and
- the receipt of the estimated net proceeds from the sales.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 24, 1996) YEAR ENDED DECEMBER 31,
TO -------------------------------------------
DECEMBER 31, PRO FORMA
1996 1997 1998 1999 1999
--------------- ---- ---- ---- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.................. $ 12 $ 340 $ 1,281 $ 7,878 $ 7,878
Gross profit................... 11 312 1,132 6,015 6,015
Operating income (loss)........ 0 127 (2,404) (12,804) (15,965)
Net income (loss).............. 0 130 (2,361) (12,205) (15,206)
Net income (loss) available to
common stockholders......... -- 130 (2,725) (65,369) (15,206)
Basic and diluted net income
(loss) available to common
stockholders per common
share....................... $0.00 $0.02 $ (0.32) $ (8.34) $ (0.46)
Weighted average shares used in
computing basic and diluted
net income (loss) per common
share....................... 7,516 8,143 8,623 7,838 32,882
</TABLE>
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<PAGE> 8
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and investments........... $ 10,599 $17,365 $
Working capital..................................... 8,323 14,064
Total assets........................................ 14,948 22,756
Mandatorily redeemable convertible preferred
stock............................................ 80,459 --
Total stockholders' equity (deficit)................ (70,512) 16,687
</TABLE>
5
<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 a variety of
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 and
our OpenSite Concierge service in 1999. We expect this evolution to continue in
response to the rapidly changing market for Internet products. Our revenue has
historically been generated primarily from the sale of auction software products
and outsourced auction solutions. In the future, we expect to generate revenue
from multiple sources, including dynamic commerce solutions and BidStream.com.
For us, this business model is unproven. We will be successful only if consumers
and businesses purchase our software products and actively use our dynamic
commerce solutions, BidStream.com and our OpenSite Concierge service. It is
impossible to predict the degree to which consumers and businesses will purchase
our software products or use these services.
As a result of our limited operating history and the emerging nature of the
dynamic commerce 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. With the recent launch of a new line of
dynamic commerce-enabled products, our sales cycle is lengthening, but
forecasting sales, although improving is still 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 or expand losses.
WE ANTICIPATE INCURRING CONTINUED LOSSES FOR THE FORESEEABLE FUTURE.
We incurred a net loss of $2.4 million in 1998, representing 184% of total
revenue. We incurred a net loss of $12.2 million in 1999, representing 155% of
total revenue. As of December 31, 1999, we had incurred cumulative net losses of
$14.4 million. As of December 31, 1999, our accumulated deficit was $67.6
million, $53.5 million of which was attributable to accretion on mandatorily
redeemable preferred stock. 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 brands;
- developing new products and services;
- increasing marketing and promotional activities;
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<PAGE> 10
- establishing and expanding our direct and indirect sales channels, both
domestically and internationally;
- 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 OPERATING RESULTS MAY ADVERSELY AFFECT OUR STOCK PRICE.
We expect that our operating results will fluctuate significantly in the
future. These fluctuations are likely to occur from quarter-to-quarter as well
as over longer periods. These fluctuations may be due to many factors,
including:
- the level of demand for online auction solutions;
- the development of the electronic commerce market;
- increasing competition;
- our ability to grow recurring services revenue and increase our services
revenue mix;
- performance of resellers;
- timely release of new products and product upgrades;
- ability to attract sales, marketing and development expertise in an
increasingly competitive market;
- 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 solutions, 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 44% from quarter to quarter in
1999. 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 future periods 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 DYNAMIC COMMERCE DOES NOT CONTINUE TO GROW, OUR BUSINESS MAY
SUFFER.
Our success is highly dependent upon the widespread acceptance and use of
the Internet for dynamic 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 for auctions and other dynamic commerce solutions is still at an
early stage of development. We cannot be certain that acceptance of online
auctions and other dynamic commerce solutions will continue to develop. Any
material reduction in the growth of acceptance and use of dynamic commerce could
have a material adverse effect on our business.
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The continued growth of online dynamic commerce 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 businesses 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 sales and revenue growth. 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.
IF OUR NEW PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, OUR CONTINUED GROWTH MAY
BE ADVERSELY AFFECTED.
We introduced our Dynamic Pricing Toolkit and AuctionNow products in the
second half of 1999. In addition, we intend to introduce new versions of these
products and our OpenSite Auction product in 2000. We cannot be certain that
these new products will achieve market acceptance. The introduction of new
products is an important component of our strategy to address the needs of the
expanding dynamic commerce market. To this end, we have expended considerable
resources on product development. If our new products fail to gain acceptance in
the dynamic commerce market, our sales and revenue growth could be materially
and adversely affected.
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. The failure of BidStream.com to be a commercial
success could have a material adverse effect on our future operating results.
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OUR ACQUISITION OF BIDDER'S EDGE HAS NOT, AND MAY NOT BE, COMPLETED.
We have entered into a letter of intent to acquire Bidder's Edge, Inc.
Consummation of this acquisition is subject to approval of our board of
directors and the negotiation of a definitive merger agreement, which will
require a significant amount of management attention and resources. We cannot be
certain that the proposed acquisition will be completed, or if completed, that
it will be accounted for as a pooling-of-interests. If the transaction is
completed but not accounted for as a pooling-of-interests, we will be required
to record the acquisition at fair value resulting in future charges to our
operations through amortization of the resulting intangible assets. If this
acquisition is not completed, we will recognize little or no benefit from our
efforts.
LITIGATION INVOLVING BIDDER'S EDGE MAY ADVERSELY AFFECT OUR BUSINESS.
Bidder's Edge aggregates the business-to-business, business-to-consumer and
person-to-person auction content from numerous online auction sites. eBay, a
person-to-person online auction community, has filed a lawsuit in United States
federal court against Bidder's Edge, alleging that Bidder's Edge cannot include
auction content from eBay's Web site without its permission. Bidder's Edge has
countersued making various antitrust and unfair business practice claims against
eBay. Bidder's Edge has informed us that it believes this lawsuit to be without
merit and intends to vigorously defend this matter. However, if eBay is
successful on the merits, and if Bidder's Edge is unable to license online
auction content from eBay, the online auction content Bidder's Edge aggregates
will be reduced, which could have a material adverse effect on its revenues.
IF WE FAIL TO SUCCESSFULLY INTEGRATE BIDDER'S EDGE WITH OUR OPERATIONS AND
PRODUCT OFFERINGS, OUR OPERATIONS AND EARNINGS MAY BE ADVERSELY AFFECTED.
If our acquisition of Bidder's Edge is completed, additional management
attention and resources will be required to integrate the operations and product
offerings of Bidder's Edge with BidStream.com and our other operations. These
efforts may require the diversion of resources from other business
opportunities. In addition, this integration may require greater financial
resources than anticipated. We cannot assure you that we will integrate Bidder's
Edge in an efficient or cost-effective manner. The failure to successfully
integrate Bidder's Edge could have a material adverse effect on our operations
and earnings.
BIDSTREAM.COM MAY ENCOUNTER SERVICE INTERRUPTIONS.
As we continue our marketing efforts for BidStream.com, the number of items
listed for bid and number of visitors is likely to increase, placing greater
demands on this Web site. As a result, BidStream.com may encounter system
interruptions that could cause it to be unavailable for extended periods. These
interruptions could reduce BidStream.com's attractiveness to businesses and
bidders, which could have a material adverse effect on our ability to develop
BidStream.com into a successful business model.
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
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brand, or if we incur substantial expenses in attempting to do so, our earnings
could be materially and adversely affected.
COMPETITION COULD REDUCE OUR MARKET SHARE AND ADVERSELY AFFECT OUR OPERATING
RESULTS.
The online auction and dynamic commerce solutions markets are new, rapidly
evolving and intensely competitive. 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. Historically, we have competed in the online auction
solutions market, which includes the following competition:
- dynamic pricing software providing low-end solutions that compete with
our entry-level auction software, including Auction Broker, Beyond
Solutions and Emaze;
- enterprise-level auction software that competes with OpenSite Auction,
AuctionNow and the Dynamic Pricing Toolkit, including IBM's WebSphere
product, formerly known as net.Commerce, Moai Technologies, Trading
Dynamics, recently acquired by Ariba, CommerceBid, recently acquired by
Commerce One and WebVision;
- Web sites that feature auction aggregation that compete with
BidStream.com, including Bidder Network, Bidder's Edge, AuctionRover.com
and BidFind;
- person-to-person online auction communities, including those operated by
Amazon.com, Auction Universe, eBay, ONSALE, recently acquired by Egghead
and uBid; and
- outsourced auction-hosting services that compete with our OpenSite
Concierge service as well as our OpenSite Auction and AuctionNow
products, including Bidder Network, Bidland and FairMarket.
With our new Dynamic Pricing Toolkit and other products and services that
are under development, we are now also competing in the larger realm of dynamic
commerce. Competition in this area includes:
- destination sites that aggregate buyers and sellers into consolidated
groups to gain market advantages and efficiencies, including Mercata,
Accompany and NexTag;
- dynamic commerce solutions to automate the process for a buyer and seller
to engage in a bid-and-ask process to sell and procure products,
including those offered by Tradex, recently acquired by Ariba; and
- online procurement applications that typically have single buyers posting
items for intended purchase and multiple sellers bidding for the sale in
a reverse auction, including those offered by Commerce One and Ariba
through their recent acquisitions.
Currently, we do not have any products or services designed to meet the
needs addressed by these destination sites or bid-and-ask solutions.
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 ability
to maintain or expand our market share.
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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 eBay and Amazon.com, have expanded to offer auction
solutions that compete with our products and services and may 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. In addition, Oracle,
which has significant market presence, has made initial efforts to establish an
electronic marketplace for procurement for the automotive industry which may be
expanded to compete with our solutions. 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 ability to maintain or expand our market share.
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. Within
the past year, we have established relationships with CNET, Excite@Home, Exodus
Communications, i-Escrow.com, Intershop Communications, FreightQuote.com,
TaxWare and Open Market. We cannot assure you that these relationships will be
successful. In addition, we intend to invest financial and management resources
in
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developing these relationships. If we do not generate additional revenue through
these relationships to offset our investment, our earnings could be materially
and adversely affected.
LONGER SALES CYCLES MAY ADVERSELY AFFECT OUR BUSINESS.
Increasing sales of higher-end auction solutions, particularly OpenSite
Auction, AuctionNow and our Dynamic Pricing Toolkit 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 60-90 days. We
expect our typical sales cycle to expand to as many as 90-180 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 materially and 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 dynamic
commerce 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. All our
products, including Dynamic Pricing Toolkit, AuctionNow and OpenSite Auction,
will require periodic updates to accommodate changes in Internet technology as
well as dynamic commerce standards. A failure to update our products to adapt to
technological changes or competitive pressures could adversely affect sales of
these products. 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 information
technology 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 revenue 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 sales and marketing
efforts. In addition, our products typically
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are 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 earnings and liquidity.
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, which continued
with the introduction of our products in Asia. 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, Japan Entry,
LLC to accelerate our expansion into the Japanese market and The Promar Group,
LLC to assist our entry into other markets in Asia and in Latin America. 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;
- difficulties localizing software for markets that require localization;
- 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;
- fewer protections of proprietary rights;
- foreign currency exchange rate fluctuations; and
- regional economic conditions.
We may not be successful in further 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 over the past year 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
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our 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. Failure to identify, hire and retain
necessary technical, managerial and marketing personnel could have a material
adverse effect on our operations.
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
products and services through the acquisition of existing products,
technologies, services and businesses in the dynamic commerce market. Other than
our proposed acquisition of Bidder's Edge, 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 adversely affect our earnings and liquidity.
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. Many jurisdictions do have laws and regulations
governing auctions generally and the licensing and liability of auctioneers. A
few jurisdictions have indicated that these laws apply to online auctions as
well. 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. 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.
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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 Dynamic Pricing Toolkit, AuctionNow
and OpenSite Auction products, in our OpenSite Concierge service and in our
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 asserted claim will not require us to enter
into a license agreement, 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.
In two instances we have received notices claiming that our technology
infringed the intellectual property rights of others. While in one instance we
have been offered a license to the intellectual property in question, we have
declined that offer because we believe that no infringement exists. The second
allegation claimed infringement of a patent application. Since the patent has
not been issued, it cannot have been infringed. We are currently unable to
assess any potential claims that may exist if the patent is issued.
In addition, effective copyright and trademark protection may be
unenforceable or limited in some 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 and
require the use of substantial management attention and resources.
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 or the misuse of private
information by our customers 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 and services. Some customers may use our products
to auction items that are subject to regulation by local, state or federal
authorities, such as firearms, alcohol, pharmaceuticals, and tobacco. We cannot
be certain that unlawful goods will not be sold using our products. 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.
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POTENTIAL YEAR 2000 PROBLEMS COULD ADVERSELY AFFECT OUR BUSINESS.
Many currently installed computer systems and software products were
originally coded to accept only two digit entries in the date code field. Prior
to corrective reprogramming, these systems could not reliably distinguish dates
beginning on January 1, 2000 from dates prior to the year 2000. At and since
January 1, 2000, year 2000 problems have not been significant and wide-spread
computer failures have not materialized. Year 2000 problems could still occur,
especially on February 29, 2000, at quarter end and at year end. Our products
operate with third-party equipment and software that may prove not to be year
2000 compliant. In addition, we cannot guarantee that the systems of our
suppliers or service providers are year 2000 compliant. Year 2000 problems could
still have a material adverse effect on our ability to conduct our business
efficiently and productively.
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 operating results. 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.
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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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
shares of our common stock, excluding shares to be issued in connection
with our proposed acquisition of Bidder's Edge, assuming no exercise of the
underwriters' over-allotment option and assuming no exercise of outstanding
options. Of these shares, the 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 27,734,844 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.
These shares of restricted securities may be eligible for sale in the public
market in accordance with the requirements of Rule 144. In addition, the letter
of intent provides for the issuance of 8,941,307 shares of restricted securities
in connection with our acquisition of Bidder's Edge. The holders of these shares
will be entitled to rights with respect to the registration of these shares
under the Securities Act. See "Description of Capital Stock -- Registration
Rights" and "Shares Eligible for Future Sale."
Upon completion of this offering, the holders of 20,243,681 shares of our
common stock and the holder of 196,257 shares of our common stock issuable upon
the exercise of warrants, or their transferees, will be entitled to rights with
respect to the registration of these 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
$ . There is 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 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
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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.
18
<PAGE> 22
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 and revenue mix;
- future profitability;
- development and expansion of our products and services;
- trends in Internet activity generally and trends in online auctions,
dynamic pricing and dynamic commerce 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;
- proposed acquisition of Bidder's Edge;
- impact and integration of acquisitions; 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 shares of common stock
in this offering are estimated to be approximately $ . Our net proceeds
are estimated to be approximately $ if the underwriters exercise their
over-allotment option in full. These estimates have been made assuming an
initial public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated expenses payable by us in
connection with this offering.
The principal purposes of this offering are to increase our working
capital, create a public market for our stock and facilitate our future access
to the public capital markets. We have no specific plans for the net proceeds of
this offering other than for general corporate purposes and working capital. Our
use of these net proceeds will be in the discretion of our management. We may,
for example, use a portion of the net proceeds to acquire complementary
technologies or businesses. However, except for our proposed acquisition of
Bidder's Edge, we have no specific agreements, commitments or understandings
with respect to any acquisitions. Pending application of the net proceeds as
described above, we intend to invest the net proceeds of the offering primarily
in short-term, investment-grade, interest-bearing securities.
19
<PAGE> 23
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.
20
<PAGE> 24
CAPITALIZATION
The following table sets forth the capitalization of OpenSite as of
December 31, 1999:
- on an actual basis;
- on a pro forma basis giving effect to: (1) the proposed acquisition of
Bidder's Edge as if the transaction had been consummated as of December
31, 1999 and accounted for as a pooling-of-interests and (2) the
conversion of all outstanding shares of mandatorily redeemable preferred
stock into common stock; and
- on a pro forma as adjusted basis to reflect the sale of
shares of common stock offered at an assumed initial public offering
price of $ 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 3,500,000 shares of common stock presently
reserved for issuance upon exercise of options granted under our stock option
plan, of which options to purchase 1,813,622 shares were outstanding as of
December 31, 1999 at a weighted average exercise price of $3.14 per share. The
amounts below also exclude 196,257 shares of common stock subject to warrants
outstanding as of December 31, 1999 at an exercise price of $0.21 per share.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
------ --------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Mandatorily redeemable preferred stock, $.01 par value,
21,175,439 shares authorized:
Series A -- 3,243,681 shares issued and outstanding
actual, none issued and outstanding pro forma and pro
forma as adjusted..................................... $ 23,769 $ --
Series B -- 5,000,000 shares issued and outstanding
actual, none issued and outstanding pro forma and pro
forma as adjusted..................................... 30,140 --
Series C -- 12,000,000 shares issued and outstanding
actual, none issued and outstanding pro forma and pro
forma as adjusted..................................... 26,550 --
-------- ------- ----
Total mandatorily redeemable preferred stock............ 80,459 --
-------- ------- ----
Stockholders' equity (deficit):
Common stock, $.01 par value, 75,000,000 shares
authorized, 9,354,678 shares issued and
outstanding actual; 36,676,151 shares issued
and outstanding pro forma; and
shares issued and outstanding pro forma
as adjusted........................................... 94 367
Additional paid-in capital.............................. -- 88,341
Deferred compensation................................... (94) (245)
Treasury stock at cost, 1,863,515 shares actual, no
shares pro forma and pro forma as adjusted............ (2,795) --
Accumulated other comprehensive income.................. (1) (1)
Accumulated deficit..................................... (67,637) (71,696)
Notes receivable from stockholders...................... (79) (79)
-------- ------- ----
Total stockholders' equity (deficit).................... (70,512) 16,687
-------- ------- ----
Total capitalization...................................... $ 9,947 $16,687
======== ======= ====
</TABLE>
21
<PAGE> 25
DILUTION
As of December 31, 1999, the pro forma net tangible book value of OpenSite
was approximately $9.9 million, or $0.36 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 shares of common stock
in this offering at an assumed initial public offering price of $ per
share and the receipt of the estimated net proceeds, the pro forma net tangible
book value of OpenSite at December 31, 1999, would have been approximately
$ , or $ per share of common stock. This represents an
immediate increase in net tangible book value of $ per share to
existing stockholders and an immediate decrease in net tangible book value of
$ 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............. $--
Pro forma net tangible book value per share at December
31, 1999............................................... $0.36
Increase attributable to the offering..................... --
Pro forma adjusted net tangible book value per share after
the offering.............................................. --
Net tangible book value dilution per share to new investors
in the offering........................................... $
===
</TABLE>
The following table summarizes, as of December 31, 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 shares of common stock in
the offering at an assumed initial public offering price of $ per share
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)..... 27,734,844 $24,603,188 $ 0.89
New investors................ $ $
----------- --------
Total................... % $ % $
=========== === =========== === ========
</TABLE>
- ---------------
(1) The consideration received from existing stockholders excludes accretion on
mandatory redeemable convertible securities of $53,488,191. The number of
shares purchased excludes shares held in treasury.
Assuming full exercise of the underwriters' over-allotment option, the
percentage of shares held by existing stockholders would be % 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
shares, or % of the total number of shares of common stock to be
outstanding after the offering.
22
<PAGE> 26
These computations are based on the number of shares of common stock
outstanding as of December 31, 1999 and exclude:
- 3,500,000 shares of common stock presently reserved for issuance
upon exercise of options granted under our stock option plan, of
which options to purchase 1,813,622 shares were outstanding as of
December 31, 1999 at exercise prices ranging from $0.08 to $5.24 per
share and a weighted average exercise price of $3.14 per share;
- 196,257 shares of common stock presently reserved for issuance upon
exercise of warrants outstanding as of December 31, 1999 at an
exercise price of $0.21 per share; and
- any shares that may be issued in connection with our proposed
acquisition of Bidder's Edge.
The exercise of options and warrants will have the effect of increasing the
net tangible book value dilution of new investors in this offering.
23
<PAGE> 27
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data set forth below should be read in conjunction
with the combined pro forma financial statements appearing elsewhere in this
prospectus, 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 statements of operations data for the
years ended December 31, 1997, 1998 and 1999 and the balance sheet data as of
December 31, 1998 and 1999 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 statement of operations data
for the period from inception to December 31, 1996 and the balance sheet data as
of December 31, 1996 and 1997 have been derived from our audited financial
statements which are not included in this prospectus. The historical results are
not necessarily indicative of results to be expected in the future.
The pro forma statement of operations for the year ended December 31, 1999
gives effect to our proposed acquisition of Bidder's Edge as if such transaction
had been consummated on January 1, 1999 using the pooling-of-interests method of
accounting. This pro forma statement of operations is presented for illustrative
purposes only and is not necessarily indicative of what our actual results of
operations would have been had this transaction been consummated on January 1,
1999, or of our future results of operations. The pro forma balance sheet data
gives effect to the proposed acquisition of Bidder's Edge as if the transaction
had been consummated as of December 31, 1999 and accounted for as a
pooling-of-interests and the conversion of all outstanding shares of mandatorily
redeemable preferred stock into common stock. The pro forma as adjusted balance
sheet data is adjusted to give effect to our sale of shares of common
stock offered at an assumed initial public offering price of $ per share,
and the receipt of the estimated net proceeds from the sale.
24
<PAGE> 28
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR ENDED DECEMBER 31,
(JULY 24, 1996) ------------------------------------------
TO DECEMBER 31, PRO FORMA
1996 1997 1998 1999 1999
------------------ ---- ---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software licenses..................... $ 11 $ 177 $ 1,072 $ 6,437 $ 6,437
Services and other.................... 1 163 209 1,441 1,441
------ ------ ------- -------- --------
Total revenue...................... 12 340 1,281 7,878 7,878
Cost of revenue:
Cost of software licenses............. -- 9 18 456 456
Cost of services and other............ 1 19 131 1,407 1,407
------ ------ ------- -------- --------
Total cost of revenue.............. 1 28 149 1,863 1,863
------ ------ ------- -------- --------
Gross Profit............................ 11 312 1,132 6,015 6,015
------ ------ ------- -------- --------
Operating expense:
Sales and marketing................... -- 43 1,918 10,629 11,589
Product development................... -- 105 695 2,980 4,375
General and administrative............ 11 36 923 5,210 6,016
------ ------ ------- -------- --------
Total operating expense............ 11 184 3,536 18,819 21,980
------ ------ ------- -------- --------
Operating income (loss)................. 0 128 (2,404) (12,804) (15,965)
Interest income, net.................... -- 2 43 599 759
------ ------ ------- -------- --------
Net income (loss)....................... 0 130 (2,361) (12,205) (15,206)
Distributions to preferred
stockholders.......................... -- -- (39) -- --
Accretion of preferred stock............ -- -- (325) (53,164) --
------ ------ ------- -------- --------
Net income (loss) available to common
stockholders.......................... $ 0 $ 130 $(2,725) $(65,369) $(15,206)
====== ====== ======= ======== ========
Basic and diluted net income (loss)
available to common stockholders per
common share.......................... $ 0.00 $ 0.02 $ (0.32) $ (8.34) $ (0.46)
------ ------ ------- -------- --------
Shares used in computing basic and
diluted net income (loss) per share... 7,516 8,143 8,623 7,838 32,882
------ ------ ------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
1996 1997 1998 1999 1999 1999
---- ---- ---- ---- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and
investments..................... $ 1 $151 $2,276 $ 10,599 $17,365
Working capital (deficit)......... (1) 141 1,780 8,322 14,064
Total assets...................... (2) 210 3,070 14,948 22,756
Long-term debt and capital lease
obligations, net of current
portion......................... -- 17 43 -- --
Mandatorily redeemable convertible
preferred stock................. -- -- 4,818 80,459 --
Total stockholders' equity
(deficit)....................... -- 159 (2,707) (70,512) 16,687
</TABLE>
25
<PAGE> 29
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 a full line of online auctions and other dynamic pricing
software solutions. We commenced operations and introduced our first auction
software product in 1996. By having delivered over 600 licensed and outsourced
auction solutions to customers, we believe we have provided more solutions than
any other auction software or services provider. We provide a variety of
cost-effective software and services that enable businesses to create branded,
Internet-based business-to-business and business-to-consumer auctions and other
dynamic pricing solutions on their own Web sites. Our products and services
automate the process of installing, running and maintaining real-time Internet
auctions within the dynamic commerce-pricing environment. We offer licenses,
services and comprehensive outsourcing solutions to a full range of small,
medium and large businesses. OpenSite brings together buyers and sellers,
helping businesses establish sales channels, manage inventory, attract
customers, introduce new products and strengthen customer and other business
relationships.
The OpenSite Auction family of software products enables businesses 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. The AuctionNow
software product enables commercial Internet Service Providers, Application
Service Providers and Internet portals to host multiple online auctions that can
be rented to their customers. The Dynamic Pricing Toolkit product provides a set
of programmer's tools for building highly customizable auction sites that can be
integrated with other enterprise applications. We have historically sold our
software directly to our customers, but are increasing the proportion that is
sold through resellers and systems integrators. We also provide related
consulting, education and technical support services. Additionally, we act as an
Application Service Provider through our OpenSite Concierge service, which
allows 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 will
contribute a growing portion of revenue in the future. As of December 31, 1999,
we had 107 full-time employees.
OpenSite's revenue is currently derived primarily from software license
fees and support and maintenance fees. Historically, our direct sales force
generated the predominant portion of our software license revenue and support
and maintenance revenue. However, with the initiation of sales through resellers
in late 1998, approximately 15% of our revenue in 1999 resulted from sales
generated by our resellers. We expect that sales through resellers will increase
as a percentage of sales in 2000. 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 12 to 24 months, in
future years we expect to generate an increasing portion of our revenue from
services and recurring revenue streams such as BidStream.com, distributor and
transaction fees from our alliance partners, and our outsourcing solution,
OpenSite Concierge. Revenue from BidStream.com will consist of advertising and
sponsorship fees, fees charged to participating auction sites and other fees
associated with
26
<PAGE> 30
enabling transactions and building community and interaction among businesses
and consumers. We expect that BidStream.com will begin to generate advertising
fees and participation fees during 2000. Our OpenSite Concierge service began
generating fees in the second quarter of 1999 consisting of monthly service fees
for auction site creation, hosting and administration services. Service fees
consist primarily of one-time setup fees, fixed monthly charges and to a lesser
extent revenue sharing arrangements.
Our revenue grew significantly in 1999. Software license revenue has
increased from $921,000 for the first quarter of 1999 to $2.5 million for the
fourth quarter of 1999, representing a 169% increase. Services and other revenue
has increased from $129,000 for the first quarter of 1999 to $678,000 for the
fourth quarter of 1999, representing a 425% increase.
Transition of our product development efforts from our Buffalo, New York
office to our Durham, North Carolina headquarters was completed on November 30,
1999. In connection with this closing of the Buffalo, New York office, we
incurred a charge of approximately $373,000 during 1999, primarily relating to
severance and other compensation expense.
In December 1999, we entered into an agreement with Excite@Home to jointly
create an auction network through their business-to-business sites, Work.com and
Excitestorebuilder.com. Under the agreement, Excite@Home will offer and
distribute auction and dynamic pricing functionality to its visitors through its
business-to-business sites using our AuctionNow software. We will also produce
co-branded BidStream.com Web sites. Benefits from the alliance consist of
multi-year technology license fees from Excite@Home, recurring auction
application fees from Excite@Home customers, advertising fees from the auction
network and co-branded pages, as well as aggregation of Excite@Home's customers'
auction items into BidStream.com. OpenSite and Excite@Home will share recurring
application service fees from Excite@Home and advertising revenue from the
auction network and the co-branded pages. We will receive 75% of advertising
revenue until we receive at least $2 million in total revenue from this
relationship. Thereafter, we will receive 50% of such revenue. As part of this
relationship, we have also agreed to purchase at least $4 million in advertising
and services from Excite@Home prior to March 31, 2001, an additional $5 million
in advertising and services prior to March 31, 2002, and an additional $6
million in advertising and services prior to March 31, 2003. However, subject to
specified exceptions, we will not be obligated to purchase advertising after
March 31, 2002 unless we have received by that time at least $5 million in
payments from the above-mentioned revenue sources.
Software license revenue is generated through the licensing of our software
products to end users, directly and through resellers. We offer a variety of
levels of our OpenSite software products with increasingly sophisticated
functionality. The current base list prices for our auction solution products
range from $5,000 to $250,000 based on the complexity of solution and customer
requirements. We expect that these prices may increase as we further penetrate
the large business market and expand our product and service offerings. 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 our outsourcing service, OpenSite
Concierge, business relationship fees, 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 $50,000
based on the level of the software product sold and the level of support
selected. OpenSite Concierge and business relationship fees are recognized as
services
27
<PAGE> 31
are performed. 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
outsourcing services, costs of consulting and customer support and maintenance,
including personnel, travel and occupancy and maintenance of the BidStream.com
Web site.
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.
Product development expense consists primarily of compensation for product
development staff and overhead costs.
General and administrative expense consists primarily of compensation for
personnel, facility and other overhead costs and, to a lesser extent, fees for
outside professional advisors.
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.
Web site development costs have been accounted for in accordance with AICPA
Statement of Position No. 98-1, "Accounting for the Costs of Software Developed
or Obtained for Internal Use." This standard was adopted effective January 1,
1999. To date, the costs of developing and maintaining the Company's Web site
has been insignificant and, therefore, all amounts incurred in developing and
maintaining the Web site have been expensed as incurred to product development
expense.
28
<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>
YEAR ENDED DECEMBER
31,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software licenses......................................... 52% 84% 82%
Services and other........................................ 48 16 18
--- ---- ----
Total revenue.......................................... 100 100 100
--- ---- ----
Cost of revenue:
Cost of software licenses................................. 3 1 6
Cost of services and other................................ 5 10 18
--- ---- ----
Total cost of revenue.................................. 8 11 24
--- ---- ----
Gross Profit................................................ 92 89 76
--- ---- ----
Operating Expense:
Sales and marketing....................................... 13 150 135
Product development....................................... 31 54 38
General and administrative................................ 10 72 66
--- ---- ----
Total operating expense..................................... 54 276 239
--- ---- ----
Operating income (loss)..................................... 38 (187) (163)
Interest, net............................................... -- 3 8
--- ---- ----
Net income (loss)........................................... 38% (184)% (155)%
=== ==== ====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUE
Total revenue increased by 515% to $7.9 million in the year ended December
31, 1999 from $1.3 million in the year ended December 31, 1998.
Software license revenue increased by 500% to $6.4 million in the year
ended December 31, 1999 from $1.1 million in the year ended December 31, 1998.
The number of software licenses sold increased to 386 in the year ended December
31, 1999 from 106 in the year ended December 31, 1998. As a percentage of total
revenue, software license revenue decreased to 82% in the year ended December
31, 1999 from 84% in the year ended December 31, 1998. The increased sale of
licenses was a result of our increased sales and marketing efforts combined with
the market acceptance and popularity of auctions and dynamic pricing on the
Internet.
Services and other revenue increased by 591% to $1.4 million in the year
ended December 31, 1999 from $208,000 in the year ended December 31, 1998. This
increase was due primarily to the support and maintenance associated with higher
license volumes and our OpenSite Concierge service, which began generating
revenues in the second quarter of 1999. As a percentage of total revenue,
services and other revenue increased to 18% in the year ended December 31, 1999
from 16% in the year ended December 31, 1998. The dollar increase was primarily
driven as a result of the increase in license sales to 386 in the year ended
December 31, 1999 from 106 in the year ended December 31, 1998. Secondarily, the
dollar increase and higher services mix was driven by the introduction of our
outsourcing solution
29
<PAGE> 33
during April 1999, which accounted for 22%, or $319,000 of the services revenue
in the year ended December 31, 1999.
COST OF REVENUE
Cost of software license revenue increased by 2,500% to $456,000 in the
year ended December 31, 1999 as compared to $18,000 in the year ended December
31, 1998. As a percentage of software license revenue, cost of software license
revenue increased to 7% in the year ended December 31, 1999 from 2% in the year
ended December 31, 1998. Cost of software license increased primarily as the
result of the increase in software licensing activity and royalties associated
with encryption and transaction processing components licensed by us and
included with our software. The increase in the royalties associated with this
embedded software is the primary reason for the increase in the cost of software
license revenue as a percentage of software license revenue.
Cost of services and other revenue increased by 974% to $1.4 million in the
year ended December 31, 1999 from $131,000 in the year ended December 31, 1998.
As a percentage of services and other revenue, cost of services and other
revenue increased to 98% in the year ended December 31, 1999 from 63% in the
year ended December 31, 1998. These increases resulted primarily from the
increase in the number of employees providing support and maintenance to 24 at
December 31, 1999 from five at December 31, 1998. Cost of services and other
revenue increased at a greater rate than services and other revenue as we
expanded the infrastructure for OpenSite Concierge and continued the expansion
of our support and maintenance group in advance of recognizing corresponding
services and other revenue.
SALES AND MARKETING
Sales and marketing expense increased by 454% to $10.6 million in the year
ended December 31, 1999 from $1.9 million in the year ended December 31, 1998.
As a percentage of total revenue, sales and marketing expense decreased to 135%
in the year ended December 31, 1999 from 150% in the year ended December 31,
1998. Sales and marketing expense increased by $8.7 million primarily as a
result of increases in expenditures for promotion of OpenSite's brand, growth of
our global sales force and support of general marketing of our products and
services. Sales and marketing employees increased to 44 at December 31, 1999
from 15 at December 31, 1998.
PRODUCT DEVELOPMENT
We expense product development costs as they are incurred. Product
development expense increased by 329% to $3.0 million in the year ended December
31, 1999 from $695,000 in the year ended December 31, 1998. As a percentage of
total revenue, product development expense decreased to 38% in the year ended
December 31, 1999 from 54% in the year ended December 31, 1998. Product
development expense increased primarily as a result of the number of employees
in the product development group increasing to 36 through November 30, 1999 from
20 at December 31, 1998. We reduced headcount by 13 in December 1999 primarily
due to the consolidation of our Buffalo office into our North Carolina office.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased by 465% to $5.2 million in the
year ended December 31, 1999 from $923,000 in the year ended December 31, 1998.
As a percentage of total revenue, general and administrative expense decreased
to 66% in the year ended December 31, 1999 from 72% in the year ended December
31, 1998. General and administrative expense increased as a result of the number
of general and administrative employees increasing to 16 at December 31, 1999
from 10 at December 31, 1998, recognition of $1.0 million of costs
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<PAGE> 34
as a result of a delay in our initial public offering, recognition of expense of
approximately $373,000 related to the closing of the Buffalo office, and 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
year ended December 31, 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 1,295% to $599,000
in the year ended December 31, 1999 from $43,000 in the year ended December 31,
1998. As a percentage of total revenue, interest income, net of interest
expense, increased to 8% in the year ended December 31, 1999 from 3% in the year
ended December 31, 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 $1.3 million in the year ended December
31, 1998 from $340,000 in the year ended December 31, 1997.
Software license revenue increased by 505% to $1.1 million 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 84% in the
year ended December 31, 1998 from 52% in the year ended December 31, 1997. The
number of software licenses sold increased to 106 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 $162,000 in the year ended December 31, 1997. As a
percentage of total revenue, services and other revenue decreased to 16% in the
year ended December 31, 1998 from 48% 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.
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 2% in the year ended December 31, 1998 from 5% 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 63% in the year ended December 31, 1998 from 12% in the
year ended December 31, 1997. These increases
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<PAGE> 35
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 $1.9 million in the year
ended December 31, 1998 from $44,000 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 13% 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% in the
year ended December 31, 1998 from 31% 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% in the year ended December 31, 1998 from 10% 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.
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% in the year ended December 31, 1998 from a negligible
percentage 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.
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QUARTERLY RESULTS OF OPERATIONS
The following table sets forth a summary of our unaudited quarterly
operating results for each of the eight quarters in the two year period ended
December 31, 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
(IN THOUSANDS)
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses....... $179 $321 $ 177 $ 396 $ 921 $ 1,313 $ 1,729 $ 2,475
Services and other...... 38 46 48 76 129 223 410 678
---- ---- ------ ------- ------- ------- ------- -------
Total revenue........... 217 367 225 472 1,050 1,536 2,139 3,153
---- ---- ------ ------- ------- ------- ------- -------
Cost of revenue:
Cost of software
license............... 3 4 3 8 8 74 116 258
Cost of services and
other................. 5 14 36 76 158 274 467 508
---- ---- ------ ------- ------- ------- ------- -------
Total cost of revenue... 8 18 39 84 166 348 583 766
---- ---- ------ ------- ------- ------- ------- -------
Gross profit............ 209 349 186 388 884 1,188 1,556 2,387
Operating expense:
Sales and marketing..... 62 147 679 1,030 1,052 2,376 2,808 4,393
Product development..... 56 116 223 300 534 776 778 892
General and
administrative........ 97 148 158 520 810 941 1,518 1,941
---- ---- ------ ------- ------- ------- ------- -------
Total operating
expense............... 215 411 1,060 1,850 2,396 4,093 5,104 7,226
---- ---- ------ ------- ------- ------- ------- -------
Operating income
(loss)................ (6) (62) (874) (1,462) (1,512) (2,905) (3,548) (4,839)
Interest income, net.... 5 4 1 33 18 223 217 141
---- ---- ------ ------- ------- ------- ------- -------
Net income (loss)....... $ (1) $(58) $ (873) $(1,429) $(1,494) $(2,682) $(3,331) $(4,698)
==== ==== ====== ======= ======= ======= ======= =======
</TABLE>
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL
REVENUE:
Revenue:
Software licenses............ 82% 87% 79% 84% 88% 85% 81% 79%
Services and other........... 18 13 21 16 12 15 19 21
--- --- ---- ---- ---- ---- ---- ----
Total revenue................ 100 100 100 100 100 100 100 100
--- --- ---- ---- ---- ---- ---- ----
Cost of revenue:
Cost of software license..... 2 1 1 2 1 5 5 8
Cost of services and other... 2 4 16 16 15 18 22 16
--- --- ---- ---- ---- ---- ---- ----
Total cost of revenue........ 4 5 17 18 16 23 27 24
--- --- ---- ---- ---- ---- ---- ----
Gross profit................. 96 95 83 82 84 77 73 76
--- --- ---- ---- ---- ---- ---- ----
Operating expense:
Sales and marketing.......... 28 40 302 218 100 155 131 139
Product development.......... 26 32 99 64 51 50 37 28
General and administrative... 45 40 70 110 77 61 71 62
--- --- ---- ---- ---- ---- ---- ----
Total operating expense...... 99 112 471 392 228 266 239 229
--- --- ---- ---- ---- ---- ---- ----
Operating income (loss)...... (3) (17) (388) (310) (144) (189) (166) (153)
Interest income, net......... 2 1 0 7 2 14 10 4
--- --- ---- ---- ---- ---- ---- ----
Net income (loss)............ (1)% (16)% (388)% (303)% (142)% (175)% (156)% (149)%
=== === ==== ==== ==== ==== ==== ====
</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 $28.2 million in proceeds, net of issuance costs, from issuances of
preferred stock. At December 31, 1999, our primary source of liquidity was $10.6
million in cash and cash equivalents.
Net cash provided by operating activities was $160,000 in the year ended
December 31, 1997. Net cash used in operating activities was $1.8 million and
$9.7 million in the years ended December 31, 1998 and 1999, respectively.
Net cash used in investing activities was $39,000, $388,000 and $1.1
million for the years ended December 31, 1997, 1998 and 1999, respectively. The
cash used in investing activities was primarily for purchases of software for
customer call support, computer equipment and office furniture. The increase in
cash used in investing activities for the year ended December 31, 1999 was
primarily due to the expansion of our office space in North Carolina.
Net cash provided by financing activities was $30,000, $4.3 million and
$19.1 million in the years ended December 31, 1997, 1998 and 1999, respectively.
The 1998 and 1999 financing activities consisted primarily of issuances of
preferred stock. In January 1998, we completed a private placement of Series A
preferred stock, totaling 4,175,439 shares, resulting in gross proceeds of
$600,000. In August and September 1998, we completed a private placement of
5,000,000 shares of Series B preferred stock, resulting in gross proceeds of
$4.3 million. In March and April 1999, we completed a private placement of
12,000,000 shares of Series C preferred stock, resulting in gross proceeds of
$24 million. 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
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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 assuming we are able to fully execute our
business plan. These cash requirements are expected to consist primarily of the
costs of developing and expanding our international operations in Japan, Europe,
Latin America and Asia, expanding our sales and marketing departments in the
United States and increasing advertising expenses. We also intend to invest in
new products and new releases of existing products, as well as evaluate
acquisition opportunities. 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". 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 required disclosures are effective for fiscal years
beginning after December 15, 1997. Management has determined that OpenSite does
not have any separately reportable operating segments as of December 31, 1998 or
December 31, 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,"
which provides guidance regarding when software developed or obtained for
internal use should be capitalized. This statement is effective for financial
statements for fiscal years beginning after December 15, 1998. The adoption of
this statement did not have a material impact on our financial condition or
results of operations.
In December 1998, the AICPA issued Statement of Position No. 98-9,
"Modification of Statement of Position No. 97-2, Software Revenue Recognition,
With Respect to Certain Transactions." Statement of Position No. 98-9 amended
Statement of Position No. 97-2 to require recognition of revenue using the
"residual method" in circumstances outlined in Statement of Position 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, is deferred and subsequently recognized in accordance with the
relevant sections of Statement of Position 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. The
adoption of Statement of Position No. 98-9 did not 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". This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities.
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<PAGE> 39
This statement is effective for financial statements for all fiscal quarters of
all fiscal years beginning after June 15, 2000. We intend to adopt this
statement when required; however, it 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 could recognize a date of "00" as the year
1900 rather than the year 2000. Year 2000 issues have the potential to 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.
At and since January 1, 2000, year 2000 problems have not been significant
and widespread computer failures have not materialized.
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. Through the end of 1999 and into 2000, no significant problems have
been detected as a result of this testing. Actual costs to date for testing and
remediation of OpenSite software products have been less than $100,000. We will
continue the process of testing our products in test environments intended to
emulate a year 2000 environment related to February 29, 2000, or leap year and
quarter ends.
CONTINGENCY PLANNING. To date, we have not developed any formalized
contingency plans to address the risk that our products, systems, customers,
vendors or other third-parties may fail to be or become year 2000 compliant. To
the extent that we identify 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.
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<PAGE> 40
BUSINESS
OVERVIEW
OpenSite enables online auctions and dynamic pricing solutions. By having
delivered over 600 licensed and outsourced auction solutions to customers, we
believe we have provided more solutions than any other auction software or
services provider. We provide a variety of cost-effective software and services
that enable businesses to create branded, Internet-based business-to-business
and business-to-consumer auctions on their own Web sites. Our products and
services automate the process of installing, running and maintaining real-time
Internet auctions within the dynamic commerce environment. We offer licenses,
services and comprehensive outsourcing solutions to a full range of small,
medium and large businesses. By bringing together buyers and sellers, our
products and services help businesses create new sales channels, manage
inventory, attract new customers, introduce new products and strengthen customer
and other business relationships. Our customers operate in a wide variety of
industries, including retail, railroad, pharmaceutical, industrial equipment and
media. 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. BidStream.com also provides valuable customer profiling information for
demand analysis. Currently, participation in BidStream.com is free to our
customers, but we intend to charge a fee in the future.
OpenSite and its products have received the following awards and
recognition: "Best of Show" for Outstanding E-commerce Applications -- Fall
Internet World 1999 and Fall Internet World 1998, "Software Company of the
Year" -- North Carolina Electronics and Information Technologies Association,
"Five Star Rating" -- Internet.com, "Analyst's Choice" -- PC Week magazine,
"Products to Watch" -- Fortune Tech Buyers Guide, "Honorable Mention" -- Spring
Internet Commerce Expo 1999 and "Best of Class" in Web-based Selling -- Fall
Internet Commerce Expo 1998.
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 and OpenSite Concierge in
1999. As of December 31, 1999, we had 107 full-time employees.
PROPOSED ACQUISITION OF BIDDER'S EDGE
We have entered into a letter of intent to acquire Bidder's Edge, Inc., a
leading auction portal with over 3 million page views per month that aggregates
over 5 million items from over 150 auction sites. BiddersEdge.com is a scalable
search engine that uses proprietary technology to create a single directory that
conveniently categorizes auction items. It also offers auction users a suite of
enhanced tools that facilitate auction tracking for multiple bids, historical
pricing of auction items and automatic notification of item availability through
email or instant messaging. BiddersEdge.com provides enhanced content, including
news, information and featured items for bid, to over 300,000 unique monthly
auction users. Additionally, BiddersEdge.com's large database of customer
profiling and marketing information is a valuable resource not only for
BiddersEdge.com but also for the operators of the sites it aggregates.
If we complete our acquisition of Bidders Edge, we plan to incorporate our
BidStream.com aggregated content into a combined BiddersEdge.com product
offering. We expect BidStream.com to significantly enhance the
business-to-business auction content of BiddersEdge.com and to accelerate its
position as a provider of aggregated content for businesses. We expect this
combined offering to increase the volume of bidders and sellers directed to
OpenSite-
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<PAGE> 41
powered auctions as well as other non-customer sites aggregated by
BiddersEdge.com. We believe that this increased bidder and seller base in turn
will make the deployment of an OpenSite-powered auction even more attractive to
prospective customers. In addition, we intend to license the auction content of
the BiddersEdge.com database to Internet Service Providers, portals and other
business Web sites as a private label or branded outsourced offering. We believe
that the acquisition of Bidder's Edge, if consummated, will accelerate the
strength of our business model by significantly expanding the content,
functionality, customer reach, time to market and market position of our
products and services.
Bidder's Edge is engaged in a lawsuit filed by eBay. The lawsuit alleges
that Bidder's Edge cannot include auction content from eBay's Web site without
its permission. Bidder's Edge has countersued making various antitrust and
unfair business practice claims against eBay. While eBay has offered to license
its content to Bidder's Edge, Bidder's Edge does not believe such a license is
necessary or warranted. Bidder's Edge has informed us that it believes this
lawsuit is without merit and intends to vigorously defend the matter. However,
if eBay is successful on the merits, and if Bidder's Edge is unable to license
online auction content from eBay, the online auction content Bidder's Edge
aggregates will be reduced, which could have a material adverse effect on its
revenues. However, while the person-to-person auction content represented by
eBay is currently significant, the combination of BidStream.com with
BiddersEdge.com will accelerate its focus on aggregating business-to-business
and business-to-consumer online auction content.
The letter of intent provides for the issuance of 8,941,307 shares of
common stock in connection with this acquisition. As a result of this issuance,
we expect Landmark Communications, Inc. to own more than five percent of our
outstanding common stock. We have begun negotiations of a definitive acquisition
agreement and expect to consummate this acquisition shortly following completion
of this offering. However, we cannot be certain that we will consummate this
acquisition.
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 businesses and consumers. Forrester Research estimates that
business-to-business electronic commerce will be $2.7 trillion in 2004.
EMERGENCE OF DYNAMIC PRICING
Dynamic pricing, in which prices are determined by buyers and sellers on a
transaction-by-transaction basis, has become more accepted as a form of
electronic commerce. Dynamic commerce refers to the spectrum of online commerce,
encompassing not only dynamic pricing, but also an entire range of dynamically
determined elements of a transaction including such items as quantity,
qualitative attributes and delivery terms. 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 benefits have led consumers and merchants to increasingly utilize
the Internet to buy and sell goods and services. The interactive nature of the
Internet, especially as embodied by real-time
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updates of information, has also given Internet users an increasing sense of
confidence about the dynamic determination of prices and transactions. Taken
together, these factors have reduced the need to adhere to the traditionally
fixed pricing of goods and services and led to the emergence of dynamic pricing.
INTERNET FACILITATION OF AUCTIONS
Auctions are among the most well known forms of dynamic pricing. Prior to
the Internet, auctions and other forms of dynamic trade faced critical
shortcomings, including expertise, 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, proprietary business methods and their fees often reduced 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 dynamic commerce can offer more products to more people over
a wide geographic area, providing a better pricing mechanism for both buyers and
sellers. Forrester Research projects that worldwide Internet commerce will reach
between $1.4 trillion and $3.2 trillion in 2003 - up from a range of $55 billion
to $80 billion in 1998. The Internet auction market initially gained acceptance
in person-to-person transactions. However, by 2003 Forrester Research expects
that only $6.4 billion is expected to be generated from person-to-person online
auction transactions, while $12.6 billion is expected to be generated from
business-to-consumer online auction transactions. Forrester Research expects
that business-to-business electronic commerce as a whole will be $2.7 trillion
in 2004. Forrester Research also projects that 74% of business-to-business
electronic marketplaces will provide more than one transaction mechanism,
including online auctions within the next two years.
BENEFITS OF ONLINE AUCTIONS
Online auctions serve the needs of both businesses and consumers. Online
auctions facilitate more efficient markets as goods and services trade at prices
reflecting current market supply and demand, with prices and other transaction
elements varying dynamically over time. Businesses benefit from the following:
- alternative transaction models;
- cost-effective methods for liquidating overstocked, outdated or
perishable inventory;
- efficient price discovery mechanisms for new products;
- the ability to collect marketing data on existing and potential buyers;
- the ability to attract additional traffic to business Web sites; and
- the ability to lengthen the duration of Web site visits.
Benefits to online customers 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 locate quality goods and services from established
businesses with a reputation for fulfilling customer expectations;
- the ability to find rare or collectible items to which they might not
otherwise be exposed; and
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<PAGE> 43
- the formation of enthusiast communities, chat rooms and newsletters which
make online auctions a participatory and enjoyable interactive
experience.
DISADVANTAGES OF ONLINE AUCTIONS
While generally beneficial to businesses and consumers, online auctions may
be disadvantageous to some market participants. For instance, auctions require a
bidder to provide personal information to the business. While this information
may be a benefit to the business, this perceived loss of privacy may deter some
potential bidders from participating in online auctions. Also, auctions require
purchasers to bid over time, which may delay the purchase cycle. As a result, in
instances where time of delivery is more critical than price, online auctions
may not be beneficial to the purchaser. Also, online auctions may make it
difficult for businesses to take advantage of imperfect market information to
advantageously price some of their products. Thus, businesses would be less
likely to sell these products through online auctions.
THE CURRENT LANDSCAPE FOR ONLINE AUCTIONS
A growing number of businesses are seeking Internet auction and dynamic
commerce capabilities. Online auction solutions currently can be divided into
two categories. 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 businesses seeking a simple
way to auction a limited number of items. These communities, however, generally
preclude businesses from maintaining their own brands on the Internet,
controlling the online experience of customers or retaining data on the activity
of their customers. The second category is comprised of applications that allow
businesses to control and maintain their own branded online auction sites. These
businesses have choices ranging from developing their own online auction and
dynamic commerce capabilities to purchasing online auction applications from
third party vendors. Proprietary, in-house applications are typically expensive
and time consuming with reduced functionality. Many applications from third
party software vendors are difficult to customize, are burdensome to implement
and often lack a wide range of features and deployment options. In addition,
these vendors typically do not provide a complete package of ancillary services.
Based on a combination of our own primary market research and secondary
data from leading industry analysts, we believe that a large and growing number
of online businesses will seek auction and dynamic commerce 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, scalable with growth 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 site traffic is such an important element of successful electronic
commerce, businesses are likely to gravitate towards a solution which possesses
the ability to attract more customers to their own auction sites.
EMERGENCE OF DYNAMIC COMMERCE
Online auctions were the first dynamic commerce applications to gain
widespread use, and they remain the most well known form of dynamic commerce.
This format typically has a seller starting at a low fixed point, and prices are
driven up through demand generated from multiple
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potential buyers bidding with a specified ending time. Additional forms of
dynamic commerce are beginning to emerge, including:
DEMAND AGGREGATION. Multiple buyers combine common purchases to form
consolidated groups, gaining market advantages and efficiency through
volume. These consolidated groups typically negotiate an advantageous price
through their combined buying power.
MARKET MAKING. A trading community of multiple buyers and multiple
sellers who trade online in a bid and ask format. This format is based on a
price that fluctuates between two points driven by a series of negotiated
intervals between a buyer and a seller. The transaction is completed when
either party agrees to the price provided.
ONLINE PROCUREMENT. This format typically has a single buyer posting
items for intended purchase, and multiple sellers bid on those items in a
reverse auction format in which the price descends on subsequent bids. A
transaction occurs when a "winner" is selected based on the lowest price
and possibly other variables.
These trading formats are facilitated through internet-based dynamic
commerce solutions. A December 1999 Forrester Research report estimates that 74%
of business-to-business electronic marketplaces will provide more than one
transaction mechanism, including auctions, within two years. We believe that
demand for non-auction dynamic commerce applications will increase as online
marketplaces add multiple dynamic commerce trading formats to their offerings,
particularly for business-to-business activities.
THE OPENSITE SOLUTION
We provide dynamic pricing solutions to businesses, Internet Service
Providers and Internet portals. Our solutions, which include a variety of
cost-effective software products, services and outsourced solutions enable
online businesses and business-to-business electronic commerce sites, which are
sometimes referred to as "net markets," to have Internet-based dynamic pricing
applications on their own Web sites. These can be in the form of highly
functional predetermined auction applications or in the form of a toolkit
infrastructure to enable the creation of custom applications tailored
specifically to a client's business. These solutions automate the process of
installing, running, and maintaining real-time dynamic pricing applications over
the Internet. By bringing together buyers and sellers, our solutions help
businesses create new sales channels, build dynamic commerce marketplaces,
manage inventory, attract new customers, introduce new products and strengthen
their customer and other business relationships.
OpenSite's family of products provides a wide range of branded software
products, services and outsourced solutions for customers. These products and
services range in functionality so as to support businesses in need of various
levels of dynamic pricing sophistication, either because of their size or their
phase of dynamic commerce implementation. OpenSite Auction products are
pre-packaged applications that offer customers a robust online branded auction
capability that is easy to use and quick to implement. Our Dynamic Pricing
Toolkit product is for businesses looking for a more customized solution coupled
with scalable, enhanced integration options. We also offer AuctionNow, an
application targeted specifically at service providers such as Internet Service
Providers, portals and electronic intermediaries. AuctionNow provides these
entities with the ability to offer an Internet auction network of their own. Our
AuctionWatch Desktop product enables auction participants to track and monitor
their own auction activity, facilitates proxy bidding and notifies auction
participants of new items up for bid.
Services and outsourced solutions have become an increasingly important
element of our offerings. We act as an Application Service Provider through our
OpenSite Concierge service, which utilizes our expertise in dynamic pricing to
provide a completely outsourced solution to our customers, ensuring the fastest
implementation of our products. A seamless transition to an in-house solution
can then be achieved at any time the customer desires through the licensing of
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the same OpenSite product. In addition, we offer a wide range of related
services, such as integration and application development, consulting and
educational courses.
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. BidStream.com, with its proprietary search engine, indexes all
items for sale at these sites. As such, it serves as the central point for
locating items for bid at participating OpenSite-powered auction sites. By
aggregating this content together with auction listings of other auction portals
and aggregation sites, such as Bidder's Edge, 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 is expected to provide our customers with
substantial additional traffic to their Web sites. If we complete the
acquisition of Bidder's Edge, we plan to incorporate our BidStream.com
aggregated content into a combined BiddersEdge.com product offering.
Our solutions have the following benefits:
COMPREHENSIVE SOLUTION. We offer a full suite of software, services,
outsourced solutions and aggregated online auction content to businesses of
varying sizes and sophistication. We believe that this capability is unique
among the participants in the online auction industry. Businesses seeking
to deploy dynamic pricing capability within their enterprise can take
advantage of our offerings via the OpenSite Auction software, the OpenSite
Concierge service, or through one of our AuctionNow service providers. More
sophisticated users can take advantage of our Dynamic Pricing Toolkit and
the expertise of our Professional Services organization for customized and
integrated solutions. No matter which product a customer uses, it can take
advantage of BidStream.com, where we aggregate item content and help to
drive new auction participants to their sites. By providing this full range
of solutions, we can capture large, medium and small business customers as
they initially undertake the deployment of a dynamic commerce solution, and
we can support them with additional products and services as their success
grows and business needs expand.
INCREASED REVENUE OPPORTUNITIES THROUGH DYNAMIC PRICING. Our products
and services facilitate new online revenue opportunities for businesses by
enabling them to easily and efficiently implement branded Internet dynamic
pricing applications. Through our dynamic pricing technology, businesses
can:
- build dynamic marketplaces and generate incremental sales by engaging
buyers and sellers in real-time transactions over the Internet;
- achieve improved product prices by stimulating demand;
- conduct price discovery by offering new products for bid; and
- manage general and perishable inventory by finding buyers in real-time
and quickly liquidating overstocks.
CONTROL OF BRAND EQUITY. Our products and services allow businesses
to control their dynamic commerce sites rather than list their products or
services in broad Internet commerce communities. This enables them to own,
control, and expand their dynamic commerce sites, building brand equity on
the Internet while increasing revenue.
INCREASED SITE TRAFFIC; AGGREGATION OF MARKETING DATA. BidStream.com
provides bidders with a central content point for locating items for sale
on participating OpenSite-powered auction sites as well as providing other
content. By aggregating the item content from our customers' sites, we
provide them with increased site traffic without incurring costly marketing
campaigns. Additionally, BidStream.com permits the mining of data,
including customer profiling data about visitors to auction sites, which
our customers may use to reach more qualified customers and more
effectively market products to targeted customers. Also,
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BidStream.com allows for the building of communities of like-minded
purchasing professionals seeking efficiencies associated with a higher
level of up-to-date market information.
EASE OF USE AND RAPID DEPLOYMENT. Our solutions are designed to
enable customers to quickly and easily create sophisticated online
auctions, dynamic marketplaces and other dynamic pricing applications. We
have implemented live auction sites for customers in as little as 48 hours.
For instance, our licensed solutions include templates and other features
that automate the process of site setup and give examples of how to
implement our solutions. In contrast, our OpenSite Concierge service, which
provides a complete outsourced solution, lets businesses establish an
online auction almost immediately without an up-front investment in
software or hardware. A customer can easily migrate from our OpenSite
Concierge solution to a licensed solution based on their evolving
technology investment philosophy and product requirements.
FLEXIBLE AND SCALABLE SOLUTIONS. Our technology is designed to enable
dynamic commerce in various industries across businesses of all sizes. Our
solutions provide customers the ability to control not only the look and
feel of their sites, but also the features included in their dynamic
pricing applications. In addition, our N-tier architecture can support the
volume needs of very large and complex sites. As the functionality needs of
our customers increase in complexity, our portfolio of products and
services provides a number of choices regarding how to meet growing
requirements. Businesses may take control of the application implementation
by choosing to build customized dynamic pricing applications that can be
integrated within an existing information technology infrastructure. For
example, with Dynamic Pricing Toolkit, we provide customers with the set of
building blocks they need to build dynamic pricing applications that are
suited to a business' specific needs.
STRATEGY
Our goals are to maintain and strengthen OpenSite's position as a leader in
enabling online auction and dynamic pricing software solutions, while broadening
our market reach into other forms of dynamic commerce on the Internet. Our
strategies to achieve these goals include the following:
USE OUR MARKET LEADERSHIP TO BUILD BRAND AWARENESS. We have delivered
over 600 licensed and outsourced auction solutions to customers, and
believe we have provided more solutions than any other auction software and
services provider. We believe that OpenSite is the first significant vendor
of a complete Internet auction solution for dynamic commerce and the first
to aggregate auction content from disparate customer sites as a means of
providing customers with increased traffic on their sites. We intend to
build upon our market position and experience by further enhancing the
value we offer to businesses through aggregation of auction content from
non-customer sites and the licensing of this content to other auction
aggregators, portals, Internet Service Providers and other business Web
sites as a private label or branded outsourced offering. We expect to
aggressively increase the market impact of the OpenSite brand by further
expanding our global sales and marketing organization and investing
significantly in both online and offline advertising. We have begun
targeted national television and print advertising campaigns and plan to
continue them for the foreseeable future. Further, the development and
promotion of BidStream.com as a value-added element for our customers'
auction sites is also 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 scalable auction and
dynamic pricing functionality. As the market for online auctions and
dynamic pricing matures, we believe that the demands of businesses in need
of dynamic commerce solutions will grow and become more sophisticated. We
intend to continue to invest in our product development resources and to
develop new dynamic
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pricing and other dynamic commerce solutions to meet these growing demands.
We believe that our market share, as reflected in over 600 deployed
solutions, provides us with a unique advantage in understanding the needs
of businesses seeking auction and dynamic commerce solutions. Furthermore,
BidStream.com, as enhanced by our proposed acquisition of Bidder's Edge,
should provide our customers with new value-added opportunities. We also
intend to explore more automated dynamic commerce applications that are
designed for the needs of specific target markets, emphasizing the
business-to-business sectors. These areas of new opportunity include demand
aggregation, procurement, market making and other dynamic commerce business
models.
AGGREGATE CONTENT THROUGH DEVELOPMENT OF BIDDERSEDGE.COM. Through
BidStream.com, we currently aggregate the content from participating
OpenSite-powered auction sites into a single Web site. BidStream.com is
designed to increase traffic to our customers' auction sites, thus
increasing the value we provide to our customers. If we complete the
proposed acquisition of Bidder's Edge, we plan to incorporate our
BidStream.com aggregated content into a combined BiddersEdge.com product
offering. Bidder's Edge currently aggregates over 5 million items from over
150 auction sites and engages more than 300,000 unique monthly auction
users with over 3 million page views per month. We expect this proposed
acquisition to significantly expand the content, customer reach and
offerings of BidStream.com. The aggregated content base represented by the
combined BiddersEdge.com offering 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 using our products
even more attractive. As we enable more customers with our solutions, the
content aggregated by BiddersEdge.com increases, repeating the cycle on a
larger scale. BiddersEdge.com also will allow us to obtain valuable
customer profiling 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. In addition, through
licensing arrangements and alliances of various kinds, we intend to
aggregate auction content from other sites and portals with
BiddersEdge.com. We will primarily be targeting our marketing efforts to
build awareness and use of BiddersEdge.com through our business alliances.
We may also use traditional direct marketing venues to a lesser extent.
ENABLE MORE HIGH-END SOLUTIONS. As the market for dynamic commerce
matures, we intend to target our sales and marketing efforts increasingly
towards larger businesses requiring enterprise-level dynamic pricing and
dynamic commerce solutions, such as Dynamic Pricing Toolkit and AuctionNow.
We believe that demand for these offerings as well as other products and
services under development, will be attractive as the need for more
sophisticated solutions increases and the market expansion accelerates. In
addition, by increasing our sales of high-end solutions to larger
businesses, 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 enhanced scalable, dynamic pricing and
commerce solutions capable of further integration into widely used
information technology systems, such as enterprise resource planning and
supply-chain management. We also believe that our indirect sales channels
and growing global sales force will provide us with greater access to this
target market.
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 businesses, more efficiently than our
direct sales force. Established in 1998, our indirect sales channel now
consists of over 90 resellers worldwide. Dynamic Pricing Toolkit and
Auction Now are the primary products used by the systems integrators and
Internet Service Providers while OpenSite Auction is targeted at the
reseller market. To further develop these
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sales efforts, we are developing the next generation OpenSite Auction,
which is targeted to larger businesses in need of increasingly scaleable,
fully integratable dynamic pricing solutions. These businesses also need
electronic commerce software providers to enable them to embed auction
functionality into their product and service offerings. We expect to
introduce the next generation OpenSite Auction in the third quarter of
2000. For more detailed information on this and other products in
development, see "Business -- Product Development -- Future Products."
EXPAND INTERNATIONALLY. We believe that a considerable market for our
products and services exists outside the United States. We intend to
accelerate our investment in international sales and to add new features
and functionality to our products and services to accommodate accounting,
customs, currency and tax requirements of foreign countries. With the sales
and marketing assistance of Protege Software Ltd. in jumpstarting our
European presence with a London office, we have already begun to experience
success in Europe. In addition, we have retained a similar organization,
Japan Entry, LLC, to accelerate our expansion into the Japanese market.
With their help, we have entered into a letter of intent with TransCosmos,
Inc. to be our exclusive provider of products and services in Japan for a
period of at least two years. We have also entered into an agreement with
The Promar Group, LLC to assist our entry into other markets in Asia and in
Latin America.
ACQUISITIONS AND ALLIANCES. We intend to aggressively pursue
acquisitions and business relationships that enhance and extend our product
and service offerings as well as our distribution capability within the
dynamic commerce market. We favor the use of relationships and alliances to
accelerate the attainment of our business goals where appropriate. Our
recent agreements with Excite@Home and CNET, and our letter of intent with
Bidder's Edge, are examples of this strategy. We also have relationships
with Open Market, Intershop Communications, i-Escrow, FreightQuote.com,
TaxWare, Exodus Communications and others.
PRODUCTS AND SERVICES
DYNAMIC PRICING TOOLKIT. Dynamic Pricing Toolkit enables businesses with
specific requirements to build customized and integrated dynamic commerce
applications. Dynamic Pricing Toolkit is targeted to sophisticated companies,
Internet businesses and systems integrators whose needs are not met by the
standard features available in our packaged applications. Dynamic Pricing
Toolkit provides these customers with tools to create customized applications
that are targeted to specific needs dictated by their industry or internal
business systems. Dynamic Pricing Toolkit was released in September 1999.
Dynamic Pricing Toolkit comes with our core Dynamic Pricing Engine server,
which contains all of our business rules and management of dynamic pricing
activity. With application programming interfaces, businesses can tailor a site
to their specific needs. As needs change or their site expands, Dynamic Pricing
Toolkit customers can augment the original functionality by adding new features.
Customers can also utilize Dynamic Pricing Toolkit to integrate their
dynamic commerce activities with their existing electronic commerce
infrastructure. We believe that the demand to integrate dynamic commerce
functionality with existing electronic commerce infrastructure will increase in
the near future.
Dynamic Pricing Toolkit offers the following features to support companies
seeking to enter dynamic commerce:
- Scalability through our N-tier architecture, allowing businesses to
distribute and scale their Web, application and database servers
according to their business needs;
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- Flexibility with our application programming interfaces, allowing
customers to build customized applications, using only the features they
need and augmenting those features by integrating with third party
applications;
- Support for various industry standard platforms, programming languages
and interfaces including support for Windows NT and Solaris, as well as
COM and COBRA interfaces that can be accessed with languages such as
Visual Basic, C++, JavaScript and Java;
- Robust dynamic pricing features, such as forward, reverse, and sealed bid
auction formats, and an extensive privileges structure to support browse,
bid, sell and administrative privileges for users to enable private
auctions and distribution of internal auction management; and
- International compatibility with support for multiple currencies and
languages including support for 8 bit character sets such as Hebrew,
Spanish and French and are double byte enabled to support languages such
as Japanese and Chinese.
AUCTIONNOW. AuctionNow is targeted to businesses that desire to create
their own service-based network of branded, online auctions such as Internet
Service Providers, Application Service Providers, Internet portals and
electronic intermediaries who are looking to augment their current service
offerings with online auction capabilities.
AuctionNow has the ability to operate and manage multiple auction galleries
from a single unit of the software. An auction gallery is a single Internet
auction that can be managed from a simple to use, Web-browser interface. Each
auction gallery may have a unique look and feel, with its own Web site
templates, category structure and items for auction. An important feature of the
AuctionNow structure is that, even though each auction gallery can be managed
separately, all auction galleries are also aggregated through a single database.
This aggregation allows bidders to register only once to bid across all auction
galleries. In addition, a centralized search engine can examine all auction
galleries for items of interest. Thus, a complete auction network is formed.
AuctionNow offers licensees the benefit of:
- an ancillary revenue stream;
- a way to attract new customers; and
- a flexible business model that lets them choose exactly how to derive
revenue from online auctions.
AuctionNow permits gallery operators to:
- quickly and easily set up and run an online auction with no technical
expertise; and
- increase the visibility of their site without a significant investment in
marketing by aggregating their data and sharing customers with other
gallery owners.
AuctionNow provides bidders with:
- a centralized point for auction activity and registration; and
- centralized searches and monitoring of bidding and transaction activity.
AuctionNow offers the following features to Application Service Providers:
- faster time to market with an end-to-end application, Web site templates
and administrative interfaces;
- scalability through our N-tier architecture, allowing businesses to
distribute and scale their Web, application and database servers
according to their business needs;
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- robust dynamic pricing features, such as forward, reverse and sealed bid
auction formats, and an extensive privileges structure to support browse,
bid, and administrative privileges for users to enable private auctions
and distribution of internal auction management;
- the ability to customize all Web site templates, and to customize the
database to add new information customers wish to capture about users or
items; and
- international compatibility with support for the use of various
currencies and languages in galleries.
AuctionNow was first released in September 1999. AuctionNow won "Best of
Show" for E-commerce Applications at the Fall Internet World 1999. A panel of
judges from Internet World and other publications judged nominations, based on
the innovative use of technology. The judges placed priority on a product's
ability to work with existing standards and the degree to which the product
contributed to the development of future Internet products and services. Only
products that had been launched since the previous Internet World show were
eligible.
OPENSITE AUCTION. OpenSite Auction, an out-of-the-box application,
automates the process of implementing, running and maintaining a single,
real-time auction site over the Internet. Through administrative tools and
wizards, it offers the flexibility to quickly create market-specific online
auctions with minimal technical expertise.
OpenSite Auction is designed to simplify for businesses the process of
installing and maintaining an auction site with features such as:
- remote installation to permit rapid deployment;
- predesigned Web page styles and templates with editors to facilitate easy
editing to create a customized look and feel;
- 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 offers the following features to enhance the auction
experience for bidders:
- monitoring of bidding;
- notification of new items;
- proxy bidding; and
- enabling simultaneous bidding on multiple items.
We offer the following three levels of OpenSite Auction. Each level is
designed to address the unique needs of specific types of customers and is
designed to allow our customers to grow with easy migration paths to increasing
levels of functionality.
- OPENSITE AUCTION PROFESSIONAL, our entry-level edition, allows customers
to build and operate their own online auctions and to begin operation
quickly and economically with modest initial financial and time
investment. This product is primarily targeted to the emerging
international market.
- OPENSITE AUCTION MERCHANT, our mid-level edition, 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 edition, is designed for
enterprise level businesses that desire an auction solution that provides
more system flexibility and an
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open database architecture for integration into third party applications.
The Corporate level enables customers to integrate their online auctions
with Oracle and SQL Server databases and offers a wider variety of
auction types, including reverse, sealed bid and modified English
auctions.
The most recent version of OpenSite Auction was released in the fourth
quarter of 1999. Enhancements include SQL Server database support, the ability
to localize e-mail notifications for the international market and performance
enhancements.
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.
OpenSite Auction also received an "Honorable Mention" at the Spring Internet
Commerce Expo 1999. The criteria for these awards 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. OpenSite Auction was also named in "Products
to Watch" in the Summer 1999 Fortune Tech Buyers Guide in the Small Business
Internet Commerce category. There was no set criteria for this recognition.
OPENSITE CONCIERGE SERVICE. We provide a complete Application Service
Provider solution through our Opensite Concierge service that enables our
customers to outsource completely to us the process of running Internet
auctions, including development, deployment, maintenance and hosting. This
solution allows a company to quickly and easily benefit from an online auction
without the expense or complication of buying and setting up hardware and
software.
Acting as an Application Service Provider, OpenSite provides all of the
site design, hosting, implementation and administration services necessary for a
company to run their own, branded online auction. Through relationships with
Exodus Communications and Navisite, Inc., we maintain dedicated, private data
centers that host the auctions of our OpenSite Concierge customers.
Customers pay a one-time set up fee and an ongoing monthly service fee,
which may be fixed or based upon transaction volume, for the service. The
customer is able to define the look and feel of the site and control all of the
data about its site. OpenSite provides all of the ongoing support required,
including auction administration and reporting. Our range and flexibility of
offerings allows customers to migrate to a licensed solution at any time.
BIDSTREAM.COM. BidStream.com is a Web site owned and operated by OpenSite
that aggregates the items for bid on participating OpenSite-powered auction
sites. BidStream.com currently aggregates over 100,000 items. We expect the
number of items 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. BidStream.com indexes all items for auction at these sites and sends a
user to our customer's Web site to facilitate the transaction. 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 will license the BidStream.com content to other information services
such as Internet Service Providers, portals, other aggregators and business Web
sites, providing greater reach for our customers through a wider network of
sites. We intend to aggressively pursue affiliate programs and relationships
with other Web publishers. Initially, these affiliate relationships primarily
will consist of co-branding BidStream.com with other sites such as CNET and
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Excite@Home to provide links between BidStream.com searches, OpenSite-powered
auction sites and focused content sites. These relationships may take other
forms as this business model evolves. Fees are expected to be charged to these
affiliates, and some of these relationships involve the sharing of revenues
generated through the links or co-branded sites. We generally share the costs of
developing co-branded sites. We believe these affiliates will direct traffic to
BidStream.com while also providing a category-specific auction page with
relevant content and context. We are also considering a marketing campaign that
will include Internet, print and radio advertising to generate additional site
traffic.
As part of our effort to expand our aggregation capabilities and provide
additional buyers to our customers, we have entered into a letter of intent to
acquire Bidder's Edge, an aggregator of online auction and dynamic commerce
content, community and buying tools. We expect our proposed acquisition of
Bidder's Edge, which currently aggregates 150 auction sites containing 5 million
items and engages 300,000 unique monthly auction users and over 3 million page
views per month, to significantly expand the content, customer reach and
offerings of BidStream.com. Our acquisition of Bidder's Edge is subject to the
negotiation of a definitive merger agreement and approval of our board of
directors. We cannot be certain that we will consummate this acquisition.
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.
[BIDSTREAM.COM SCREEN SHOT]
AUCTIONWATCH DESKTOP. AuctionWatch Desktop is an application that allows
bidders to use one central interface to simultaneously track and bid on multiple
items from selected auction sites 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. 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. This tool can also be used by sellers to
monitor bidding activity of all listed items across multiple auction sites.
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The following table summarizes our current products and services.
<TABLE>
<CAPTION>
DYNAMIC PRICING TOOLKIT
- --------------------------------------------------------------------------------------------
BENEFITS TARGET MARKET
- -------------------------------------------- --------------------------------------------
<S> <C>
SCALABILITY Businesses and systems integrators that need
to implement a robust and scalable dynamic
N-tier architecture provides a solution that pricing application with specific
will scale as a business grows. requirements and integration needs not
satisfied by a packaged application.
FLEXIBILITY
Utilizes available programming interfaces to
build customized dynamic pricing solutions
and integrate with third party applications.
BROAD PLATFORM AND LANGUAGE SUPPORT
Runs on Windows NT and Solaris. Applica-
tions can be built using Visual Basic, C++
and Java.
ROBUST BUSINESS RULES
Includes forward, reverse and sealed bid
auction formats. Complex privileges scheme
enables private auction and administrative
distribution.
INTERNATIONAL SUPPORT
Multiple language and currency support.
BIDSTREAM.COM INTEGRATION
Seamless integration with the BidStream.com
aggregation site.
</TABLE>
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<TABLE>
<CAPTION>
AUCTIONNOW
- --------------------------------------------------------------------------------------------
BENEFITS TARGET MARKET
- -------------------------------------------- --------------------------------------------
<S> <C>
FAST TIME TO MARKET Service providers, including Internet
Service Providers, Application Service
Application includes auction setup and man- Providers, portals, electronic
agement for end-to-end functionality. intermediaries and businesses that want to
offer online auction services to their
SCALABILITY customers or divisions.
N-tier architecture provides a solution that
will scale as a business grows.
ROBUST BUSINESS RULES
Includes forward, reverse and sealed bid
auction formats. Complex privileges scheme
enables private auction and administrative
distribution.
FLEXIBILITY
Customers can customize the templates and
database to meet their target market's
needs.
CUSTOM ADMINISTRATION
Customers can conduct multiple auctions for
many users and administrate them in a cen-
tralized fashion.
INTERNATIONAL SUPPORT
Multiple language and currency support.
BIDSTREAM.COM INTEGRATION
Seamless integration with the BidStream.com
aggregation site.
</TABLE>
<TABLE>
<CAPTION>
OPENSITE AUCTION
- --------------------------------------------------------------------------------------------
BENEFITS TARGET MARKET
- -------------------------------------------- --------------------------------------------
<S> <C>
THREE-TIERED PRODUCT FAMILY
OpenSite Auction provides solutions specific
to a customer's needs and offers a migration
path as customer's needs change.
FAST TIME TO MARKET
Through CD-ROM installation and
administrative tools to easily customize the
site, customers can quickly get their online
auction up and running.
ROBUST
OpenSite Auction supports many auction types
and formats, as well as open database
connectivity, making it a very robust and
scalable solution.
</TABLE>
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<TABLE>
<CAPTION>
OPENSITE AUCTION
- --------------------------------------------------------------------------------------------
BENEFITS TARGET MARKET
- -------------------------------------------- ---------------------------------------------
<S> <C>
EASE OF USE Merchants that desire to create or augment an
existing electronic commerce Web site, with
There are many enhanced buyer and seller an online auction, easily and quickly.
features that make the auction experience
exciting and promote longer visits to the
site.
BIDSTREAM.COM INTEGRATION
Seamless integration with the BidStream.com
aggregation site.
</TABLE>
<TABLE>
<CAPTION>
OPENSITE CONCIERGE SERVICE
- --------------------------------------------------------------------------------------------
BENEFITS TARGET MARKET
- -------------------------------------------- --------------------------------------------
<S> <C>
TOTALLY OUTSOURCED SOLUTION Businesses that need a customized dynamic
pricing solution with a quick time to market
We provide everything from site design to and that may not have the internal resources
setup to administration. The customer needs or expertise to do so. Companies with the
only to provide input into the site design, expertise may also choose this solution as
items for upload, and fulfillment of part of a growing trend toward outsourcing
purchases. to Application Service Providers.
FAST TIME TO MARKET
Site implementation time averages four weeks
for fully functional and live dynamic
pricing sites.
LEADING HOSTING SERVICES
Exodus Communications and Navisite, Inc.,
two worldwide leaders in co-location
services, provide the hosting and backbone
for this service via dedicated private data
centers, which include redundancy and
backups.
CUSTOMER CONTROLS AND OWNS DATA
Customers are provided with customized re-
ports that they can utilize for data mining,
marketing or sales purposes.
BIDSTREAM.COM INTEGRATION
Seamless integration with the BidStream.com
aggregation site.
</TABLE>
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<TABLE>
<CAPTION>
BIDSTREAM.COM
- --------------------------------------------------------------------------------------------
BENEFITS TARGET MARKET
- -------------------------------------------- --------------------------------------------
<S> <C>
INCREASED VISIBILITY FOR OPENSITE CUSTOMERS Online auction and dynamic pricing partici-
pants who value a wide selection of products
Centralized searching across customer sites and time savings that can be realized
to increase buyer access to our customers. through an aggregated network.
PERSONALIZATION
Registered members have access to special-
ized searches that notify them when items of
interest are posted.
EASY TO BROWSE CATEGORIES
Auction participants can search for items of
interest, or just browse sites that have
been previously categorized.
</TABLE>
CUSTOMER SUPPORT AND PROFESSIONAL SERVICES
Our Customer Support and Professional Services organizations of 23 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 organization provides
marketing expertise, 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 and is designed for businesses that want to build
customized dynamic pricing solutions with a fast time to market but lack the
internal expertise or resources to do so.
TECHNICAL SUPPORT. Our Technical Support group provides product support to
our licensees. Subscribers contact the support staff via telephone, e-mail or
the Web to ask questions and request assistance. Issues are logged and tracked
electronically from first customer contact through resolution. The Online
Resource Center is a Web site that supplements the support staff, providing
up-to-the-moment technical information and post-sale customer contact. Technical
Support services are generally paid for in advance through annual fixed-price
maintenance fees.
EDUCATION SERVICES. Our Education Services group designs the curricula,
develops the materials and delivers training programs to our customers. Training
sessions cover installation, administration, maintenance and customization of
our products. Educational materials are designed for use in both self-paced
online and instructor-led learning. Five different instructor-led courses are
currently available. Customers can browse the training schedule and register for
courses online via the Online Resource Center. Pricing for Educational Services
offerings is generally based on the duration of the offering and whether it is
delivered at the customer's site or at our dedicated onsite education center.
CUSTOMERS
We have delivered over 600 licensed and outsourced auction solutions to
customers in a wide variety of categories. The following table lists all of our
customers that either participate in our customer reference program or who have
become customers in the past six months and therefore are not yet part of the
reference program. We include customers that participate in our customer
reference program in our public relations efforts, such as press releases, trade
shows
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and other marketing opportunities. The customer reference program does not
generate revenue directly for either OpenSite or our customers.
TECHNOLOGY AND TELECOMMUNICATIONS
CNET Auction
e-software.com
NextBid.com
Nortel Networks
PCAuctioneer
SourceWireless.com
Telecom Auction.com
U Post
USBid
INDUSTRIAL SUPPLIES/EQUIPMENT
bLiquid.com
eFibre.com
John Deere
Planet Test by Tucker Electronics
The Textile Auction House
FINANCIAL AND BUSINESS SERVICES
Barrett Capital Group
Merrill Lynch
Off Lease Auction
PNC Bank
Republic Bank & Trust Company
The Chase Manhattan Bank
FOOD AND BEVERAGE
Ambrosia Wine
Brentwood Wine Company
ecFood.com
WineBid.com
SPORTS AND RECREATION
Basketball Bonanza
bike.com
Cannondale Corporation
Currans Select Auctions
Pro Team (New England Patriots) Auctions
SportsCards Center
CHARITIES
AccessAtlanta
AFundRaiser.com
Beverly Hills Charity Auction
Canadian Council on Social Development
Detroit Public Television
Grant Hill Charity Auction
Save the Earth Foundation
St. Jude's
RETAIL/CATALOG
CrossMarket
Daddy's Junky Music Stores, Inc.
earjoy
RockBottomAuctions
The Sharper Image
BUSINESS EXCHANGES
BBCN.com, Inc.
CrossRail
Dovebid.com
Drugmax.com
VerticalNet
MEDIA
Cumulus Broadcasting, Inc.
Mobilia Magazine
PaxTV.com
QVC
Rareties-Exchange.com
The Shopping Channel
ANTIQUES AND COLLECTIBLES
ArtNet Worldwide Corporation
Asian Collection Japanese Print Auction
Biddingtons
The Bradford Exchange (Collectibles Today)
Elizabeth Sterling (Sugal Manufacturing)
Icon20
Washington Rare Coin Center
Weston/Sachs
BOOKS, MUSIC AND VIDEOS
Acexchange
American Booksellers Foundation for Free Expression
Books By Bid
Pacific Book Auctions Galleries Inc.
Critics Choice Video (subsidiary of Playboy, Inc.)
OTHER GOODS AND SERVICES
Cyberhorse
Excite@Home
Packaging Exchange
RH Communications
AuctionAtlanta
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TRAVEL AND VACATION
Capecodauction.com
Holiday Resale Homes
SkyAuction.com
SunFunAuction.com
ETravelbreak
AUTOMOBILES AND MOTORCYCLES
Autoweb.com
Gearheadauction.com
Salvage Direct.com, Inc.
Swapman.com
HOME AND GARDEN
Biz2Bizfloors.com
FurnitureFinders.com
Modernauctions.com
INTERNATIONAL
Bidabike
Bidbusiness
British Airways
Buystuff
Ducati
Hewlett-Packard -- Asia (Regional Hub)
Madaboutwine.com
The Globe Gallery
QXL
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 follow 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 is supported on a variety of the
most common hardware and software platforms used for electronic commerce. NT
Windows Server 4.0, BSD 3.1, BSD 4.0, Linux RedHat 5.x and Linux Debian are all
supported on Intel hardware. Solaris 2.6 is supported on SPARC hardware.
AuctionNow and the Dynamic Pricing Toolkit are supported on NT Server 4.0 on
Intel platforms and Solaris 2.6 on SPARC-based platforms. All software is
designed to run in conjunction with the Internet Information Server on NT 4.0,
and in conjunction with the Netscape Enterprise Server on all other operating
systems.
STANDARD PROGRAMMING LANGUAGES. OpenSite Auction 4.2 was developed using
the ANSI Standard C and C++ programming languages to provide maximum
cross-platform portability across operating systems. AuctionNow was developed
with ANSI standard C++. The Dynamic Pricing Toolkit was also developed with ANSI
standard C++ and Java.
COMPATIBILITY WITH DATABASE MANAGEMENT SYSTEMS. We offer several options
for back-end database management. OpenSite Auction includes a proprietary
database that provides an efficient database solution with reporting and
management enabled through the administrative interface at no additional cost.
OpenSite Auction 4.2 Corporate features Oracle and Microsoft SQL Server database
support designed to provide a more robust database and more scalable system
solution for larger customers. This solution also allows reporting and analysis
via third party tools. AuctionNow and Dynamic Pricing Toolkit support Oracle and
SQL Server for compatibility with existing business systems, robustness and
scalability.
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 OpenSite products use a
variety of Internet access protocols with Hypertext Transfer Protocol including
Common Gateway Interface, Microsoft's Information Server Application Programming
Interface and Netscape's Netscape Server Application Interface. OpenSite
application and services user interfaces are created with Hypertext Markup
Language and JavaScript. Secure network transmission is through the Secure
Socket Layer. Object Services for AuctionNow and Dynamic Pricing Toolkit use
either Microsoft's Component Object Model (COM) and Distributed Component Object
Model (DCOM) or Common Object Request
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Broker Architecture (CORBA) depending on the platform. Both AuctionNow and the
Dynamic Pricing Toolkit were developed using an object-oriented paradigm for
enhanced reusability and maintainability.
INTEGRATION WITH BIDSTREAM.COM. OpenSite Auction, AuctionNow and Dynamic
Pricing Toolkit incorporate design features which allow for the efficient
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.
N-TIER ARCHITECTURE. AuctionNow and Dynamic Pricing Toolkit provide
auction system components that are tailored for use in enterprise N-tier
systems, which minimally provide for a user interface tier, which is typically a
Web server, a business rules tier, which is the auction engine and a database
tier. The auction engine is built with a distributed object interface, providing
flexibility and robustness for customization and integration with other software
systems. Use of the N-tier architecture provides enhanced scalability for
enterprise applications by allowing the three functional tiers to be distributed
over multiple hardware servers. The auction engine's interface to the user
interface tier is constructed as an in-process server, using the Web Application
Interface to the Netscape Enterprise Server and the Information Server
Application Programming Interface to Microsoft's Internet Information Server.
Automatic email notifications are accomplished via the Simple Mail Transfer
Protocol.
PRODUCT DEVELOPMENT
Our product development organization of 23 software engineers, technical
writers, quality assurance professionals and managers are 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 600 deployed solutions.
Most of our development efforts are directed toward producing an
entry-level to enterprise suite of scalable dynamic pricing solutions for
customers, whether they deploy the auction on their own behalf or do so for
their customers as an Application Service Provider.
Our product development organization consists of three product groups, a
documentation group and a quality assurance group. The product development group
follows a structured 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 specifications,
development plans, schedules and test plans. 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 tracking and resolution.
Our product development expenses were approximately $105,000 in 1997,
$695,000 in 1998 and $3.0 million in 1999.
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FUTURE PRODUCTS
We expect to introduce the following products by the end of 2000. Further
development of these products is expected to be required prior to their release.
The following is a summary of the next generation of our software products:
DYNAMIC PRICING TOOLKIT will contain enhancements to more fully
support dynamic commerce marketplaces including programming interfaces that
allow monitoring of sellers and other functions for a business-to-business
Internet dynamic commerce community. In addition, this product will support
International TaxWare and contain other performance enhancements.
AUCTIONNOW will provide third party selling functionality within a
single gallery. With this feature, AuctionNow customers can create an
online trading community that includes third party auctions, giving these
service providers an additional revenue stream. In addition, AuctionNow
will support International TaxWare and contain other performance
enhancements.
OPENSITE AUCTION will include support for RedHat Linux 6.1 and Free
BSD and support for very large bid values. We will continue to enhance and
maintain our current OpenSite Auction product until the Next Generation
OpenSite Auction is released.
NEXT GENERATION OPENSITE AUCTION is intended to replace OpenSite
Auction as our out-of-the-box online auction application based on our
Dynamic Pricing Engine technology. Next Generation OpenSite Auction will
offer many of the robust features of OpenSite Auction Corporate, but offer
integration with electronic commerce applications and enhanced scalability.
Next Generation OpenSite Auction will be targeted to merchants desiring an
online auction solution that offers fast time-to-market, ease of use,
robustness, scalability and an open, extensible system architecture.
We are currently planning to introduce products to address what we believe
to be unmet demand in the demand aggregation and market making areas of dynamic
commerce within the next 18 months.
FUTURE SERVICES
CARTRIDGE PROGRAM. As part of our expanding business development efforts,
we will be selecting key partners' products and services to integrate with our
solutions. Throughout the second half of 2000 we will be developing and
releasing software or services to enable the integration of our software with
those of other companies. These may include integration with products such as
wireless devices, shipping software, transaction processing systems, content
management systems, currency conversion systems and others.
OPENSITE CONCIERGE SERVICE. We will continue to broaden the value-added
services provided through our OpenSite Concierge service. These services may
include additional integration options as identified by our Cartridge Program,
or additional service features such as end-user customer support, custom
integration and development work, or other services as required by our
customers. We will continue to enhance the infrastructure at Exodus
Communications and will upgrade existing systems as necessary. OpenSite
Concierge will utilize all new OpenSite created technology as it becomes
available.
SALES & MARKETING
SALES
Our sales philosophy is to combine direct selling and indirect channel
sales in order to maximize our sales efforts. Our global sales organization
currently has a staff of 30 people, which we expect to significantly expand.
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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 offices in
California and the United Kingdom with a presence in Florida. We have entered
into a letter of intent with TransCosmos to be our exclusive distributor in
Japan for at least two years and have entered into an agreement with The Promar
Group, LLC to assist with our entry into other markets in Asia and in Latin
America.
Our sales strategy takes advantage of a combination of a direct sales force
and indirect sales through resellers and systems integrators. Initially, we
began recruiting a reseller channel to optimize market coverage. These
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. We sell our products
to resellers at a percentage discount off of list price. Resellers typically
provide first-line maintenance and support and receive a percentage of our
maintenance and support fees. At the end of 1999, we began recruiting systems
integrators to enhance our sales and implementation efforts in the enterprise
market. We do not have exclusivity or noncompetition arrangements with any
domestic resellers or systems integrators. Worldwide channel recruitment efforts
have yielded over 90 resellers. We currently have four sales professionals
dedicated to establishing and developing reseller relationships and plan to
continue the expansion of this group. Additionally, we are targeting Internet
Service Providers, Application Service Providers and Internet portals, such as
Excite@Home, to act as resellers of our auction and dynamic pricing
functionality to their customer base through our AuctionNow product.
We have a sales group that concentrates specifically on national accounts
within targeted industry segments, including technology, travel/hospitality,
media, finance and retail. This group also handles any Fortune 1000 companies
that are not included in specifically identified categories. These sales
representatives are located in San Francisco, Florida and the North Carolina
headquarters. We expect to move into additional cities and are targeting the New
York, Austin and Boston areas.
The sales support staff includes sales engineers, a pre-sales group, an
account management group and a sales coordinator. Sales engineers help 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, sell additional services 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 management, building corporate
brand identity, lead generation for all sales channels and outreach to key
industry analysts and targeted press. Our marketing group consists of 14 people
and is divided into the following areas:
PRODUCT MANAGEMENT. Product managers are responsible for positioning
market driven products and services and authoring product marketing plans.
Their duties include providing direction for product development as well as
new product concept planning. Product managers are also responsible for
product forecasts, profitability, segmenting the marketplace and refining
the target customer base for their assigned products.
MARKET INTELLIGENCE AND RESEARCH. The manager of Market Intelligence
is responsible for monitoring industry analyst reports, fielding primary
research studies and managing our ongoing customer panels and customer
satisfaction benchmark studies. We emphasize the
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importance of listening to customers, resellers and prospects, 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, directing channel marketing and
maintaining consistency in the look and feel of the OpenSite corporate
identity. Our marketing program efforts concentrate on targeted trade shows
and media planning, including television, print and online creative
campaigns. The group is also responsible for daily updating of the
corporate Web site. It also works closely with our advertising and
marketing communications agencies to direct our print and television
advertising campaigns, which commenced in 1999. This group also develops
sales tools such as our corporate brochure and product sheets, white papers
and customer touch programs as well as our industry guides -- The Web
Auction Guide and The Web Auction Security Guide. Every program has
measurement tools in place designed 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 relationships that increase sales of our products and create
value for our customers.
We intend to pursue business relationships with service providers,
technology providers and Internet portals. Relationships with service providers
and technology providers are focused on securing recurring revenue and enhancing
our solutions. Relationships with Internet portals are focused on expanding
market reach and increasing brand exposure.
SERVICE RELATIONSHIPS. By bundling the services of third parties with our
products and services, we can provide greater value to our customers at little
or no increased cost. This provides an opportunity for us to leverage our
installed customer base and capture incremental recurring revenue. Our current
service relationships include i-Escrow, an independent Internet escrow service
adding security to online transactions, and FreightQuote.com, an aggregator of
bulk-shipping information, including price and corresponding delivery times.
TECHNOLOGY RELATIONSHIPS. We seek relationships with technology providers
that augment the dynamic commerce process and dynamic commerce infrastructure
providers, including database vendors, commerce platform providers and
enterprise resource planning providers. Our technology relationships include
Open Market, an electronic commerce platform provider, and Intershop
Communications, a leading developer of electronic commerce applications that
allow merchants to integrate separate business functions in the sale of their
products.
INTERNET PORTAL RELATIONSHIPS. The ability to leverage a portal site's
brand, market reach and revenue streams provides the opportunity for us to
accelerate the growth of our market position. In our relationships with
Excite@Home, CNET and VerticalNet, we provide auction functionality for their
sites.
INTERNATIONAL OPERATIONS
We believe that markets outside the United States will provide an
increasing portion of our revenues in the future. We generally introduce our
products internationally by retaining third parties experienced in the sales,
marketing and customer support of Internet solutions in their respective
markets.
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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.
We have retained Japan Entry, LLC to accelerate our expansion into the
Japanese market. With their help, we have entered into a letter of intent with
Transcosmos, Inc. to be our exclusive reseller in Japan for a period of at least
two years. We have also retained The Promar Group, LLC to assist entry into
other markets in Asia and in Latin America.
COMPETITION
ONLINE AUCTION SOLUTIONS
We face competition in a number of areas, including software applications,
content aggregation and auction hosting.
SOFTWARE APPLICATIONS. Our direct competitors include other software
providers, application service providers and systems integrators that 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. These
providers can be segmented into entry and enterprise level. The entry-level
providers tend to offer solutions for companies that desire easy entry into the
auction market without a significant financial investment. Most software is
relatively inexpensive, typically 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.
Another category of software 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
enterprise resource planning 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 WebSphere
product, formerly known as net.Commerce, Moai Technologies and Web Vision.
Recently, Commerce One purchased Commerce Bid and Ariba purchased Trading
Dynamics, each of which may represent future competition.
CONTENT AGGREGATION. A number of aggregation sites exist today, including
Bidder's Edge, AuctionRover, AuctionWatch.com and BidFind.
AUCTION HOSTING. We believe that the outsourced Internet technology model
will become increasingly popular in the auction space. Currently, four main
competitors offer outsourced auction hosting services similar to our OpenSite
Concierge product. They are the Bidder Network, Bidland, FairMarket and Moai
Technologies.
DYNAMIC COMMERCE
We have traditionally competed in the online auction and dynamic pricing
solutions market. However, with our new Dynamic Pricing Toolkit and other
products and services that are under development, we have begun to compete in
the larger realm of dynamic commerce. This arena focuses not only on traditional
online auctions, but also on other forms of dynamic commerce, including:
DEMAND AGGREGATION. Multiple buyers combine common purchases to form
consolidated groups, gaining market advantages and efficiency through volume.
These consolidated groups
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typically negotiate an advantageous price through their combined market power.
Competitors in this arena mainly consist of destination sites that offer sellers
a market to liquidate excess inventory through their aggregated buying groups.
Currently, there are no application providers of demand aggregation software.
Sites that offer group buying or demand aggregation include Mercata, Accompany,
and NexTag. Applications that enable this type of dynamic commerce are currently
in the planning stages.
MARKET MAKING. A trading community of multiple buyers and multiple sellers
who trade online in a bid and ask format. Under this format, price fluctuates
between two points driven by a series of negotiated intervals between a buyer
and seller. The transaction is completed when either party agrees to the price
provided. Some vendors offer dynamic commerce solutions to automate the process
for a buyer and a seller to engage in a bid-and-ask process to sell and procure
products, for example Tradex, which was recently purchased by Ariba. In
addition, online marketplaces such as Chemdex, may expand their offerings to
include dynamic commerce capability. Applications that enable this type of
dynamic commerce are currently in the planning stages.
ONLINE PROCUREMENT. Today, companies are utilizing reverse auctions for a
variety of reasons. The most common is to automate the process for
requests-for-proposal with descending price as one of the components. This
format typically has a single buyer posting items for intended purchase, and
multiple sellers bidding on those items in a reverse auction format in which the
price descends on subsequent bids. A transaction occurs when a "winner" is
selected based on the lowest price and possibly other variables. Applications
for reverse auctions can enable net markets as well as the pricing conducted
throughout a supply chain. OpenSite Auction, AuctionNow and our Dynamic Pricing
Toolkit products all contain reverse auction functionality. Companies
representing that they have this software capability include Commerce One and
Ariba. FreeMarkets provides a service for single-event procurement reverse
auctions for the procurement of production parts, raw materials and commodities.
We do not currently consider FreeMarkets a direct competitor because their
offering is not provided as an ongoing application through a purchased license
or outsourced service.
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. To date, none of our technology is patented. However, we
continue to assess on an ongoing basis whether to use patents as a method to
protect aspects of our intellectual property. Currently, our most important
proprietary rights are those embodied in our Dynamic Pricing Toolkit, AuctionNow
and OpenSite Auction products 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 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 that 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.
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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 through 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 within a single operating environment
by trained 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 other marks
and have applications pending with the US Patent and Trademark Office for
registration of nine 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. We
have filed a trademark infringement lawsuit in federal court against
AuctionWatch.com relating to our registered trademark "AuctionWatch." Additional
litigation may be required in the future to enforce our trademark rights.
We integrate third party software into our products. This software has been
acquired pursuant to license agreements and is supported by annual maintenance
and support agreements with the software vendor. If we cannot continue to obtain
licenses to these technologies or continue to obtain support from the providers,
development and delivery of our planned software releases could be delayed until
functionally equivalent software can 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. Except as described
below, 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. These
claims, whether or not they have merit, are likely to be time-consuming and
costly to defend, require the use of substantial management attention and
resources and could result in the need to enter into
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<PAGE> 66
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.
In two instances we have received notices claiming that our technology
infringed the intellectual property rights of others. While in one instance we
have been offered a license of the intellectual property in question, we have
declined that offer because we believe that no patent infringement exists. The
second allegation claimed infringement of a patent application. Since the patent
has not been issued, it cannot have been infringed. We are currently unable to
assess any potential claims that may exist if the patent is issued.
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. For instance, Congress has recently enacted the Digital
Millennium Copyright Act relating to the availability and protection of
copyrighted works on the Internet. Congress continues to consider laws relating
to Internet taxation. Several states have taken the position that their laws and
regulations governing the conduct, licensing and liability of auctions and
auctioneers apply to online auctions. 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 December 31, 1999, we had 107 full-time employees, of which 47 were
in product development and customer services, 44 in sales and marketing and 16
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 33,000 square feet in Durham,
North Carolina. We also maintain sales offices in California and in the United
Kingdom. With an expansion of our North Carolina facility to a total of 42,000
square feet, currently under negotiation, we believe our facilities are adequate
for our current requirements and will meet our growth needs for the foreseeable
future.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings. However, we have
entered into a letter of intent to acquire Bidder's Edge, which is currently
engaged in a lawsuit filed by eBay. See "Business -- Proposed Acquisition of
Bidder's Edge" for a more detailed discussion of this lawsuit.
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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.............................. 41 President, Chief Executive Officer and
Director
Thomas F. Hanlon, III.................... 35 Senior Vice President, Sales and Business
Development
Douglas B. Kubel......................... 42 Senior Vice President, Technology
Timothy K. Oakley........................ 38 Senior Vice President and Chief Financial
Officer
Roger R. Edgar........................... 36 Vice President, Corporate Development and
Strategy
James R. Ford............................ 46 Vice President, Finance
Grace Ueng Trombetta..................... 34 Vice President, Marketing
Richard E. Widin......................... 44... Vice President, Business and Legal
Affairs
Justin Hall-Tipping(1)................... 42 Director
Russell Howard(2)........................ 38 Director
Michael Brader-Araje..................... 31 Director
Ross B. Kenzie(1)........................ 68 Director
Mitchell M. Mumma(2)..................... 40 Director
Alan J. Taetle(1)........................ 36 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, Inc. 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. Mr. Frey negotiated and closed the sale of Ventana to International
Thomson Publishing in 1994. 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 an Adjunct Professor at Duke University's
Sanford Institute for Public Policy Studies and a visiting lecturer at Duke Law
School. He 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.
THOMAS F. HANLON, III has served as our Senior Vice President, Sales and
Business Development since January, 2000. From March 1999 to December 1999, he
served as our Vice President, Sales and Business Development, 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
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<PAGE> 68
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.
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.
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 1994
to January 1998, Mr. Ford served as Controller for Ventana Communications, a
division of International Thomson Publishing, a multimedia and software
publisher. Mr. Ford received an M.B.A. from Florida State University and a B.S.
in Accounting and Finance from Gardner-Webb College.
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 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.
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MICHAEL BRADER-ARAJE, founder of OpenSite, has served as a director of
OpenSite from our inception to May 1999 and from January 2000 to present. Mr.
Brader-Araje served as our Chief Executive Officer from February 1996 to March
1999. From May 1996 to April 1997, Mr. Brader-Araje served as Director of
Internet Services for SciQuest, a Web-based marketplace for scientific products.
From October 1993 to April 1996, Mr. Brader-Araje served as a consultant to
public and private schools working on technology in education initiatives. Mr.
Brader-Araje received a M.Ed. from the University of Massachusetts -- Amherst, a
M.A. in English from the University of Rochester and a B.A. in English from
Lafayette College.
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.
RUSSELL HOWARD has served as a director of OpenSite since January 2000. Mr.
Howard has served as a Senior Vice President in the Technology and Information
Services Group within GE Equity since 1994. Mr. Howard has been part of GE
Equity since 1994 and has been focused on electronic commerce and Internet
software investing since 1997. From 1990 to 1994, Mr. Howard was a Senior
Investment Manager for Equitable Capital Management Corp. in its private
investing group. From 1984 to 1988, Mr. Howard served as Senior Associate for
The Futures Group, a Connecticut-based management consulting firm specializing
in long term strategic and technology consulting. Mr. Howard received an M.B.A.
from the Darden School at the University of Virginia and a B.A. in Economics,
cum laude, from Williams 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 1979, 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.
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. Messrs.
Hall-Tipping, Howard, Kenzie, Mumma and Taetle were elected to the board of
directors in accordance with a Shareholders Agreement. This Shareholders
Agreement has been terminated, and no continuing obligation to elect these
persons to the board of directors will exist following this offering. Our letter
of intent with
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Bidder's Edge provides that its shareholders will have the right to appoint two
additional directors to our board of directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The members of the Audit Committee are Messrs. Howard 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, Hall-Tipping,
and Taetle. Mr. Kenzie is Chairman of the Compensation Committee. 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 1999 for our Chief Executive Officer, our former Chief Executive Officer
and our four other most highly compensated executive officers who earned more
than $100,000 during 1999. We may refer to these persons as our named executive
officers elsewhere in this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION(2)
- --------------------------- ------ ----- ---------- ---------------
<S> <C> <C> <C> <C>
Kip A. Frey......................... $181,971 $ 91,500 50,000 $2,531
Michael Brader-Araje(1)............. 99,562 7,500 -- 2,416
Thomas F. Hanlon, III............... 85,168 114,096 90,000 2,606
Grace Ueng Trombetta................ 110,308 13,000 100,000 1,712
James R. Ford....................... 103,569 11,700 -- 1,532
Timothy K. Oakley................... 85,593 25,000 350,000 1,969
</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.
OPTION GRANTS
The following table provides summary information regarding stock options
granted to our named executive officers during 1999.
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<PAGE> 71
We calculated the potential realizable value of options in the table
assuming the exercise price on the date the grant appreciates at the indicated
rate for the entire term of the option and that the option holder exercises his
options on the last day of its term at the appreciated price. All options listed
have a term of 10 years. We assumed stock price appreciation of 5% and 10%
pursuant to the rules of the Securities and Exchange Commission. We cannot
assure you that the actual stock price will appreciate over the 10-year option
term at the assumed 5% and 10% levels or at any other rate.
OPTION GRANTS DURING 1999
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENTAGE VALUE AT
NUMBER OF OF TOTAL ASSUMED ANNUAL RATES
SECURITIES OPTIONS EXERCISE OF
UNDERLYING GRANTED TO PRICE STOCK PRICE
OPTIONS EMPLOYEES PER EXPIRATION APPRECIATION FOR
GRANTED IN 1999 SHARE DATE OPTION TERM
---------- ---------- -------- ---------- --------------------
NAME 5% 10%
- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Kip A. Frey.................... 50,000 3.7% $5.00 5/26/09
Michael Brader-Araje........... -- -- -- --
Thomas F. Hanlon, III.......... 60,000 4.4 5.00 5/26/09
30,000 2.2 0.08 7/10/08
Grace Ueng Trombetta........... 15,000 1.1 0.15 1/29/09
85,000 6.3 0.15 12/11/08
James R. Ford.................. -- -- -- --
Timothy K. Oakley.............. 350,000 25.8 5.00 7/6/09
</TABLE>
FISCAL YEAR END OPTION VALUES
The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by our named
executive officers as of December 31, 1999. None of these executive officers
exercised options during 1999. We have calculated the value of in-the-money
options based on the estimated fair market value for our common stock of $5.24
per share on December 31, 1999.
<TABLE>
<CAPTION>
FISCAL YEAR END OPTION
VALUES
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED IN-THE-MONEY
DECEMBER 31, 1999 OPTIONS AT DECEMBER 31, 1999
--------------------------- ----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Kip A. Frey....................... 0 50,000
Michael Brader-Araje.............. -- --
Thomas F. Hanlon, III............. 11,875 78,125
Grace Ueng Trombetta.............. 29,166 70,834
James R. Ford..................... -- --
Timothy K. Oakley................. 0 350,000
</TABLE>
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 3,457,251 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 plan may be
either options intended to qualify as "incentive stock options" under Section
422 of the Code or nonqualified stock options.
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As of December 31, 1999, 42,749 shares of common stock had been issued
under the stock option plan and options to purchase 1,813,622 shares of common
stock were outstanding under the stock option plan at a weighted average
exercise price of $3.14 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.
In June 1999, OpenSite and Timothy K. Oakley entered into a letter
agreement concerning the terms of his employment as Senior Vice President and
Chief Financial Officer. The letter agreement provides for an annual salary of
$175,000, a signing bonus of $25,000 and a targeted bonus of up to 40% of his
annual salary. The bonus will be paid semi-annually based equally on OpenSite's
performance and his performance in meeting agreed upon objectives. Mr. Oakley
was also granted options to acquire 350,000 shares pursuant to the letter
agreement. Of these options, 300,000 are subject to a time-based vesting
schedule over four years, provided that vesting may be partially accelerated
based on the value of OpenSite's common stock achieving specified values over
this time. The remaining 50,000 options will vest upon the earlier of the
completion of four years of service and the achievement of agreed upon
performance objectives. If we terminate Mr. Oakley's employment without cause,
Mr. Oakley will be entitled to receive a severance payment equal to his then
current salary.
In January 2000, the board of directors adopted change of control
compensation provisions for our other executive officers. Each of these
executives will receive 12 months salary and 50% of his or her annual bonus if
he or she is terminated or constructively terminated following a change of
control of OpenSite.
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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 December 31, 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 December 31,
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 December 31, 1999 and as adjusted to reflect
the sale by OpenSite of common stock in this offering by:
- each director of OpenSite;
- all executive officers and directors of OpenSite as a group; and
- 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................. 4,000,000(2) 14.4% 4,000,000
9 North Parkway Square
4200 Northside Parkway, NW
Atlanta, Georgia 30327
Auction Ventures, LLC......................... 3,243,681 11.7 3,243,681
369 Franklin Street
Buffalo, New York 14202
SGC Partners II LLC........................... 3,125,000(3) 11.3 3,125,000
1221 Avenue of the Americas
New York, New York 10020
Michael Brader-Araje.......................... 2,839,312 10.2 2,839,312
Mark Jauquet.................................. 2,839,312 10.2 2,839,312
GE Capital Equity Investments, Inc............ 2,500,000(4) 9.0 2,500,000
120 Long Ridge Road
Stamford, Connecticut 06927
Intersouth Partners IV, L.L.C................. 2,437,500 8.8 2,437,500
One Copley Parkway, Suite 102
Morrisville, North Carolina 27713
Southeast Interactive Technology Fund II,
LLC......................................... 1,875,000 6.8 1,875,000
2525 Meridian Parkway, Suite 300
Durham, North Carolina 27713
Wakefield Group, II, LLC...................... 1,562,500 5.6 1,562,500
1110 East Morehead Street
Charlotte, North Carolina 28204
CNET, Inc..................................... 1,500,000 5.4 1,500,000
150 Chestnut Street
San Francisco, California 94111
Kip A. Frey................................... 650,000 2.3 650,000
Justin Hall-Tipping........................... -- -- -- --
Russell Howard................................ -- -- -- --
Ross B. Kenzie................................ 3,243,681(5) 11.7 3,243,681
Mitchell M. Mumma............................. 2,437,500(6) 8.8 2,437,500
Alan J. Taetle................................ 4,000,000(7) 14.4 4,000,000
All directors and executive officers as a
group (14 persons)(2)(3)(4)(5)(6)(7)........ 13,260,493 47.8 13,260,493
</TABLE>
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- ---------------
(1) For purposes of calculating the percentage beneficially owned, the number of
shares of common stock deemed outstanding prior to this offering consists of
27,734,844 shares outstanding as of December 31, 1999. The number of shares
of common stock deemed outstanding after this offering includes an
additional 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 II 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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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 December 31, 1999, we had issued and outstanding
27,734,844 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. In
addition, the issuance of preferred stock may have the effect of limiting or
modifying the rights of holders of our common stock. 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 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.
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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 may prevent a Delaware corporation, including one whose securities are
listed for trading on the Nasdaq National Market, from engaging 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.
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
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<PAGE> 78
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 20,243,681 shares of our common stock and 196,257 shares of common
stock subject to an outstanding warrant. Subject to specified limitations,
approximately six months after the 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 March 2001, these holders may make such demands on an
unlimited number of occasions.
Our letter of intent with Bidder's Edge provides for the issuance of
8,941,307 shares of common stock in connection with the acquisition following
the consummation of this offering. Pursuant to the letter of intent, the holders
of these shares will be entitled to registration rights that are, generally,
similar to those granted to existing holders of restricted common stock.
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.
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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> 80
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
shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
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. In addition, shares sold in this offering
will be subject to the lock-up agreements described below assuming that we sell
all shares reserved under our directed share program to the entities or persons
for whom these shares have been reserved. The remaining 27,734,844 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 under our directed share program and the
restricted securities will be available for sale in the public market as
follows:
- 1,162,539 shares will be freely tradable without restriction or
registration under the Securities Act upon expiration of the lock-up
agreements; and
- 26,572,305 shares may be eligible for sale in accordance with the
requirements of Rule 144 upon expiration of the lock-up agreements.
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 Goldman, Sachs & Co., 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.
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 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.
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<PAGE> 81
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
20,243,681 shares of our common stock and the holder of 196,257 shares of our
common stock issuable upon the exercise of warrants outstanding as of December
31, 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 228,373
shares of our common stock are fully vested as of December 31, 1999. Of the
total shares issuable pursuant to these vested options, are subject to
the 180-day lock-up agreements described above. As of December 31, 1999, options
to purchase an additional 1,643,629 shares of common stock were outstanding but
subject to future vesting and an additional 1,454,409 shares of common stock
were available for future grants under our stock option plan. In addition,
196,257 shares of common stock are issuable upon the exercise of warrants
outstanding as of December 31, 1999.
BIDDER'S EDGE. The letter of intent provides for the issuance of 8,941,307
shares of common stock in connection with our acquisition of Bidder's Edge
following the consummation of this offering. These shares will be restricted
securities. The holders of these shares will be entitled to rights with respect
to the registration of these shares under the Securities Act.
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.
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 other legal matters relating to this offering will
be passed on for us by 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.
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UNDERWRITING
OpenSite and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to certain
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman, Sachs & Co., Chase Securities
Inc., The Robinson-Humphrey Company, LLC and SoundView Technology Group, Inc.
are the representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ------------ ---------
<S> <C>
Goldman, Sachs & Co.........................................
Chase Securities Inc........................................
The Robinson-Humphrey Company, LLC..........................
SoundView Technology Group, Inc.............................
Wachovia Securities, Inc....................................
TOTAL..................................................
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from OpenSite to cover these sales. They may exercise that
option for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by OpenSite. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
Paid by OpenSite
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per Share.......................................... $ $
Total.............................................. $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any of those
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $ per share from the initial
public offering price. If all the shares are not sold at the initial public
offering price, the representatives may change the offering price and the other
selling terms.
OpenSite and its directors, officers, employees and other holders of
substantially all its securities have agreed with the underwriters, subject to
limited exceptions, not to dispose of or hedge any of their common stock or
securities convertible into or exchangeable for shares of common stock during
the period from the date of this prospectus through the date 180 days after the
date of this prospectus, except with the prior written consent of the
representatives. See "Shares Eligible for Future Sale" for a discussion of
certain transfer restrictions.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be negotiated
among OpenSite and the representatives of the underwriters. Among the factors to
be considered in determining the initial public offering price of the shares, in
addition to prevailing market conditions, are OpenSite's historical performance,
estimates of OpenSite's business potential and earnings prospects, an assessment
of OpenSite's management and the consideration of the above factors in relation
to the market valuation of companies in related businesses.
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A prospectus in electronic format may be made available on the Web sites
maintained by one or more of the underwriters of this offering. The underwriters
may agree to allocate a number of shares to underwriters for sale to their
online brokerage account holders. Internet distributions will be allocated by
the representatives to underwriters that may make Internet distributions on the
same basis as other allocations.
OpenSite has applied to have its common stock approved for quotation on the
Nasdaq National Market under the symbol "OPNS".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purposes of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to other underwriters a portion of the
underwriting discount received by it because the representatives have
repurchased shares sold by or for the account of such underwriter in stabilizing
or short-sale covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
At the request of OpenSite, the underwriters have reserved for sale at the
initial public offering price an aggregate of shares in this
offering as follows:
- up to shares to The Chase Manhattan
Corporation;
- up to shares to CNET, Inc;
- up to shares to Excite@Home;
- up to shares to InfoSpace.com, Inc.;
- up to shares to TransCosmos, Inc.; and
- up to shares to VerticalNet.
The number of shares available for sale to the general public will be
reduced by the number of reserved shares sold. Any reserved shares not so
purchased will be offered by the underwriters to the general public on the same
basis as other shares offered hereby.
OpenSite estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ .
OpenSite has agreed to indemnify the underwriters against various
liabilities, including liabilities under the Securities Act of 1933.
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EXPERTS
The consolidated financial statements of OpenSite as of December 31, 1998
and 1999 and for each of the three years in the period ended December 31, 1999
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Bidder's Edge as of December 31, 1998 and 1999
and for the years then ended and for the period from inception through December
31, 1999 included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
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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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Pro Forma Condensed Combined Balance Sheet as of December
31, 1999 (Unaudited)................................... F-3
Pro Forma Condensed Combined Statement of Operations for
the year ended December 31, 1999 (Unaudited)........... F-4
Pro Forma Condensed Combined Statement of Operations for
the year ended December 31, 1998 (Unaudited)........... F-5
Pro Forma Condensed Combined Statement of Operations for
the year ended December 31, 1997 (Unaudited)........... F-6
Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited)............................................ F-7
OPENSITE TECHNOLOGIES, INC. CONSOLIDATED FINANCIAL
STATEMENTS
Report of Independent Accountants......................... F-9
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... F-10
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999....................... F-11
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996, 1997, 1998 and
1999................................................... F-12
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999....................... F-13
Notes to Consolidated Financial Statements................ F-14
BIDDER'S EDGE, INC. FINANCIAL STATEMENTS
Report of Independent Accountants......................... F-29
Balance Sheets as of December 31, 1998 and 1999........... F-30
Statements of Operations for the years ended December 31,
1998 and 1999 and for the period from April 7, 1997
(date of inception) to December 31, 1999............... F-31
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1997, 1998 and 1999................. F-32
Statements of Cash Flows for the years ended December 31,
1998 and 1999 and for the period from April 7, 1997
(date of inception) to December 31, 1999............... F-33
Notes to Financial Statements............................. F-34
</TABLE>
F-1
<PAGE> 86
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
The following is an unaudited pro forma condensed combined balance sheet
(the "Pro Forma Balance Sheet") as of December 31, 1999 and unaudited pro forma
condensed combined statements of operations (the "Pro Forma Statements of
Operations") for the years ended December 31, 1997, 1998, and 1999. The Pro
Forma Balance Sheet assumes the Company's proposed acquisition of Bidder's Edge,
Inc. (the "Proposed Acquisition") was consummated as of December 31, 1999 and
accounted for as a pooling-of-interests as defined by Accounting Principles
Board Opinion No. 16 ("APB No. 16"). The Pro Forma Statements of Operations for
the years ended December 31, 1997, 1998, and 1999 give effect to the Company's
Proposed Acquisition as if such transaction been consummated on January 1, 1997
and accounted for as a pooling-of-interests.
For all periods presented in the Pro Forma Statements of Operations, the
average number of common and common equivalent shares gives effect to the
issuance of 8,941,307 shares of OpenSite Technologies, Inc.'s ("OpenSite")
common stock, a proposed 3.3706 exchange ratio (the "Exchange Ratio"), for all
of the issued and outstanding shares of Bidder's Edge, Inc. ("Bidder's Edge").
The Pro Forma Statements of Operations do not reflect any expenses of the
Proposed Acquisition, which are expected to be approximately $400,000.
Certain data and notes normally included in the financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The accompanying unaudited pro forma condensed combined
financial statements and notes ("Pro Forma Financial Statements") have been
prepared by the management of OpenSite and Bidder's Edge based upon the
historical financial statements of OpenSite and Bidder's Edge. The Pro Forma
Financial Statements should be read in conjunction with the historical financial
statements of OpenSite and Bidder's Edge included elsewhere in this prospectus.
The Pro Forma Financial Statements do not purport to be indicative of the
actual financial position or results of operations that would have been achieved
had the Company's Proposed Acquisition been consummated as of the assumed dates
or that may be achieved in the future.
F-2
<PAGE> 87
OPENSITE TECHNOLOGIES, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
OPENSITE AND
BIDDER'S EDGE
OPENSITE BIDDER'S EDGE CONFORMING PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents....... $ 10,599,244 $ 4,802,054 $ -- $ 15,401,298
Investments, held-to-maturity... -- 1,963,213 -- 1,963,213
Accounts receivable, net........ 2,385,814 -- -- 2,385,814
Prepaid expenses................ 338,439 45,060 -- 383,499
------------ ----------- ------------ ------------
Total current
assets.............. 13,323,497 6,810,327 -- 20,133,824
Property and equipment, net..... 1,064,290 297,520 -- 1,361,810
Investments held-to-maturity.... -- 700,889 -- 700,889
Notes receivable from officer... 300,000 -- -- 300,000
Other assets.................... 259,762 -- -- 259,762
------------ ----------- ------------ ------------
Total assets.......... $ 14,947,549 $ 7,808,736 $ -- $ 22,756,285
============ =========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable................ $ 204,210 $ 459,949 $ -- $ 664,159
Accrued expenses................ 3,034,027 208,913 400,000(1) 3,642,940
Deferred revenue................ 1,762,346 -- -- 1,762,346
------------ ----------- ------------ ------------
Total current
liabilities......... 5,000,583 668,862 400,000 6,069,445
Mandatorily redeemable
convertible preferred stock in
series........................ 80,458,786 -- (80,458,786)(2) --
Stockholders' equity (deficit):
Preferred stock in series..... -- 11,527 (11,527)(3) --
Common stock.................. 93,547 15,000 183,802(2) 366,762
74,413(3)
Additional paid-in capital.... -- 10,924,715 77,479,710(2) 88,341,539
(62,886)(3)
Deferred compensation......... (93,273) (152,144) (245,417)
Treasury stock................ (2,795,274) -- 2,795,274(2) --
Accumulated other
comprehensive income....... (1,389) -- -- (1,389)
Accumulated deficit........... (67,636,931) (3,659,224) (400,000)(1) (71,696,155)
Notes receivable from
stockholders............... (78,500) -- -- (78,500)
------------ ----------- ------------ ------------
Total stockholders'
equity (deficit).... (70,511,820) 7,139,874 80,058,786 16,686,840
------------ ----------- ------------ ------------
Total liabilities and
stockholders' equity
(deficit)........... $ 14,947,549 $ 7,808,736 $ -- $ 22,756,285
============ =========== ============ ============
</TABLE>
See accompanying notes to pro forma condensed combined financial statements
(unaudited).
F-3
<PAGE> 88
OPENSITE TECHNOLOGIES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
OPENSITE AND
BIDDER'S EDGE
OPENSITE BIDDER'S EDGE CONFORMING PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Revenue........................ $ 7,877,639 $ -- $ -- $ 7,877,639
Cost and operating expense:
Cost of revenue.............. 1,862,804 -- -- 1,862,804
Sales and marketing.......... 10,629,393 959,637 -- 11,589,030
Product development.......... 2,979,795 1,395,042 -- 4,374,837
General and administrative... 5,210,056 805,776 -- 6,015,832
------------ ----------- ----------- ------------
Total operating
expense............ 20,682,048 3,160,455 -- 23,842,503
------------ ----------- ----------- ------------
Operating loss....... (12,804,409) (3,160,455) -- (15,964,864)
Interest income, net........... 598,953 159,560 -- 758,513
------------ ----------- ----------- ------------
Net loss..................... (12,205,456) (3,000,895) -- (15,206,351)
Accretion of preferred stock... (53,163,530) -- 53,163,530(b) --
------------ ----------- ----------- ------------
Net loss available to
common
stockholders....... $(65,368,986) $(3,000,895) $53,163,530 $(15,206,351)
============ =========== =========== ============
Net loss available to common
stockholders per common
share -- basic and diluted... $ (8.34) $ (0.46)
============ ============
Weighted average shares used in
basic and diluted net loss
available to common
stockholders per common share
calculation(a)............... 7,837,992 32,882,267
============ ============
</TABLE>
See accompanying notes to pro forma condensed combined financial statements
(unaudited).
F-4
<PAGE> 89
OPENSITE TECHNOLOGIES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
OPENSITE AND
BIDDER'S EDGE
OPENSITE BIDDER'S EDGE CONFORMING PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Total revenue....................... $ 1,280,545 $ -- $ -- $ 1,280,545
Cost and operating expense:
Cost of revenue................... 148,489 -- -- 148,489
Sales and marketing............... 1,917,745 44,849 -- 1,962,594
Product development............... 695,282 284,752 -- 980,034
General and administrative........ 922,689 258,660 -- 1,181,349
----------- ---------- ----------- -----------
Total operating
expenses................ 3,684,205 588,261 -- 4,272,466
----------- ---------- ----------- -----------
Operating loss............ (2,403,660) (588,261) -- (2,991,921)
Interest income (expense), net...... 42,943 (20,545) -- 22,398
----------- ---------- ----------- -----------
Net loss.................. (2,360,717) (608,806) -- (2,969,523)
Distributions to preferred
stockholders...................... (39,457) -- -- (39,457)
Accretion of preferred stock........ (324,661) -- -- (324,661)
----------- ---------- ----------- -----------
Net loss available to
common stockholders..... $(2,724,835) $ (608,806) $ -- $(3,333,641)
=========== ========== =========== ===========
Net loss available to common
stockholders per common share --
basic and diluted................. $ (0.32) $ (0.25)
=========== ===========
Weighted average shares used in
basic and diluted net loss
available to common stockholders
per common share calculation(a)... 8,622,739 13,515,779
=========== ===========
</TABLE>
See accompanying notes to pro forma condensed combined financial statements
(unaudited).
F-5
<PAGE> 90
OPENSITE TECHNOLOGIES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
OPENSITE AND
BIDDER'S EDGE
OPENSITE BIDDER'S EDGE CONFORMING PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Revenue............................... $ 339,703 $ -- $ -- $ 339,703
Cost and operating expense:
Cost of revenue..................... 28,010 -- -- 28,010
Sales and marketing................. 43,541 -- -- 43,541
Product development................. 105,054 25,244 -- 130,298
General and administrative.......... 35,607 24,279 -- 59,886
--------- ---------- --------- -----------
Total operating expense..... 212,212 49,523 -- 261,735
--------- ---------- --------- -----------
Operating income (loss)..... 127,491 (49,523) -- 77,968
Interest income (expense), net........ 2,336 -- -- 2,336
--------- ---------- --------- -----------
Net income (loss)........... $ 129,827 $ (49,523) $ -- $ 80,304
========= ========== ========= ===========
Net income (loss) per common
share -- basic and diluted.......... $ 0.02 $ 0.01
========= ===========
Weighted average shares used in basic
and diluted net income (loss) per
common share calculation(a)......... 8,142,676 11,513,276
========= ===========
</TABLE>
See accompanying notes to pro forma condensed combined financial statements
(unaudited).
F-6
<PAGE> 91
OPENSITE TECHNOLOGIES, INC.
NOTES TO PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined financial statements reflect the
combined operations and financial position of OpenSite and Bidder's Edge as if
the Proposed Acquisition had been consummated and accounted for as a
pooling-of-interests. The unaudited pro forma condensed combined balance sheet
presents the combined financial position of OpenSite and Bidder's Edge as if the
Proposed Acquisition was consummated on December 31, 1999.
The pro forma adjustments are based on available information and certain
estimates and assumptions. Therefore, it is likely that the actual adjustments
will differ from the pro forma adjustments. OpenSite and Bidder's Edge believe
that such adjustments provide a reasonable basis for presenting all of the
significant effects of the Proposed Acquisition. Management of OpenSite and
Bidder's Edge also believe that the pro forma adjustments give appropriate
effect to those assumptions and are properly applied in the pro forma condensed
combined financial statements.
The pro forma financial statements do not reflect any synergies, cost
savings and operational efficiencies that may become available to the combined
enterprise as a result of the Proposed Acquisition.
2. PRO FORMA ACCOUNTING ADJUSTMENTS -- BALANCE SHEET
(1) To increase pro forma combined accumulated deficit for non-recurring
costs (as currently estimated by management) directly associated with the
Proposed Acquisition, estimated at approximately $400,000. These costs will be
expended upon consummation of the Proposed Acquisition.
(2) To reflect the conversion of 20,243,681 shares of OpenSite's
mandatorily redeemable convertible preferred stock into 20,243,681 shares of
OpenSite's common stock, of which 1,863,515 will be issued from Treasury.
(3) To reflect the conversion of 1,152,727 shares of Bidder's Edge Series A
and Series B convertible preferred stock into 1,152,727 shares of Bidder's Edge
common stock immediately prior to the Proposed Acquisition and the issuance of
8,941,307 shares of OpenSite's common stock in exchange for all of the issued
and outstanding shares of Bidder's Edge common stock.
F-7
<PAGE> 92
OPENSITE TECHNOLOGIES, INC.
NOTES TO PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
3. PRO FORMA ACCOUNTING ADJUSTMENTS -- INCOME STATEMENT
(a) Pro forma net income (loss) per share is computed by dividing the pro
forma net income (loss) by the pro forma weighted average shares outstanding for
the period presented. The pro forma weighted average shares outstanding ("WASO")
for the years ended December 31, 1997, 1998, and 1999 is calculated as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
OpenSite WASO....................................... 8,142,676 8,622,739 7,837,992
Bidder's Edge WASO adjusted for the Exchange Ratio.. 3,370,600 4,494,132 5,055,900
Conversion of Bidder's Edge shares into common
stock, adjusted for the Exchange Ratio............ -- 398,908 2,549,690
Conversion of OpenSite mandatorily redeemable
preferred stock into common stock................. -- -- 17,438,685
----------- ----------- -----------
11,513,276 13,515,779 32,882,267
=========== =========== ===========
</TABLE>
(b) To reflect the elimination of the accretion of the OpenSite mandatorily
redeemable preferred stock as a result of the assumed conversion of the
mandatorily redeemable preferred stock as of January 1, 1999.
F-8
<PAGE> 93
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
OpenSite Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated 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, 1998 and 1999, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Raleigh, North Carolina
January 28, 2000
F-9
<PAGE> 94
OPENSITE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
------------------------ 1999
1998 1999 (UNAUDITED)
---- ---- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $2,276,031 $10,599,244 $10,599,244
Accounts receivable, net......................... 303,312 2,385,814 2,385,814
Prepaid expenses................................. 61,591 338,439 338,439
---------- ----------- -----------
Total current assets.......................... 2,640,934 13,323,497 13,323,497
Property and equipment, net........................ 417,723 1,064,290 1,064,290
Note receivable from officer....................... -- 300,000 300,000
Other assets....................................... 11,032 259,762 259,762
---------- ----------- -----------
Total assets.................................. $3,069,689 $14,947,549 $14,947,549
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................. $ 75,542 $ 204,210 $ 204,210
Accrued expenses................................. 408,839 3,034,027 3,034,027
Deferred revenue................................. 354,802 1,762,346 1,762,346
Capital lease obligations -- current portion..... 22,155 -- --
---------- ----------- -----------
Total current liabilities..................... 861,338 5,000,583 5,000,583
Capital lease obligations -- noncurrent portion.... 42,765 -- --
Redeemable common stock warrants................... 54,221 -- --
Mandatorily redeemable convertible preferred stock
in series........................................ 4,817,892 80,458,786 --
Commitments and contingencies (Note 11)
Stockholders' equity (deficit):
Common stock, $.01 par value, 40,000,000 shares
authorized: 9,090,876 and 9,354,678 shares
issued and outstanding at December 31, 1998
and 1999, respectively; 27,734,844 shares
issued and outstanding pro forma.............. 90,909 93,547 295,984
Additional paid-in capital....................... -- -- 77,461,075
Deferred compensation............................ -- (93,273) (93,273)
Treasury stock, at cost, 1,863,515 shares at
December 31, 1999; none pro forma............. -- (2,795,274) --
Accumulated other comprehensive income........... -- (1,389) (1,389)
Accumulated deficit.............................. (2,718,936) (67,636,931) (67,636,931)
Notes receivable from stockholders............... (78,500) (78,500) (78,500)
---------- ----------- -----------
Total stockholders' equity (deficit).......... (2,706,527) (70,511,820) 9,946,966
---------- ----------- -----------
Total liabilities and stockholders' equity
(deficit)................................... $3,069,689 $14,947,549 $14,947,549
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 95
OPENSITE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue:
Software licenses............................. $ 177,234 $ 1,072,152 $ 6,437,253
Services and other............................ 162,469 208,393 1,440,386
---------- ----------- ------------
Total revenue............................ 339,703 1,280,545 7,877,639
---------- ----------- ------------
Cost and operating expense:
Cost of software licenses..................... 9,000 17,550 456,254
Cost of services and other.................... 19,010 130,939 1,406,550
Sales and marketing........................... 43,541 1,917,745 10,629,393
Product development........................... 105,054 695,282 2,979,795
General and administrative.................... 35,607 922,689 5,210,056
---------- ----------- ------------
Total operating expense.................. 212,212 3,684,205 20,682,048
---------- ----------- ------------
Operating income (loss).................. 127,491 (2,403,660) (12,804,409)
---------- ----------- ------------
Interest income (expense):
Interest income............................... 2,336 48,362 604,283
Interest expense.............................. -- (5,419) (5,330)
---------- ----------- ------------
Interest income (expense), net............. 2,336 42,943 598,953
---------- ----------- ------------
Net income (loss)........................ 129,827 (2,360,717) (12,205,456)
Distributions to preferred stockholders......... -- (39,457) --
Accretion of preferred stock.................... -- (324,661) (53,163,530)
---------- ----------- ------------
Net income (loss) available to common
stockholders.......................... $ 129,827 $(2,724,835) $(65,368,986)
========== =========== ============
Net income (loss) available to common
stockholders per common share-basic and
diluted....................................... $ 0.02 $ (0.32) $ (8.34)
========== =========== ============
Weighted average shares used in basic and
diluted net income (loss) per common share
calculation................................... 8,142,676 8,622,739 7,837,992
========== =========== ============
Pro forma per common share data (unaudited):
Pro forma net loss per common share-basic and
diluted.................................... $ (0.48)
============
Pro forma weighted average basic and diluted
shares outstanding......................... 25,276,677
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE> 96
OPENSITE TECHNOLOGIES, INC.
CONSOLIDATED 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 DECEMBER 31, 1996.... 7,515,788 $75,158 $ -- $ -- $ -- $ -- $ --
Issuance of common stock........ 835,088 8,351 21,649 -- -- -- --
Net income...................... -- -- -- -- -- -- --
--------- ------- --------- --------- -------- ------- -----------
BALANCE AT DECEMBER 31, 1997.... 8,350,876 83,509 21,649 -- -- -- --
Dividends paid to S corporation
stockholders................... -- -- -- -- -- -- --
Change from S-Corporation to
C-Corporation.................. -- -- 54,203 -- -- -- --
Distribution to Series A
preferred stockholders......... -- -- -- -- -- -- --
Issuance of common stock........ 740,000 7,400 71,100 -- (78,500) -- --
Accretion of mandatorily
redeemable convertible
preferred stock................ -- -- (146,952) -- -- -- --
Net loss........................ -- -- -- -- -- -- --
--------- ------- --------- --------- -------- ------- -----------
BALANCE AT DECEMBER 31, 1998.... 9,090,876 90,909 -- -- (78,500) -- --
Deferred compensation related to
grant of stock options......... -- -- 118,450 (118,450) -- -- --
Amortization of deferred
compensation................... -- -- -- 25,177 -- -- --
Repurchase of common stock...... -- -- -- -- (2,795,274)
Termination of put provision of
redeemable common stock
warrants....................... -- -- 322,737 -- -- -- --
Exercise of warrants to purchase
common stock................... 221,053 2,211 6,631 -- -- -- --
Exercise of stock options....... 42,749 427 3,173 -- -- -- --
Accretion of mandatorily
redeemable convertible
preferred stock................ (450,991) -- -- --
Net loss........................ -- -- -- -- -- -- --
Other comprehensive income --
foreign currency translation
adjustment..................... -- -- -- -- -- (1,389) --
--------- ------- --------- --------- -------- ------- -----------
BALANCE AT DECEMBER 31, 1999.... 9,354,678 $93,547 $ -- $ (93,273) $(78,500) $(1,389) $(2,795,274)
========= ======= ========= ========= ======== ======= ===========
<CAPTION>
RETAINED TOTAL
EARNINGS STOCKHOLDERS'
(ACCUMULATED EQUITY
DEFICIT) (DEFICIT)
------------ -------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1996.... $ (75,624) $ (466)
Issuance of common stock........ -- 30,000
Net income...................... 129,827 129,827
------------ ------------
BALANCE AT DECEMBER 31, 1997.... 54,203 159,361
Dividends paid to S corporation
stockholders................... (141,053) (141,053)
Change from S-Corporation to
C-Corporation.................. (54,203) --
Distribution to Series A
preferred stockholders......... (39,457) (39,457)
Issuance of common stock........ -- --
Accretion of mandatorily
redeemable convertible
preferred stock................ (177,709) (324,661)
Net loss........................ (2,360,717) (2,360,717)
------------ ------------
BALANCE AT DECEMBER 31, 1998.... (2,718,936) (2,706,527)
Deferred compensation related to
grant of stock options......... -- --
Amortization of deferred
compensation................... -- 25,177
Repurchase of common stock...... (2,795,274)
Termination of put provision of
redeemable common stock
warrants....................... -- 322,737
Exercise of warrants to purchase
common stock................... -- 8,842
Exercise of stock options....... -- 3,600
Accretion of mandatorily
redeemable convertible
preferred stock................ (52,712,539) (53,163,530)
Net loss........................ (12,205,456) (12,205,456)
Other comprehensive income --
foreign currency translation
adjustment..................... -- (1,389)
------------ ------------
BALANCE AT DECEMBER 31, 1999.... $(67,636,931) $(70,511,820)
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE> 97
OPENSITE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $129,827 $(2,360,717) $(12,205,456)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Bad debt expense............................. 5,099 164,092 577,626
Depreciation and amortization expense........ 6,519 78,220 393,465
Loss on termination of capital lease......... -- -- 23,413
Non-cash consulting expense.................. 17,000 54,221 268,516
Amortization of deferred compensation........ -- -- 25,177
Changes in operating assets and liabilities:
Increase in accounts receivable............ (27,949) (443,691) (2,660,128)
Increase in prepaid expenses and other
assets.................................. (1,838) (70,785) (276,848)
Increase in accounts payable............... 16,553 56,040 128,668
Increase in accrued expenses............... 14,571 394,268 2,625,188
Increase in deferred revenue............... -- 354,802 1,407,544
-------- ----------- ------------
Net cash provided by (used in) operating
activities................................. 159,782 (1,773,550) (9,692,835)
-------- ----------- ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment.... -- -- 35,000
Purchases of property and equipment............. (39,422) (387,610) (1,094,689)
-------- ----------- ------------
Net cash used in investing activities........ (39,422) (387,610) (1,059,689)
-------- ----------- ------------
Cash flows from financing activities:
Repayment of note payable....................... -- (17,000) --
Principal payment on capital lease obligation... -- (9,875) (67,406)
Repurchase of common stock...................... -- -- (2,795,274)
Repurchase of mandatorily redeemable convertible
preferred stock.............................. -- -- (1,397,636)
Loan to officer................................. -- -- (300,000)
Purchase of convertible note.................... -- (250,000)
Dividends paid.................................. -- (180,510) --
Proceeds from issuance of mandatorily redeemable
convertible preferred stock, net............. -- 4,493,231 23,875,000
Proceeds from issuance of common stock.......... 30,000 -- --
Exercise of warrant and options to purchase
common stock................................. -- -- 12,442
-------- ----------- ------------
Net cash provided by financing activities.... 30,000 4,285,846 19,077,126
-------- ----------- ------------
Effect of changes in foreign exchange on cash
and cash equivalents....................... -- -- (1,389)
-------- ----------- ------------
Net increase in cash and cash equivalents.... 150,360 2,124,686 8,323,213
Cash and cash equivalents at beginning of year.... 985 151,345 2,276,031
-------- ----------- ------------
Cash and cash equivalents at end of year.......... $151,345 $ 2,276,031 $ 10,599,244
======== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE> 98
OPENSITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND PRESENTATION
OpenSite Technologies, Inc. (the "Company") develops and markets Internet
auction and dynamic pricing technology that enables organizations to create
branded, interactive, real-time Internet auctions. The Company offers a range of
products and services including software, complete outsourced solutions,
professional services and 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
December 31, 1999.
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 December 31, 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 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 the date of purchase to be cash equivalents.
F-14
<PAGE> 99
OPENSITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH FLOW
The Company had the following non-cash investing and financing activities
during the year ended December 31, 1998:
<TABLE>
<S> <C>
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 years
ended December 31, 1997 and 1999.
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, 1998 and 1999. Fair values are based on quoted
market prices and assumptions covering the amount and timing of estimated future
cash flows and assumed discount rates, reflecting varying degrees of perceived
risk.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Expenditures for maintenance and repairs are charged to
operations. Expenditures for maintenance and repairs are expensed as incurred.
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.
Depreciation periods for property and equipment are as follows:
<TABLE>
<S> <C>
Computer equipment.......................................... 2-3 years
Office furniture and equipment.............................. 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. At December 31, 1999,
other assets included capitalized trademarks of $9,762, net of accumulated
amortization of $1,960. Amortization expense was $1,172 during the year ended
December 31, 1999.
The remaining $250,000 in other assets relates to a Convertible Promissory
Note from an unrelated company (the "Borrower"). This loan bears interest at 6%
per annum. It can be paid at anytime, subject to certain conversion provisions.
All unpaid principal and accrued interest converts into stock of the Borrower
during their next financing round at 50% of the price per share received from
other investors.
F-15
<PAGE> 100
OPENSITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the net realizable value 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") relying on a number of factors including
operating results, business plans, economic projections and anticipated future
cash flows. 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 recognized during the years
ended December 31, 1997, 1998 or 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 effective January
1, 1998. The Company adopted the provisions of SOP No. 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions,"
effective January 1, 1999. These adoptions 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. Revenue from distributors is
recognized based on sell-through to the end-user by the distributors. Support
and maintenance revenue, which is included 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.
Revenue from the Company's auction Web site, Bidstream.com, and co-branded
Web sites with corporate partners consists primarily of on-line advertising,
sponsorship fees, and certain other volume and transactional fees. The Company
recognizes revenue from on-line advertising
F-16
<PAGE> 101
OPENSITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on a pro-rata basis as the Company meets its obligations for running the
advertising on its Web site or co-branded Web sites. Revenue from sponsorship
fees are recognized on a straight-line basis over the terms of the agreement.
Revenues from volume and transactional services are recognized as the services
are performed and the Company's obligations met. To date the Company has not had
any significant revenues from its Bidstream.com or co-branded Web sites.
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 other
indirect costs.
PRODUCT 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," ("SFAS No. 86").
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
as incurred. The Company continues to account for its costs of developing
software for resale under SFAS No. 86.
In March 1998, the Accounting Standards Executive Committee of 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. The Company adopted SOP No. 98-1 effective January 1,
1999 for costs associated with development of its Web site. The adoption of SOP
No. 98-1 did not have a material impact on the Company's financial position or
results of operations, as costs related to developing, modifying and updating
the Company's Web site are insignificant.
ADVERTISING COSTS
All costs of advertising the services and products offered by the Company
are expensed as incurred and included in sales and marketing expenses.
Advertising expense totaled $16,475, $1,090,040 and $6,637,415 for the years
ended December 31, 1997, 1998 and 1999, 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 in fixed amounts and
with fixed exercise prices 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-17
<PAGE> 102
OPENSITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED 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 doubtful accounts based on their credit evaluation. One customer comprised
approximately 11% of the Company's accounts receivable balance at December 31,
1999.
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS PER COMMON SHARE
HISTORICAL
The Company computes net income (loss) available to common stockholders 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) available to common stockholders per common share
("Basic EPS") is computed by dividing net income (loss) available to common
stockholders 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) available to common
stockholders 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 convertible preferred stock of
$53,163,530 for the year ended December 31, 1999, is excluded from the
calculation of pro forma net loss per common share. The calculation of pro forma
net loss per common share for the year ended December 31, 1999 does not include
686,075 equivalent shares 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, 1997
and 1998. The only item of other comprehensive income during the year ended
December 31, 1999 is a foreign currency translation adjustment. Comprehensive
loss for 1999 was $65,370,375.
F-18
<PAGE> 103
OPENSITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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"). SFAS No. 131 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 December 31, 1999.
The Company established an international sales office in the United Kingdom
during 1999. The following aggregates the Company's international operations:
<TABLE>
<CAPTION>
UNITED STATES UNITED KINGDOM TOTAL
------------- -------------- -----
<S> <C> <C> <C>
Revenues from external customers....... $ 6,901,030 $976,609 $ 7,877,639
Net loss............................... $11,979,013 $226,443 $12,205,456
Total Assets........................... $14,258,891 $668,658 $14,947,549
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
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, as amended by SFAS No. 137, is effective for financial statements for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The 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 $108,500 and $389,549 at December 31, 1998 and 1999, respectively.
Changes in the allowance for doubtful accounts consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Allowance for doubtful accounts at beginning of
period........................................ $ -- $ 3,500 $ 108,500
Additions charged to costs and expenses......... 5,099 164,092 577,626
Deductions...................................... (1,599) (59,092) (296,577)
------- -------- ---------
Allowance for doubtful accounts at end of
period........................................ $ 3,500 $108,500 $ 389,549
======= ======== =========
</TABLE>
F-19
<PAGE> 104
OPENSITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1999 consisted of the
following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Computer equipment......................................... $377,354 $1,122,825
Office furniture and equipment............................. 87,944 308,198
Leasehold improvements..................................... 37,244 91,414
-------- ----------
502,542 1,522,437
Less accumulated depreciation and amortization............. (84,819) (458,147)
-------- ----------
$417,723 $1,064,290
======== ==========
</TABLE>
During the year ended December 31, 1999, the Company sold equipment under
capital lease for $35,000. As a result of the sale the Company terminated its
capital lease agreements and recognized a loss on the sale of the related fixed
assets of $23,413.
5. ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Marketing.................................................. $116,264 $1,387,215
Accrued compensation....................................... 154,694 835,368
Professional services...................................... 96,532 294,065
New facility costs......................................... -- 321,462
Taxes...................................................... -- 62,117
Other...................................................... 41,349 133,800
-------- ----------
$408,839 $3,034,027
======== ==========
</TABLE>
6. INCOME TAXES
There is no current income tax provision or benefit for the years ended
December 31, 1998 or 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 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.
F-20
<PAGE> 105
OPENSITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Domestic net operating loss carryforwards.............. $ 709,084 $ 4,792,270
Accounts receivable.................................... 42,261 151,729
Research and development credit........................ 37,783 110,656
Deferred revenue....................................... 49,077 193,999
Compensation related items............................. 21,119 67,859
Fixed and intangible assets............................ -- 19,734
Other.................................................. 839 135,111
--------- -----------
Gross deferred tax assets........................... 860,163 5,471,358
Less: Valuation allowance........................... (859,698) (5,471,358)
--------- -----------
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 and 1999, the Company has provided a full valuation allowance
against its net deferred tax assets since realization of these benefits could
not be reasonably assured. Management re-evaluates the positive and negative
evidence periodically. There were no deferred tax assets or liabilities for the
year 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, 1999, the Company had Federal and state net operating
loss carryforwards of approximately $13,071,000. 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.
F-21
<PAGE> 106
OPENSITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Taxes computed at the statutory Federal income tax rate of 34% are
reconciled to the provision for income taxes for the years ended December 31,
1998 and 1999 as follows:
<TABLE>
<CAPTION>
1998 1999
------------------- ---------------------
% OF % OF
PRETAX PRETAX
AMOUNT LOSS AMOUNT LOSS
------ ------ ------ ------
<S> <C> <C> <C> <C>
United States Federal tax at statutory
rate................................. $(753,344) (34)% $(4,149,855) (34)%
State taxes (net of federal benefit)... (62,301) (5)% (357,931) (3)%
Research and development credit........ (37,783) (2)% (72,873) (1)%
Other, net............................. (6,270) (0)% (31,001) (0)%
Change in valuation allowance.......... 859,698 41% 4,611,660 38%
--------- --- ----------- ---
Provision for income taxes............. $ -- 0% $ -- 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 reserves 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 July 1999, the Company entered into an Amended and Restated Executive
Employment Agreement. This Agreement superceded the Company's agreement dated
August 1998, pursuant to which the company sold 650,000 restricted shares of the
Company's common stock at a price of $0.10 per share to an employee of the
Company. These shares are subject to an Amended and Restated Restricted Stock
Agreement dated as of July 8, 1999. This agreement also cancelled a note payable
to the Company in the amount of $65,000 dated August 1998, which note was then
reissued and reexecuted as of October 1998. If the employee is terminated for
"cause" as defined in his employment agreement, the Company has the option to
repurchase the shares at the original purchase price. If the employee is
terminated "without cause," as defined in his employment agreement, the employee
has 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.
In October 1998, the Company entered into an agreement with another
employee, whereby the employee was issued 90,000 restricted shares of common
stock at a price of $0.15 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
F-22
<PAGE> 107
OPENSITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
repurchase the shares at the original purchase price. If the employee is
terminated for "good reason," as defined in the 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 employee is terminated "without cause," as
defined in the respective employment agreement, the employee has 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.
9. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
In January 1998, the Company sold 4,175,439 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
5,000,000 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 10,750,000 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
1,250,000 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, 1,863,515 shares of common stock at a purchase price
of $1.50 per share, 931,758 shares of Series A preferred stock at a purchase
price of $1.50 per share, and 56,375 warrants at a price of $1.50 per warrant,
less the exercise price of the warrants, for an aggregate purchase price of
$4,265,635.
As of December 31, 1998 and 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 December 31, 1999,
the Series C preferred stock had an aggregate liquidation preference of
$48,000,000. As of December 31, 1999, there are 3,243,681 shares of Series A
preferred stock outstanding; 5,000,000 shares of Series B preferred stock
outstanding; and 12,000,000 shares of Series C preferred stock outstanding.
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.
F-23
<PAGE> 108
OPENSITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
$4.00 per share. 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 $0.1437 and $0.80 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 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, Series B and Series C 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
$53,163,530 for the year ended December 31, 1999 to reflect the Series A, Series
B and Series C preferred stock at its fair value.
F-24
<PAGE> 109
OPENSITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 2,000,000 stock options. In May 1999, the
Company increased the number of options authorized under the Plan to 3,500,000.
Stock options granted under the Plan have exercise periods not to exceed ten
years. Options granted under the Plan during the years ended December 31, 1998
and 1999 vest over a period of four years.
The Company applies 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 available to common stockholders
for the years ended December 31, 1998 and 1999 would have increased from
$2,360,717 to $2,375,472 and from $12,205,456 to $12,576,002, respectively. The
Company's basic and diluted net loss per common share for the year ended
December 31, 1998 would be the same as reported under APB No. 25. The net loss
per share for 1999 would increase from $8.34 per share to $8.39 per share. The
unaudited pro forma net loss per common share, both basic and diluted, would
increase from $0.48 per share in 1999 to $0.50 per share.
The fair value of each option is estimated on the grant date using the
minimum value method with the following weighted average assumptions used for
grants during the year ended December 31, 1998: risk free interest rate of 5.5%,
expected option term of four years, and a dividend yield of 0%. Assumptions used
for grants during 1999 were as follows: risk free interest rate of 5.8%,
expected option term of five years, and a dividend yield of 0%.
A summary of the status of the Plan as of December 31, 1998 and December
31, 1999 and changes during the years ended December 31, 1998 and 1999 is
presented below:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
UNDERLYING EXERCISE
OPTIONS PRICE
---------- --------
<S> <C> <C>
Outstanding at December 31, 1997............................ -- $ --
Granted..................................................... 565,500 0.12
---------
Outstanding at December 31, 1998............................ 565,500 0.12
---------
Granted..................................................... 1,399,500 4.14
Exercised................................................... (42,749) 0.08
Forfeited................................................... (108,629) 1.42
---------
Outstanding at December 31, 1999............................ 1,813,622
=========
</TABLE>
The Company did not grant any stock options prior to the year ended
December 31, 1998.
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 year ended
December 31, 1999, the Company recognized $118,450 in deferred compensation
related to options granted at exercise prices less than fair value. The weighted
average fair value of options granted during the years ended December 31,
F-25
<PAGE> 110
OPENSITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 and 1999 was $0.03 and $1.06 per share, respectively. The following table
summarizes information about the Company's stock options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
AT DECEMBER 31, 1999
-------------------------------
WEIGHTED AVERAGE
REMAINING OPTIONS EXERCISABLE
NUMBER CONTRACTUAL AT DECEMBER 31,
EXERCISE PRICE OUTSTANDING LIFE(YEARS) 1999
- -------------- ----------- ---------------- -------------------
<S> <C> <C> <C>
$0.08.............................. 171,832 8.5 110,807
$0.15.............................. 360,812 9.0 112,703
$0.35.............................. 27,000 9.1 --
$0.70.............................. 61,500 9.2 885
$2.25.............................. 169,062 9.3 562
$5.00.............................. 694,916 9.4 3,416
$5.24.............................. 328,500 9.7 --
--------- -------
1,813,622 228,373
========= =======
</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 252,632 shares of common stock at an exercise price of $0.21 per
share. A warrant representing a total of 56,375 shares of common stock was
repurchased from the holder in connection with the Series C financing in March
1999, as described in Note 9. The outstanding warrants expire on December 31,
2002. The Company also issued warrants to this director to purchase 221,052
shares of common stock at an exercise price of $0.04. The $0.04 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.
During the years ended December 31, 1998 and 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 director's 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 AND CONTINGENCIES
The Company has several non-cancelable operating leases, primarily for
office space and office equipment, that extend through August 2006. Rental
expense, including maintenance charges, for operating leases during 1998 and
1999 was $72,295 and $298,998, respectively.
F-26
<PAGE> 111
OPENSITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The future minimum lease payments under the non-cancelable lease agreements
are as follows:
<TABLE>
<S> <C>
Year ending December 31:
2000.................................................... $ 575,122
2001.................................................... 560,407
2002.................................................... 533,809
2003.................................................... 525,095
2004.................................................... 469,369
Thereafter.............................................. 725,958
----------
Total future minimum lease payments..................... $3,389,760
==========
</TABLE>
In March 1999, the Company entered into an agreement with Protege Software
Limited ("Protege"), whereby Protege manages the Company's European subsidiary,
OpenSite Europe Ltd., and provides 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
subsequent 12-month period unless the agreement is terminated by either Protege
or the Company.
The Company pays 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.
During December 1999, the Company entered into a Strategic Marketing
Agreement with a global media company that provides consumers with high speed,
high bandwidth Internet connectivity and content and interactive services
available on multiple bandwidth platforms. The Company will generate certain
software license and services revenue as a result of this agreement. In
connection with this agreement the Company has committed to purchase advertising
and other services from this global media company of at least $4 million through
March 31, 2001 and an additional $5 million for the twelve month period ending
March 31, 2002. If the Company generates more than $5 million in cumulative
revenue from this agreement through March 31, 2002 and under certain other
circumstances as defined, then the Company is obligated to purchase an
additional $6 million of advertising and other services from the global media
company during the 12 month period ending March 31, 2003.
The Company is exposed to a number of asserted and unasserted claims
encountered in the normal course of business. In the opinion of management, the
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
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 147,392 shares of the
Company's restricted stock owned by the officer.
F-27
<PAGE> 112
OPENSITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. BENEFIT PLAN
The Company provides a 401(k) Retirement Savings Plan to its U.S.
employees. The Company matches 100% of an employee's contributions up to 3% of
pay, and the contributions vest immediately. Company matching contributions were
$90,698 for the year ended December 31, 1999. No such contributions were made
prior to 1999.
14. SUBSEQUENT EVENTS (UNAUDITED)
On February 7, 2000, the Company entered into a letter of intent to merge
with Bidder's Edge, Inc. The letter of intent provides for the issuance of
8,941,307 shares of common stock to acquire all of the capital stock of Bidder's
Edge. The Company intends to account for this transaction as a
pooling-of-interests.
F-28
<PAGE> 113
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Bidder's Edge, Inc.:
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 Bidder's Edge, Inc.
(a development stage enterprise) at December 31, 1998 and 1999, and the results
of its operations and its cash flows for the years then ended and for the period
from April 7, 1997 (date of inception) to December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/S/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 7, 2000
F-29
<PAGE> 114
BIDDER'S EDGE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $1,126,318 $ 4,802,054
Investments, held-to-maturity............................. -- 1,963,213
Prepaid expenses and other assets......................... 25,512 45,060
---------- -----------
Total current assets.............................. 1,151,830 6,810,327
Property and equipment, net................................. 59,738 297,520
Investments, held-to-maturity............................... -- 700,889
---------- -----------
Total assets...................................... $1,211,568 $ 7,808,736
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 14,184 $ 459,949
Accrued expenses.......................................... 45,982 208,913
---------- -----------
Total current liabilities......................... 60,166 668,862
---------- -----------
Commitments and contingencies (Note 10)
Stockholders' equity:
Series A convertible preferred stock, $.01 par value,
473,395 shares authorized; 473,395 shares issued and
outstanding at December 31, 1998 and 1999; liquidation
preference of $1,785,646 at December 31, 1998 and
1999................................................... 4,734 4,734
Series B convertible preferred stock, $.01 par value,
679,332 shares authorized; none issued and outstanding
at December 31, 1998 and 679,332 shares issued and
outstanding as of December 31, 1999; liquidation
preference of $0 and $9,001,149 at December 31, 1998
and 1999, respectively................................. -- 6,793
Common stock, $.01 par value, 3,402,727 shares authorized;
1,500,000 shares issued and outstanding at December 31,
1998 and 1999.......................................... 15,000 15,000
Additional paid-in capital................................ 1,789,997 10,924,715
Deferred compensation..................................... -- (152,144)
Deficit accumulated during the development stage.......... (658,329) (3,659,224)
---------- -----------
Total stockholders' equity........................ 1,151,402 7,139,874
---------- -----------
Total liabilities and stockholders' equity........ $1,211,568 $ 7,808,736
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 115
BIDDER'S EDGE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED APRIL 7, 1997 (DATE
DECEMBER 31, OF INCEPTION) TO
------------------------ DECEMBER 31,
1998 1999 1999
--------- ----------- -------------------
<S> <C> <C> <C>
Operating expense:
Sales and marketing.......................... $ 44,849 $ 959,637 $ 1,004,486
Product development.......................... 284,752 1,395,042 1,705,038
General and administrative................... 258,660 805,776 1,088,715
--------- ----------- -----------
Total operating expense and operating
loss............................... (588,261) (3,160,455) (3,798,239)
--------- ----------- -----------
Interest income (expense):
Interest income.............................. 17,379 159,560 176,939
Interest expense............................. (37,924) -- (37,924)
--------- ----------- -----------
Interest income (expense), net............ (20,545) 159,560 139,015
--------- ----------- -----------
Net loss............................. $(608,806) $(3,000,895) $(3,659,224)
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 116
BIDDER'S EDGE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED TOTAL
PREFERRED STOCK ADDITIONAL DURING THE STOCKHOLDERS'
------------------- COMMON PAID-IN DEFERRED DEVELOPMENT EQUITY
SERIES A SERIES B STOCK CAPITAL COMPENSATION STAGE (DEFICIT)
-------- -------- ------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of 1,000,000 shares of
common stock................. $ -- $ -- $10,000 $ -- $ -- $ -- $ 10,000
Net loss....................... -- -- -- -- -- (49,523) (49,523)
------ ------ ------- ----------- --------- ----------- -----------
Balance at December 31, 1997... -- -- 10,000 -- -- (49,523) (39,523)
Issuance of 500,000 shares of
common stock................. -- -- 5,000 45,000 -- -- 50,000
Value of preferential
conversion feature on notes
payable...................... -- -- -- 30,000 -- -- 30,000
Issuance of 397,667 shares of
Series A preferred stock, net
of issuance costs of
$33,193...................... 3,977 -- -- 1,462,830 -- -- 1,466,807
Conversion of $245,000 of
convertible notes and related
accrued interest of $7,924
into 75,728 shares of Series
A preferred stock............ 757 -- -- 252,167 -- -- 252,924
Net loss....................... -- -- -- -- -- (608,806) (608,806)
------ ------ ------- ----------- --------- ----------- -----------
Balance at December 31, 1998... 4,734 -- 15,000 1,789,997 -- (658,329) 1,151,402
Issuance of 679,332 shares of
Series B preferred stock, net
of issuance costs of
$50,134...................... -- 6,793 -- 8,944,222 -- -- 8,951,015
Deferred compensation.......... -- -- -- 190,496 (190,496) -- --
Amortization of deferred
compensation................. -- -- -- -- 38,352 -- 38,352
Net loss....................... -- -- -- -- -- (3,000,895) (3,000,895)
------ ------ ------- ----------- --------- ----------- -----------
Balance at December 31, 1999... $4,734 $6,793 $15,000 $10,924,715 $(152,144) $(3,659,224) $ 7,139,874
====== ====== ======= =========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 117
BIDDER'S EDGE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED APRIL 7, 1997
DECEMBER 31, (DATE OF INCEPTION)
------------------------ TO DECEMBER 31,
1998 1999 1999
---------- ----------- ----------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $ (608,806) $(3,000,895) $(3,659,224)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense...................... 5,224 61,127 66,351
Stock-based compensation expense.......... 50,000 38,352 88,352
Interest expense related to preferential
conversion feature on notes payable..... 30,000 -- 30,000
Changes in operating assets and
liabilities:
Increase in prepaid expenses and other
assets............................... (25,512) (19,548) (45,060)
Increase in accounts payable............ 14,184 445,765 459,949
Increase in accrued expenses............ 47,461 162,931 216,837
---------- ----------- -----------
Net cash used in operating activities..... (487,449) (2,312,268) (2,842,795)
---------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment.......... (61,598) (298,909) (363,871)
Purchases of investments..................... -- (2,664,102) (2,664,102)
---------- ----------- -----------
Net cash used in investing activities..... (61,598) (2,963,011) (3,027,973)
---------- ----------- -----------
Cash flows from financing activities:
Repayment of related party notes payable..... (48,000) -- (48,000)
Proceeds from issuance of related party notes
payable and convertible notes payable..... 238,000 -- 293,000
Proceeds from issuance of convertible
preferred stock, net of issuance costs.... 1,466,807 8,951,015 10,417,822
Proceeds from issuance of common stock....... -- -- 10,000
---------- ----------- -----------
Net cash provided by financing
activities.............................. 1,656,807 8,951,015 10,672,822
---------- ----------- -----------
Net increase in cash and cash
equivalents............................. 1,107,760 3,675,736 4,802,054
Cash and cash equivalents at beginning of
period....................................... 18,558 1,126,318 --
---------- ----------- -----------
Cash and cash equivalents at end of period..... $1,126,318 $ 4,802,054 $ 4,802,054
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 118
BIDDER'S EDGE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND PRESENTATION
Bidder's Edge, Inc. (the "Company") was incorporated on April 7, 1997 to
develop and market a Web site that aggregates auction sites on the world wide
web. By aggregating the content of numerous auction sites, the Company provides
a bidder with one site to search and bid for the desired product, while
providing the auction site with additional views of their site. As of December
31, 1999, the Company aggregated over 150 auction sites on the Internet through
its Internet auction Web site, BiddersEdge.com. In addition, the Company has
developed co-branded Web sites with a corporate partner using the Company's
technology.
Since inception, the Company has devoted substantially all of its efforts
to research and development of its technology, business and financial planning,
raising capital and recruiting new employees. No revenues have been derived from
operations. Accordingly, the Company is considered a development stage
enterprise, as defined by Statement of Financial Accounting Standards ("SFAS")
No. 7, and the accompanying financial statements represent those of a
development stage enterprise.
The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating results
and cause actual results to vary materially from expectations, include, but are
not limited to, rapid technology change, uncertainty of market acceptance of the
Company's services, competition from substitute products and larger companies,
protection of proprietary technology, strategic relationships and dependence on
key individuals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS AND STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of purchase to be cash equivalents.
During the year ended December 31, 1998, the holders of $245,000 in the
Company's notes payable converted the notes and related accrued interest of
$7,924 into 75,728 shares of the Company's Series A preferred stock, which was a
non-cash financing activity.
INVESTMENTS
The Company's investments include primarily investments in marketable debt
securities, which are recorded at cost, net of amortization of premiums and
discounts. All premiums or discounts are amortized over the remaining term of
the related security using the straight-line method, which does not differ
significantly from the level-yield method. The Company's investments are
accounted for in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company's investments are
accounted for as held-to-maturity securities as of December 31, 1999. The
Company had no investments as of December 31, 1998. The classification of
investments is determined on the date of acquisition.
F-34
<PAGE> 119
BIDDER'S EDGE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company reviews its investment portfolio as deemed necessary and, where
appropriate, adjusts investments for other-than-temporary impairments.
As of December 31, 1999, the carrying value of the Company's
held-to-maturity securities approximated their fair value. All short-term
investments have contractual maturities of less than three months from December
31, 1999, and all long-term investments have contractual maturities of less than
eighteen months from December 31, 1999.
FINANCIAL INSTRUMENTS
The Company's financial instruments, which are comprised of cash in demand
deposit accounts, investments in commercial paper, investments in corporate debt
securities and accounts payable, are carried at amortized cost, which
approximates their fair value at December 31, 1998 and 1999. Fair values are
based on quoted market prices and assumptions covering the amount and timing of
estimated future cash flows at assumed discount rates, reflecting varying
degrees of perceived risk. These financial instruments potentially expose the
Company to concentrations of credit risk. This risk is limited due to
investments being made in corporate debt of several companies.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Expenditures for maintenance and repairs are charged to operations as incurred.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the assets. No property and equipment was retired or disposed of
in any period presented.
Depreciation periods for property and equipment are as follows:
<TABLE>
<S> <C>
Computer equipment.......................................... 2-3 years
Office furniture and equipment.............................. 5 years
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the net realizable value of its property and
equipment and other assets in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed of," relying on a number of
factors including operating results, business plans, economic projections and
anticipated future cash flows. 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 recognized
during the years ended December 31, 1998 or 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.
F-35
<PAGE> 120
BIDDER'S EDGE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Prior to September 17, 1998, the Company had elected subchapter S status
for federal income tax purposes and, accordingly, no income tax benefit is
presented for periods prior to September 17, 1998 as losses were attributable
personally to the stockholders.
SALES AND MARKETING EXPENSES
Sales and marketing expenses include salaries and costs of the Company's
advertising and certain other indirect costs.
ADVERTISING COSTS
All costs of advertising the services offered by the Company are expensed
as incurred and included in sales and marketing expenses. Advertising expense
totaled approximately $420,000 for the year ended December 31, 1999. The Company
did not incur any advertising expense during the year ended December 31, 1998.
PRODUCT DEVELOPMENT COSTS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("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. The
Company adopted SOP No. 98-1 effective January 1, 1999 for costs associated with
development of its Web site. The adoption of SOP No. 98-1 did not have a
material impact on the Company's financial position or results of operations, as
costs related to modifying and updating the Company's Web site were
insignificant during the year ended December 31, 1999. Product development
expenditures are charged to operations as incurred.
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 in fixed amounts and
with fixed exercise prices 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. When the exercise price of stock options granted to employees is
less than the fair market value of common stock at the date of grant, the
Company records that difference multiplied by the number of shares under option
as deferred compensation, which is then amortized over the vesting period of the
options. The Company has adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," 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.
COMPREHENSIVE INCOME (LOSS)
The Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
effective January 1, 1998. SFAS No. 130 requires the Company to display an
amount representing comprehensive income (loss) for the year in a financial
statement that 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 1999.
F-36
<PAGE> 121
BIDDER'S EDGE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT DISCLOSURES
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 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. Management has determined that
the Company has only one operating segment as of December 31, 1998 and 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". 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, as amended by SFAS No. 137, is effective for
financial statements for all fiscal quarters of fiscal years beginning after
June 15, 2000. The 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. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1999 consisted of the
following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Computer equipment.................................... $58,297 $311,607
Office furniture and equipment........................ 6,665 52,264
------- --------
64,962 363,871
Less accumulated depreciation......................... (5,224) (66,351)
------- --------
$59,738 $297,520
======= ========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Professional services................................. $17,500 $126,768
Accrued compensation.................................. 22,864 55,441
Marketing............................................. -- 26,479
Other................................................. 5,618 225
------- --------
$45,982 $208,913
======= ========
</TABLE>
F-37
<PAGE> 122
BIDDER'S EDGE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 139,221 $ 1,099,607
Research and development credits............... -- 103,343
Cash basis method of accounting................ 13,955 251,205
Property and equipment......................... 1,809 --
--------- -----------
Gross deferred tax assets................... 154,985 1,454,155
Less: valuation allowance................... (154,985) (1,449,292)
--------- -----------
Net deferred tax assets..................... -- 4,863
--------- -----------
Deferred tax liabilities:
Property and equipment......................... -- 4,863
--------- -----------
Total deferred tax liabilities......... -- 4,863
--------- -----------
Net deferred tax asset...................... $ -- $ --
========= ===========
</TABLE>
For 1998 and 1999, the Company has provided a full valuation allowance
against its net deferred tax assets since realization of these benefits could
not be reasonably assured. Management evaluates the positive and negative
evidence periodically. There were no deferred tax assets or liabilities for the
periods prior to September 17, 1998 because the Company had elected subchapter S
status prior to that date.
As of December 31, 1999, the Company has federal and state net operating
loss carryforwards of approximately $2,730,000. The net operating loss
carryforwards expire in various amounts starting in 2018 and 2003 for federal
and state tax purposes, respectively. As of December 31, 1999, the Company had
federal and state research and development tax credits of approximately $75,000
and $28,000, respectively, which expire in 2019 and 2014, respectively. The
utilization of the federal net operating loss carryforwards and research and
development tax credits 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.
6. CONVERTIBLE NOTES PAYABLE
During 1998, the Company issued seven convertible notes payable totaling
$195,000 bearing interest at 8% and due one year from the date of issue. During
1997, the Company had also issued two convertible notes payable totaling $50,000
bearing interest at 8% and due one year from the date of issue (collectively
with the convertible notes payable issued in 1998, the "Convertible Notes
Payable"). The Convertible Notes Payable provided that upon the issuance of a
Qualified Financing, as defined, the Convertible Notes Payable would
automatically convert into the equity instruments issued in the Qualified
Financing using a conversion rate equal to or 20% less than the price per share
obtained in the Qualified Financing. In connection with the
F-38
<PAGE> 123
BIDDER'S EDGE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company's issuance of Series A Preferred Stock in September 1998 as described in
Note 8, the holders of the Convertible Notes Payable converted the $245,000 of
Convertible Notes Payable and related accrued interest of $7,924 into 75,728
shares of the Company's Series A preferred stock. The Company recognized a
non-cash charge of $30,000 during the year ended December 31, 1998 related to
the beneficial conversion feature of certain of the Convertible Notes Payable.
7. CAPITAL STOCK
During the year ended December 31, 1999, the Company's Certificate of
Incorporation was amended and restated to authorize 3,402,727 shares of common
stock with a par value of $0.01 and 1,152,727 shares of preferred stock with a
par value of $0.01, of which 473,395 were designated as Series A preferred stock
and 679,332 were designated as Series B preferred stock. At all times, the
Company reserves 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 options to purchase the
Company's common stock.
In April 1997, the Company issued 1,000,000 restricted shares of the
Company's common stock at a price of $0.01 per share, the par value of the
common stock, to the two founders of the Company. Under the terms of the
issuance, the founders vested in 333,280 of the shares immediately and monthly
thereafter for two years. In May 1998, the Company removed the restriction from
these shares and immediately vested the remaining unvested shares. In May 1998,
the Company also issued 500,000 shares of the Company's common stock to the new
chief executive officer, and as a result, recognized a compensation charge of
$50,000 and a corresponding increase to additional paid-in capital.
8. CONVERTIBLE PREFERRED STOCK
In September 1998, the Company sold 397,667 shares of Series A preferred
stock in a private placement transaction in exchange for proceeds of $1,500,000,
or $3.772 per share, with related costs of issuance of $33,193. In July 1999,
the Company sold 679,332 shares of Series B preferred stock in a private
placement transaction in exchange for proceeds of $9,001,149, or $13.25 per
share, with related costs of issuance of $50,134.
DIVIDENDS
The holders of the Series A and Series B 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 Certificate of Incorporation, as amended. No cash dividends may be
paid to any of the holders of shares of common stock unless a dividend has been
declared and paid to holders of the Series A and Series B preferred stock in an
amount equivalent to the dividend that would be declared payable based on the
number of common shares into which the preferred stock is convertible.
LIQUIDATION
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of Series A and Series B preferred stock are entitled to receive an
amount equal to the higher of: (i) the original issue price per share, subject
to certain adjustments as defined, plus accrued but unpaid dividends or (ii) the
amount that the Series A and Series B holders would have received if they had
converted their shares to common stock immediately prior to such liquidation,
F-39
<PAGE> 124
BIDDER'S EDGE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
dissolution or winding up of the Company. The holders of Series A and Series B
preferred stock rank equally on liquidation. 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 liquidation payments have been made in
full to the holders of Series A and Series B preferred stock, the remaining
assets of the Company will be distributed to the holders of common stock.
CONVERSION
Each share of Series A and Series B 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 of the
Series A and Series B preferred stock is automatic upon the closing of a firm
commitment for an underwritten public offering with net proceeds to the Company
of at least $15,000,000 and at a price greater than $18 per share. Conversion of
the Series A and Series B preferred stock is also automatic upon the election of
holders of at least 70% of the total number of the preferred shares to convert
their preferred shares into common shares.
VOTING
Holders of the Series A and Series B preferred shares have voting rights on
an as if converted basis. In addition, the approval of the holders of a majority
of the shares of the Series A and Series B preferred stock is required for
certain matters that affect the rights of the Series A and Series B preferred
stock.
9. STOCK OPTIONS
In 1997, the Company adopted a stock option plan (the "Plan") which
provided for the grant of up to 220,000 stock options. In August 1999, the
Company increased the number of options authorized under the Plan to 450,000.
Stock options granted under the Plan have exercise periods not to exceed ten
years. Options granted under the Plan during the years ended December 31, 1998
and 1999 vest over periods of three to four years.
The Company applies 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 years ended December 31,
1998 and 1999 would have increased from $608,806 to $609,942 and from $3,000,895
to $3,019,582, respectively.
The fair value of each option is estimated on the grant date using the
minimum value method with the following weighted average assumptions used for
grants during the year ended December 31, 1998: risk free interest rate of 5.5%,
expected option term of four years, and a dividend yield of 0%. Assumptions used
for grants during 1999 were as follows: risk free interest rate of 5.8%,
expected option term of four years, and a dividend yield of 0%.
F-40
<PAGE> 125
BIDDER'S EDGE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Plan as of December 31, 1997, 1998 and 1999
and changes during the years ended December 31, 1998 and 1999 and the period
from April 7, 1997 (date of inception) to December 31, 1997 is presented below:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
UNDERLYING EXERCISE
OPTIONS PRICE
---------- --------
<S> <C> <C>
Granted................................................ 41,000 $0.10
Outstanding at December 31, 1997....................... 41,000 0.10
Granted................................................ 32,600 0.23
Forfeited.............................................. (21,000) 0.10
-------
Outstanding at December 31, 1998....................... 52,600 0.18
Granted................................................ 39,200 1.09
Forfeited.............................................. (4,000) 0.25
-------
Outstanding at December 31, 1999....................... 87,800 0.58
=======
</TABLE>
During May 1998, the Company granted an option to purchase 5,000 shares of
common stock at an exercise price of $.10 per share to a non-employee for
consulting services. This option vested one-third at the one-year anniversary of
the grant and ratably thereafter on a quarterly basis for the next two years. A
total of 2,500 of these options were vested at December 31, 1999. In addition,
as of December 31, 1999 the Company had granted 62,800 options at exercise
prices less than fair value. The average exercise price of these options was
$1.09. Accordingly, the Company has recorded a deferred compensation charge of
$190,496 ($47,956 in connection with the variable award to the non-employee for
consulting services and $142,540 in connection with the options granted to
employees at less than fair value) at December 31, 1999, of which $38,352 was
amortized to expense during the year ended December 31, 1999.
The weighted average fair value of options granted during the years ended
December 31, 1998 and 1999 was $0.63 and $3.87 per share, respectively.
The Company had 167,400 and 362,200 shares available for future grant at
December 31, 1998 and 1999, respectively. The following table summarizes
information about the Company's stock options as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
AT DECEMBER 31, 1999
-------------------------------
WEIGHTED AVERAGE
REMAINING OPTIONS EXERCISABLE
NUMBER CONTRACTUAL AT DECEMBER 31,
EXERCISE PRICE OUTSTANDING LIFE (YEARS) 1999
- -------------- ----------- ---------------- -------------------
<S> <C> <C> <C>
$0.10.............................. 25,000 8.0 16,112
$0.25.............................. 36,600 8.9 10,694
$1.50.............................. 26,200 9.8 --
------ ------
87,800 26,806
====== ======
</TABLE>
There were 6,667 options exercisable at December 31, 1998.
F-41
<PAGE> 126
BIDDER'S EDGE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
The Company has several non-cancelable operating leases, primarily for
office space and office equipment, that extend through March 2002. While the
Company has no plans to terminate its office space lease, the Company may
terminate the lease for a termination fee of $58,710. Rental expense, including
maintenance charges, for operating leases during 1998 and 1999 was $6,925 and
$68,473, respectively.
The future minimum lease payments under the non-cancelable lease agreements
as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
2000...................................................... $192,500
2001...................................................... 267,500
2002...................................................... 29,500
--------
Total future minimum lease payments......................... $489,500
========
</TABLE>
In 1999, eBay, Inc. ("eBay"), a person-to-person on-line auction community,
filed a lawsuit in federal court against the Company alleging that the Company
cannot include auction content from eBay's Web site without eBay's permission.
The Company believes this lawsuit is without merit and intends to vigorously
defend this matter. However, an adverse resolution of this litigation could have
a material adverse effect on the Company's financial position, results of
operations or liquidity. No costs have been accrued for this possible loss
contingency.
11. RELATED PARTY TRANSACTION
During 1998, the Company borrowed a total of $43,000 from two officers and
directors of the Company (the "Related Party Notes"), which were subsequently
repaid by the Company. In addition during 1998, the Company repaid a $5,000 note
from an officer of the Company issued in 1997. Each of these Related Party Notes
had terms of one year or less and bore no interest during the original term. Had
the notes remained outstanding after the maturity date, interest would have been
payable on the Related Party Notes at a rate of 10% until paid in full. The
Company did not pay any interest on the Related Party Notes.
12. RETIREMENT PLAN
In February 1999, the Company adopted the Bidder's Edge 401(k) Plan (the
"Plan"). All employees who are eighteen years of age may participate in the
Plan. At the Company's discretion, the Company can contribute to the Plan on
behalf of the Plan's participants. During the year ended December 31, 1999, the
Company did not make a contribution to the Plan.
13. SUBSEQUENT EVENTS
On February 7, 2000, the Company entered into a letter of intent to merge
with OpenSite Technologies, Inc. ("OpenSite"). The letter of intent provides for
the issuance of 8,941,307 shares of common stock to acquire all of the capital
stock of the Company. OpenSite intends to account for this transaction as a
pooling-of-interests.
F-42
<PAGE> 127
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 6
Forward-Looking Statements............ 19
Use of Proceeds....................... 19
Dividend Policy....................... 20
Capitalization........................ 21
Dilution.............................. 22
Selected Financial Data............... 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
Business.............................. 37
Management............................ 64
Related Party Transactions............ 70
Principal Stockholders................ 71
Description of Capital Stock.......... 73
Shares Eligible for Future Sale....... 77
Legal Matters......................... 78
Underwriting.......................... 79
Experts............................... 81
Change in Accountants................. 81
Where You Can Find More Information... 81
Index to Financial Statements......... F-1
</TABLE>
------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
Shares
OPENSITE TECHNOLOGIES, INC.
Common Stock
[OPENSITE LOGO]
GOLDMAN, SACHS & CO.
CHASE H&Q
THE ROBINSON-HUMPHREY COMPANY
WIT SOUNDVIEW
Representatives of the Underwriters
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 128
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 19,800
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............................................... 5,200*
--------
Total Expenses......................................... $895,000*
========
</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> 129
In January 1998, we sold an aggregate 4,175,439 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 650,000 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 473,684 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 5,000,000 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 90,000 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 12,000,000 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.
II-2
<PAGE> 130
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
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.
10.17** -- Letter of Intent dated February 7, 2000 between OpenSite and
Bidder's Edge, Inc.
16.1* -- Letter from KPMG LLP, dated July 23, 1999.
21.1* -- List of Subsidiaries.
23.1+ -- Consent of PricewaterhouseCoopers LLP.
</TABLE>
II-3
<PAGE> 131
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
23.2+ -- Consent of PricewaterhouseCoopers LLP.
23.3** -- 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 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> 132
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 7th day of February, 2000.
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
--------- ----- ----
<C> <S> <C>
/s/ KIP A. FREY President, Chief Executive February 7, 2000
- --------------------------------------------------- Officer (Principal
Kip A. Frey Executive Officer) and
Director
/s/ TIMOTHY K. OAKLEY Vice President and Chief February 7, 2000
- --------------------------------------------------- Financial Officer
Timothy K. Oakley (Principal Financial and
Accounting Officer)
/s/ JUSTIN HALL-TIPPING Director February 7, 2000
- ---------------------------------------------------
Justin Hall-Tipping
/s/ RUSSELL HOWARD Director February 7, 2000
- ---------------------------------------------------
Russell Howard
/s/ ROSS B. KENZIE Director February 7, 2000
- ---------------------------------------------------
Ross B. Kenzie
/s/ MITCHELL MUMMA Director February 7, 2000
- ---------------------------------------------------
Mitchell Mumma
</TABLE>
II-5
<PAGE> 133
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MICHAEL BRADER-ARAJE Director February 7, 2000
- ---------------------------------------------------
Michael Brader-Araje
/s/ ALAN J. TAETLE Director February 7, 2000
- ---------------------------------------------------
Alan J. Taetle
</TABLE>
II-6
<PAGE> 134
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
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.
10.17** -- Letter of Intent dated February 7, 2000 between OpenSite and
Bidder's Edge.
16.1* -- Letter from KPMG LLP, dated July 23, 1999.
21.1* -- List of Subsidiaries.
23.1+ -- Consent of PricewaterhouseCoopers LLP.
23.2+ -- Consent of PricewaterhouseCoopers LLP.
23.3** -- 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.
<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 January 28, 2000, 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
February 4, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated February 7, 2000, relating to the financial statements of Bidder's
Edge, Inc., which appear in such Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 7, 2000
