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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-86889
LOGO
3,500,000 SHARES
COMMON STOCK
OnDisplay, Inc. is offering 3,500,000 shares of its common stock. This is
our initial public offering, and no public market currently exists for our
shares. We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "ONDS".
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public Offering Price....................................... $28.00 $98,000,000
Underwriting Discounts and Commissions...................... $ 1.96 $ 6,860,000
Proceeds to OnDisplay, Inc.................................. $26.04 $91,140,000
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
OnDisplay has granted the underwriters a 30-day option to purchase up to an
additional 525,000 shares of its common stock to cover over-allotments.
------------------------
ROBERTSON STEPHENS DEUTSCHE BANC ALEX. BROWN
SG COWEN
The date of this prospectus is December 17, 1999
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ONDISPLAY
GRAPHICS
FRONT COVER:
FOLD: table of contents
INSIDE FOLD: as follows:
Written in bold at the top of the diagram/graphic:
AUTOMATING THE E-BUSINESS COMMUNITY
The diagram is as follows:
Two rectangular computer servers are centered on the page back to back with a
line connecting the two servers and with arrows pointing to each other: the left
computer server has: E-BUSINESS PORTAL written above the graphic: The right
computer server has: E-MARKETPLACE written below the graphic.
From the E-BUSINESS PORTAL computer server = five lines lead to four smaller
servers and a circle and are as follows from top to bottom in a crescent shape:
1(st) is a computer server which has the word: DISTRIBUTOR written to the left
of the server. The server is connected to a circle with the words: INTERNAL
SYSTEMS above the circle.
2(nd) is a computer server which has the word: SUPPLIER written to the left of
the server. The server is connected to a circle with the words: INTERNAL SYSTEMS
to the left of the circle.
3(rd) is a computer server which has the word: BUYER written below the computer
server.
4(th) is a circle with the words: INTERNAL SYSTEMS written below the computer
server.
5(th) is a computer server with the word: E-MARKETPLACE written below the
computer server.
From the E-MARKETPLACE computer server = four arrows six lines lead to six
smaller computer servers and are as follows from top to bottom in a crescent
shape:
1(st) is a computer server which has the word: BUYER written to the left of the
server.
2(nd) is a computer server which has the word: SUPPLIER written above the
server. The server is connected to a circle with the words: INTERNAL SYSTEMS
above the circle.
3(rd) is a computer server which has the word: BUYER written to the right of the
computer server. The server is connected to a circle with the words: INTERNAL
SYSTEMS below the circle.
4(th) is a computer server which has the word: BUYER written to the right of the
computer server.
5(th) is a computer server which has the words: E-BUSINESS PORTAL written to the
right of the server.
6(th) is a computer server which has the words: E-BUSINESS PORTAL written to the
right of the server.
Above the left side of the diagram will read as follows:
OnDisplay's CenterStage(R) product suite enables e-business portals and
e-marketplaces to exchange information and services automatically and
seamlessly. Using CenterStage, e-business companies in both business-to-business
and business-to-consumer markets can:
- Reduce their time-to-market for delivery of rich, relevant information
and services.
- Engage and retain customers.
- Rapidly integrate with suppliers, distributors, customers and
e-marketplaces.
- Scale their e-businesses to accommodate increasing numbers of users.
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ONDISPLAY
GRAPHICS
Below the right side of the diagram will read as follows:
OnDisplay's CenterStage product suite enables e-business portals and
e-marketplaces to:
- Aggregate rich, relevant information and services for diverse communities
of suppliers, distributors and customers.
- Integrate e-business applications with internal systems.
- Personalize information of interest to customers.
- Exchange complex business transactions with suppliers, distributors and
customers.
- Share customized information with customers and distributors dynamically.
OUTSIDE BACK COVER:
Centered on the back cover page is the OnDisplay logo with the address written
to the left of the logo:
12667 Alcosta Blvd.
Suite 300
San Ramon, CA 94583
<PAGE> 4
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, REFERENCES TO
"ONDISPLAY," "WE," "US" AND "OUR" REFER TO ONDISPLAY, INC.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary..................................................... 3
Risk Factors................................................ 6
Concurrent Private Sale of Common Stock..................... 15
Use of Proceeds............................................. 15
Dividend Policy............................................. 15
Capitalization.............................................. 16
Dilution.................................................... 17
Selected Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 30
Management.................................................. 43
Certain Transactions........................................ 52
Principal Stockholders...................................... 54
Description of Capital Stock................................ 56
Shares Eligible For Future Sale............................. 59
Underwriting and Plan of Distribution....................... 61
Legal Matters............................................... 63
Experts..................................................... 63
Where You Can Find Additional Information................... 64
Index to Financial Statements............................... F-1
</TABLE>
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CenterStage(R) and the OnDisplay(R) name and logo and the names of products
and services offered by us (including those referred to in "Business") are
trademarks, registered trademarks, service marks or registered service marks of
OnDisplay. Other service marks, trademarks and trade names referred to in this
prospectus are the property of their respective owners.
<PAGE> 5
SUMMARY
Because this is only a summary, it does not contain all the information
that may be important to you. You should read the entire prospectus, especially
"Risk Factors" and the Financial Statements and notes to those statements
appearing elsewhere in this prospectus, before deciding to invest in our common
stock. Except as described in the financial statements or as otherwise specified
in this prospectus, all information in this prospectus: (1) assumes no exercise
of the underwriters' over-allotment option; and (2) reflects the conversion of
all of our outstanding preferred stock into common stock upon the effectiveness
of the registration statement related to this offering.
We offer a comprehensive suite of software applications that enable
companies to rapidly deploy and easily manage e-business portals and
e-marketplaces.
Companies in industries around the world face the strategic imperative to
become electronic commerce, or e-commerce, companies by augmenting or even
replacing their traditional supply chain, distribution and customer-service
channels with Internet-based channels. These companies seek to build new revenue
streams and gain a competitive advantage. In particular, many companies are
beginning to participate in two complementary Internet channels: e-business
portals and e-marketplaces. An e-business portal is a destination Web site where
companies create value-added relationships with their suppliers, distributors
and customers by offering a comprehensive set of relevant information and
services. An e-marketplace is a Web site that functions as a centralized trading
market by efficiently managing transactions and services among multiple buyers
and sellers. According to Forrester Research, the volume of business-to-business
e-commerce transacted through e-business portals, e-marketplaces and other
e-business offerings will grow from $43 billion in 1999 to $1.3 trillion in
2003.
Companies that deploy e-business portals and e-marketplaces must be able to
manage a broad range of dynamic information provided by and delivered to a large
number of diverse market participants, or trading partners, and do so faster
than their competitors. In addition, the business relationships made possible by
e-business portals and e-marketplaces must be adaptable to accommodate rapid
change. Given the technical complexity of meeting these requirements, companies
face significant technical challenges in building robust e-business portals and
e-marketplace infrastructures that can take advantage of the opportunities
created by the Internet.
Our CenterStage product suite addresses the unique challenges faced by
companies deploying e-business portals and e-marketplaces for both
business-to-business and business-to-consumer e-commerce. Our infrastructure
solutions allow both business-to-business and business-to-consumer e-commerce
companies to rapidly automate and continuously manage the flow of information
and transactional data among their suppliers, distributors, customers and other
trading partners. Our CenterStage product suite includes:
- CENTERSTAGE ECONTENT, which enables the rapid gathering and preparation
of disparate information for e-business portals and e-marketplaces;
- CENTERSTAGE EBIZXCHANGE, which facilitates the rapid and transparent
exchange of information needed for business transactions among market
participants;
- CENTERSTAGE EINTEGRATE, which links e-business portal or e-marketplace
applications to internal systems including enterprise resource planning
applications;
- CENTERSTAGE ENOTIFY, which allows e-businesses to offer
customer-requested updates, or alerts, via e-mail or pager, to build
long-lasting customer relationships; and
- CENTERSTAGE ESYNDICATE, which enables our customers to offer their
trading partners select information from their e-business portals and
e-marketplaces on a schedule specified by each participant.
We market our CenterStage products and related services primarily through a
direct sales organization which focuses on both recently formed companies that
are creating e-business portals and e-marketplaces
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as well as larger corporate customers that are building or improving their Web
presence. Our e-business portal and e-marketplace customers include Aspect
Development, ClubComputer.com, FASTXchange, Harbinger Corporation, Moore North
America Ltd., PurchasePro.com, TRIP.com, Travelocity.com and W.W. Grainger, Inc.
Our objective is to become the leading provider of comprehensive e-business
infrastructure solutions that enable the creation of e-business portals and
e-marketplaces. There are several key elements in our strategy to achieve this
objective. First, we will target customers in the large and rapidly growing
e-business portal and e-marketplace markets, including both traditional
"bricks-and-mortar" and Internet-only businesses. We believe that as these
companies implement our solutions, participants in their e-business transactions
experience the benefits that our products deliver, which creates a powerful
network effect to drive more rapid product recognition and adoption. Our
strategy also depends on continuing our technological innovation with additional
e-business infrastructure solutions, growing our network of relationships with
industry-leading technology companies, and establishing an international field
sales, marketing and services organization. There are numerous obstacles related
to our ability to execute the key elements of our strategy. See "Risk Factors."
CORPORATE INFORMATION
OnDisplay, Inc. was incorporated in Delaware in August 1996. Our principal
executive offices are located at 12667 Alcosta Boulevard, Suite 300, San Ramon,
California 94583. Our telephone number at this location is (925) 355-3200. Our
corporate Internet address is www.ondisplay.com. The information contained on
our Web site is not a part of this prospectus.
------------------------
THE OFFERING
Common stock to be offered by OnDisplay..... 3,500,000 shares
Common stock outstanding after the
offering.................................... 19,197,719 shares
Use of proceeds............................. General corporate purposes.
Nasdaq National Market Symbol............... ONDS
The number of shares of common stock to be outstanding after this offering
is based on 15,397,719 shares outstanding at September 30, 1999, and includes
300,000 shares that are proposed to be sold in a concurrent private offering.
See "Concurrent Private Sale of Common Stock". It excludes 2,099,990 shares of
common stock issuable upon exercise of stock options then outstanding and 18,834
shares of common stock available for future grant under our stock option plan
plus annual increases in the number of shares authorized to be issued under the
plan beginning in 2001. Between September 30, 1999 and December 14, 1999, we
increased the number of shares under our stock option plan by 1,500,000 and
granted additional options to purchase a total of 1,482,464 shares. We will
record additional deferred stock-based compensation of approximately $23.0
million in the fourth quarter of 1999. In connection with options granted prior
to September 30, 1999, we recorded a total of $10.5 million of deferred
stock-based compensation.
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table provides a summary of our statement of operations data.
For a more detailed explanation of these financial data, see "Selected Financial
Data" and our financial statements located elsewhere in the prospectus.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED NINE MONTHS ENDED
AUGUST 14, 1996 DECEMBER 31, SEPTEMBER 30,
(DATE OF INCEPTION) TO ------------------------ -------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
---------------------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
License revenues............. $ -- $ 265 $ 2,229 $ 1,568 $ 4,018
Service revenues............. -- -- 1,114 652 2,550
---------- ---------- ----------- ---------- -----------
Total revenues..... $ -- $ 265 $ 3,343 $ 2,220 $ 6,568
---------- ---------- ----------- ---------- -----------
Loss from operations......... (617) (5,689) (8,479) (5,924) (9,257)
Net loss..................... (572) (5,534) (8,348) (5,841) (9,267)
Net loss per share -- basic
and diluted................ $ (0.17) $ (1.62) $ (2.34) $ (1.66) $ (2.34)
========== ========== =========== ========== ===========
Shares used in per share
calculation -- basic and
diluted.................... 3,400,000 3,410,313 3,572,353 3,517,022 3,966,598
========== ========== =========== ========== ===========
Pro forma net loss per
share -- basic and
diluted.................... $ (0.75) $ (0.70)
=========== ===========
Shares used in pro forma net
loss per share -- basic and
diluted.................... 11,174,494 13,182,268
=========== ===========
</TABLE>
The following table provides a summary of our balance sheet as of September
30, 1999. The pro forma column gives effect to the conversion of all outstanding
shares of preferred stock into 10,615,293 shares of common stock and the pro
forma as adjusted column reflects the net proceeds from the sale of 3,500,000
shares of common stock in this offering by OnDisplay, Inc. at an initial public
offering price of $28.00 per share, after deducting the estimated underwriting
discount and offering expenses payable by OnDisplay, Inc. See "Use of Proceeds"
and "Capitalization."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................. $ 15,913 $ 15,913 $106,053
Working capital........................................... 15,184 15,184 105,324
Total assets.............................................. 21,979 21,979 114,119
Long-term debt, net of current portion.................... 2,299 2,299 2,299
Mandatorily redeemable convertible preferred stock........ 35,392 -- --
Accumulated deficit....................................... (23,721) (23,721) (23,721)
Total stockholders' equity (deficit)...................... (21,130) 14,262 104,402
</TABLE>
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RISK FACTORS
You should consider the risks described below before making an investment
decision. Our business, operating results or financial condition could be
materially adversely affected by any of the following risks. The market price of
our common stock could decline due to any of such risks, and you might lose all
or part of your investment.
WE HAVE A HISTORY OF LOSSES AND EXPECT LOSSES IN THE FUTURE. IF WE DO NOT
ACHIEVE OR SUSTAIN PROFITABILITY IN THE FUTURE, OUR VIABILITY WILL BE IN DOUBT
AND OUR STOCK PRICE WILL DECLINE.
We were incorporated in August 1996 and first recognized revenues in the
fourth quarter of 1997. As of September 30, 1999, we had an accumulated deficit
of approximately $23.7 million. To date, we have not had a profitable quarter
and do not expect to have a profitable quarter in 2000. If we do achieve
profitability, we cannot be certain that we can sustain profitability in the
future. To date, we have funded our operations from the sale of equity
securities and have not generated cash from operations. We expect to continue to
incur significant costs developing and introducing enhancements to our suite of
e-business infrastructure applications and related services and expanding our
direct sales and marketing activities, leading to losses at least through 2002.
Included in our expenses will be stock-based compensation as a result of stock
options granted through December 15, 1999, of $2.1 million for the three months
ended December 31, 1999, and $15.4 million in 2000, $8.0 million in 2001, $4.2
million in 2002 and $1.6 million in 2003. These losses could impede our ability
to compete effectively by creating doubt among our potential customers as to our
long-term viability, and cause a decrease in the market price of our common
stock. Although our revenues have grown in recent quarters, we do not believe
that we can sustain these growth rates, or that these growth rates are
indicative of future revenue growth rates. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT AND IF WE
FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE
MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY.
Our quarterly operating results have varied in the past and may vary
significantly in the future. Because our business is evolving rapidly and we
have a limited operating history, we have little experience in forecasting our
revenues. Since our operating results are volatile and difficult to predict, we
believe that period-to-period comparisons of our operating results are not a
reliable indication of our future performance. Our future quarterly operating
results may be below the expectations of public market analysts and investors.
In this event, the market price of our common stock may decrease significantly.
Our future quarterly operating results may vary for several reasons, including
the numerous risk factors discussed below.
In the past, we have recognized a substantial portion of our revenues in
the last few days of a quarter, which is typical of many companies in the
software industry, and we believe is primarily due to the budgetary cycles of
and the timing of purchasing decisions by our customers. Accordingly, we cannot
accurately predict our financial results for any quarter until very late in that
quarter. In addition, we derive a significant portion of our revenues in each
quarter from a small number of large orders. A delay in completing an
anticipated sale near the end of a quarter can seriously harm our net operating
results for that quarter.
Our expense levels are relatively fixed in the short term and are based, in
part, on our expected future revenues. Our inability to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall could
accentuate the negative effect on our quarterly results.
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OUR REVENUES DEPEND ON A SINGLE PRODUCT LINE, OUR CENTERSTAGE PRODUCT SUITE,
WHICH IS IN AN EARLY STAGE OF COMMERCIALIZATION.
Most of our revenues in 1998 and in the nine months ended September 30,
1999, were derived from software licenses and service fees from one suite of
products, CenterStage, which until recently has consisted of CenterStage
eContent and CenterStage eIntegrate. We have recently introduced three new
products to our CenterStage product suite, CenterStage eNotify, CenterStage
eBizXchange and CenterStage eSyndicate. We expect that the CenterStage suite of
products will continue to account for the substantial majority of our total
revenues for at least the next several quarters.
Our products are at an early stage of commercialization, particularly our
three new products. Therefore, the level of market acceptance they will attain
is difficult to forecast. Market acceptance could be seriously impeded in the
following circumstances:
- broad standards for conducting e-business emerge and become widely
adopted, thus reducing the need for our infrastructure products;
- information services departments of potential customers choose instead to
create their e-business portals and e-marketplaces internally or use
third-party professional developers to create and maintain their sites;
- competitors develop products, technologies or capabilities that render
our CenterStage products and related services obsolete or noncompetitive
or that shorten the life cycles of these products and services;
- our CenterStage products do not meet customer performance needs or fail
to remain free of significant software defects or bugs; or
- we are unable to recruit and retain the additional sales personnel needed
to effectively market our CenterStage products.
Furthermore, to remain competitive, software products like ours typically
require frequent updates that add new features. There can be no assurance that
we will succeed in creating and selling updated or new versions of our
CenterStage products. A decline in demand for, or in the average selling price
of, our CenterStage products would have a direct negative effect on our primary
source of revenues and could cause our stock price to fall.
THE MARKET FOR E-BUSINESS PORTALS AND E-MARKETPLACES IS NEW AND EMERGING AND IF
IT DOES NOT GROW AS RAPIDLY AS WE ANTICIPATE OR FAILS TO EMERGE AT ALL, OUR
PLANNED GROWTH AND FINANCIAL OBJECTIVES WILL NOT BE MET.
Our success is dependent on the emergence of the market for e-business
portals and e-marketplaces. We are planning to dedicate all of our sales,
marketing and product development efforts toward e-business portals and
e-marketplaces. If these markets do not develop as rapidly as we expect, our
planned growth and financial objectives will not be met. A number of factors
could prevent or hinder the emergence of these markets, including the following:
- the unwillingness of customers to change their traditional method of
conducting commerce;
- the failure of the Internet network infrastructure to keep pace with
substantial growth; and
- adverse publicity and consumer concern about the security of electronic
commerce transactions.
OUR CENTERSTAGE PRODUCTS HAVE LONG AND VARIABLE SALES CYCLES; IT IS THEREFORE
DIFFICULT TO PREDICT THE TIMING OF INDIVIDUAL ORDERS AND MATCH REVENUES WITH
OPERATING EXPENSES, WHICH ARE RELATIVELY FIXED IN THE SHORT TERM.
Variations in the length of our sales cycles could cause our revenues to
fluctuate widely from period to period. Because our operating expenses are
relatively fixed over the short term, these revenue
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fluctuations could have an accentuated effect on our net operating results in
some future periods. To date, the average sales cycle for our CenterStage
products has been three to six months and has required pre-purchase evaluation
by a significant number of decision makers, including senior management. Our
sales cycles can be much longer for larger opportunities with new customers.
Since a number of factors influence the sales process, the period between our
initial contact with a new customer and the time we recognize revenues from that
customer varies widely. We spend significant time educating and providing
information to our prospective customers regarding the use and benefits of our
CenterStage products. Even after purchase, our customers tend to deploy our
solution slowly and deliberately. Deployment schedules depend on the specific
technical capabilities of each customer, the size of the deployment, the
complexity of each customer's network environment, and the quantity of hardware
and the degree of hardware configuration required.
WE FACE COMPETITION PRIMARILY FROM COMPANIES DEVELOPING THEIR OWN INTERNAL
E-BUSINESS INFRASTRUCTURE SYSTEMS AND OTHER PROVIDERS OF E-BUSINESS
INFRASTRUCTURE SOLUTIONS, AND IF WE ARE UNABLE TO COMPETE SUCCESSFULLY, WE WILL
NOT ACHIEVE OUR FINANCIAL OBJECTIVES.
The market for e-business infrastructure applications and services is
intensely competitive, evolving and susceptible to rapid technological change.
We expect the intensity of our competition to increase in the future. Many of
our competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources, significantly greater name
recognition and a larger installed base of customers than we have. In addition,
many of our competitors have well-established relationships with current and
potential customers of ours, have extensive knowledge of our industry and are
capable of offering alternative solutions. As a result, our competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of their products and services than we can. In addition, many
of our current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties that may
improve their ability to address customer needs. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. Increased competition is likely to result in
price reductions, reduced gross margins and loss of market share, any of which
could negatively impact our ability to sell our products at the price levels
required to support our continuing operations. See "Business -- Competition" for
a discussion of our current and potential competitors.
WE NEED TO EXPAND OUR DIRECT SALES OPERATIONS IF WE ARE TO INCREASE MARKET
AWARENESS OF AND REVENUES DERIVED FROM OUR CENTERSTAGE PRODUCTS AND RELATED
SERVICES.
If we fail to expand our direct sales capabilities as we have planned, our
prospects for revenue growth will be diminished. Our CenterStage products and
related services require a sophisticated sales effort targeted at senior
management of our prospective customers. We have recently expanded our direct
sales force and plan to hire additional sales personnel. Competition for
qualified sales personnel is intense in each of the locations we plan to expand,
and we might not be able to hire and retain the type and number of sales
personnel we are targeting. New hires will require extensive training and
typically take several months to achieve productivity. We cannot be certain that
our recent hires will be as productive as necessary.
OUR OPERATIONS AND GROWTH PROSPECTS MAY BE SIGNIFICANTLY IMPEDED IF WE ARE
UNABLE TO RETAIN OUR KEY PERSONNEL OR ATTRACT ADDITIONAL KEY PERSONNEL,
PARTICULARLY SINCE EXPERIENCED PERSONNEL AND NEW SKILLED PERSONNEL ARE IN SHORT
SUPPLY.
Competition for key personnel is intense, particularly in the San Francisco
Bay Area, where our headquarters is located. We have experienced difficulties
attracting, hiring, training and retaining new personnel in the past, and our
key personnel, including members of our management team, may terminate their
employment with us or decide to work for one of our competitors at any time for
any reason. Currently, we are particularly dependent upon the services of our
founder and Chief Executive Officer,
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Mark Pine, and founder and Chief Technical Officer, Trung Dung. The loss of Mr.
Pine's or Mr. Dung's services would materially impede the operation and growth
of our business. We do not maintain key person life insurance for any of our
personnel.
IF WE FAIL TO SUCCESSFULLY MANAGE OUR PLANNED EXPANSION OF OPERATIONS, OUR
GROWTH PROSPECTS WILL BE DIMINISHED AND OUR OPERATING EXPENSES COULD EXCEED
BUDGETED AMOUNTS.
Our ability to offer our CenterStage products and related services in a
quickly evolving market requires an effective planning and management process.
We have expanded our operations rapidly since inception, and we intend to
continue to expand them in the foreseeable future. This rapid growth places
significant demand on our managerial and operational resources and our internal
training capabilities. In addition, we have recently hired a significant number
of employees and plan to further increase our total headcount. We also plan to
expand the geographic scope of our operations, both domestically and
internationally. This expansion will continue to substantially burden our
management team. To manage growth effectively, we must:
- implement and improve our operational, financial and other systems,
procedures and controls on a timely basis;
- expand, train and manage our workforce, particularly our sales and
marketing and support organizations; and
- identify and move into suitable office space to expand our facilities.
We cannot be certain that our systems, procedures or controls will be
adequate to support our current or future operations or that our management will
be able to manage expansion and still achieve the rapid execution necessary to
meet our growth expectations. Failure to manage our growth effectively could
diminish our growth prospects and could result in lost opportunities as well as
operating expenses exceeding the amount budgeted.
IF WE FAIL TO ADEQUATELY RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR EXISTING
PRODUCTS WILL BECOME OBSOLETE OR UNMARKETABLE.
New approaches to gather, exchange, integrate, personalize and syndicate
information over the Internet based on new technologies and industry standards
could render our CenterStage products obsolete and unmarketable. We believe that
to succeed we must enhance our CenterStage products, develop new products on a
timely basis to keep pace with technological developments and satisfy the
increasingly sophisticated requirements of our customers. Therefore, we cannot
be certain that we will successfully respond to technological change, evolving
industry standards or customer requirements. If we are unable to adequately
respond to these changes, our revenues and market share could rapidly decline.
In connection with the introduction of new products and enhancements, we have
experienced development delays and related cost overruns, which are not unusual
in the software industry. We could encounter these problems or more serious
delays in the future. Any delays in developing and releasing new products or
enhancements to our CenterStage products could result in:
- customer dissatisfaction;
- cancellation of orders and license agreements;
- negative publicity;
- loss of revenues;
- slower market acceptance; and
- legal action by customers against us.
Our CenterStage products are designed to work on a variety of hardware and
software platforms used by our customers. However, these products may not
operate well with future versions of hardware and
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software platforms, programming languages, database environments, accounting and
other systems that our customers use. We must constantly modify and improve our
technology to keep pace with changes made to these platforms and to operational
applications and other Internet-related applications. This may result in
uncertainty relating to the timing and nature of new product announcements,
introductions or modifications, which may harm our business. If we fail to
modify or improve our CenterStage products in response to evolving industry
standards, they could rapidly become obsolete or unmarketable, which would have
a direct negative effect on our revenues.
IF OUR CENTERSTAGE PRODUCTS CONTAIN ERRORS, OUR REVENUES AND NET OPERATING
RESULTS WILL BE NEGATIVELY IMPACTED AND OUR REPUTATION AND THE MARKET ACCEPTANCE
OF THESE PRODUCTS WILL BE JEOPARDIZED.
Our e-business infrastructure applications are complex and may contain
undetected errors or result in system failures, especially when first introduced
or when new versions or enhancements are released. Despite extensive testing,
errors could occur in any of our current or future product offerings after
commencement of commercial shipments. We have discovered software defects in our
new products after their introduction. Testing of our CenterStage products is
particularly challenging because it is difficult to simulate the wide variety of
computer environments into which they are deployed. The implementation of our
CenterStage products typically involves working with sophisticated software,
computing and communications systems. If our software contains undetected errors
or we fail to meet our customers' expectations in a timely manner we could
experience:
- loss of or delay in revenues and loss of market share;
- loss of customers;
- failure to achieve market acceptance;
- diversion of development resources;
- diversion of customer support resources;
- negative publicity;
- increased service and warranty costs;
- legal actions by customers against us; and
- increased insurance costs.
Because our customers use our CenterStage products for mission-critical
applications, errors or defects in or other performance problems associated with
these products could result in financial or other damages to our customers. Our
customers may then seek damages from us for their losses. We have not
experienced any product liability claims to date. However, a product liability
claim brought against us, even if not successful, would likely be time-consuming
and costly and could harm our reputation.
Our licenses with customers generally contain provisions designed to limit
our exposure to potential product liability claims such as disclaimers of
warranties and limitations on liability for special, consequential and
incidental damages. In addition, our license agreements generally limit the
amounts recoverable for damages to the amounts paid by our customers to us for
the products or services giving rise to the damages. We cannot be certain that
the limitations of liability we include in our contracts will be enforceable
since existing or future laws or unfavorable judicial decisions could negate
these liability limiting provisions. The successful assertion of one or more
large claims that exceed contractual limitations on our liability could have a
significant negative impact on our results of operations and cause our stock
price to fall.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OUR ABILITY TO
COMPETE COULD BE SERIOUSLY HARMED, AND IF OTHER COMPANIES BRING LAWSUITS
CLAIMING THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS WE COULD BE LIABLE
FOR SIGNIFICANT DAMAGES.
10
<PAGE> 13
Our success depends in large part on our ability to adequately protect our
intellectual property rights. We seek to protect our source code, documentation
and other written materials under trade secret and copyright laws, which afford
only limited protection. We require our customers to enter into license
agreements, which impose restrictions on our customers' ability to utilize our
CenterStage products. In addition, we seek to avoid disclosure of our trade
secrets by, among other methods, restricting access to our source code and
requiring those persons with access to our proprietary information to sign
confidentiality agreements with us. However, some of these confidentiality
agreements contain provisions that may permit these persons, in some
circumstances, to develop products based on our proprietary information as a
result of their access to our source code. If these persons develop products
based on our proprietary information, the value of our proprietary information
will be adversely impacted. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our technology or to
obtain and use information that we regard as proprietary. Policing unauthorized
use of our technology is difficult, and while we are unable to determine the
extent to which piracy of our CenterStage products exists, software piracy can
be a persistent problem. In addition, as we expand our operations globally, we
become increasingly exposed to intellectual property infringement since the laws
of some foreign countries do not protect our proprietary rights to as great an
extent as the laws of the United States. Our means of protecting our proprietary
rights may not be adequate and our competitors may copy our CenterStage
products, independently develop similar technology, or design around our
intellectual property. If we fail to adequately protect our intellectual
property, our ability to compete may be seriously harmed.
There has been a substantial amount of litigation in the software industry
regarding intellectual property rights. It is possible that in the future third
parties may claim that our current or future products infringe their
intellectual property. We expect that software developers will increasingly be
susceptible to infringement claims as the number of products and competitors in
our industry segment grows and the functionality of products in different
industry segments overlaps. Any intellectual property claims, with or without
merit, could be time-consuming, result in costly litigation, cause product
shipment delays or require us to enter into royalty or licensing agreements. Any
royalty or licensing agreements, if required, may not be available on terms
acceptable to us, or may not be available at all, which could jeopardize the
viability of our business.
THERE IS SUBSTANTIAL RISK THAT FUTURE REGULATIONS COULD BE ENACTED THAT EITHER
DIRECTLY RESTRICT OUR BUSINESS OR INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE
GROWTH OF INTERNET COMMERCE.
As Internet commerce evolves, we expect federal, state or foreign agencies
to adopt regulations covering many issues, including user privacy, pricing,
content and quality of products and services. If enacted, these laws, rules or
regulations could limit the market for our CenterStage products and related
services, which could adversely affect our operating results and business
prospects. Although many of these regulations may not apply to our business
directly, we expect that laws regulating the solicitation, collection or
processing of personal/consumer information could indirectly affect our
business. The Telecommunications Act of 1996 prohibits some types of information
and content from being transmitted over the Internet. The prohibition's scope
and the liability associated with a Telecommunications Act violation are
currently unsettled. In addition, although substantial portions of the
Communications Decency Act were held to be unconstitutional, we are unsure
whether similar legislation will be enacted and upheld in the future. It is
possible that legislation could expose companies involved in Internet commerce
to liability, which could limit the growth of Internet commerce generally.
Legislation like the Telecommunications Act and the Communications Decency Act
could dampen the growth of Internet usage and decrease its acceptance as a
commercial medium. Moreover, the applicability to the Internet of existing laws
in various jurisdictions governing issues such as property ownership, sales tax,
libel and personal privacy is uncertain and may take years to resolve. Our costs
could increase and our growth could be harmed by any new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing laws
and regulations to the Internet and on-line businesses.
11
<PAGE> 14
OUR PLANNED INTERNATIONAL OPERATIONS MAY NOT BE SUCCESSFUL AND WILL MAKE US
SUSCEPTIBLE TO VARIOUS RISKS.
We are beginning our international operations in the fourth quarter of 1999
by establishing and staffing our international headquarters and field sales
offices in Europe. Establishing our international operations will require
significant management attention and financial resources and could harm our
financial performance by increasing our costs. We have very limited experience
in marketing, selling and distributing our CenterStage products and related
services internationally. We currently have no employees located outside of the
United States. We may encounter difficulties in staffing and managing offices in
foreign countries because of our inexperience and unfamiliarity with local
conditions, as well as shortages of qualified personnel in some countries. Some
countries provide little or no protection of intellectual property rights. Our
products may be copied with impunity in such countries. We may find that the
costs of customizing our products in some foreign countries exceeds our
estimates or results in delays in product readiness. Some countries provide only
minimal levels of protection to trade creditors in collecting amounts due, which
could result in difficulties in collecting accounts receivable.
OUR SYSTEMS ARE SUSCEPTIBLE TO EXTERNAL EVENTS THAT MAY IMPACT OUR ABILITY TO
CONDUCT OUR BUSINESS OPERATIONS.
We are vulnerable to a major earthquake and other calamities. Our
operational facilities are located in the San Francisco Bay area, a seismically
active region. Our computer systems, as well as the telecommunications and other
infrastructure serving our operations, are potentially vulnerable to a major
earthquake. We have not undertaken a systematic analysis of the potential
consequences to our business and financial results from a major earthquake and
do not have a recovery plan for earthquake, fire, flood, systemic power or
communication failure, sabotage or similar disasters. We are unable to predict
the effects of any such event, but the effects could be seriously harmful to our
business.
PROBLEMS RELATED TO THE "YEAR 2000 ISSUE" COULD ADVERSELY AFFECT OUR BUSINESS.
The "year 2000 issue" refers generally to the problems that some software
may have in determining the correct century for the year. For example, software
with date-sensitive functions that is not year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results. We designed our CenterStage products to be year
2000 compliant provided that the underlying operating system of the host machine
and any other software used with our products are year 2000 compliant. Risks are
posed if, despite our investigation and remediation efforts, one or more of the
following occurs:
- our own CenterStage software products contain undetected errors or
defects associated with the year 2000 problem;
- third party hardware and software used with our CenterStage products
experiences problems which are wrongly attributed to us;
- our suppliers, internal information technology systems or non-information
technology systems, including telecommunications systems and utilities,
experience problems; and
- our customers experience year 2000 problems.
The occurrence of any of these problems could result in delays or losses of
revenues, diversion of our development resources, damage to our reputation,
increased service and warranty costs and litigation costs. We do not currently
have any information concerning the year 2000 compliance status of our
customers. Our current or future customers may incur significant expenses to
achieve year 2000 compliance. If our customers are not year 2000 compliant, they
may experience material costs to remedy problems, they may face litigation costs
and they may delay purchases or implementation of our CenterStage products. Year
2000 issues could reduce or eliminate the budgets that current or potential
customers could have for purchases of our CenterStage products and related
services. As a result, our revenues could be adversely affected. Regardless of
whether we experience year 2000 problems, enterprises may reduce their spending
on software and systems during the latter part of 1999 and into 2000 in
connection with the potential
12
<PAGE> 15
effects of the year 2000 or to concentrate their resources on remediation. In
addition, we may experience material problems and costs with year 2000
compliance that could adversely affect our net operating results. We have
established a year 2000 compliance team, whose purpose is to evaluate any year
2000 risks that we face and to remedy any year 2000 problems. Our year 2000
compliance team is in the process of completing our compliance program,
including the final stages of remediation and testing. Although it is the duty
of this team to identify and correct any year 2000 problems, it may fail to
identify material year 2000 problems that we face. Further, even if this team
successfully identifies year 2000 problems, it may not be able to adequately
remedy any year 2000 problems. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000 Compliance." We have
not developed a contingency plan to address situations that may result if we are
unable to achieve year 2000 readiness of our critical operations or if our
customers or vendors encounter significant year 2000 compliance problems.
WE MAY SPEND THE NET PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH YOU MIGHT NOT
APPROVE AND WHICH MIGHT NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS.
We intend to use the net proceeds from this offering for general corporate
purposes, without designating amounts for any specific uses. Accordingly,
management will have significant flexibility in applying the net proceeds from
this offering and may do so in ways which you might not approve. The failure of
management to apply the net proceeds from this offering effectively could
negatively impact our results of operations and cause our stock price to fall.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE ON TERMS
FAVORABLE TO US, IF AT ALL.
We expect that the net proceeds from this offering will be sufficient to
meet our need for capital for at least the next twelve months. After that, we
may need to raise additional capital and we cannot be certain that we will be
able to obtain additional financing on favorable terms, if at all. If we cannot
raise additional capital on acceptable terms, we may not be able to develop or
enhance our products and services, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements.
THE DETERMINATION OF THE INITIAL PUBLIC OFFERING PRICE IS BASED ON NEGOTIATION
WITH THE UNDERWRITERS WITHOUT THE BENEFIT OF ANY PRIOR PUBLIC MARKET FOR OUR
COMMON STOCK, AND THE MARKET PRICE OF OUR COMMON STOCK MAY VARY SUBSTANTIALLY
FROM THE INITIAL OFFERING PRICE.
We negotiated and determined the initial public offering price of the
common stock in this offering with the representatives of the underwriters based
on several factors, but without the benefit of any prior public market prices.
The market price of our common stock after this offering may vary substantially
from the initial public offering price.
A THIRD PARTY COULD BE PREVENTED FROM ACQUIRING YOUR SHARES OF COMMON STOCK AT A
PREMIUM TO THE MARKET PRICE BECAUSE OF OUR ANTI-TAKEOVER PROVISIONS AND THE
CONCENTRATION OF OWNERSHIP AMONG EXISTING STOCKHOLDERS.
Our management and members of our Board of Directors and their affiliates
will own approximately 58.0% of our outstanding stock immediately following this
offering, assuming no exercise of outstanding warrants and options. This
ownership interest by the Board of Directors and their affiliates in addition to
provisions of our charter, bylaws and Delaware law, could make it more difficult
for a third party to acquire us without the approval of the Board of Directors,
even if a change in control would result in the purchase of your shares of
common stock at a premium to the market price. These anti-takeover provisions
are further described in "Description of Capital Stock -- Charter and Bylaw
Provisions and Delaware Law."
FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE.
If our stockholders sell substantial amounts of our common stock, in the
public market after this offering, the market price of our common stock could be
adversely affected. In addition, the sale of these shares could impair our
ability to raise capital through the sale of additional equity securities.
13
<PAGE> 16
Upon completion of this offering, we will have 18,897,719 shares of common
stock outstanding and 957,489 shares covered by currently exercisable options
and warrants. The 3,500,000 shares sold in this offering will be freely tradable
without restriction or further registration under the Federal securities laws
unless purchased by "affiliates" of OnDisplay as that term is defined in Rule
144. The remaining 15,397,719 shares of common stock outstanding upon completion
of this offering will be "restricted securities" as that term is defined in Rule
144. Substantially all of our stockholders have signed lock-up agreements under
which they have agreed not to sell or otherwise dispose of any shares of common
stock for a period of at least 180 days after the date of this prospectus
without the prior written approval of BancBoston Robertson Stephens Inc. When
these lock-up agreements expire, these shares and the shares underlying the
options will become eligible for sale, in some cases without restriction and in
other cases only in accordance with Rule 144. See "Shares Eligible for Future
Sale."
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF SHARES
PURCHASED IN THIS OFFERING.
The initial public offering price is expected to be substantially higher
than the book value per share of our outstanding common stock immediately after
this offering. Accordingly, if you purchase common stock in the offering at an
initial public offering price of $28.00 per share, you will incur immediate
dilution of approximately $22.48 in the book value per share of our common stock
from the price you pay for our common stock.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS; THESE STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND ARE SUSCEPTIBLE TO RISKS, UNCERTAINTIES AND
OTHER FACTORS, SOME OF WHICH ARE BEYOND OUR CONTROL.
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use the words "anticipates," "believes," "plans," "expects,"
"future," "seeks," "estimates" and "intends" and similar expressions to identify
forward-looking statements. This prospectus also contains forward-looking
statements attributed to third parties relating to their estimates regarding the
growth of e-commerce and the use of the Internet for engaging in purchasing
transactions. Our actual results could differ materially from those anticipated
in these forward-looking statements for many reasons, including the risks faced
by us described in "Risk Factors" and elsewhere in this prospectus.
14
<PAGE> 17
CONCURRENT PRIVATE SALE OF COMMON STOCK
We may sell up to 200,000 shares of our common stock to a small number of
our existing holders of convertible preferred stock and up to 100,000 shares to
PurchasePro.com, a significant customer or to its affiliates, in private
transactions that would be completed concurrently with the closing of this
public offering. The price to be paid by the purchasers would be equal to the
public offering price shown on the cover of this prospectus less the
underwriting discount. The purchasers would receive restricted shares not
publicly tradable unless their sale is subsequently registered under the
Securities Act or unless an exemption from registration is available, such as
Rule 144. The private offering purchasers would be entitled to participate in
the registration rights described under "Description of Capital Stock --
Registration Rights of Certain Holders." All of the purchasers will be
"qualified institutional buyers" or large venture capital "accredited investors"
as those terms are defined in Rules 144A and 501.
USE OF PROCEEDS
Our proceeds from the sale of the 3,500,000 shares of common stock we are
offering are estimated to be $90.1 million, or $103.8 million if the
underwriters' over-allotment option is exercised in full, based on an initial
public offering price of $28.00 per share and after deducting the underwriting
discount and our estimated offering expenses.
We plan to use the proceeds for general corporate purposes. We have no
current specific plan for allocation of the proceeds. Although we may use some
of the proceeds to acquire other companies, technology or products that
complement our business, we are not currently planning any of these
transactions. Prior to their expenditure, we will invest the net proceeds of
this offering in short-term, interest-bearing securities.
The principal purposes of this offering are to obtain additional capital,
to create a public market for the common stock, to facilitate future access to
public equity markets and to provide increased visibility and credibility in a
marketplace where many of our current and potential competitors are or are
likely to become publicly-held companies.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently expect to retain our future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future. Under an agreement with a secured lender we may not pay
dividends without the lender's prior approval.
15
<PAGE> 18
CAPITALIZATION
The following table sets forth:
- the actual capitalization of OnDisplay as of September 30, 1999;
- the pro forma capitalization of OnDisplay after giving effect to the
conversion of all outstanding shares of preferred stock into 10,615,293
shares of common stock immediately prior to the completion of this
offering; and
- the pro forma as adjusted capitalization, which gives effect to the sale
in this offering of 3,500,000 shares of common stock at an initial public
offering price of $28.00 per share and after deducting the underwriting
discount and estimated offering expenses.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, less current portion...................... $ 2,299 $ 2,299 $ 2,299
Mandatorily redeemable convertible preferred stock, Series
A, B, C and D, $0.001 par value; 11,600,000 shares
authorized, actual 10,615,293 shares issued and
outstanding, proforma none................................ 35,392 -- --
Stockholders' equity (deficit):
Common stock, $0.001 par value; 25,000,000 shares
authorized, shares issued and outstanding, at amount
paid in(1):
Actual: 4,782,426 shares;
Pro forma: 15,397,719 shares; and
Pro forma as adjusted: 18,897,719 shares(1).......... 1 12 16
Additional paid-in capital.............................. 10,911 46,292 136,428
Deferred stock-based compensation....................... (8,321) (8,321) (8,321)
Accumulated deficit..................................... (23,721) (23,721) (23,721)
-------- -------- --------
Total stockholders' deficit.......................... (21,130) 14,262 104,402
-------- -------- --------
Total capitalization............................ $ 16,561 $ 16,561 $106,701
======== ======== ========
</TABLE>
This table excludes the following shares:
- up to 300,000 shares that may be sold privately concurrently with this
public offering;
- 2,099,990 shares issuable upon exercise of stock options outstanding as
of September 30, 1999;
- 18,834 shares available for future grant or issuance under our stock
option plan as of September 30, 1999; and
- 85,537 shares issuable upon exercise of warrants outstanding as of
September 30, 1999
SUBSEQUENT TO SEPTEMBER 30, 1999, WE ISSUED OPTIONS TO PURCHASE APPROXIMATELY
1.5 MILLION SHARES OF COMMON STOCK AT EXERCISE PRICES OF $6.50 AND $8.00 PER
SHARE. AS A RESULT, WE WILL RECORD DEFERRED STOCK-BASED COMPENSATION OF
APPROXIMATELY $23 MILLION IN THE FOURTH QUARTER OF 1999. THIS COMPENSATION WILL
BE AMORTIZED OVER THE FOUR-YEAR VESTING PERIOD OF THE OPTIONS.
See Notes 8, 9 and 12 to the Financial Statements.
16
<PAGE> 19
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
approximately $14.3 million, or approximately $0.93 per share of common stock.
Net tangible book value per share represents the amount of tangible assets less
total liabilities, divided by the number shares of common stock outstanding,
assuming the conversion of all outstanding shares of preferred stock into common
stock.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of our common stock in
this offering and the pro forma net tangible book value per share of our common
stock immediately after this offering. After giving effect to our sale of
3,500,000 shares of common stock in this offering at an initial public offering
price of $28.00 per share and after deduction of the underwriting discount and
estimated offering expenses, our pro forma net tangible book value as of
September 30, 1999 would have been approximately $104.4 million, or $5.52 per
share. This represents an immediate increase in pro forma net tangible book
value of $4.59 per share to existing stockholders and an immediate dilution in
pro forma net tangible book value of $22.48 per share to purchasers of common
stock in this offering.
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $28.00
Net tangible book value per share before offering........... $ 0.93
Increase per share attributable to new investors.......... 4.59
------
Pro forma net tangible book value per share after
offering.................................................. 5.52
------
Net tangible book value dilution per share to new
investors................................................. $22.48
======
</TABLE>
This table excludes all options and warrants that will remain outstanding
upon completion of this offering. See Notes 8 and 9 of Notes to Financial
Statements. The exercise of outstanding options and warrants having an exercise
price less than the offering price would increase the dilutive effect to new
investors.
The following table sets forth as of September 30, 1999 the total
consideration paid and the average price per share paid by the existing
stockholders and by new investors, excluding the 300,000 shares that are
proposed to be sold in a concurrent private offering, before deducting estimated
underwriting discounts and commissions and offering expenses payable by the
Company at an initial public offering price of $28.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 15,397,719 81.5% $ 35,692,000 26.7% $ 2.32
New investors..................... 3,500,000 18.5 98,000,000 73.3 28.00
---------- ----- ------------ -----
Total................... 18,897,719 100.0% $133,692,000 100.0%
========== ===== ============ =====
</TABLE>
17
<PAGE> 20
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
our financial statements and notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. The statement of operations data for the period from inception to
December 31, 1996, the years ended December 31, 1997 and 1998 and the nine
months ended September 30 1999 and the balance sheet data as of December 31,
1997 and 1998 and September 30, 1999 are derived from our Financial Statements
that have been audited by PricewaterhouseCoopers LLP, independent auditors, and
are included elsewhere in this prospectus. The balance sheet data for the year
ended December 31, 1996 is derived from our Financial Statements audited by
PricewaterhouseCoopers LLP, that are not included in this prospectus. The
statement of operations data for the nine months ended September 30, 1998 and
1999 and the balance sheet data as of September 30, 1999 are derived from
unaudited financial statements included elsewhere in this prospectus. The
results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the entire year. The
pro forma net loss per share data assume conversion of all outstanding shares of
preferred stock into common stock. See Note 11 of Notes to Financial Statements.
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 14,
1996
(DATE OF YEAR ENDED NINE MONTHS
INCEPTION) TO DECEMBER 31, ENDED SEPTEMBER 30,
DECEMBER 31, ------------------------ -------------------------
1996 1997 1998 1998 1999
------------- ---------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
License revenues................... $ -- $ 265 $ 2,229 $ 1,568 $ 4,018
Service revenues................... -- -- 1,114 652 2,550
---------- ---------- ----------- ---------- -----------
Total revenues.............. -- 265 3,343 2,220 6,568
Cost of license revenues........... -- -- 2 1 5
Cost of service revenues........... -- -- 1,618 954 2,622
---------- ---------- ----------- ---------- -----------
Total cost of revenues...... -- -- 1,620 955 2,627
---------- ---------- ----------- ---------- -----------
Gross profit....................... -- 265 1,723 1,265 3,941
Operating expenses:
Sales and marketing.............. 42 2,810 5,747 4,125 6,931
Research and development......... 393 1,986 2,636 2,003 2,825
General and administrative....... 182 1,158 1,201 685 1,891
Amortization of deferred
stock-based compensation...... -- -- 618 376 1,551
---------- ---------- ----------- ---------- -----------
Total operating expenses.... 617 5,954 10,202 7,189 13,198
---------- ---------- ----------- ---------- -----------
Loss from operations............... (617) (5,689) (8,479) (5,924) (9,257)
Interest income and other.......... 46 173 174 115 235
Interest expense................... (1) (18) (43) (32) (245)
---------- ---------- ----------- ---------- -----------
Net loss........................... $ (572) $ (5,534) $ (8,348) (5,841) (9,267)
========== ========== =========== ========== ===========
Net loss per share -- basic and
diluted.......................... $ (0.17) $ (1.62) $ (2.34) $ (1.66) $ (2.34)
========== ========== =========== ========== ===========
Shares used in per share
calculation -- basic and
diluted.......................... 3,400,000 3,410,313 3,572,353 3,517,022 3,966,598
========== ========== =========== ========== ===========
Pro forma net loss per
share -- basic and diluted
(unaudited)...................... $ (0.75) $ (0.70)
=========== ===========
Shares used in pro forma net loss
per share calculation -- basic
and diluted (unaudited).......... 11,174,494 13,182,268
=========== ===========
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998 SEPTEMBER 30, 1999
------- -------- ------------------
<S> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS)
Cash and cash equivalents............................. $ 3,900 $ 4,648 $ 15,913
Working capital....................................... 3,748 4,584 15,184
Total assets.......................................... 4,710 8,253 21,979
Long-term debt, less current portion.................. 128 240 2,299
Mandatorily redeemable convertible preferred stock.... 10,200 18,982 35,392
Accumulated deficit................................... (6,106) (14,454) (23,721)
Total stockholders' deficit........................... (6,098) (13,729) (21,130)
</TABLE>
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements based upon current
expectations that involve risks and uncertainties. When used in this prospectus,
the words "intend," "anticipate," "believe," "estimate," "plan" and "expect" and
similar expressions as they relate to OnDisplay are included to identify
forward-looking statements. The following discussion should be read in
conjunction with the Financial Statements and Notes included elsewhere in this
prospectus. Our actual results and the timing of certain events could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
We offer a comprehensive suite of software applications that enable
companies to rapidly deploy and easily manage e-business portals and
e-marketplaces. Our solution addresses the unique challenges faced by e-business
portals and e-marketplaces in both business-to-business and business-to-consumer
e-commerce. Our infrastructure solutions allow both business-to-business and
business-to-consumer e-commerce companies to rapidly automate and continuously
manage the flow of information and transactional data among their suppliers,
distributors and customers. Our products enable our e-business portal and
e-marketplace customers to: achieve rapid time-to-market, engage and retain
customers, increase revenues and marketshare and attain agile e-business
relationships.
We were incorporated in August 1996, based on the expectation that the
Internet would become a significant medium over which business would be
conducted. Our founders believed that as commerce over the Internet evolved,
companies employing the Internet for e-commerce would require products allowing
them to manage extensive amounts of data. Therefore, we focused our resources on
developing our CenterStage technology platform. During the fourth quarter of
1997, we shipped our first applications, CenterStage eContent and CenterStage
eIntegrate. Through 1998, the demand for CenterStage products for use in
e-commerce applications grew slowly and the majority of our shipments were
primarily to customers using the products in connection with implementing
software systems that plan the management of resources on a company-wide or
enterprise basis. In the first quarter of 1999, the enterprise resource planning
marketplace slowed significantly, as did demand for products used for enterprise
resource planning implementations. Demand for using CenterStage products for
e-commerce was increasing. During the second quarter of 1999, we redirected
substantially all of our sales and marketing resources to the e-commerce
infrastructure market, and released and shipped three new products, CenterStage
eNotify, CenterStage eBizXchange and CenterStage eSyndicate, to complete our
CenterStage suite of e-business products.
We expect that the significant majority of our revenues will continue to be
derived from our CenterStage product suite and related services for the
foreseeable future. Our revenues, which consist of software license revenues and
service revenues, totaled $265,000 and $3.3 million for the years ended December
31, 1997 and 1998, and $6.6 million for the nine months ended September 30,
1999. Substantially all of our revenues since inception have been derived from
the license of applications based on our CenterStage technology platform and
related services. Our product pricing is principally based on the number of
servers running the software and the number of different information sources
accessed by each customer. Service revenues consist of fees received for
consulting, maintenance, customer support and training.
We sell our CenterStage products and related services primarily through a
direct sales force based in the United States. In addition, we have entered into
co-marketing arrangements to enhance our indirect sales channels. In the future,
we expect that the majority of our revenues will continue to be derived from our
direct sales force.
Revenues from software license agreements are recognized upon shipment or
upon notification to the customer of the downloadable software location,
provided that a signed contract exists, the fee is fixed and determinable, and
collection of the resulting receivable is probable and, if applicable,
acceptance criteria
20
<PAGE> 23
are met. Service revenues are recognized as services are performed or, with
respect to maintenance, ratably over the contract term, typically over one year.
Our cost of revenues includes costs associated with the electronic
transmission of software and royalties for third party embedded software, which
are not material, salaries and related expenses for our consulting and training
services and customer support organizations, cost of third parties contracted to
provide consulting services to customers and an allocation of our facilities and
depreciation expenses.
We allocate the total costs for facilities to each functional area that
uses the overhead and facilities services based on their headcount. These
allocated charges include facility rent for the corporate office, communication
charges, and depreciation expense for office furniture and equipment.
Since inception, we have incurred substantial research and development
costs and invested heavily in the expansion of our sales, marketing and
professional services organizations to support our long-term growth strategy.
The number of our full-time employees increased from 39 as of December 31, 1997,
to 65 as of December 31, 1998, and to 106 as of September 30, 1999. As a result
of these expenses, we have incurred net losses in each fiscal quarter since
inception and, as of September 30, 1999, had an accumulated deficit of $23.7
million. We intend to continue expanding our sales and marketing groups and to
implement significant marketing programs to solidify our market position, gain
name recognition, establish an international presence and introduce new products
and services. We also intend to increase our research and development and
professional services groups so that we can continue investing in new products
and adding additional services to benefit our customers. As a result of these
anticipated expenditures we expect to incur net losses in the foreseeable
future.
Through September 30, 1999, we have recorded aggregate deferred stock-based
compensation of $10.5 million in connection with stock option grants. Deferred
stock-based compensation is amortized over the life of the options, generally
four years. Subsequent to September 30, 1999, we issued options to purchase
approximately 1.5 million shares of common stock at exercise prices of $6.50 and
$8.00 per share. As a result, we will record deferred stock-based compensation
of approximately $23 million in the fourth quarter of 1999. This compensation
will be amortized over the four-year vesting period of the options. Included in
our expenses will be stock-based compensation as a result of stock options
granted through December 15, 1999, of $2.1 million for the three months ended
December 31, 1999, and $15.4 million in 2000, $8.0 million in 2001, $4.2 million
in 2002 and $1.6 million in 2003.
We believe that period-to-period comparisons of our operating results
should not be relied upon as indicative of future performance. Our prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in early stages of development, particularly companies
in new and rapidly evolving markets. There can be no assurance we will be
successful in addressing such risks and difficulties. Although we have
experienced revenue growth recently, this growth may not continue. In addition,
we may not achieve or maintain profitability in the future.
21
<PAGE> 24
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as a percentage
of total revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, ----------------------
1998 1998 1999
------------ ----------- --------
(UNAUDITED)
<S> <C> <C> <C>
License revenues............................................ 66.7% 70.6% 61.2%
Service revenues............................................ 33.3 29.4 38.8
------- ------- -------
Total revenues......................................... 100.0 100.0 100.0
Cost of license revenues.................................... -- -- --
Cost of service revenues.................................... 48.5 43.0 40.0
Total cost of revenues................................. 48.5 43.0 40.0
------- ------- -------
Gross profit................................................ 51.5 57.0 60.0
------- ------- -------
Operating expenses:
Sales and marketing....................................... 171.9 185.8 105.5
Research and development.................................. 78.9 90.2 43.0
General and administrative................................ 35.9 30.9 28.8
Amortization of deferred stock-based compensation......... 18.5 16.9 23.6
------- ------- -------
Total operating expenses............................... 305.2 323.8 200.9
Loss from operations........................................ (253.6) (266.8) (140.9)
Interest income and other, net.............................. 3.9 3.7 (0.2)
------- ------- -------
Net loss.................................................... (249.7)% (263.1)% (141.1)%
======= ======= =======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
Revenues
Our revenues are derived from software licenses and related services. Our
revenues were $2.2 million and $6.6 million for the nine months ended September
30, 1998 and 1999. In the nine months ended September 30, 1998 one customer
accounted for more than 10.0% of our total revenues, and in the nine months
ended September 30, 1999 another customer accounted for more than 10.0% of our
total revenues.
License Revenues. Our license revenues were $1.6 million and $4.0 million
for the nine months ended September 30, 1998 and 1999. License revenues
represented 70.6% and 61.2% of total revenues for the nine months ended
September 30, 1998 and 1999. This dollar increase reflected initial market
acceptance of our CenterStage products in the e-commerce markets in 1999, and an
increase in the size and productivity of the sales force. During the nine month
period in 1998, license revenues were derived primarily from enterprise resource
planning markets.
Service Revenues. Our service revenues were $652,000 and $2.6 million for
the nine months ended September 30, 1998 and 1999. Service revenues represented
29.4% and 38.8% of total revenues for the nine months ended September 30, 1998
and 1999. The increase in service revenues for the nine months ended September
30, 1999 over the nine months ended September 30, 1998 was primarily due to the
increase in our customer base and service contracts performed during this
period. We expect that the proportion of our service revenues to total revenues
will fluctuate in the future, depending in part on our customers' breadth and
scope of implementation and the mix of products implemented.
Cost of Revenues
Our cost of revenues was $955,000, representing 43.0% of revenues, and $2.6
million, representing 40.0% of revenues, for the nine months ended September 30,
1998 and 1999. This dollar increase was primarily due to an increase in
professional service support personnel to manage and support our growing
customer base. Cost of service revenues, which constitutes substantially all of
cost of revenues, has exceeded service revenues primarily due to our investment
in our consulting and training services and customer support organizations. Cost
of revenues as a percentage of revenues may vary between periods due to the mix
of services we provide.
22
<PAGE> 25
Operating Expenses
Sales and Marketing. Our sales and marketing expenses increased 68.0% from
$4.1 million, representing 185.8% of revenues, in the nine months ended
September 30, 1998 to $6.9 million, representing 105.5% of revenues, in the nine
months ended September 30, 1999. This dollar increase was primarily due to an
increase of approximately $1.4 million in compensation expenses, resulting
principally from increased staffing and higher sales commissions related to the
period to period increase in revenues, and increased spending of $850,000 on
marketing programs. We believe sales and marketing will increase substantially
in future periods as we continue to expand our sales force, establish our
international presence and expand our marketing programs.
Research and Development. Our research and development expenses increased
41.0% from $2.0 million, representing 90.2% of revenues, in the nine months
ended September 30, 1998 to $2.8 million, representing 43.0% of revenues, in the
nine months ended September 30, 1999. This dollar increase was primarily due to
an increase of headcount of 11, and related personnel costs of approximately
$400,000 as well as increased costs related to contract development personnel of
approximately $180,000. We believe that research and development expenditures
will increase substantially in future periods as we continue to develop
additional products and enhance existing products. Technological feasibility of
our software is generally not established until substantially all product
development is complete. Historically, software development costs eligible for
capitalization have been insignificant, and all costs related to research and
development have been expensed as incurred.
General and Administrative. Our general and administrative expenses were
$685,000, representing 30.9% of revenues, and $1.9 million, representing 28.8%
of revenues, for the nine months ended September 30, 1998 and 1999. This dollar
increase was primarily due to increased compensation and related benefits
associated with additional personnel costs of approximately $200,000, an
increase in the allowance for bad debts of approximately $200,000, increased
costs associated with moving to new facilities and higher professional and an
increase in outside service fees of $80,000, and other increased costs related
to supporting the expansion of our business. We believe that general and
administrative costs will increase in future periods as we incur additional
costs related to the overall growth of our company, as well as costs associated
with being a public company, such as directors and officers liability insurance,
investor relations and regulatory filings.
Amortization of Deferred Stock-Based Compensation. During the nine months
ended September 30, 1998 and 1999, we recorded deferred compensation of $1.6
million and $8.3 million in connection with stock option grants. We are
amortizing this amount over the vesting periods of the applicable options,
resulting in amortization expense of $376,000 and $1.6 million for the nine
months ended September 30, 1998 and 1999. Subsequent to September 30, 1999, we
issued options to purchase approximately 1.5 million shares of common stock at
exercise prices of $6.50 and $8.00 per share. As a result, we will record
deferred stock-based compensation of approximately $23.0 million in the fourth
quarter of 1999. This compensation will be amortized over the four-year vesting
period of the options.
Loss From Operations. For the nine months ended September 30, 1999, we had
an operating loss of $9.3 million compared to an operating loss of $5.9 million
for the nine months ended September 30, 1998. The increase in our operating loss
from the prior year period was the result of our operating expenses increasing
$6.0 million, the largest component of which was the $2.8 million increase in
sales and marketing expenses, while gross profit increased $2.7 million.
Interest Income and Other. Our Interest income and other was $115,000 and
$235,000 for the nine months ended September 30, 1998 and 1999. Interest income
and other earned during these periods was earned using cash invested from the
proceeds received by the issuance of Series B, Series C, and Series D preferred
stock. The increase in interest income, net from the prior year period was the
result of higher cash balances in the nine months ended September 30, 1999.
Interest Expense. Our interest expense was $32,000 and $245,000 for the
nine months ended September 30, 1998 and 1999. Increased interest expense
resulted from additional borrowings and higher capital lease obligations during
the nine months ended September 30, 1999; including the expense related to the
valuation of warrants granted to a lender as part of these borrowings.
23
<PAGE> 26
THE PERIOD FROM INCEPTION TO DECEMBER 31, 1996 AND THE YEARS ENDED DECEMBER 31,
1997 AND 1998
Revenues
Our revenues were $265,000 and $3.3 million for 1997 and 1998. In 1997,
three customers accounted for more than 10.0% of total revenues, and in 1998 two
customers accounted for more than 10.0% of our total revenues.
License Revenues. Our license revenues were $265,000 and $2.2 million in
1997 and 1998. This increase in license revenues was attributable to an increase
in sales to new customers resulting from increased headcount in our sales force.
Service Revenues. Our service revenues were $1.1 million in 1998, which was
the first year we offered consulting, implementation, maintenance, training and
customer support services. We began recognition of revenues from maintenance
contracts in 1998. Service revenues represented 33.3% of our total revenues in
1998.
Cost of Revenues
Our cost of revenues was $1.6 million in 1998, which was the first year we
offered consulting, implementation, maintenance, training and customer support
services. In 1998 we established our consulting and customer support
organization, which required hiring and training of personnel prior to selling
and recognizing revenues for such services.
Operating Expenses
Sales and Marketing. Our sales and marketing expenses were $42,000, $2.8
million and $5.7 million, in 1996, 1997 and 1998. These increases were primarily
due to our continuing investment in our sales and marketing infrastructure,
which included significant personnel-related expenses such as salaries, benefits
and commissions, recruiting fees, and related costs of hiring sales management,
sales representatives, sales engineers and marketing personnel.
Personnel-related expenses increased approximately $1.7 million in 1997 and $2.0
million in 1998.
Research and Development. Our research and development expenses were
$393,000, $2.0 million and $2.6 million, in 1996, 1997 and 1998. These increases
were primarily due to the increase in the number of software developers and
quality assurance personnel and outside contractors to support our product
development and testing activities related to the development and release of our
CenterStage suite of products. Personnel-related expenses increased
approximately $1.2 million in 1997 and $644,000 in 1998.
General and Administrative. Our general and administrative expenses were
$182,000, $1.2 million and $1.2 million in 1996, 1997 and 1998. The increase
from 1996 through 1997 was primarily due to our efforts to increase
administrative infrastructure to support our operations, including facilities
expansion, personnel related expenses and outside services. Facility costs
increased approximately $500,000 and personnel related costs increased
approximately $196,000 in 1997. Expenses remained flat from 1997 to 1998,
primarily due to our emphasis on growing our sales and marketing and our
research and development organizations, which resulted in no growth in general
and administrative organization.
Amortization of Deferred Stock-Based Compensation. During 1998 we recorded
deferred compensation of $2.2 million in connection with stock option grants. We
are amortizing this amount over the vesting periods of the applicable options,
resulting in amortization expenses of $618,000 in 1998.
Loss From Operations. Our operating losses were $617,000, $5.7 million and
$8.5 million for 1996, 1997 and 1998. The sequential increase in our operating
loss from the prior year period was the result of our operating expenses
increasing at a rate higher than our revenues and gross profit.
Interest Income and Other. Our interest income and other were $46,000,
$173,000 and $174,000 in 1996, 1997 and 1998. Interest income and other earned
during 1996, 1997 and 1998 was earned from cash invested by the proceeds
received from the issuance of series B and series C preferred stock.
Interest Expense. Our interest expense was $1,000, $18,000 and $43,000 in
1996, 1997 and 1998. Interest expense resulted from a financing agreement
established in June 1997 to purchase equipment.
24
<PAGE> 27
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited statement of operations data for
the seven quarters in the 21-month period ended September 30, 1999 and data
expressed as a percentage of our total revenues for the periods indicated. This
data has been derived from our unaudited Financial Statements that have been
prepared on the same basis as the audited Financial Statements and, in the
opinion of our management, include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the information when
read in conjunction with the Financial Statements and Notes. Our quarterly
results have been in the past and may in the future be susceptible to
significant fluctuations. As a result, we believe that results of operations for
interim periods should not be relied upon as any indication of the results to be
expected in any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30,
1998 1998 1998 1998 1999 1999 1999
-------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
License revenues.............. $ 445 $ 431 $ 692 $ 661 $ 628 $ 1,309 $ 2,081
Service revenues.............. 87 189 376 462 922 796 832
------- ------- ------- ------- ------- ------- -------
Total revenues............ 532 620 1,068 1,123 1,550 2,105 2,913
Cost of license revenue....... -- -- 1 1 1 2 2
Cost of service revenue....... 114 356 484 664 877 1,101 644
Total cost of revenue..... 114 356 485 665 878 1,103 646
------- ------- ------- ------- ------- ------- -------
Gross profit.................. 418 264 583 458 672 1,002 2,267
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing......... 1,092 1,296 1,737 1,622 1,600 2,493 2,838
Research and development.... 673 682 648 633 738 900 1,187
General and
administrative............ 194 167 324 516 564 686 641
Amortization of deferred
stock-based
compensation.............. 77 117 182 242 322 447 782
------- ------- ------- ------- ------- ------- -------
Total operating
expenses................ 2,036 2,262 2,891 3,013 3,224 4,526 5,448
Loss from operations.......... (1,618) (1,998) (2,308) (2,555) (2,552) (3,524) (3,181)
Interest income and other..... 39 17 59 59 85 -- 150
Interest expense.............. (10) (11) (11) (11) (12) (71) (162)
------- ------- ------- ------- ------- ------- -------
Net loss...................... $(1,589) $(1,992) $(2,260) $(2,507) $(2,479) $(3,595) $(3,193)
======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL
REVENUES
License revenues.............. 83.6% 69.5% 64.8% 58.9% 40.5% 62.2% 71.4%
Service revenues.............. 16.4 30.5 35.2 41.1 59.5 37.8 28.6
------- ------- ------- ------- ------- ------- -------
Total revenues............ 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of license revenue... -- -- -- -- -- -- --
Cost of service revenue... 21.4 57.4 45.5 59.2 56.6 52.4 22.2
Total cost of revenue..... 21.4 57.4 45.4 59.2 56.6 52.4 22.2
------- ------- ------- ------- ------- ------- -------
Gross profit.................. 78.6 42.6 54.6 40.8 43.4 47.6 77.8
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing......... 205.3 209.0 162.6 144.4 103.2 118.4 97.4
Research and development.... 126.5 110.0 60.7 56.4 47.6 42.8 40.7
General and
administrative............ 36.5 26.9 30.3 45.9 36.4 32.6 22.0
Amortization of deferred
stock-based
compensation.............. 14.5 18.9 17.0 21.5 20.8 21.2 26.8
------- ------- ------- ------- ------- ------- -------
Total operating
expenses................ 382.7 364.8 270.7 268.3 208.0 215.0 187.0
Loss from operations.......... (304.1) (322.3) (216.1) (227.5) (164.6) (167.4) (109.2)
Interest income and other..... 7.3 2.8 5.5 5.2 5.4 -- 5.2
Interest expenses............. (1.9) (1.8) (1.0) (0.9) (0.7) (3.4) (5.6)
------- ------- ------- ------- ------- ------- -------
Net loss...................... (298.7)% (321.3)% (211.6)% (223.2)% ( 159.9)% (170.8)% (109.6)%
======= ======= ======= ======= ======= ======= =======
</TABLE>
25
<PAGE> 28
Our quarterly operating results have fluctuated significantly in the past,
and will continue to fluctuate in the future, as a result of a number of
factors, many of which are outside our control. These factors include:
- demand for and timing of the sales of our CenterStage products and
related services;
- actions taken by our competitors, including new product introductions and
enhancements;
- changes in the rapidly evolving market for e-business infrastructure
applications;
- our ability to develop, introduce and market e-business infrastructure
applications and enhancements to our existing CenterStage products on a
timely basis;
- changes in our pricing policies and those of our competitors; and
- our inability to complete large sales on schedule.
We have experienced delays in the planned release dates of our new software
products or upgrades in the past, and have discovered software defects in our
new products after their introduction. Our new products or upgrades may not be
released according to schedule, or when released may contain defects. Either of
these situations could result in adverse publicity, loss of revenues, delay in
market acceptance and claims by customers brought against us, any of which could
harm our business. In addition, the timing of individual sales has been
difficult for us to predict, and large individual sales have, in some cases,
occurred in quarters subsequent to those anticipated by us. The loss or deferral
of one or more significant sales may harm our quarterly operating results.
We expect that, based on seasonal factors that typically affect companies
in the software industry, our license revenues in the first quarter may in the
future tend to be lower than those in the fourth quarter.
LIQUIDITY AND CAPITAL RESOURCES
Through September 30, 1999, we have funded our operations primarily through
sales of equity securities, with net proceeds of $35.7 million, and, to a lesser
extent, the use of long-term debt and equipment leases. We had raised $3.0
million from the issuance of long-term debt, and had financed equipment
purchases totaling approximately $851,000. Our sources of liquidity, as of
September 30, 1999, consisted principally of cash and cash equivalents of $15.9
million.
Net cash used in operating activities was $488,000, $5.4 million and $7.8
million for 1996, 1997 and 1998, and $7.6 million for the nine months ended
September 30, 1999. For these periods, net cash used by operating activities was
primarily a result of funding ongoing operations.
To date, our investing activities have consisted of purchases of property
and equipment. Capital expenditures, including those under capital leases,
totaled $137,000, $624,000 and $556,000 for 1996, 1997 and 1998, and $759,000 in
the nine months ended September 30, 1999. We finance the acquisition of property
and equipment, which consists mainly of computer hardware and software for our
increasing employee base as well as for our management information systems,
primarily through capital leases. We expect to experience an increase in our
capital expenditures and lease commitments consistent with our anticipated
growth in operations, infrastructure and personnel.
Net cash from financing activities was $3.4 million, $7.0 million and $8.8
million in 1996, 1997 and 1998, and $19.2 million for the nine months ended
September 30, 1999. For 1997, proceeds from financing activities were primarily
received from the private sale of preferred stock of $6.8 million and $200,000
from the sale and lease back of property and equipment. In 1998, proceeds
provided by financing activities were primarily from the sale of preferred stock
of $8.8 million. For the nine months ended September 30, 1999, cash provided by
financing activities consisted of equity financing of $16.6 million and $3.0
million from long-term borrowings offset in part by principal payments on
capital lease obligations and long-term debt of $385,000.
26
<PAGE> 29
We expect to experience significant growth in our operating expenses in the
future, particularly in sales and marketing and research and development in
order to execute our business plan. As a result, we anticipate that these
operating expenses, as well as planned capital expenditures, will constitute a
material use of our cash resources. In addition, we may utilize cash resources
to fund acquisitions or investments in complementary businesses, technologies or
product lines. We believe that the net proceeds from the sale of common stock in
this offering will be sufficient to meet our operational and capital expenditure
requirements for at least the next twelve months. Thereafter, we may find it
necessary to obtain additional equity or debt financing. In the event additional
financing is required, we may not be able to raise it on acceptable terms or at
all.
YEAR 2000 COMPLIANCE
Background of Year 2000 Issues
Many currently installed computer systems and software products are unable
to distinguish between twentieth century dates and twenty-first century dates
because these systems were developed using two digits rather than four to
determine the applicable year. For example, computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This error could result in system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced to comply with year 2000
requirements.
State of Readiness
Our business is dependent on the operation of numerous systems that could
potentially be affected by year 2000-related problems. Those systems include,
among others:
- software products sold to customers;
- hardware and software systems used by us to deliver products and services
to customers, including our proprietary software systems as well as
software supplied by third parties;
- communications networks such as the Internet and private Intranets;
- the internal systems of our customers and suppliers;
- the hardware and software systems used internally by us in the management
of our business; and
- non-information technology systems and services, such as power, telephone
systems and building systems.
We have tested our software products and have determined that current
versions of all of our software products are year 2000 compliant by ensuring our
products support the use, output, storage, entry and creation of all dates
before, on, and after January 1, 2000. However, we cannot assure you that all
other hardware and software products used by our customers in conjunction with
our products can properly exchange accurate date data. We are evaluating the
year 2000 compliance of our products currently under development.
We have established a year 2000 compliance team, composed of high-level
representatives of the product, information systems and general administrative
departments to evaluate our internal and external systems. The team has been
charged with the responsibility of formulating and implementing our year 2000
readiness and is applying a phased approach to analyzing our operations and
relationships as they relate to the year 2000 problem. The phases of our year
2000 program are as follows:
Phase 1: establishment of a year 2000 team;
Phase 2: assignment of responsibility for external issues, such as
products licensed by us, internal issues, such as systems,
facilities, equipment, software and legal audit;
27
<PAGE> 30
Phase 3: inventory of all aspects of our operations and relationships
susceptible to the year 2000 problem; and
Phase 4: remediation and testing.
We have completed Phases 1, 2 and 3 of our program. We have partially
completed Phase 4, remediation and testing, and anticipate that we will have
completed the remainder by mid-December 1999.
Cost of Product and Internal Systems Preparation
Based upon our assessment to date, we do not expect the total cost of year
2000 preparation and remediation to be material. To date, these costs have not
been material.
Risks Related to Year 2000 Issues
Based on our assessment to date, we believe the current versions of our
software products are year 2000 compliant. However, our products are generally
integrated into enterprise and other systems involving sophisticated hardware
and complex software products which may not be year 2000 compliant. In addition,
in some cases, some earlier year 2000 compliant versions of our software, while
compatible with earlier, non-year 2000 compliant versions of other software
products with which our software is integrated, are not compatible with some
more recent year 2000 compliant versions of other software providers. While we
do not believe we have any obligation under these circumstances given that these
customers are using our older versions of our software products, there can be no
assurance that we will not be susceptible to claims or complaints by our
customers. Our year 2000 compliance efforts may depend on our customers' ability
to manage their own year 2000 issues. We sell our products to companies in a
variety of industries, each of which is experiencing different year 2000
compliance issues. Customer difficulties with year 2000 issues might require us
to devote additional resources to resolve underlying problems.
Although we have not been a party to any litigation or arbitration
proceeding related to year 2000 compliance issues to date involving our products
or services, there can be no assurance that we will not be required to defend
our products or services in such proceedings, or to negotiate resolutions of
claims based on year 2000 issues. The costs of defending and resolving year
2000-related disputes, regardless of the merits of such disputes, and any
liability for year 2000-related damages, including consequential damages, could
have a material adverse effect on our business, operating results and financial
condition.
Purchases of our products by customers and potential customers may be
affected by year 2000 issues as companies expend significant resources to
correct or upgrade their current software systems for year 2000 compliance or to
deal with the consequences of any failures to achieve year 2000 compliance. To
the extent year 2000 issues cause significant delay in, or cancellation of,
decisions to purchase our products or services, our business would be adversely
affected.
To date, we have not encountered any material year 2000 problems with our
internal computer systems or any other equipment that might be susceptible to
such problems. Our plan for the year 2000 calls for compliance verification of
external vendors supplying software and information systems to us and
communication with significant suppliers to determine the readiness of third
parties' remediation of their own year 2000 issues. We anticipate that our
vendors and service providers are year 2000 compliant or will be before the end
of December, based on readiness statements received from a high percentage of
them and assurances from the others that they will become compliant before
January 1, 2000. In the event that any such third parties' products, services or
systems do not meet year 2000 requirements on a timely basis, we could
experience substantial disruptions to our business. We could also experience
adverse effects on our business if we fail to identify all year 2000
dependencies in our systems and in the systems of our suppliers, customers and
financial institutions. We may not identify and remediate all significant year
2000 problems on a timely basis, remediation efforts may involve significant
time and expense, and unremediated problems may cause major disruptions to our
continuing operations and may lead to delays, lost sales and material losses.
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We are unable to determine at this time whether these or other year 2000
failures will occur and will have a material impact on our business, results of
operations, or financial condition. This inability is particularly due to the
potential scope of the year 2000 problem and our inability to assure the year
2000 compliance of customers or to confirm the assurances received from vendors
and service providers such as utilities. Although we have considered our
possible responses to some year 2000 contingencies, we have not developed and
have no current effort underway to develop a contingency plan to attempt to deal
with the complex and extreme circumstances that could accompany a likely worst
case scenario involving year 2000-related failures in our internal systems, our
supply channels, our customers' businesses and the general business
infrastructure.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, Software for Internal Use, which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The adoption of this SOP did
not have any significant effect on our financial statements.
In April 1998, the Accounting Standards Executive Committee released
Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities."
SOP No. 98-5 is effective for fiscal years beginning after December 15, 1998 and
requires companies to expense all costs incurred or unamortized in connection
with start-up activities. The adoption of this SOP is not expected to have any
significant effect on our results of operations as we had expensed such start-up
costs in prior years.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities and will be adopted
in the year 2000. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. We are in process of evaluating the impact of this pronouncement.
In December 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position 98-9, modification of SOP 97-2, "Software Revenue
Recognition," with Respect to Certain Transactions. SOP 98-9 will be effective
for transactions that are entered into in fiscal years beginning after March 15,
1999. Retroactive application is prohibited. We are in process of evaluating the
impact of this pronouncement.
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BUSINESS
OVERVIEW
We offer a comprehensive suite of software applications that enable
companies to rapidly deploy and easily manage e-business portals and
e-marketplaces. Our solution addresses the unique challenges faced by e-business
portals and e-marketplaces in both business-to-business and business-to-consumer
e-commerce. Our infrastructure solutions allow both business-to-business and
business-to-consumer e-commerce companies to rapidly automate and continuously
manage the flow of information and transactional data among their suppliers,
distributors and customers. Our products enable our e-business portal and
e-marketplace customers to: achieve rapid time-to-market, engage and retain
customers, increase revenues and marketshare and attain agile e-business
relationships. Our e-business portal and e-marketplace customers include Aspect
Development, ClubComputer.com, FASTXchange, Harbinger Corporation, Moore North
America Ltd., PurchasePro.com, TRIP.com, Travelocity.com and W.W. Grainger, Inc.
INDUSTRY BACKGROUND
Companies in all industries around the world face the strategic imperative
of re-creating themselves into electronic commerce, or e-commerce, companies. By
augmenting or even replacing their traditional distribution, supply chain and
customer-service channels with Internet-based channels, these companies seek to
build new revenue streams and gain competitive advantage. Although the first
generation of e-commerce consisted primarily of basic Web sites offering product
information for marketing purposes, today the stakes are higher. We believe
successful companies now need to create value-added relationships with suppliers
and distributors and offer differentiated and unique online services to
customers. By extending core business processes over the Internet and
integrating systems with suppliers, distributors and customers, these companies
seek to achieve significant competitive advantage, increased customer
satisfaction and new sources of revenues. This next generation of e-commerce,
often referred to as e-business, is transforming the way business is done and
has given rise to the "Internet economy."
With the evolution of the Internet as a primary means of conducting
business, both in business-to-business and business-to-consumer markets,
competitive pressures have driven new and more sophisticated forms of e-commerce
to emerge. In the Internet economy, companies find it increasingly difficult to
differentiate their offerings on the basis of products, price or location. As a
result, vendors must deliver comprehensive business services and information to
offer enhanced value to their suppliers, distributors and customers. In
particular, companies seek to participate in two complementary e-business
channels -- e-business portals and e-marketplaces -- as distinct ways to
capitalize on the Internet, expand their businesses and protect their revenue
opportunities. These channels are complementary since many vendors will create
an e-business portal to directly sell their own goods and services in addition
to offering those goods and services through participation in an e-marketplace.
E-BUSINESS PORTALS. An e-business portal is an online destination site
where vendors create value-added relationships with their suppliers,
distributors and customers by offering an expanded set of information and
services. For example, a business-to-consumer, travel-oriented e-business portal
enables visitors to gain information about all aspects of the travel experience,
including airfare, hotel availability, cultural activities, weather and current
events, and then purchase all of the goods and services for a particular trip
without having to leave the portal at any point in the process.
E-MARKETPLACES. An e-marketplace is a comprehensive trading hub designed to
efficiently manage transactions and services among multiple buyers and sellers.
For example, a business-to-business e-marketplace acts as an intermediary to
enable businesses to interact with potentially thousands of discrete vendors,
compare parts, prices and configurations among those vendors, and then purchase
all of the goods and services from one or several vendors without having to
leave the e-marketplace at any point in the process.
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The Internet economy is poised for rapid growth, across both
business-to-business and business-to-consumer markets. According to Forrester
Research, the volume of business-to-business e-commerce transacted through
e-business portals, e-marketplaces and other e-business offerings will grow from
$43 billion in 1998 to $1.3 trillion in 2003.
There are many demands placed on the infrastructure of e-business portals
and e-marketplaces. Companies deploying e-business portals and e-marketplaces
must be able to offer a broad range of dynamic information and services from a
large, diverse set of trading partners, and do so faster than their competitors.
Compounding this challenge is the fact that these e-business relationships
require agility in terms of flexible, adaptable connections that accommodate
rapid change. No single standard can be imposed on all suppliers of information
and services offered by e-business portals and e-marketplaces.
To successfully address these business requirements, e-business portals and
e-marketplaces must meet complicated technical requirements. Key technical
requirements include:
- Aggregation -- capturing and transforming diverse information from a
broad range of sources and in multiple formats;
- Exchange -- enabling the exchange of business documents, including
purchase orders and invoices, for secure, real-time business process
automation;
- Integration -- integrating e-business portals and e-marketplaces with
operational systems to synchronize and automate services and
transactions;
- Personalization -- offering proactive notification of the availability of
new information and events based on criteria defined by the end user; and
- Syndication -- enabling businesses to package and publish select
information in a broad range of formats to their trading partners.
Given these requirements, e-business portals and e-marketplaces face
significant challenges in effectively expanding their businesses to fully
capitalize on the opportunities created by the Internet. Existing approaches for
addressing these challenges are limited. The most common approaches consist of
manual, custom systems, which may be adequate initially, but tend to break down
as the e-business portals and e-marketplaces expand to provide additional
services and information from an ever-increasing number of suppliers,
distributors and customers. Many of these custom approaches incorporate
single-function products that address particular infrastructure needs but do not
offer a comprehensive solution that spans each of the important requirements.
These custom approaches often lack:
- speed of deployment;
- ability to accommodate growth to thousands of discrete participants;
- agility to accommodate rapid change; and
- comprehensiveness to meet the demands of a broad range of e-business
relationships and interactions.
As a result, there is a need for e-business infrastructure applications
that provide a comprehensive solution for enabling e-business portals and
e-marketplaces. This solution must be open, expandable to many concurrent users
and adaptable to enable the rapid aggregation, exchange, integration,
personalization and syndication of dynamic information and services from a broad
range of suppliers, distributors and customers.
ONDISPLAY SOLUTION
We provide a comprehensive suite of software applications that enable
companies to rapidly deploy and easily manage e-business portals and
e-marketplaces. Our solution addresses the unique challenges faced by e-business
portals and e-marketplaces in both business-to-business and business-to-consumer
e-commerce. Our product suite spans each of the key infrastructure requirements:
aggregation and
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syndication of diverse content and information; automation of critical
business-to-business transactions; integration with operational systems; and
proactive notification to enhance customer loyalty.
Our solution enables our e-business portal and e-marketplace customers to:
- ACHIEVE RAPID TIME-TO-MARKET. Our products enable our customers to
rapidly deploy e-business portals and e-marketplaces. We provide a
comprehensive application suite that eliminates the need for months of
custom programming and that reduces the customer's reliance on complex
systems integration. As a result, we enable our customers to dramatically
reduce their time-to-market.
- ENGAGE AND RETAIN CUSTOMERS. By automating the aggregation of a wide
variety of rich, relevant, and timely information and services, our
solution enables e-business portals and e-marketplaces to transform their
Web sites into highly convenient destination locations for their
customers. In addition to aggregating diverse information and services,
we offer a personalization product that enables our customers to
automatically notify their participants of newly available information.
These personalization and rich content capabilities enable e-business
portals and e-marketplaces to turn temporary visitors into buyers and to
then build high-quality relationships with those buyers over time.
- INCREASE REVENUES AND MARKET SHARE. Our products enable our customers to
create superior Internet revenue channels through the rapid delivery of
high quality information and services, and through achieving efficient
interactions with suppliers, distributors and other business affiliates.
These superior Internet revenue channels may, in turn, drive market share
expansion as our customers are able to enhance their competitive position
and extend their market leadership.
- ENABLE EXPANDABLE AND AGILE E-BUSINESS. Our solution enables our
customers to be more agile in responding to the rapid pace of change
associated with the Internet economy. By delivering an easy-to-use and
highly flexible product suite, we provide our customers with the ability
to handle a broad range of rapidly changing business relationships. Our
solution is capable of growing to support thousands of participants,
flexible to accommodate rapidly changing relationships and industry
standards, and adaptable to manage disparate systems and ways of doing
business.
ONDISPLAY STRATEGY
Our objective is to become the leading provider of comprehensive e-business
infrastructure solutions that enable the creation of e-business portals and
e-marketplaces. Key elements of our strategy to achieve this objective are:
- TARGET E-BUSINESS PORTAL AND E-MARKETPLACE MARKETS. We intend to
establish our brand and expand market share in two large and growing
e-business markets: e-business portals and e-marketplaces. In the
e-business portal market we will target both traditional and
Internet-based businesses across specific markets with critical and
urgent e-business needs. Our strategy is to pursue industries that have a
large number of fragmented buyers and sellers and conduct large amounts
of commerce. At the same time, we intend to aggressively expand our
presence in the e-marketplace market, which we believe represents a major
opportunity as e-marketplace businesses become pioneers in the use of
automated, robust and expandable information exchange solutions.
- ADDITIONAL EXPOSURE THROUGH NETWORK EFFECTS. As our customers use our
solution across their network of suppliers, buyers and other market
participants, numerous other e-businesses become aware of our products
and their features and are continually exposed to our products with
subsequent exchanges of critical business information. We believe this
allows participants in e-business transactions to experience the benefits
that our products deliver first hand, which creates a powerful network
effect to drive more rapid product recognition and adoption. We intend to
take maximum advantage of this visibility across our targeted markets in
order to drive increased sales.
- CONTINUE OUR TECHNOLOGICAL INNOVATION. We intend to continue to innovate
comprehensive e-business infrastructure solutions based on our technology
and emerging industry standards. Our
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core CenterStage technology provides a powerful foundation for seamless
information exchange among e-business participants. With each succeeding
generation of our technology, we have extended this foundation and added
features that increase the range of functions and ease-of-use of our
solutions. For example, as the Internet becomes the preferred medium for
business transactions of all types, companies are increasingly using
extensible markup language, or XML, as the software protocol upon which
to base their interactions with suppliers, distributors and customers. We
intend to take advantage of this trend by continually enhancing our
highly automated, easy-to-use XML solution.
- BUILD UPON OUR NETWORK OF RELATIONSHIPS. We are building relationships
with a variety of industry leading independent software vendors, platform
providers and systems integrators. We intend to utilize and extend this
network to reach target markets, accelerate the adoption of our
technologies, and test and validate our next-generation product and
technology. These relationships enable us to focus on our core
competencies, while offering our customers highly complementary
technologies from industry leaders and innovators. We believe that these
relationships, in addition to others that we intend to pursue, will help
validate and accelerate the widespread adoption of our e-business
infrastructure solutions.
- EXPAND OUR INTERNATIONAL PRESENCE. We intend to penetrate global markets
by establishing a worldwide field sales, marketing, and services
organization. We are currently establishing and staffing international
headquarters and field sales offices in Europe. We also expect to
establish relationships with international distributors and systems
integrators.
PRODUCTS
We provide an integrated solution for enabling the rapid deployment and
seamless management of e-business portals and e-marketplaces. Our products are
complementary, but can be purchased separately, so that online businesses can
select the individual products they need to meet their immediate business
objectives and then add additional CenterStage products as their requirements
evolve.
The license fee for each CenterStage product is based on the number of
servers running the software and the number of different information sources
accessed. The list price of each CenterStage product starts at $75,000. License
fees for installations typically range from $100,000 to $400,000. The
CenterStage product suite includes:
- CENTERSTAGE ECONTENT -- Our CenterStage eContent application enables our
customers to aggregate, or gather, and transform a wide range of
information, or content, for their e-business portals and e-marketplaces.
Whether the source format is structured, as with database or application
data, or unstructured, as with Web pages, CenterStage eContent lets users
specify, select, transform, update and manage diverse content rapidly and
easily. CenterStage eContent can handle high volumes of data, for
example, aggregating text and graphics on hundreds of thousands of
products. As a result, CenterStage eContent enables e-business portals
and e-marketplaces to deliver a wide array of rich, relevant information
to keep their customers from having to leave their Web sites to access
this information.
Travel portals, for example, use CenterStage eContent to pull up-to-date
airline, hotel, cruise package, car rental and weather information onto
their Web sites from hundreds of affiliated companies. By presenting
customers with this pertinent and timely information, these travel
portals are better able to engage and retain their customers and increase
their bookings.
- CENTERSTAGE EBIZXCHANGE -- Our CenterStage eBizXchange application takes
advantage of advanced technologies to rapidly and securely exchange
business transaction information across a wide array of trading partners.
This information exchange can be accomplished across corporate security
systems, or firewalls, using both "tight" and "loose" collaboration
models. CenterStage eBizXchange's tight collaboration model allows
business partners to define a standard approach for secure
business-to-business information exchange, using a mutually agreed upon
format. The
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product's loose collaboration model, enables the e-business to complete a
transaction with its online trading partner by mimicking a user's actions
on the trading partner's Web site, without the need for an explicit
format agreement between the partners. CenterStage eBizXchange can handle
thousands of transactions simultaneously, which enables our customers to
expand their e-business applications to meet the needs of increasing
numbers of users.
Industrial supplies e-marketplaces, for example, use CenterStage
eBizXchange to manage transactions among multiple buyers and sellers,
using a range of transaction formats and protocols. These e-marketplaces
use CenterStage eBizXchange to automatically request and route electronic
business documents including purchase orders, requisitions, inventories
and pick lists. These e-marketplaces may use tight collaboration for
large buyers and suppliers, while they employ loose collaboration for
smaller groups that might not have the resources to implement specific
technology formats.
- CENTERSTAGE EINTEGRATE -- Our CenterStage eIntegrate product provides a
complete solution for linking the e-business portal or e-marketplace with
its existing internal applications, including enterprise resource
planning, or ERP, systems. This linking, or integration, enables the
portal's customers, partners and suppliers to perform a range of
functions on the Web-based portal, including placing an order with the
source data, such as inventory availability, accessible from an internal
system. CenterStage eIntegrate can handle thousands of internal
application updates and data requests simultaneously, which enables our
customers to expand their e-business applications to meet the needs of
increasing numbers of users. CenterStage eIntegrate can use existing
technologies, including popular message brokers, to request and route
data. In addition, customers can purchase and use integration toolkits to
create tighter links between their e-business portals and their internal
applications, including those from Oracle, PeopleSoft and SAP.
A computer and electronics portal, for example, may use CenterStage
eIntegrate to process customer orders and enter these orders directly
into the e-business's internal accounting system. The portal's customers
could also check the status of their orders by accessing that information
directly from the internal accounting system using CenterStage
eIntegrate.
- CENTERSTAGE ENOTIFY -- Our CenterStage eNotify product allows
e-businesses to offer customer-requested updates, or alerts, to build
relationships with their customers. Unlike many existing programs that
track each user's behavior patterns to create targeted sales offers,
CenterStage eNotify enables online visitors to enter their own
information requests about specific events on the e-business Web site.
The CenterStage eNotify system would then deliver notifications of new
requested information via email or pager update directly to the customer.
CenterStage eNotify can support thousands of information requests, which
enables our customers to meet the needs of increasing numbers of users.
This event-based execution enables customers to receive notifications
based on timely information.
An online gift store, for example, can use CenterStage eNotify to invite
customers to specify the product and price they want, and to then alert
those customers when the requested item is available.
- CENTERSTAGE ESYNDICATE -- Our CenterStage eSyndicate product enables
e-businesses to offer, or publish, select information from their
e-business portals or e-marketplaces, based on customers' information
requests, or subscriptions. CenterStage eSyndicate intelligently manages
and routes the requested information using any electronic format, open
standard or industry protocol. CenterStage eSyndicate is capable of
routing a wide range of continuously changing information from an array
of original sources, including databases and Web pages.
An automotive manufacturer, for example, may use CenterStage eSyndicate
to publish parts catalogs to its dealer network. Dealers in the network
would select the parts information they need and specify how often they
want the manufacturer to update the information. As the manufacturer adds
new parts or changes prices on its Web site, CenterStage eSyndicate would
automatically update dealers on the changes relevant to them.
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
PRODUCT FEATURES BENEFITS
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
CenterStage eContent - Rapid, automated content - Quick access to rich, relevant
aggregation from diverse content from the most
sources appropriate source available
- Access to structured and - Fresh content delivered
unstructured data automatically
- Easy-to-use interface - Reduces deployment cost by not
requiring programmer support
- Expandable to many concurrent - Supports data from a variety of
users sources and multiple concurrent
users
- --------------------------------------------------------------------------------------------------
CenterStage eBizXchange - Automated transaction exchange - Time and cost savings from
between market participants elimination of manual processes
- Support for "loose" - Exchange transactions with
collaboration multiple trading partners
without requiring changes to
the partner's infrastructure
- Support for "tight" - Rapidly facilitates business
collaboration models using transactions using reliable,
industry standards highly secure connections
- High-volume execution - Quick and reliable business
environment exchange processing
- --------------------------------------------------------------------------------------------------
CenterStage eIntegrate - Automated, rapid integration of - Reduces manual integration
e-business portal with internal processes
applications
- Expandable, real-time execution - Support for high transaction
volumes with complex business
process routing
- Integration with industry - Flexibility to route
leading message brokers transactions and messages while
optimizing existing enterprise
infrastructures
- PeopleSoft, Oracle and SAP - Tight integration with leading
Integration Toolkits enterprise resource planning
applications
- --------------------------------------------------------------------------------------------------
CenterStage eNotify - Customer request-based - Proactive, permission-based
notification interaction to engage and
retain customers
- Event-based execution - Notifications based on fresh,
relevant content
- Delivery of alerts via email - Immediate, reliable
and pager notification using customer's
preferred medium
- --------------------------------------------------------------------------------------------------
CenterStage eSyndicate - Automated content publication - Customized information based on
based upon user subscriptions company specific requirements
- Content publishing in multiple - Flexibility to syndicate
formats content to a wide range of
market participants
- Continuous routing of dynamic - Automatic support for fast-
data using industry standards changing information
- --------------------------------------------------------------------------------------------------
</TABLE>
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LOGO
Using the CenterStage application suite, an e-business portal can rapidly
automate and continuously manage the flow of information among its suppliers,
distributors and customers. In the diagram above, the e-business portal uses
CenterStage eContent to quickly gather and transform diverse product and other
information from a large community of suppliers, regardless of source format. In
addition, the e-business portal uses CenterStage eBizXchange to automate
business transactions with suppliers and also with e-marketplaces and other
affiliates. CenterStage eIntegrate is used to link the e-business portal with
internal systems. The e-business portal may use CenterStage eNotify to
proactively deliver requested notifications to customers, while it uses
CenterStage eSyndicate to publish customized product catalogs and price lists to
affiliates and e-marketplaces.
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LOGO
An e-marketplace may use the CenterStage product suite to automate and
seamlessly manage the flow of information and transactions among multiple
buyers, suppliers and distributors. The e-marketplace is able to use CenterStage
eContent to capture and transform diverse data from multiple suppliers, while
using CenterStage eBizXchange to handle multiple simultaneous transactions among
buyers, affiliates and suppliers. CenterStage eSyndicate can be used to
proactively publish information of interest to buyers and affiliates using a
variety of formats. Concurrently, participant buyers and suppliers can use
CenterStage eIntegrate to link their e-business operations with their internal
applications.
Each of the participants in the e-business value chain are able to use our
CenterStage product suite to exchange information and services with other
participants. For example, suppliers may use CenterStage eSyndicate to publish
information to multiple e-marketplaces simultaneously, just as an e-business
portal is able to publish information to its customers. Similarly, corporate
buyers may use CenterStage eIntegrate to link their Web-based procurement
applications to operational systems.
SERVICES
Our professional services organization works with customers to ensure that
they meet their business objectives and achieve their expected return on
investment. We focus on the rapid deployment of e-business solutions by taking
advantage of an experienced team of consultants. Our professional services
organization brings a diverse set of skills and experiences -- combining both
business and technical expertise to quickly meet our customers' requirements.
Our professional services include:
- design system and application architectures that best utilize the
functionality of our software;
- installation of our software and implementation within customers'
existing information technology infrastructure;
- transformation of data from one format to another;
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- development of interfaces between disparate software applications;
- training of users at the location of implementation; and
- maintenance and support of our software by skilled professional services
providers.
ARCHITECTURE
Our CenterStage product suite is based on the CenterStage technology
platform. This platform provides a means to develop and execute agents for
accessing, gathering, transforming and distributing information and transactions
using multiple approaches. Our CenterStage technology platform provides easy
application customization capabilities along with a high-performance execution
engine for production environments.
The CenterStage architecture provides the following environments:
- rapid development environment -- graphical development environment for
creating CenterStage agents and for customizing the resulting information
display; and
- execution/routing environment -- featuring a high-volume execution server
for processing information agents.
CENTERSTAGE ARCHITECTURE GRAPHIC
Rapid Development Environment
At the core of our CenterStage technology platform is a graphical
development environment to create and test information retrieval and
transformation agents. These agents have the ability to access
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information from multiple sources in many different formats. Some of these
sources include the Web, databases, software applications and various
information systems.
Flexible Execution/Routing Environment
Our flexible CenterStage technology architecture can process agents in
three ways:
- the Agent Engine processes large batches of information on a one-time or
regularly scheduled basis;
- the Agent Server handles multiple requests simultaneously and also
includes a load balancing feature, which distributes requests across
multiple servers; and
- the Content Broker enables the publishing of agents based on user-defined
events. These agents can be published through a wide variety of delivery
mechanisms, including message brokers, application interfaces, Internet
connections, e-mail and pagers.
CUSTOMERS
The following is a representative list of our customers as of September 30,
1999 who have purchased CenterStage products for use in e-business portal or
e-marketplace applications.
<TABLE>
<S> <C>
Aspect Development Moore North America Ltd.
Carlson Travel Group Orlando Sentinel Communications
Classified Ventures PurchasePro.com
ClubComputer.com RMI.NET
FASTXchange Travelocity.com
Harbinger Corporation telstreet.com
International eCommerce TRIP.com
W.W. Grainger, Inc.
</TABLE>
No customer accounted for more than 10% of our revenues in the nine months
ended September 30, 1999, except PurchasePro.com, which accounted for
approximately 14%.
The following are illustrative customer case studies:
Online Travel e-Business Portal -- Travelocity.com (Sabre)
Travelocity.com is a one-stop travel Web site providing secure online
reservation capabilities for air, car, hotel and vacation reservations, plus
access to a vast database of destination and other travel information. One of
Travelocity.com's biggest challenges that all online travel Web sites face, is
getting online visitors to book reservations online instead of solely using the
travel site as a planning tool. With our CenterStage eContent product,
Travelocity.com aggregates extensive destination and related travel information
into their Web site, replacing its previous practice of providing links to other
Web sites and sending visitors to those Web sites to get the information. For
example, Travelocity.com consolidates hotel amenities, images and room rates
from more than 42,000 hotel properties.
In another project, Travelocity.com used CenterStage eContent to bring
tourist-related content for worldwide vacation destinations into their Web site.
With these solutions in place, Travelocity.com has increased the number of
visitors who book reservations by delivering all the relevant information their
members need in order to close the transaction online.
Online Computer Retail e-Business Portal -- ClubComputer.com
ClubComputer.com is a rapidly growing membership-based online retailer of
computer products. Since ClubComputer.com relies on its e-business portal to
conduct all of its business, it must deliver a superior online experience while
operating on very thin margins. ClubComputer.com was receiving incomplete
product information from its trading partners. At the same time, placing
customer orders was a slow, manual process. To address these information
exchange problems, ClubComputer.com uses
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CenterStage eContent to supplement its trading partners' incomplete product
information with information directly pulled from manufacturers' Web sites, and
CenterStage eBizXchange to provide a real-time solution to placing orders with
its trading partners. As a result, ClubComputer.com improved the online shopping
experience for its customers and saved substantial time and expense in
implementing automated business-to-business communications with its trading
partners.
Business-to-Business e-Marketplace -- FASTXchange
FASTXchange delivers outsourced purchasing services via a suite of
Internet-based products and services. FASTXchange sources products, on behalf of
its customers, from over 30,000 suppliers. A customer's purchase request is
first processed by FASTXchange's Internet-based procurement engine. Any purchase
requests that cannot be automatically fulfilled by the procurement engine are
then serviced by the FASTXchange purchasing department. To increase the
percentage of purchase requests that can be automatically processed, FASTXchange
uses CenterStage eContent to dynamically pull supplier, part, pricing and
availability information into its procurement engine. This allows FASTXchange to
process more orders by increasing the level of overall automation, and to
shorten the average time required to fulfill an order for its customers.
Online Travel e-Business Portal -- TRIP.com
TRIP.com is a one-stop online travel services provider devoted to the
business traveler. TRIP.com recently launched intelliTRIP.com, an online travel
Web site for bargain airfare reservations, powered by a proprietary travel
search technology designed to collect airfares directly from the major airlines.
As intelliTRIP.com became increasingly successful, demand for airfares from a
wider range of airlines increased. In addition, TRIP.com wanted to expand
intelliTRIP.com into new travel markets such as the hotel and rental car
markets. TRIP.com's proprietary technology was unable to keep pace with its
growth plans because of the time required to connect to a new travel supplier.
Rather than continuing to invest in this technology, TRIP.com chose CenterStage
eContent to simultaneously query, extract and deliver travel fares and other
related information from hundreds of airlines, hotels and rental car suppliers.
With our CenterStage eContent product, intelliTRIP.com can bring a new travel
supplier online in at least 50% less time.
SALES AND MARKETING
We market our CenterStage products and related services primarily through a
direct sales organization. Our direct sales organization focuses on sales to
recently formed companies that are creating e-business portals and
e-marketplaces and larger corporate customers building or improving their Web
presence. We maintain a sales office in our headquarters in San Ramon, CA and in
offices located in the following metropolitan areas: Atlanta, Boston, Denver,
Houston, Indianapolis, Los Angeles, Mt. Laurel, NJ and New York. We intend to
increase our North American sales force by opening additional field sales
offices and adding sales representatives to our existing territories.
Additionally, we intend to expand our presence in international markets by
building an international sales force.
Since our inception, we have invested substantial resources in a broad
range of marketing activities to generate demand, gain corporate brand identity,
establish the e-business portal and e-marketplace product category and educate
the market about our products and services. These activities have included
advertising, including both print and online, direct marketing, including direct
mail and e-mail and online seminars, public relations, participating in trade
shows and conferences and providing product information through our Web site.
In addition to the direct sales channel, we have also entered into several
marketing and referral agreements with industry leading software companies. As
part of these agreements these companies introduce our products and services to
prospective customers to generate qualified sales leads. In some cases we pay a
referral fee for these leads. These fees are based on the net license revenue we
receive
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from these leads and are included in marketing expense when paid. These
agreements enable us to expand our potential market and help to validate our
solution.
As part of our sales and service offerings, we provide comprehensive
product support through a variety of methods. Our experienced support team
members understand the problems our customers face and work closely with them to
help provide solutions. This comprehensive support enables us to ensure our
customers' satisfaction and increases opportunities for repeat sales and
positive customer references.
COMPETITION
The market for our products and services is intensely competitive, evolving
and prone to rapid technological change. We expect the intensity of competition
to increase in the future. Competitors vary in size and in the scope and breadth
of the products and services offered. To date, we have faced competition and
sales resistance from the internal information technology departments of current
and potential customers that have developed or may develop in-house systems that
may substitute for those we offer. We expect that internally developed
infrastructure systems will continue to be a principal source of competition for
the foreseeable future. In the license of e-commerce products, we primarily
encounter competition from webMethods. If we are successful, we expect to
encounter many additional competitors in the future. In addition, because there
are relatively low barriers to entry in the software market, we expect
additional competition from other established and emerging companies as the
Internet software market continues to develop and expand. In particular, we
believe we may face competition from IBM, Microsoft, Oracle and Sun Microsystems
as those companies may perceive entry into our market segment as strategic. We
also may face competition from established companies in the enterprise
application integration and e-business platform markets, any of which could
build and market products that would reduce or eliminate the need for our
technology.
We believe that the principal competitive factors affecting our market
include core technology, product features, product quality and performance and
customer service. Although we believe that our products and services currently
compete favorably with respect to these factors, our market is relatively new
and is rapidly evolving. We may not be able to maintain our competitive position
against current and potential competitors, especially those with significantly
greater financial, marketing, service, support, technical and other resources.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than we have.
In addition, many of our competitors have well-established relationships with
current and potential customers of ours, have extensive knowledge of our
industry and are capable of offering a comparable solution. As a result, our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products and services than we can. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products and services to address customer needs. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share. We also expect that competition
will increase as a result of software industry consolidations.
Increased competition is likely to result in price reductions, reduced
gross margins and loss of market share, any of which could seriously harm our
business, operating results and financial condition. We may not be able to
compete successfully against current and future competitors.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we seek to protect
through a combination of copyright, trade secret and trademark law. We also
enter into confidentiality or license agreements with our employees and
consultants, and other companies with whom we have concluded marketing
agreements and generally seek
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to control access to and distribution of our documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use our proprietary information without
authorization or to develop similar technology independently. We pursue the
registration of our trade and service marks in the United States and
internationally, and we have registered the trademarks OnDisplay and CenterStage
in the United States. Effective trademark, service mark, copyright and trade
secret protection may not be available in every country in which our services
are distributed or made available through the Internet, and policing
unauthorized use of our proprietary information is difficult.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related businesses are
uncertain and still evolving. We cannot give any assurance as to the future
viability or value of any of our proprietary rights. In addition, we cannot give
any assurance that the steps taken by us will prevent misappropriation or
infringement of our proprietary information. Any intellectual property
infringement or misappropriation, should it occur, could have a material adverse
effect on our business, operating results and financial condition.
In addition, litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Any intellectual
property litigation would result in substantial costs and diversion of resources
and management attention and could have a material adverse effect on our
business, operating results and financial condition. Our business activities may
infringe upon the proprietary rights of others, and other parties may assert
infringement claims against us. Any claim and resultant litigation, should it
occur, might subject us to significant liability for damages and might result in
invalidation of our proprietary rights and even if not meritorious, would be
time consuming and expensive to defend and would result in the diversion of
management time and attention, any of which might have a material adverse effect
on our business, operating results and financial condition.
EMPLOYEES
As of September 30, 1999, we employed 106 persons. Our success will depend
in large part upon our ability to attract and retain employees. We face
competition in this regard from other companies, but we believe that we maintain
good relations with our employees.
FACILITIES
We sublease approximately 20,000 square feet of office space in two office
locations in San Ramon, California and smaller sales offices located in the
following metropolitan areas: Atlanta, Boston, Denver, Houston, Indianapolis,
Los Angeles, Mt. Laurel, NJ and New York. We believe that our San Ramon
facilities will meet our space requirements for the next year. The sublease for
the San Ramon facilities expire in July 2000 and July 2002 with no option to
extend.
LEGAL PROCEEDINGS
We are not a party to any material legal proceeding.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth some information concerning our executive
officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark Pine.................................... 45 Chief Executive Officer and Director
Venkat Mohan................................. 46 President and Chief Operating Officer
David Larson................................. 52 Vice President and Chief Financial Officer
Carol Richwood............................... 38 Vice President, Corporate Controller
Trung Dung................................... 32 Chief Technology Officer
Mark Deppe................................... 47 Vice President, Software Development
Olivier Sermet............................... 34 Vice President, Worldwide Field Operations
Santi Pierini................................ 36 Vice President, Global Product Management
Peter Buzzard................................ 33 Vice President of Product Marketing
Janet Azevedo................................ 40 Vice President of Human Resources
Timothy Barrows(1)........................... 42 Director
Promod Haque(1)(2)........................... 51 Director
John Mandile................................. 38 Director
Christopher Spray............................ 43 Director
Margaret Taylor.............................. 48 Director
Carmine Villani(2)........................... 56 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Mark Pine is a founder of OnDisplay and has served as our Chief Executive
Officer and as a member of our board of directors since August 1996, and also as
our President until November 1999. From 1994 to August 1996, Mr. Pine served as
a part-time consultant to various software companies. From 1990 to 1994, Mr.
Pine was the Vice President of Engineering and Senior Vice President of Sybase,
Inc., a database software company, overseeing Sybase's largest product division.
Prior to joining Sybase, Mr. Pine was a part of the founding management team of
ARIX Corporation, a computer manufacturer, and Parallel Computers, a computer
manufacturer. Mr. Pine holds a B.A. from University of California, San Diego.
Venkat Mohan became our President and Chief Operating Officer in November
1999. Prior to joining OnDisplay, he had been Vice President, Global Marketing
and E-Commerce at General Electric Information Services, Inc., a subsidiary of
General Electric Company, since August 1996. Mr. Mohan was the President and COO
of Cadis Inc., a software company, from November 1993 to August 1996, and was
the Executive Vice President, Marketing of VMX, Inc., a voice processing
technology company, from 1990 to 1993. He holds a technology degree from the
Indian Institute of Technology, an MS degree in Industrial and System
Engineering from the University of Florida and an MBA degree from the Harvard
Business School, where he was a Baker Scholar.
David Larson has served as our Vice President and Chief Financial Officer
since October 1999. From November 1998 to September 1999, Mr. Larson served as
Senior Vice President and Chief Financial Officer of AboveNet Communications
Inc., a provider of managed co-location and Internet connectivity solutions.
From December 1997 to November 1998, Mr. Larson served as Vice President and
Treasurer of Silicon Valley Group, Inc., a manufacturer of semiconductor
equipment. From August 1993 to December 1997, Mr. Larson served as Silicon
Valley Group's Director of Planning and from July 1991 to August 1993, Mr.
Larson served as Silicon Valley Group's Corporate Controller. Mr. Larson
received a B.S. from California Polytechnic State University, San Luis Obispo.
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Carol Richwood has served as our Vice President, Corporate Controller since
April 1999. From June 1997 to April 1999, Ms. Richwood served in various senior
accounting positions at PeopleSoft, Inc, an enterprise software supplier,
including as a divisional controller of PeopleSoft. From June 1994 to June 1997,
she served as controller of various divisions of VeriFone, Inc., a supplier of
transaction automated systems. Ms. Richwood holds a B.S. from San Francisco
State University and is a certified public accountant.
Trung Dung is a founder of OnDisplay and has served as our Chief Technology
Officer since August 1996. From August 1995 to June 1996, Mr. Dung was a senior
software engineer at Open Market, Inc., an e-commerce software provider. From
August 1994 to July 1995, Mr. Dung was a senior software engineer with Software
Emancipation Technology, a software company. Mr. Dung holds a B.S. from
University of Massachusetts and attended graduate school at Boston University
from 1988 to 1993.
Mark Deppe has served as our Vice President Software Development since
October 1996. From August 1990 to October 1996, Mr. Deppe served in various
technical positions, including Senior Director of Engineering, at Sybase, Inc.,
a software company. Prior to joining Sybase, Mr., Deppe held senior management
positions at Hewlett-Packard Company, a manufacturer of computers and other
automated systems, Apple Computer, a computer manufacturer, Software Publishing
Corporation, a software company and Cooperative Solutions, a software company.
Mr. Deppe holds a B.S.E. and M.S.E. from University of Michigan.
Olivier Sermet has served as our Vice President, Worldwide Field Operations
since May 1997. From June 1995 to May 1997, Mr. Sermet served as Vice President
of Operations and General Manager for Dun & Bradstreet Software, a software
company. From 1994 to June 1995 Mr. Sermet served as Regional Sales Manager at
Racal Datacom, a manufacturer of telecommunications equipment. Mr. Sermet holds
a Baccalaureate from Ecole de Provence (Marseille, France) and an M.B.A. from
Northern Illinois University.
Santi Pierini has served as Vice President, Global Product Management since
November 1999, and also held positions as our Vice President of Technology from
February to November 1999, and as our Director of Worldwide Presales (technical
support) from July 1997 to February 1999. From August 1994 to July 1997, Mr.
Pierini served as Director, Presales of Dun & Bradstreet Software, Inc. Mr.
Pierini holds a B.S. from California Polytechnic State University, San Luis
Obispo.
Peter Buzzard has served as Vice President of Product Marketing since
September 1999. From February 1996 to November 1998, Mr. Buzzard served as
Manager of Worldwide Channel Marketing at Open Market, Inc., a software company.
From May 1995 to February 1996, Mr. Buzzard served as Senior Product Marketing
Manager at ON Technology, Inc., a software company. From July 1993 to May 1995,
Mr. Buzzard served as Marketing Manager at MathSoft, Inc., a software company.
Mr. Buzzard holds a B.S. from the College of Idaho and an M.I.M. from the
American Graduate School of International Management.
Janet Azevedo became our Vice President of Human Resources in November
1999. From October 1998 to November 1999, Ms. Azevedo performed independent
consulting services. From May 1996 to September 1998, Ms. Azevedo served as Vice
President, Human Resources of Genstar Container Corporation, a subsidiary of
General Electric Company. From September 1993 to May 1996, Ms. Azevedo served as
Vice President, Human Resources and Administration of GE Capital Computer
Leasing, a subsidiary of General Electric Company. Ms. Azevedo holds a B.B.A.
from Baylor University.
Timothy Barrows has served as one of our directors since September 1996.
Since 1985, Mr. Barrows has been a general partner of Matrix Partners, a venture
capital firm. Mr. Barrows serves as director of SilverStream, Inc., Sycamore
Networks, Inc. and several private companies. Mr. Barrows holds a B.A. from
Williams College and an M.B.A. from Stanford University.
Promod Haque has served as one of our directors since August 1997. Dr.
Haque has since November 1990 served as a general partner of various of the
Norwest Venture Partners venture capital funds. He is currently managing general
partner of Norwest Venture Partners VII. Dr. Haque is a director of Showcase
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Corporation, Extreme Networks, Inc., Primus Knowledge Solutions, Cerent
Corporation, Siara Systems, Transaction Systems Architects, Inc. and several
privately held companies. Dr. Haque holds a Ph.D.E.E. degree and an M.S.E.E.
degree from Northwestern University, an M.M. degree from the J.L. Kellogg
Graduate School of Management, Northwestern University, and a B.S.E.E. degree
from the University of Delhi, India.
John Mandile has served as one of our directors since August 1996. Since
September 1996, Mr. Mandile has been a general partner of Sigma Partners, a
venture capital firm. From August 1995 to April 1996, Mr. Mandile was the
President & CEO of Vermeer Technologies, Inc., a Web authoring company that was
acquired by Microsoft. From 1988 to 1992 Mr. Mandile was Vice President of
Engineering of SQL Solutions, a software company, which was acquired by Sybase
and after the acquisition served as Vice President of System Management at
Sybase from 1992 to July 1995. Mr. Mandile holds a B.S.E. in Engineering Science
from Tufts University and an MS in Computer Science from Worcester Polytechnic
State University.
Christopher Spray has served as one of our directors since September 1996.
Since 1986, Mr. Spray has been a general partner of Atlas Venture, a venture
capital firm. Mr. Spray holds a B.A. from Oxford University and an M.B.A. from
INSEAD.
Margaret Taylor has served as one of our directors since March 1999. Since
1989, Ms. Taylor has served at PeopleSoft, Inc. as Senior Vice President of
Operations. Ms. Taylor holds a B.A. from Lone Mountain College.
Carmine Villani has served as one of our directors since April 1997. Since
1992, Mr. Villani has been Senior Vice President and Chief Information Officer
of McKessonHBOC, Inc., a health information services company. Mr. Villani holds
a B.A. from Rutgers University.
COMMITTEES OF THE BOARD OF DIRECTORS
Our compensation committee consists of Messrs. Barrows and Haque. The
compensation committee makes recommendations regarding our various incentive
compensation and benefit plans and determines salaries for our executive
officers and incentive compensation for our employees and consultants.
Our audit committee consists of Messrs. Haque and Villani. The audit
committee makes recommendations to the board of directors regarding the
selection of our independent auditors, reviews the results and scope of the
audit and other services provided by our independent auditors and reviews and
evaluates our control functions.
BOARD COMPOSITION
Our bylaws currently authorize seven directors. Our certificate of
incorporation and bylaws that become effective upon the completion of this
offering provide that our Board will be divided into three classes, Class I,
Class II and Class III, with each class serving staggered three-year terms. The
terms of the Class I directors, Messrs. Mandile and Spray, will end at the 2000
annual meeting of stockholders. The terms of the Class II directors, Messrs.
Barrows and Haque will end at the 2001 annual meeting of stockholders. The terms
of the Class III directors, Messrs. Pine and Villani and Ms. Taylor, will end at
the 2002 annual meeting of stockholders. Any additional directorships resulting
from an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors. This staggered classification of the board of directors may have
the effect of delaying or preventing changes in control or management. There are
no family relationships among any of our directors, officers or key employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our compensation committee was, at any time since
our formation, an officer or employee of OnDisplay. None of our executive
officers serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving as a member of our
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board of directors or compensation committee. See "Certain Transactions" for a
description of transactions between OnDisplay and entities affiliated with
members of our compensation committee.
DIRECTOR COMPENSATION
Directors currently do not receive any cash compensation from OnDisplay for
their services as members of the board of directors, although members are
reimbursed for expenses in connection with attendance at board of directors and
committee meetings. At times in the past we have granted our outside directors
options to purchase shares of our common stock under the 1996 Stock Plan. In
October 1996, we granted John Mandile an option to purchase 42,500 shares at a
per share exercise price of $0.10. In April 1997, we granted Carmine Villani an
option to purchase 20,000 shares at per share exercise price of $0.10 and in
January 1999, we granted Mr. Villani an option to purchase an additional 20,000
shares at a per share exercise price of $0.40. In March 1999, we granted
Margaret Taylor an option to purchase 30,000 shares at per share exercise price
of $0.40. In December 1999, we granted options to Timothy Barrows, Promod Haque
and Christopher Spray each to purchase 30,000 shares at a per share exercise
price of $8.00.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us during the year
ended December 31, 1998, to our Chief Executive Officer and to our other most
highly compensated executive officers during our last fiscal year. This
prospectus refers to these executives as the Named Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS
--------------------------- --------- -------- ------------
<S> <C> <C> <C>
Mark Pine................................................. 175,002 5,000 --
President and Chief Executive Officer, Director
Olivier Sermet............................................ 150,002 68,581 --
Vice President, Worldwide Field Operations
Mark Deppe................................................ 150,001 -- --
Vice President, Software Development
Trung Dung................................................ 96,667 -- --
Chief Technology Officer
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted to our Named Executive Officers during the
year ended December 31, 1998. In the current year through December 14, 1999, the
Named Executive Officers received options totaling 390,000 shares (Mark Pine
250,000, Olivier Sermet 60,000, Mark Deppe 30,000 and Trung Dung 50,000). In
addition, Venkat Mohan received an option to purchase 350,000 shares and David
Larson received an option to purchase 200,000 shares in connection with their
recent appointments as executive officers.
In 1998, we granted options to purchase an aggregate of 781,750 shares of
common stock to our employees, directors and consultants. Generally, we grant
options at an exercise price equal to the fair market value of the underlying
common stock on the date of grant, as determined by our board of directors, and
the options vest over four years from the date of grant. In determining the fair
market value of our common stock, our board of directors considers valuations of
comparable companies, valuations at which we have issued preferred stock,
valuation reports and analyses prepared by third parties, the relative rights
and preferences of our preferred stock as compared to our common stock, and the
lack of liquidity
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<PAGE> 49
of our securities. Once we become a publicly-held company, the fair market value
of our stock will equal its trading market price.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND VALUES OF UNEXERCISED OPTIONS
None of the Named Executive Officers exercised any option in the year ended
December 31, 1998.
The following table sets forth for each of the Named Executive Officers the
number and value of securities underlying unexercised options held at December
31, 1998. The "Value of Unexercised In-the-Money Options" at December 31, 1998
is based on a value of $0.40 per share, the fair market value of our common
stock as of December 8, 1998, as determined by the board of directors, and at
October 18, 1999 is based on an initial public offering price of $28.00 per
share. In each case, the per share exercise price is subtracted and the
resulting amount is multiplied by the number of shares issuable upon exercise of
the option. All options were granted under our 1996 Stock Plan.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998 DECEMBER 15, 1999
--------------------------- --------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark Pine................ -- -- -- -- -- --
Olivier Sermet........... 54,688 -- $ 16,406 -- $ 1,525,795 --
Trung Dung............... -- -- -- -- -- --
Mark Deppe............... 382,500 -- $114,750 -- $10,671,750 --
</TABLE>
INCENTIVE STOCK PLANS
1996 STOCK PLAN
The board of directors adopted the 1996 Stock Plan on August 13, 1996 and
the stockholders initially approved the 1996 Stock Plan on September 17, 1996.
The 1996 Stock Plan provides for the grant of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code to employees, and for the
grant of nonstatutory stock options and stock purchase rights to employees,
directors and consultants.
Number of Shares of Common Stock Available under the 1996 Stock Plan
As of September 30, 1999, a total of 3,475,000 shares of common stock were
authorized for issuance pursuant to the 1996 Stock Plan, of which options to
acquire 2,099,990 shares were issued and outstanding as of that date and 18,834
shares remained available for future option grants. Between September 30, 1999
and December 14, 1999, we increased the number of authorized shares under the
1996 Stock Plan to 4,975,000 and granted additional options under the 1996 Stock
Plan to purchase a total of 1,482,464 shares. The 1996 Stock Plan provides for
annual increases in the number of shares available for issuance thereunder, on
the first day of each new fiscal year, effective beginning with fiscal year
2001, equal to the lesser of 4.0% of the outstanding shares of common stock on
the first day of the fiscal year, 1,000,000 shares or a lesser amount as the
board of directors may determine.
Administration of the 1996 Stock Plan
The administrator of the 1996 Stock Plan, which may be either the board of
directors or a committee of the board of directors, administers the 1996 Stock
Plan. In the case of options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Internal Revenue Code,
the committee will consist of two or more "outside directors" within the meaning
of Section 162(m) of the Internal Revenue Code. The administrator has the power
to determine the terms of the options or stock purchase rights granted,
including the exercise price, the number of shares issuable upon exercise of
each option or stock purchase right, the exercisability of the options and the
form of consideration payable upon exercise.
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Options
The administrator determines the exercise price of nonstatutory stock
options granted under the 1996 Stock Plan, but with respect to nonstatutory
stock options intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Internal Revenue Code, the exercise price must
at least be equal to the fair market value of the common stock on the date of
grant. The exercise price of all incentive stock options granted under the 1996
Stock Plan must be at least equal to the fair market value of the common stock
on the date of grant and the term of such option may not exceed ten years. With
respect to any participant who owns stock possessing more than 10% of the voting
power of all classes of the our outstanding capital stock, the exercise price of
any incentive stock option granted must equal at least 110% of the fair market
value on the grant date and the term of such incentive stock option must not
exceed five years. The administrator determines the term of all other options.
No optionee may be granted an option to purchase more than 500,000 shares
in any fiscal year. In connection with his or her initial service, an optionee
may be granted an option to purchase up to an additional 500,000 shares, which
shall not count against the yearly limit set forth in the previous sentence.
An optionee generally must exercise an option granted under the 1996 Stock
Plan at the time set forth in the optionee's option agreement after termination
of the optionee's status as an employee, director or consultant. Generally, in
the case of the optionee's termination by death or disability, the option will
remain exercisable for twelve months. In all other cases, the option will
generally remain exercisable for a period of three months. However, an option
may never be exercised later than the expiration of the option's term.
Stock Purchase Rights
The Administrator determines the exercise price of stock purchase rights
granted under the 1996 Stock Plan. In the case of stock purchase rights, unless
the Administrator determines otherwise, the restricted stock purchase agreement
entered into in connection with the exercise of the stock purchase right shall
grant us a repurchase option that we may exercise upon the voluntary or
involuntary termination of the purchaser's service with the us for any reason,
including death or disability. The purchase price for shares we repurchase
pursuant to restricted stock purchase agreements shall generally be the original
price paid by the purchaser and may be paid by cancellation of any indebtedness
of the purchaser to us. The repurchase option shall lapse at a rate that the
Administrator determines.
Transferability of Options and Stock Purchase Rights
An optionee generally may not transfer options and stock purchase rights
granted under the 1996 Stock Plan and only the optionee may exercise an option
and stock purchase right during his or her lifetime.
Adjustments upon Merger or Asset Sale
The 1996 Stock Plan provides that in the event of a merger, sale or
reorganization of OnDisplay with or into any other corporation or the sale of
all or substantially all of the assets or outstanding stock of OnDisplay, in
which transaction our stockholders immediately prior to such transaction own
immediately after such transaction less than 50% of the equity securities of the
surviving corporation, 18 months worth of vesting of outstanding options shall
accelerate and become exercisable. The 1996 Stock Plan also provides that in the
event of a merger of OnDisplay with or into another corporation, the successor
corporation shall assume or substitute each option or stock purchase right. If
the outstanding options or stock purchase rights are not assumed or substituted,
the administrator shall provide notice to the optionee that he or she has the
right to exercise the option or stock purchase right as to all of the shares
issuable upon exercise of the option or stock purchase right, including shares
which would not otherwise be exercisable, for a period of 15 days from the date
of the notice. The option or stock purchase right will terminate upon the
expiration of the 15-day period.
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Amendment and Termination of the 1996 Stock Plan
Unless terminated sooner, the 1996 Stock Plan will terminate automatically
in 2006. In addition, the Board of Directors has the authority to amend, suspend
or terminate the 1996 Stock Plan, provided that no such action may affect any
share of common stock previously issued and sold or any option previously
granted under the 1996 Stock Plan.
1999 EMPLOYEE STOCK PURCHASE PLAN
Concurrently with the offering, we intend to establish an Employee Stock
Purchase Plan.
Number of Shares of Common Stock Available under the Purchase Plan
A total of 1,500,000 shares of common stock will be made available for
sale. In addition, the purchase plan provides for annual increases in the number
of shares available for issuance under the purchase plan on the first day of
each fiscal year, beginning with the fiscal year 2001, equal to the lesser of
1.5% of the outstanding shares of common stock on the first day of the fiscal
year, 350,000 shares, or such other amount as may be determined by the board.
Administration of the Purchase Plan
The board of directors or a committee appointed by the board of directors
administers the purchase plan. The board of directors or its committee has full
and exclusive authority to interpret the terms of the purchase plan and
determine eligibility.
Eligibility to Participate
Employees are eligible to participate if they are customarily employed by
us or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, an employee may not be granted an
option to purchase stock under the purchase plan if such employee:
- immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of the capital stock of
OnDisplay; or
- whose rights to purchase stock under all employee stock purchase plans of
OnDisplay accrues at a rate that exceeds $25,000 worth of stock for each
calendar year.
Offering Periods and Contributions
The purchase plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, contains consecutive, overlapping 24-month offering
periods. Each offering period includes four 6-month purchase periods. The
offering periods generally start on the first trading day on or after May 1 and
November 1 of each year, except for the first such offering period which will
commence on the first trading day on or after the effective date of this
offering and will end on the last trading day on or before October 31, 2001.
The purchase plan permits participants to purchase common stock through
payroll deductions of up to 15% of the participant's eligible compensation which
includes the participant's base straight time gross earnings, commissions and
cash incentive compensation, but exclusive of payments for overtime, shift
premium, bonuses and other compensation. The maximum number of shares a
participant may purchase during a six-month purchase period is 10,000 shares.
Purchase of Shares
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each six-month purchase period. The price
of stock purchased under the purchase plan is 85% of the lower of the fair
market value of the common stock at the beginning of an offering period or after
a purchase period end. In the event the fair market value at the end of a
purchase period is less than
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the fair market value at the beginning of the offering period, participants will
be withdrawn from the current offering period following their purchase of shares
on the purchase date and will be automatically re-enrolled in a new offering
period. Participants may end their participation at any time during an offering
period, and they will be paid their payroll deductions to date. Participation
ends automatically upon termination of employment with us.
Transferability of Rights
A participant may not transfer rights granted under the purchase plan other
than by will, the laws of descent and distribution or as otherwise provided
under the purchase plan.
Adjustments upon Merger or Asset Sale
The purchase plan provides that, in the event of a merger of OnDisplay with
or into another corporation or a sale of all or substantially all of our assets,
a successor corporation may assume or substitute for each outstanding option. If
the successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened, and a new
exercise date will be set.
Amendment and Termination of the Purchase Plan
The purchase plan will terminate in 2009. However, the board of directors
has the authority to amend or terminate the purchase plan, except that,
contingent on some exceptions described in the purchase plan, no such action may
adversely affect any outstanding rights to purchase stock under the purchase
plan.
CHANGE OF CONTROL ARRANGEMENTS
Under our 1996 Stock Plan, in the event of a merger, sale or reorganization
of OnDisplay into another corporation which results in a change of control of
OnDisplay, options that would have become vested within 18 months after the
closing date of the merger transaction will accelerate and become fully vested
upon the closing of the transaction.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for any of the
following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies, including injunctive relief or rescission.
Our bylaws provide that we shall indemnify our directors and executive
officers and may indemnify our other officers and employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in such capacity, regardless of whether the bylaws would
permit indemnification.
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We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and executive officers
for specified expenses, including attorneys' fees, judgments, fines and
settlement amounts incurred by any person in any action or proceeding, including
any action by us arising out of that person's services as our director or
executive officer, any of our subsidiaries or any other company or enterprise to
which the person provides services at our request. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers.
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CERTAIN TRANSACTIONS
OUR FORMATION
In connection with our incorporation in August 1996, we issued 1,554,525
shares of common stock to Mark Pine, 1,554,525 shares of common stock to Trung
Dung and 85,000 shares to Thang Tran at a purchase price of $.001 per share,
paid in cash. We have the right to repurchase for $.001 per share any unvested
founders' shares in the event of termination of employment under specified
circumstances. This repurchase right lapsed as to one-fourth of the shares upon
the first anniversary of the vesting start date, which in the case of Messrs.
Pine and Dung was August 1996, and lapses as to the remaining shares on a
cumulative monthly basis over a period of 36 months from the first anniversary
of the vesting start date.
PREFERRED STOCK FINANCINGS
In September 1996 and June 1997, OnDisplay issued to various investors a
total of 3,500,000 shares of series A preferred stock at a purchase price of
$1.00 per share. In June 1997 and January 1998, OnDisplay issued to various
investors a total of 3,202,381 shares of series B preferred stock at a purchase
price of $2.10 per share. In July 1998 and October 1998, OnDisplay issued to
various investors a total of 2,189,173 shares of series C preferred stock at a
purchase price of $4.00 per share. In August 1999, OnDisplay issued to various
investors 1,723,739 shares of series D preferred stock at a purchase price of
$9.52 per share. Each share of each series of preferred stock will convert into
one share of common stock prior to the closing of this public offering.
The holders of our preferred stock include, among others, the following
directors and holders of more than 5% of our outstanding stock:
<TABLE>
<CAPTION>
PREFERRED STOCK
-------------------------------------------
PREFERRED STOCKHOLDER SERIES A SERIES B SERIES C SERIES D
--------------------- --------- --------- -------- --------
<S> <C> <C> <C> <C>
HOLDERS OF MORE THAN 5%:
ATGF II................................................ -- -- 945,000 52,521
Matrix Partners IV, L.P(1)........................... 1,800,000 629,870 340,909 137,214
Atlas Venture Fund II, L.P........................... 1,500,000 524,892 284,091 52,521
Norwest Venture Partners VI, LP...................... -- 1,904,762 500,000 119,088
DIRECTORS:
Timothy Barrows(2)................................... 1,800,000 629,870 340,909 137,214
Christopher Spray(3)................................. 1,500,000 524,892 284,091 52,521
Promod Haque(4)...................................... -- 1,904,762 500,000 119,088
John Mandile......................................... 100,000 11,905 -- --
Margaret Taylor...................................... -- -- 25,000 --
</TABLE>
- ---------------
(1) Includes 145,400 shares held by the Matrix IV Entrepreneurs Fund, L.P.
(2) Includes shares held by Matrix Partners IV, L.P and Matrix IV Entrepreneurs
Fund, L.P. Mr. Barrows, a general partner of Matrix Partners IV, L.P and
Matrix IV Entrepreneurs Fund, L.P., disclaims beneficial ownership of the
shares held by Matrix Partners IV, L.P and Matrix IV Entrepreneurs Fund,
L.P., except to the extent of his proportionate pecuniary interest therein.
Mr. Barrows is a member of our board of directors.
(3) Includes shares held by Atlas Venture Fund II, L.P. Mr. Spray, a general
partner of Atlas Venture Fund II, L.P., disclaims beneficial ownership of
the shares held by Atlas Venture Fund II, L.P., except to the extent of his
proportionate pecuniary interest therein. Mr. Spray is a member of our board
of directors.
(4) Includes shares held by Norwest Venture Partners VI, LP. Mr. Haque, a
general partner of Norwest Venture Partners VI, LP, disclaims beneficial
ownership of the shares held by Norwest Venture
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Partners VI, LP, except to the extent of his proportionate pecuniary
interest therein. Mr. Haque is a member of our board of directors.
OFFICER LOANS
In December 1999, OnDisplay made loans to the following executive officers
in order to fund the exercise of a portion of the stock options held by each of
them:
<TABLE>
<CAPTION>
NUMBER OF
NAME AMOUNT SHARES
- ----------------------------------------------------- -------- ---------
<S> <C> <C>
Mark Pine............................................ $625,000 250,000
Venkat Mohan......................................... $650,000 100,000
Trung Dung........................................... $325,000 50,000
David Larson......................................... $500,000 100,000
</TABLE>
OnDisplay has the right to repurchase unvested shares if the executive's
employment terminates under some circumstances. Each loan was made under a
full-recourse promissory note secured by pledge of the purchased shares. The
notes will mature eighteen months after the date of this prospectus and bear
interest at 5.66% compounded semiannually and payable at maturity.
POLICY REGARDING TRANSACTIONS WITH AFFILIATES
All future transactions with affiliates, including any loans we make to our
officers, directors, principal stockholders or other affiliates, will be
approved by a majority of our board of directors, including a majority of the
independent and disinterested members or, if required by law, a majority of
disinterested stockholders, and will be on terms no less favorable to us than we
could have obtained from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of September 30, 1999, by the following
individuals or groups:
- each person, or group of affiliated persons, whom we know beneficially
owns more than 5% of our outstanding stock;
- each of our executive officers;
- each of our directors; and
- all of our directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder on this table
is c/o OnDisplay, Inc., 12667 Alcosta Boulevard, Suite 300, San Ramon, CA 94583.
Except as otherwise noted, and dependent on applicable community property laws,
to the best of our knowledge, the persons named in this table have sole voting
and investing power with respect to all of the shares of common stock held by
them.
This table lists applicable percentage ownership based on 15,397,719 shares
of common stock outstanding as of September 30, 1999, as adjusted to reflect the
conversion of all outstanding shares of preferred stock upon the closing of this
offering, and also lists applicable percentage ownership based on 18,897,719
shares of common stock outstanding after completion of this offering. Options to
purchase shares of our common stock that are exercisable within 60 days of
September 30, 1999 are deemed to be beneficially owned by the persons holding
these options or warrants for the purpose of computing percentage ownership of
that person, but are not treated as outstanding for the purpose of computing any
other person's ownership percentage. The "Percent After Offering" column does
not reflect the shares that may be acquired by the named stockholders in this
offering or in the concurrent private sale of common stock. In no case will
those purchases result in any named stockholder owning a higher percentage of
outstanding shares after the public offering than before the public offering.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
---------------------------------------------
PERCENT BEFORE PERCENT AFTER
BENEFICIAL OWNER NUMBER OFFERING OFFERING
---------------- ---------- -------------- -------------
<S> <C> <C> <C>
Matrix Partners IV, L.P(1)........................... 2,907,993 18.9% 15.4%
Bay Colony Corporate Center
1000 Winter Street, Suite 4500
Waltham, MA 02154
Norwest Venture Partners VI, LP...................... 2,523,850 16.4 13.4
245 Lytton Avenue, Suite 250
Palo Alto, CA 94111
Atlas Venture Fund II, L.P........................... 2,361,504 15.3 12.5
222 Berkeley Street
Boston, MA 02116
ATGF II.............................................. 997,521 6.5 5.3
c/o Amerindo Investment Advisors
One Embarcadero, Suite 2300
San Francisco, CA 94111
Mark Pine(2)......................................... 1,463,275 9.5 7.7
Trung Dung........................................... 1,090,775 7.1 5.8
Mark Deppe(3)........................................ 414,375 2.6 2.2
Olivier Sermet(4).................................... 174,312 1.1 *
Timothy Barrows(5)................................... 2,907,993 18.9 15.4
Promod Haque(6)...................................... 2,523,850 16.4 13.4
John Mandile(7)...................................... 145,551 * *
</TABLE>
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<PAGE> 57
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
---------------------------------------------
PERCENT BEFORE PERCENT AFTER
BENEFICIAL OWNER NUMBER OFFERING OFFERING
---------------- ---------- -------------- -------------
<S> <C> <C> <C>
Christopher Spray(8)................................. 2,361,504 15.3 12.5
Margaret Taylor...................................... 25,000 * *
Carmine Villani(9)................................... 40,000 * *
All directors and executive officers as a group (10
persons)........................................... 11,146,635 72.4% 59.0%
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 145,400 shares held by the Matrix IV Entrepreneurs Fund, L.P.
(2) Includes 249,000 shares beneficially held by trusts for the benefit of Mr.
Pine's minor children and other family members.
(3) Includes 286,875 shares of common stock issuable upon the exercise of stock
options exercisable within 60 days of September 30, 1999.
(4) As of September 30, 1999, 72,229 of the shares held by Mr. Sermet are
repurchasable by OnDisplay in the event Mr. Sermet's employment is
terminated.
(5) Includes shares held by Matrix Partners IV, L.P and Matrix IV Entrepreneurs
Fund, L.P. Mr. Barrows, a general partner of Matrix Partners IV, L.P and
Matrix IV Entrepreneurs Fund, L.P., disclaims beneficial ownership of the
shares held by Matrix Partners IV, L.P and Matrix IV Entrepreneurs Fund,
L.P., except to the extent of his proportionate pecuniary interest therein.
(6) Includes shares held by Norwest Venture Partners VI, LP. Mr. Haque, a
general partner of Norwest Venture Partners VI, LP, disclaims beneficial
ownership of the shares held by Norwest Venture Partners VI, LP, except to
the extent of his proportionate pecuniary interest therein.
(7) Includes 33,646 shares of common stock issuable upon the exercise of stock
options exercisable within 60 days of September 30, 1999.
(8) Includes shares held by Atlas Venture Fund II, L.P. Mr. Spray, a general
partner of Atlas Venture Fund II, L.P., disclaims beneficial ownership of
the shares held by Atlas Venture Fund II, L.P., except to the extent of his
proportionate pecuniary interest therein.
(9) As of September 30, 1999, 27,917 of the shares held by Mr. Villani are
repurchasable by OnDisplay in the event Mr. Villani's service to the
corporation as a director or consultant is terminated.
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DESCRIPTION OF CAPITAL STOCK
Our certificate of incorporation that becomes effective upon the closing of
this offering authorizes the issuance of up to 100,000,000 shares of common
stock, $0.001 par value, and authorizes the issuance of 10,000,000 shares of
undesignated preferred stock, $0.001 par value. Our board of directors has the
legal power, without stockholder approval, to establish the rights and
preferences of the undesignated preferred stock. As of September 30, 1999,
4,782,426 shares of common stock were issued and outstanding and held by 97
stockholders, and 10,615,293 shares of preferred stock were issued and
outstanding and held by 29 stockholders. Upon the closing of this offering, all
outstanding shares of preferred stock will convert into an aggregate of
10,615,293 shares of common stock.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders and there are no cumulative
voting rights. Holders of common stock are entitled to receive any dividends
declared by the board of directors. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of OnDisplay, the holders of common stock
are entitled to share in our assets remaining after the payment of liabilities.
Holders of common stock have no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. The dividend, liquidation and other rights of
the holders of common stock are junior to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock which we may
issue in the future.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of preferred stock. However, the effects might
include, among other things:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; or
- delaying or preventing a change in control of OnDisplay without further
action by the stockholders.
Upon the closing of this offering, no shares of preferred stock will be
outstanding, and OnDisplay has no present plans to issue any shares of preferred
stock.
WARRANTS AND OTHER OBLIGATIONS TO ISSUE CAPITAL STOCK
As of September 30, 1999, we have outstanding warrants to purchase an
aggregate of 85,537 shares of series C preferred stock at an exercise price of
$6.05 per share. The warrants are currently exercisable in full and will expire
on the third anniversary of the effective date of this offering. Upon the
closing of this offering, the warrants will become exercisable for 85,537 shares
of common stock.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
After this offering, holders of 10,615,293 shares of common stock and
85,537 shares of common stock issuable upon exercise of outstanding warrants,
the "registrable securities," or their transferees are entitled to certain
rights with respect to the registration of shares under the Securities Act.
These rights are provided under the terms of an agreement between OnDisplay and
the holders of the registrable securities. Beginning six months following the
date of this prospectus, holders of the registrable securities may require on
two occasions, that we use our best efforts to register the registrable
securities for public resale. On the
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<PAGE> 59
first occasion holders of at least 10% may request a registration and on the
second occasion holders of 40% may request a registration. OnDisplay is
obligated to register these shares only if the outstanding registrable
securities have an anticipated public offering price of at least $5,000,000.
Also, holders of 10% of the registrable securities may require, no more than
once during any twelve-month period, that OnDisplay register their shares for
public resale on Form S-3 or similar short-form registration if the value of the
securities to be registered is at least $1,000,000. Furthermore, in the event
OnDisplay elects to register any of its shares of common stock for purposes of
effecting any public offering, with the exception of our initial public
offering, the holders of registrable securities are entitled to include their
shares of common stock in the registration, but OnDisplay may reduce the number
of shares proposed to be registered in view of market conditions. OnDisplay will
bear all expenses in connection with any registration, other than underwriting
discounts and commissions. All registration rights will terminate five years
following the consummation of this offering.
CHARTER AND BYLAW PROVISIONS AND DELAWARE LAW
Some provisions of Delaware law and OnDisplay's certificate of
incorporation and bylaws could make the following more difficult:
- the acquisition of OnDisplay by means of a tender offer;
- acquisition of OnDisplay by means of a proxy contest or otherwise; or
- the removal of OnDisplay's incumbent officers and directors.
These provisions, summarized below, are expected to discourage some types
of coercive takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control of OnDisplay
to first negotiate with OnDisplay's board. OnDisplay believes that the benefits
of increased protection of its potential ability to negotiate with the proponent
of an unfriendly or unsolicited proposal to acquire or restructure OnDisplay
outweigh the disadvantages of discouraging proposals because negotiation of
these proposals could result in an improvement of their terms.
Election And Removal Of Directors.
Our board of directors is divided into three classes. The directors in each
class will serve for a three-year term, with OnDisplay's stockholders electing
one class each year. See "Management-Board Composition." This system of electing
and removing directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of OnDisplay, because it
generally makes it more difficult for stockholders to replace a majority of the
directors.
Stockholder Meetings.
Under our bylaws, only the board of directors, the chairman of the board
and the president may call special meetings of stockholders.
Requirements For Advance Notification Of Stockholder Nominations And
Proposals.
Our bylaws establish advance notice procedures for stockholder proposals
and the nomination of candidates for election as directors, other than
nominations made by or at the direction of the board of directors or a committee
of the board.
Delaware Anti-takeover Law.
Section 203 of the Delaware General Corporation Law, an anti-takeover law,
applies to OnDisplay. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless the "business combination" or the transaction in
which the person became an interested stockholder is approved in a prescribed
manner. Generally, a "business
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<PAGE> 60
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns or within three years prior to the determination of interested
stockholder status, did own, 15% or more of a corporation's voting stock. The
existence of this provision may have an anti-takeover effect with respect to
transactions not approved in advance by the board of directors, including
discouraging attempts that might result in a premium over the market price for
the shares of common stock held by stockholders.
Elimination Of Stockholder Action By Written Consent.
Our certificate of incorporation eliminates the right of stockholders to
act by written consent without a meeting.
No Cumulative Voting.
Our certificate of incorporation does not provide for cumulative voting in
the election of directors.
Undesignated Preferred Stock.
The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
OnDisplay. These and other provisions may have the effect of deferring hostile
takeovers or delaying changes in control or management of OnDisplay.
Amendment Of Charter Provisions.
The amendment of any of the above provisions would require approval by
holders of at least 66 2/3% of the outstanding common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for the common stock will
develop or be sustained after this offering. Future sales of substantial amounts
of common stock, including shares issued upon exercise of outstanding options
and warrants, in the public market following this offering could adversely
affect prevailing market prices and could impair our ability to raise capital
through sale of our equity securities.
Upon completion of this offering, we will have outstanding 18,897,719
shares of common stock based upon shares outstanding as of September 30, 1999,
excluding up to 300,000 shares sold in the concurrent private offering and
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options or warrants that do not expire prior to completion of
this offering. Of these 18,897,719 shares, the 3,500,000 shares sold in this
offering will be freely tradable without restriction under the Securities Act,
except for any shares purchased by our "affiliates" as Rule 144 under the
Securities Act defines that term. The remaining 15,397,719 shares of common
stock held by existing stockholders are restricted as Rule 144 defines that
term. Lock-up agreements apply to all restricted shares and also to shares
purchased in the public offering by any person who has signed a lock-up
agreement except ATGF II. The lock-up agreements provide that, with limited
exceptions, the stockholder will not offer, sell, contract to sell or otherwise
dispose of any common stock or any securities that are convertible into common
stock for a period of 180 days after the date of this prospectus without the
prior written consent of FleetBoston Robertson Stephens Inc. As a result of
these lock-up agreements, notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144, 144(k) and 701, none of these shares will be
resellable until 181 days after the date of this prospectus. Beginning 181 days
after the date of this prospectus, approximately 13,667,730 restricted shares
will be eligible for sale in the public market, to all of which volume
limitations under Rule 144 applies, except 3,010,145 shares eligible for sale
under Rule 144(k) and 1,135,512 shares eligible for sale under Rule 701. In
addition, as of September 30, 1999, there were 2,099,740 outstanding options and
a warrant to purchase preferred stock convertible into 85,537 shares of common
stock. All options and warrants are covered by lock-up agreements. FleetBoston
Robertson Stephens Inc. may, in their sole discretion and at any time without
notice, release all or any portion of the shares to which lock-up agreements
apply, however any release shall apply pro-rata to all stockholders who are
bound by lock-up agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year including the holding period of any prior owner,
except in some cases an affiliate, would be entitled to sell within any
three-month period a number of restricted shares that does not exceed the
greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 188,977 shares immediately after this offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to a sale.
For persons who are affiliated, these limitations apply to both their
restricted and unrestricted shares.
Sales under Rule 144 must also comply with manner of sale and notice
provisions. Under Rule 144(k), a person who is not deemed to have been an
affiliate of OnDisplay at any time during the three months 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, except in some cases an
affiliate, is entitled to sell shares without complying with the manner of sale,
public information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance
upon Rule 144 but without compliance with some restrictions, including the
holding period requirement, of Rule 144. Any employee, officer or director of or
consultant to OnDisplay who purchased shares pursuant to a written compensatory
plan or contact may be entitled to rely on the resale provisions of Rule 701.
Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of
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Rule 144. Rule 701 further provides that non-affiliates may sell shares in
reliance on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until 90 days after the date of this
prospectus before selling shares. However, lock-up agreements apply to all Rule
701 shares and will only become eligible for sale at the earlier of the
expiration of the 180-day lock-up agreements or no sooner than 90 days after the
offering upon obtaining the prior written consent of FleetBoston Robertson
Stephens Inc.
After this offering, we intend to file a registration statement on Form S-8
registering shares of common stock covered by outstanding options or reserved
for future issuance under our stock plans. As of September 30, 1999, options to
purchase a total of 2,099,990 shares were outstanding and 18,834 shares were
reserved for future issuance under our stock plans. Shares issued upon exercise
of options or issued pursuant to our Employee Stock Purchase Plan, other than
shares issued to our affiliates, will be available for immediate resale in the
open market after the expiration of the lock-up agreements.
Also beginning six months after the date of this offering, holders of
10,615,293 restricted shares and holders of warrants to purchase preferred stock
convertible into 85,537 shares of common stock will be entitled to registration
rights with respect to their shares for sale in the public market. See
"Description of Capital Stock -- Registration Rights of Certain Holders."
Purchasers of up to 300,000 shares in the concurrent private offering will also
by entitled to participate in those registration rights. Registration of shares
under the Securities Act would result in those shares becoming freely tradable
without restriction under the Securities Act, immediately upon the effectiveness
of the registration statement.
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UNDERWRITING AND PLAN OF DISTRIBUTION
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Deutsche Banc Alex. Brown and SG Cowen
Securities Corporation, have severally agreed with OnDisplay, under the terms
and conditions of the underwriting agreement, to purchase the number of shares
of common stock set forth opposite their respective names below. The
underwriters are committed to purchase and pay for all shares, if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
FleetBoston Robertson Stephens Inc.......................... 1,400,000
Deutsche Banc Alex. Brown................................... 1,225,000
SG Cowen Securities Corporation............................. 875,000
----------
Total............................................. 3,500,000
==========
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus and to some dealers at a price less a
concession of not more than $1.16 per share, of which $0.10 may be reallowed to
other dealers. After the completion of this offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
reduction shall change the amount of proceeds to be received by us as set forth
on the cover page of this prospectus.
The following table sets forth the items of compensation considered to be
underwriting compensation under the rules of the National Association of
Securities Dealers:
<TABLE>
<CAPTION>
Total
-----------------------------
Per Without Over- With Over-
Share Allotment Allotment
----- ------------- -------------
<S> <C> <C> <C>
Underwriting fees paid by us............................ $1.96 $6,860,000 $ 7,889,000
Expenses payable by us.................................. 0.29 1,000,000 1,000,000
Deemed compensation paid by us.......................... $0.56 $1,960,000 $ 1,960,000
----- ---------- -----------
Total................................................. $2.81 $9,820,000 $10,849,000
</TABLE>
Over-Allotment Option
We have granted to the underwriters an option, exercisable during the
30-day period after the date of this prospectus, to purchase up to 525,000
additional shares of common stock at the same price per share as we will receive
for the 3,500,000 shares that the underwriters have agreed to purchase from us.
To the extent that the underwriters exercise the option, each of the
underwriters will have a firm commitment to purchase approximately the same
percentage of additional shares that the number of shares of common stock to be
purchased by it shown in the above table represents as a percentage of the total
number of shares offered hereby. If purchased, the additional shares will be
sold by the underwriters on the same terms as those on which the shares are
being sold.
61
<PAGE> 64
Indemnity
The underwriting agreement contains covenants of indemnity among the
underwriters and OnDisplay against some civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements
Our stockholders and option holders have agreed, for a period of 180 days
after the date of this prospectus, not to offer, pledge, sell, offer to sell,
contract to sell, sell any option or contract to purchase, purchase any option
to sell, grant any option right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any of the shares of common stock or any
securities convertible into, or exercisable or exchangeable for, common stock,
owned as of the date of this prospectus or later acquired directly by the
holders or with respect to which they have or later acquire the power of
disposition, without the prior written consent of the underwriters. However, the
underwriters may, in their sole discretion and at any time without notice,
release all or any portion of the securities covered by lock-up agreements.
There are no agreements between the underwriters and any of our shareholders
providing consent by the underwriters to the sale of shares prior to the
expiration of the lock-up period. In addition, we have agreed that during the
lock-up period, we will not, open to some exceptions, issue, sell, contract to
sell, or otherwise dispose of, any shares of common stock, any options or
warrants to purchase any shares of common stock or any securities convertible
into, exercisable for or exchangeable for shares of common stock other than
OnDisplay's sale of shares in this offering, the issuance of common stock upon
the exercise of outstanding options or warrants, and our issuance of option and
shares under existing employee stock option and stock purchase plans, without
the prior written consent of the underwriters.
BancBoston Capital Inc. has agreed, for a period of three years after the
date of this prospectus, not to offer, pledge, sell, offer to sell, contract to
sell, sell any option or contract to purchase, or otherwise transfer or dispose
of, directly or indirectly, 110,135 shares of OnDisplay capital stock held by
it. In addition, 99,949 shares of OnDisplay capital stock held by BancBoston
Capital Inc., will be similarly restricted from sale or transfer for a period of
four years after the date of this prospectus.
Future Sales
In addition, we have agreed that until 180 days after the date of this
prospectus, we will not, without prior written consent of FleetBoston Robertson
Stephens Inc., with some exceptions, offer, sell, contract to sell or otherwise
dispose of any shares of common stock, any options to purchase any share of
common stock or any securities convertible into, exercisable for or exchangeable
for shares of common stock other than our sale of shares in this offering, the
issuance of shares of common stock upon the exercise of outstanding options and
the grant of options to purchase shares of common stock under existing employee
stock option or stock purchase plans. See "Shares Eligible For Future Sale."
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Reserved Shares
At our request, the underwriters have reserved up to 5% of the shares of
common stock for sale at the initial public offering price to our directors,
officers or employees, and to persons who are otherwise associated with us and
our affiliates, and who have advised us of their desire to purchase shares in
the offering. In addition, the underwriters intend to reserve, at the initial
public offering price, up to 5% of the shares of common stock in this offering
for holders of our Series C preferred stock who have contractual rights to
participate in the offering. As a result, the number of shares of common stock
available for sale to the general public in the offering will be reduced to the
extent of sales of shares to any of the persons for whom they have been
reserved. Any shares not so purchased will be offered by the underwriters to the
general public on the same basis as all other shares of common stock in the
offering. We have agreed to
62
<PAGE> 65
indemnify those underwriters against some liabilities and expenses, including
liabilities under the Securities Act, in connection with the sales of these
reserved shares.
No Prior Public Market
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the common stock
offered hereby will be determined through negotiations between us and the
representatives. Among the factors to be considered in such negotiations are
prevailing market conditions, OnDisplay financial information, market valuations
of other companies that we and the representatives of the underwriters believe
to be comparable to us, estimates of our business potential, the present state
of our development and other factors deemed relevant.
Stabilization
The representatives have advised us that, pursuant to Regulation M under
the Exchange Act, some persons participating in the offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids which may have the effect of stabilizing or
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the common stock on behalf of the underwriters for the purpose
of fixing or maintaining the price of the common stock. A "syndicate covering
transaction" is the bid for or the purchase of the common stock on behalf of the
underwriters to reduce a short position incurred by the underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the offering if the common
stock originally sold by the underwriter or syndicate member is purchased by the
representatives in a syndicate covering transaction and has therefore not been
effectively placed by the underwriter or syndicate member. The representatives
have advised us that these transactions may be effected on the Nasdaq National
Market or otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
OnDisplay by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Some legal matters in connection with this offering will be
passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto,
California. As of September 30, 1999, some members of Wilson Sonsini Goodrich &
Rosati, Professional Corporation, directly or through an investment partnership,
beneficially owned an aggregate of 43,155 shares of common stock of OnDisplay.
Mario M. Rosati, our Secretary, is a member of Wilson Sonsini Goodrich & Rosati.
EXPERTS
The financial statements of OnDisplay, Inc. at December 31, 1997, and 1998,
and September 30, 1999, and for each of the two years in the period ended
December 31, 1998, the nine months ended September 30, 1999 and for the period
from August 14, 1996 to December 31, 1996 included in this prospectus have been
so included in reliance on the report of PricewaterhouseCoopers, LLP,
independent accountants, which report is given upon the authority of said firm
as experts in accounting and auditing.
63
<PAGE> 66
WHERE YOU CAN FIND ADDITIONAL INFORMATION
OnDisplay has filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act with respect to the
common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules to the registration statement. For further information with respect to
OnDisplay and our common stock, reference is made to the registration statement
and the exhibits and schedules. Copies of the registration statement, including
the exhibits and schedules, may be inspected without charge at the Securities
and Exchange Commission's principal office in Washington, D.C., or obtained at
prescribed rates from the Public Reference Section of the Securities and
Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Securities and Exchange Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Securities and Exchange
Commission. The address of the site is http://www.sec.gov.
64
<PAGE> 67
ONDISPLAY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Accountants' Report............................. F-2
Balance Sheets as of December 31, 1997 and 1998 and
September 30, 1999.......................................... F-3
Statements of Operations for the period from inception to
December 31, 1996, Years ended December 31, 1997 and 1998
and Nine Months ended September 30, 1998 (unaudited) and
1999...................................................... F-4
Statements of Changes in Stockholders' Deficit for the
period from inception to December 31, 1996, Years ended
December 31, 1997 and 1998 and Nine Months ended September
30, 1999.................................................. F-5
Statements of Cash Flows for the period from inception to
December 31, 1996, Years ended December 31, 1997 and 1998
and Nine Months ended September 30, 1998 (unaudited) and
1999...................................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
OnDisplay, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' deficit and cash flows present fairly,
in all material respects, the financial position of OnDisplay, Inc. at December
31, 1997 and 1998 and September 30, 1999 and the results of its operations and
its cash flows for the period from August 14, 1996 (date of inception) to
December 31, 1996, and the years ended December 31, 1997 and 1998 and the nine
month period ended September 30, 1999 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
October 15, 1999
F-2
<PAGE> 69
ONDISPLAY, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------ SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1999 1999
------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 3,900 $ 4,648 $ 15,913
Trade accounts receivable, net of allowance for
doubtful accounts of $0 in 1997, $250 in 1998
and $558 in 1999.............................. 189 2,600 4,384
Prepaid and other current assets................. 139 96 305
------- -------- --------
Total current assets........................ 4,228 7,344 20,602
------- -------- --------
Property and equipment, net........................ 482 720 1,125
Deposits and other assets.......................... -- 189 252
------- -------- --------
Total assets................................ $ 4,710 $ 8,253 $ 21,979
======= ======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................. $ 220 $ 386 $ 831
Accrued liabilities.............................. 196 823 1,139
Deferred revenue................................. 11 1,402 2,347
Current portion of long term debt................ 53 149 1,101
------- -------- --------
Total current liabilities................... 480 2,760 5,418
------- -------- --------
Long term debt, net of current portion............. 128 240 2,299
------- -------- --------
Commitments (Note 4)
Mandatorily redeemable convertible preferred stock,
Series A, B, C and D, $0.001 par value:
Authorized: 11,600,000 shares; issued and
outstanding: 6,690,476 shares at December 31,
1997, 8,891,554 shares at December 31, 1998
and 10,615,293 shares at September 30, 1999
and no pro forma shares....................... 10,200 18,982 35,392
------- -------- --------
(Liquidation value: $35,391,638 as of
September 30, 1999)
Stockholders' equity (deficit):
Common stock, $0.001 par value:
Authorized: 25,000,000 shares; issued and
outstanding: 3,420,625, 4,133,751 and
4,782,426 at December 31, 1997 and 1998 and
September 30, 1999 and 15,397,719 pro forma
shares........................................ -- 1 1 $ 12
Additional paid-in capital......................... 8 2,328 10,911 46,292
Deferred stock-based compensation.................. -- (1,604) (8,321) (8,321)
Accumulated deficit................................ (6,106) (14,454) (23,721) (23,721)
------- -------- -------- --------
Total stockholders' equity (deficit)........ (6,098) (13,729) (21,130) $ 14,262
------- -------- -------- ========
Total liabilities, mandatorily redeemable
convertible preferred stock and
stockholders' deficit.................... $ 4,710 $ 8,253 $ 21,979
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 70
ONDISPLAY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 14,
1996
(DATE OF YEAR ENDED NINE MONTHS ENDED
INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------ -------------------------
1996 1997 1998 1998 1999
------------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
License revenues................... $ -- $ 265 $ 2,229 $ 1,568 $ 4,018
Service revenues................... -- -- 1,114 652 2,550
---------- ---------- ----------- ---------- -----------
Total revenues.............. -- 265 3,343 2,220 6,568
Cost of license revenues........... -- -- 2 1 5
Cost of service revenues........... -- -- 1,618 954 2,622
---------- ---------- ----------- ---------- -----------
Total Cost of revenues... -- -- 1,620 955 2,627
---------- ---------- ----------- ---------- -----------
Gross profit....................... -- 265 1,723 1,265 3,941
Operating expenses:
Sales and marketing.............. 42 2,810 5,747 4,125 6,931
Research and development......... 393 1,986 2,636 2,003 2,825
General and administrative....... 182 1,158 1,201 685 1,891
Amortization of deferred
stock-based compensation...... -- -- 618 376 1,551
---------- ---------- ----------- ---------- -----------
Total operating expenses.... 617 5,954 10,202 7,189 13,198
---------- ---------- ----------- ---------- -----------
Loss from operations............... (617) (5,689) (8,479) (5,924) (9,257)
Interest income and other.......... 46 173 174 115 235
Interest expense................... (1) (18) (43) (32) (245)
---------- ---------- ----------- ---------- -----------
Net loss........................... $ (572) $ (5,534) $ (8,348) $ (5,841) $ (9,267)
========== ========== =========== ========== ===========
Net loss per share -- basic and
diluted.......................... $ (0.17) $ (1.62) $ (2.34) $ (1.66) $ (2.34)
========== ========== =========== ========== ===========
Shares used in per share
calculation -- basic and
diluted.......................... 3,400,000 3,410,313 3,572,353 3,517,022 3,966,598
========== ========== =========== ========== ===========
Pro forma net loss per
share -- basic and diluted
(unaudited)...................... $ (0.75) $ (0.70)
----------- -----------
Shares used in pro forma net loss
per share calculation -- basic
and diluted (unaudited).......... 11,174,494 13,182,268
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 71
ONDISPLAY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED TOTAL
------------------ PAID-IN STOCK-BASED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT DEFICIT
--------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Changes in the period from August 14, 1996
(date of inception) to December 31, 1996:
Issuance of common stock in exchange for
services rendered.............................. 3,400,000 $-- $ 8 $ -- $ -- $ 8
Net loss....................................... -- -- -- -- (572) (572)
--------- -- ------- ------- -------- --------
BALANCES, DECEMBER 31, 1996.................... 3,400,000 -- 8 -- (572) (564)
Issuance of common stock in exchange for
services rendered............................ 20,000 -- -- -- -- --
Issuance of common stock in connection with
option exercises............................. 625 -- -- -- -- --
Net loss....................................... -- -- -- -- (5,534) (5,534)
--------- -- ------- ------- -------- --------
BALANCES, DECEMBER 31, 1997.................... 3,420,625 -- 8 -- (6,106) (6,098)
Issuance of common stock in connection with
options exercised............................ 754,520 1 106 -- -- 107
Repurchase of unvested common stock............ (41,394) -- (8) -- -- (8)
Deferred compensation related to stock options
granted...................................... -- -- 2,222 (2,222) -- --
Amortization of deferred stock-based
compensation................................. -- -- -- 618 -- 618
Net loss....................................... -- -- -- -- (8,348) (8,348)
--------- -- ------- ------- -------- --------
BALANCES, DECEMBER 31, 1998.................... 4,133,751 1 2,328 (1,604) (14,454) (13,729)
Issuance of common stock in connection with
options exercised............................ 713,979 -- 216 -- -- 216
Repurchase of unvested common stock............ (71,554) -- (15) -- -- (15)
Issuance of common stock in connection with
services rendered............................ 6,250 -- 38 -- -- 38
Amortization of discount related to warrants
issued in connection with long term loan..... -- -- 76 -- -- 76
Deferred compensation related to stock options
granted...................................... -- -- 8,268 (8,268) -- --
Amortization of deferred stock-based
compensation................................. -- -- -- 1,551 -- 1,551
Net loss....................................... -- -- -- -- (9,267) (9,267)
--------- -- ------- ------- -------- --------
BALANCES, SEPTEMBER 30, 1999................... 4,782,426 $1 $10,911 $(8,321) $(23,721) $(21,130)
========= == ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 72
ONDISPLAY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 14,
1996
(DATE OF YEAR ENDED NINE MONTHS ENDED
INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ----------------- -------------------------
1996 1997 1998 1998 1999
------------- ------- ------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (572) $(5,534) $(8,348) $(5,841) $(9,267)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 8 123 306 216 354
Loss (gain) from sale of property and equipment......... (4) -- 9 -- --
Provision for doubtful accounts......................... -- -- 250 -- 333
Amortization of deferred stock compensation............. -- -- 618 376 1,551
Amortization of discount related to warrants issued in
connection with long term loan........................ -- -- -- -- 76
Issuance of common stock in connection with services
rendered.............................................. 8 -- -- -- 38
Change in operating assets and liabilities
Trade accounts receivable............................. (2) (187) (2,661) (565) (2,117)
Prepaid and other current assets...................... (46) (96) 43 (86) (209)
Accounts payable...................................... 87 125 166 221 445
Accrued liabilities................................... 33 163 627 286 316
Deferred revenue...................................... -- 11 1,391 314 945
Other long term assets................................ -- -- (189) -- (63)
------ ------- ------- ------- -------
Net cash used in operating activities................. (488) (5,395) (7,788) (5,079) (7,598)
------ ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (133) (428) (219) (205) (363)
Proceeds from sales of property and equipment............. 7 -- 3 -- --
------ ------- ------- ------- -------
Net cash used in investing activities................. (126) (428) (216) (205) (363)
------ ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales and lease back of property and
equipment............................................... -- 200 -- -- --
Proceeds from issuance of Series A preferred stock........ 3,400 100 -- -- --
Proceeds from issuance of common stock.................... -- -- 107 87 216
Proceeds from issuance of Series B preferred stock........ -- 6,700 25 25 --
Principal payments under capital lease obligations........ (35) (28) (129) (41) (101)
Proceeds from borrowings under long term loan received.... -- -- -- -- 3,000
Repayment of long term loan............................... -- -- -- -- (284)
Proceeds from issuance of Series C preferred stock........ -- -- 8,757 8,587 --
Proceeds from issuance of Series D preferred stock........ -- -- -- -- 16,410
Repurchases of unvested common stock...................... -- -- (8) -- (15)
------ ------- ------- ------- -------
Net cash provided by financing activities............. 3,365 6,972 8,752 8,658 19,226
------ ------- ------- ------- -------
Net increase in cash and cash equivalents................... 2,751 1,149 748 3,374 11,265
Cash and cash equivalents at beginning of period............ -- 2,751 3,900 3,900 4,648
------ ------- ------- ------- -------
Cash and cash equivalents at end of period.................. $2,751 $ 3,900 $ 4,648 $ 7,274 $15,913
====== ======= ======= ======= =======
NONCASH INVESTING AND FINANCING ACTIVITY:
Property and equipment acquired under capital lease
obligations............................................. $ 4 $ 196 $ 337 $ 249 $ 396
====== ======= ======= ======= =======
Property and equipment financed under notes payable....... $ 52 $ -- $ -- $ -- $ --
====== ======= ======= ======= =======
Deferred stock-based compensation......................... $ -- $ -- $ 2,222 $ 1,539 $ 8,268
====== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 73
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
NOTE 1. FORMATION AND BUSINESS OF THE COMPANY:
OnDisplay, Inc. (the "Company") was incorporated under the laws of the
state of Delaware in August 1996 to develop and market applications for powering
e-business portals and e-marketplaces in both business-to-business and
business-to-consumer e-commerce. The Company's product suite provides an open,
scalable, adaptable solution to enable the rapid aggregation, exchange,
integration, personalization and syndication of e-business information and
services from a broad range of partners, suppliers and customers. Through the
use of the Internet, customers are able to link information systems with
business allies without modification to existing applications or to migrate
rapidly from their existing systems to new enterprise applications. The Company
has determined that it operates in a single business segment and does not have
any separately reportable business segments as of December 31, 1998.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements for the nine month period ended
September 30, 1998, together with the related notes, are unaudited but include
all adjustments, consisting only of normal recurring adjustments which, in the
opinion of management, are necessary for a fair presentation, in all material
respects, of the operating results and cash flows for the period presented.
MANAGEMENT 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 periods. These estimates include levels of allowances for accounts
receivable, valuation of deferred tax assets and value of the Company's capital
stock. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all investments purchased with an original or
remaining maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash and cash equivalents in accounts with two
major financial institutions in the United States. The Company has not
experienced any losses on its deposits of cash and cash equivalents.
The Company performs ongoing credit evaluations of its customers, and
collateral is not required. The Company records an allowance for doubtful
accounts for credit losses at the end of each period based on an analysis of
individual aged accounts receivable balances. As a result of this analysis, the
Company believes that its allowance for doubtful accounts is adequate but not
excessive at December 31, 1997 and 1998 and September 30, 1999.
At December 31, 1997, two customers accounted for 35% and 55% of accounts
receivable and at December 31, 1998 two different customers accounted for 24%
and 12% of accounts receivable. No customer accounted for more than 10% of
accounts receivable at September 30, 1999.
F-7
<PAGE> 74
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
The Company derives most of its license service and support revenues from
one suite of products. The following table sets forth customers comprising 10%
or more of the revenue for each of the periods reported:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------ --------------
CUSTOMER 1997 1998 1998 1999
- -------------------------- ---- ---- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
A 37% -- -- --
B 30% -- -- --
C 21% -- -- --
D -- 13% 17% --
E -- 11% -- --
F -- -- -- 14%
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of some of the Company's financial instruments,
including cash, cash equivalents, trade accounts receivable, accounts payable
and accrued liabilities approximate fair value due to their short maturities.
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of its long-term debt approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful life of the related assets of
three years. Leasehold improvements and leased assets are amortized on a
straight line basis over the lesser of their estimated useful life or the lease
term. Gains and losses from the disposal of property and equipment are taken
into income in the year of disposition. Repairs and maintenance costs are
expensed as incurred.
REVENUE RECOGNITION
Revenue consists of revenue earned under software license agreements,
service agreements, and maintenance agreements. Revenue from software license
agreements is recognized upon shipment or upon notification to the customer of
the downloadable software location, provided that a signed contract exists, the
fee is fixed and determinable and collection of the resulting receivable is
probable and, if applicable, acceptance criteria are met. In cases where a fee
is due to a referring party under the Company's referral agreements, such fees
are recorded as sales and marketing expenses when the accompanying sales are
recorded.
For contracts with multiple obligations (e.g., deliverable and
undeliverable products, maintenance, installation and other services), revenue
is allocated to each component of the contract based on objective evidence of
its fair value, which is specific to the Company, or for products not being sold
separately, the price established by management. The Company recognizes revenue
allocated to undelivered products when the criteria for product revenue set
forth above are met. The Company recognizes revenue from maintenance fees,
including amounts allocated from product revenues for ongoing customer support
and product updates ratably over the period of the maintenance contract.
Payments for maintenance fees are generally made in advance and are
non-refundable. For revenue allocated to consulting services, such as
installation and training and for such services sold separately, the Company
recognizes revenues as the related services are performed.
F-8
<PAGE> 75
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
Deferred revenue consists of payments received prior to delivery of
licenses, fulfillment of acceptance criteria, or performance of services.
COST OF REVENUES
Cost of license revenues includes costs associated with the electronic
transmission of software and royalties for third party embedded software which
were not material. Cost of service revenue includes salaries and related
expenses for the service organization and cost of third parties contracted to
provide services to customers.
RESEARCH AND DEVELOPMENT EXPENDITURES
Expenditures for research and development are charged to expense as
incurred. Under Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" some software development costs are capitalized after technological
feasibility has been established. Development costs incurred in the period
between achievement of technological feasibility, which the Company defines as
the establishment of a working model, until the general availability of such
software to customers, has been short and software development costs qualifying
for capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs to date.
STOCK-BASED COMPENSATION
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company accounts for employee stock options under Accounting Principles Board
Opinion ("APB") No. 25 and follows the disclosure-only provisions of SFAS 123.
Under APB No. 25, compensation expense is based on the difference, if any, on
the date of the grant, between the estimated fair value of the Company's stock
and the exercise price of options to purchase that stock.
INCOME TAXES
Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss available to
common stockholders by the weighted average number of vested common shares
outstanding for the period. Diluted net loss per share is computed giving effect
to all dilutive potential common stock, including options, warrants and
preferred stock. Options, warrants, non vested common stock and preferred stock
were not included in the computation of diluted net loss per share in the
periods reported because the effect would be antidilutive.
F-9
<PAGE> 76
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
Antidilutive securities not included in net loss per share calculation for
the periods:
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 14, 1996 YEAR ENDED NINE MONTHS ENDED
(DATE OF DECEMBER 31, SEPTEMBER 30,
INCEPTION) TO ---------------------- -----------------------
DECEMBER 31, 1996 1997 1998 1998 1999
----------------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Non vested common stock..... -- -- 148,792 91,401 469,942
Common stock options........ 77,430 65,531 562,450 944,592 1,125,957
Warrants.................... -- -- -- -- 3,906
Convertible Preferred
Stock..................... 3,400,000 4,787,698 7,602,141 7,207,130 8,987,317
--------- --------- --------- --------- ----------
3,477,430 4,853,229 8,313,383 8,243,123 10,587,122
========= ========= ========= ========= ==========
</TABLE>
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended December 31, 1998 and the
nine months ended September 30, 1999 is computed using the weighted average
number of common shares outstanding, including the pro forma effects of the
automatic conversion of the Company's Series A, Series B, Series C and Series D
mandatorily redeemable preferred stock into shares of the Company's common stock
as contemplated upon the closing of the Company's initial public offering (See
Note 12 -- Subsequent Events) as if such conversion occurred on January 1, 1998,
or at the date of original issuance, if later. The resulting pro forma
adjustment results in an increase in the weighted average shares used to compute
basic and diluted net loss per share of 7,602,141 shares for the year ended
December 31, 1998. Pro forma common equivalent shares, composed of unvested
restricted common stock and incremental common shares issuable upon the exercise
of stock options and warrants, are not included in pro forma diluted net loss
per share because they would be anti-dilutive.
PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
As contemplated upon the closing of the Company's initial public offering,
the outstanding shares of Series A, Series B, Series C and Series D mandatorily
redeemable preferred stock will convert into 10,615,293 shares of common stock.
The pro forma effects of these transactions are unaudited and have been
reflected in the accompanying pro forma balance sheet at September 30, 1999 (see
Note 12 -- Subsequent Events).
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. The Company has no comprehensive income
components other than its net loss.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Software for Internal Use,"
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP No. 98-1 is effective for financial
F-10
<PAGE> 77
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
statements for fiscal years beginning after December 15, 1998. The adoption of
this SOP did not have any significant effect on the Company's financial
statements.
In April 1998, the Accounting Standards Executive Committee released
Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities."
SOP No. 98-5 is effective for fiscal years beginning after December 15, 1998 and
requires companies to expense all costs incurred or unamortized in connection
with start-up activities. The adoption of this SOP did not have any significant
effect on the Company's results of operations as the Company had expensed such
start-up costs in prior years.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities and will be adopted
in the year 2000. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. The Company is in process of evaluating the impact of this pronouncement.
In December 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-9, modification of SOP 97-2, "Software Revenue
Recognition," with Respect to Certain Transactions. SOP 98-9 will be effective
for transactions that are entered into in fiscal years beginning after March 15,
1999. Retroactive application is prohibited. The Company is in process of
evaluating the impact of this pronouncement.
NOTE 3. BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
PROPERTY AND EQUIPMENT (IN THOUSANDS) 1997 1998 1999
------------------------------------- ----- ------ -------------
<S> <C> <C> <C>
Computer hardware.................................. $ 463 $ 869 $1,173
Computer software.................................. 82 177 322
Furniture and fixtures............................. 68 93 338
Leasehold improvements............................. -- 13 78
----- ------ ------
613 1,152 1,911
Less accumulated depreciation and amortization..... (131) (432) (786)
----- ------ ------
$ 482 $ 720 $1,125
===== ====== ======
</TABLE>
Included in property and equipment at December 31, 1997 and 1998 and
September 30, 1999 is approximately $200,000, $537,000 and $851,000 of computer
equipment purchased under capital leases. Accumulated amortization of assets
acquired under capital leases is approximately $28,000, $241,000 and $404,000 at
December 31, 1997 and 1998 and September 30, 1999.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1997 1998 1999
ACCRUED LIABILITIES (IN THOUSANDS) ------------ ------------ -------------
<S> <C> <C> <C>
Accrued commissions........................ $ 16 $275 $ 247
Accrued professional fees.................. -- 132 80
Accrued vacation........................... 94 190 256
Accrued bonuses............................ 67 226 311
Other...................................... 19 -- 245
---- ---- ------
$196 $823 $1,139
==== ==== ======
</TABLE>
F-11
<PAGE> 78
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
NOTE 4. COMMITMENTS:
OPERATING LEASES
The Company leases various facilities under operating leases expiring
through 2002. Under these leases, the Company is responsible for maintenance and
insurance.
The minimum lease payments, net of sublease income, required under these
operating leases as of December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 466
2000........................................................ 392
2001........................................................ 315
2002........................................................ 184
------
$1,357
======
</TABLE>
Rent expense, net of sublease income, for the years ended December 31, 1997
and 1998 and the nine months ended September 30, 1999, was approximately
$186,000, $270,000 and $413,000.
CAPITAL LEASE OBLIGATIONS
In June 1997, the Company entered into a capital lease agreement which was
amended March 16, 1998 under which the Company had $550,000 available to acquire
equipment. As of December 31, 1998, the Company had drawn a total of
approximately $537,000 under this line. Borrowings under this agreement are
collateralized by the assets purchased under this equipment facility and are
included in the capital lease obligations at December 31, 1998. In February
1999, the Company entered into another financing agreement under which the
Company has $1,350,000 available to purchase equipment. The draw down period
under this agreement expires on August 19, 2000.
Future minimum lease payments under the capital lease agreements as of
December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 184
2000........................................................ 182
2001........................................................ 82
---------
Total minimum lease payments................................ 448
Less amount representing interest........................... (59)
---------
Present value of minimum lease payments..................... 389
Less current portion........................................ (149)
---------
$ 240
=========
</TABLE>
F-12
<PAGE> 79
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
NOTE 5. LONG TERM DEBT:
Long term debt consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1997 1998 1999
-------- --------- -------------
<S> <C> <C> <C>
Long term loan.................................. $ -- $ -- $ 2,716
Capital lease obligations (see Note 4).......... 181 389 684
-------- --------- -----------
181 389 3,400
Less current portion............................ (53) (149) (1,101)
-------- --------- -----------
$ 128 $ 240 $ 2,299
======== ========= ===========
</TABLE>
In February 1999 the Company entered into a loan agreement which allows for
borrowings of $3,000,000 bearing interest at 12.5% per annum. The Company
borrowed the full amount in May 1999 and is required to make monthly payments of
principal and interest of approximately $100,000 in 36 installments commencing
June 1, 1999 through May 1, 2002. Long-term debt is collateralized by
substantially all of the Company's assets. Dividends declared by the Company are
contingent on the approval of the lender under this loan agreement.
Annual maturities under the loan as of September 30, 1999 are as follows
(in thousands):
<TABLE>
<S> <C>
FISCAL YEAR ENDING DECEMBER 31,
1999........................................................ $ 217
2000...................................................... 943
2001...................................................... 1,068
2002...................................................... 488
----------
Total.................................................. $ 2,716
==========
</TABLE>
NOTE 6. 401(k) SAVINGS PLAN:
In February 1997, the Company established a 401(k) Savings Plan (the
"Plan") that covers substantially all employees. Under the Plan, employees are
permitted to contribute a portion of gross compensation not to exceed standard
limitations provided by the Internal Revenue Service. The Company maintains the
right to match employee contributions, but for the years ended December 31, 1997
and 1998 and for the nine months ended September 30, 1999, no Company matching
contributions were made.
NOTE 7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
As of December 31, 1998 the convertible preferred stock comprises:
<TABLE>
<CAPTION>
NUMBER
NUMBER OF SHARES ANNUAL LIQUIDATION
OF SHARES ISSUED AND DIVIDEND VALUE
AUTHORIZED OUTSTANDING PER SHARE PER SHARE
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Series A............................. 3,500,000 3,500,000 $0.08 $1.00
Series B............................. 3,500,000 3,202,381 $0.17 $2.10
Series C............................. 2,500,000 2,189,173 $0.32 $4.00
Series D............................. 2,100,000 1,723,739 $0.76 $9.52
---------- ----------
11,600,000 10,615,293
========== ==========
</TABLE>
F-13
<PAGE> 80
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
DIVIDENDS
The holders of Series A, Series B, Series C and Series D preferred stock
are entitled to receive the above annual dividends, when and if declared by the
Board of Directors. After payment of any required dividends to the Series A,
Series B, Series C and Series D stockholders, declared dividends shall be
distributed among all holders of common stock and all holders of Series A,
Series B, Series C and Series D preferred stock in proportion to the number of
shares of common stock which would be held by each such holder if all shares of
Series A, Series B, Series C and Series D preferred stock were converted to
common stock. Dividends declared by the Company are contingent on approval by
the lender of the long-term loan.
LIQUIDATION
In the event of any liquidation, dissolution, or winding up of the Company,
either voluntary or involuntary, the holders of Series A, Series B, Series C and
Series D preferred stock are entitled to receive, prior and in preference to any
distribution of any of the assets of the Company to the holders of common stock
by reason of their ownership, an amount equal to the sum of $1.00, $2.10, $4.00
and $9.52 for each outstanding share of Series A, Series B, Series C and Series
D preferred stock, (as adjusted for any stock dividends, combinations or splits)
plus any declared but unpaid dividends on such shares. If upon the occurrence of
such event, the assets distributed among the holders of preferred stock are
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then the entire assets of the Company legally available
for distribution are to be distributed first ratably among the holders of the
preferred stock in proportion to the aggregate liquidation preference of the
shares of preferred stock then held by them.
After payment has been made to the holders of preferred stock, any
remaining assets and funds are to be distributed pro rata among the holders of
the preferred stock and the common stock on a per share basis, treating all
shares of preferred stock convertible into shares of common stock as if
converted; provided, however, that after the receipt by each share of preferred
stock of distributions equal to two times the original purchase price for the
preferred stock, then all remaining assets shall be distributed equally among
the holders of the common stock on a per-share basis.
CONVERSION
Each share of preferred stock, at the option of the holder thereof, shall
be convertible into such number of fully paid and nonassessable shares of common
stock which results from dividing the issuance price per share by the conversion
price per share in effect for the shares of preferred stock at the time of
conversion. The issuance price per share and initial conversion price per share
of Series A, B, Series C and Series D preferred stock are $1.00, $2.10, $4.00
and $9.52. The number of shares of common stock into which a share of a series
of preferred stock is convertible is referred to as the conversion rate of such
series. The initial conversion prices of Series A, B, C and D preferred stock
may be adjusted under circumstances described in the Company's Restated Articles
of Incorporation. At December 31, 1998 and September 30, 1999 the conversion
ratio was one to one.
Conversion is automatic at the then effective conversion price of such
series immediately prior to the closing of a qualified initial public offering
at an aggregate offering price to the public of not less than 20 million
provided that the Series A, B and C preferred stock shall not be converted
without the majority approval of such series, and the Series D preferred stock
shall not be converted without the approval by more than 2/3 of the holders of
Series D preferred stock.
F-14
<PAGE> 81
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
VOTING
The holders of Series A, Series B, Series C and Series D preferred stock
are entitled to voting rights equal to the number of shares of common stock into
which each share of preferred stock could be converted at the record date for a
vote or consent of stockholders, except as otherwise required by law, and have
voting rights and powers equal to the voting rights and powers of the shares of
common stock.
REDEMPTION
Preferred stock shall be redeemable at the option of the holders of a
majority of the outstanding shares of preferred stock at any time after
September 30, 2001 if the Company has not completed a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
common stock for the account of the Corporation with an aggregate offering price
to the public of not less than $20,000,000 defined hereafter as a "Qualified
IPO." Such redemption right may be exercised by giving at least 120 day notice
prior to the date of commencement of the redemption. After receipt of such
notice of a redemption, the Company shall redeem all of the outstanding shares
of preferred stock in three equal annual installments on the last day of each
fiscal year (commencing with the first fiscal year ending after the 120 day
notice period). The redemption price of the preferred stock shall be the
original purchase price per share (as adjusted for any stock dividends,
combinations or splits) plus any accrued but unpaid dividends. Any redemption of
only a part of the outstanding preferred stock by the Company shall be pro rata
as among all holders of preferred stock in proportion to the aggregate
redemption price to be paid to such holders.
NOTE 8. STOCK OPTION AND STOCK PURCHASE PLANS:
STOCK OPTION PLAN
The Company adopted the 1996 Stock Plan (the "Plan") under which 1,700,000
shares of common stock were reserved for issuance to employees, directors and
consultants of the Company. The number of shares reserved for issuance under the
Plan was increased by 450,000, 400,000 and 925,000 in 1997, 1998 and 1999. The
Plan expires in 2006, or if earlier, upon approval of the Board of Directors.
Under the Plan, incentive options to purchase the Company's common stock
may be granted to employees at prices not lower than the fair market value per
share on the date of grant, as determined by the Board of Directors.
Nonstatutory options may be granted to key employees, including directors and
consultants, at prices not lower than 85% of the fair market value, and 110% for
qualified incentive stock options in some cases, at the date of grant, as
determined by the Board of Directors. The Board also has the authority to set
the term of the options no longer than ten years from date of grant and no more
than five years in some instances. Options granted generally vest over four
years. Holders of options granted under the Plan may exercise their options
prior to complete vesting of shares, contingent on the Company's right of
repurchase, such that, in the event of a termination of the optionee's
employment or consulting relationship, any unvested shares may be repurchased at
a price per share equal to the original exercise price per share for the option.
Unexercised vested options expire three months after termination of employment
with the Company. Shares repurchased by the Company were none and 41,394 in 1997
and 1998.
At December 31, 1997 and 1998 and September 30, 1999 the Company's
repurchase rights applied to none, 377,732 and 721,375 shares of common stock
outstanding.
F-15
<PAGE> 82
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
Activity under the Plan is set forth below:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
NUMBER OF OPTIONS AVERAGE
OF SHARES ISSUED AND EXERCISE AGGREGATE
AUTHORIZED OUTSTANDING PRICE PRICE
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Balances, January 1, 1997...................... 933,000 767,000 $0.10 $ 76,700
Shares reserved................................ 450,000 -- --
Options granted................................ (1,080,000) 1,080,000 $0.12 131,540
Options exercised.............................. -- (625) $0.10 (62)
Options cancelled.............................. 243,625 (243,625) $0.10 (24,363)
---------- --------- ----------
Balances, December 31, 1997.................... 546,625 1,602,750 $0.11 183,815
Shares reserved................................ 400,000 -- --
Options granted................................ (781,750) 781,750 $0.27 213,948
Options exercised.............................. -- (754,520) $0.14 (107,366)
Options repurchased............................ 41,394 -- -- --
Options cancelled.............................. 263,792 (263,792) $0.17 (45,575)
---------- --------- ----------
Balances, December 31, 1998.................... 470,061 1,366,188 $0.18 244,822
Shares reserved................................ 925,000 -- -- --
Options granted................................ (1,670,250) 1,670,250 $2.79 4,655,350
Options exercised.............................. -- (713,979) $0.30 (216,272)
Options repurchased............................ 71,554 -- --
Options cancelled.............................. 222,469 (222,469) $0.23 (51,358)
---------- --------- ----------
Balances, September 30, 1999................... 18,834 2,099,990 $2.21 $4,632,542
========== ========= ==========
</TABLE>
For financial reporting purposes, the Company has determined that the
estimated value of common stock determined in anticipation of this offering was
in excess of the exercise price, which was deemed to be the fair market value as
of the date of grant for 781,750 options issued in 1998 and 1,670,250 options
issued in the nine month period ended September 30, 1999. In connection with the
grants of such options, the Company has recognized deferred compensation of
approximately $2,222,000 in 1998 and $8,268,000 during the nine month period
ended September 30, 1999. Deferred stock-based compensation will be amortized
over the vesting period which is generally 48 months from the date of grant;
approximately $618,000 was expensed in the year ended December 31, 1998 and
$1,551,000 in the nine month period ended September 30, 1999. Future
amortization based on options granted through September 30, 1999 is expected to
be $1,181,000 for the three months ended December 31, 1999, and $3,866,000,
$2,007,000, $974,000 and $293,000 in the years 2000, 2001, 2002 and 2003.
The options outstanding and exercisable by exercise price at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS CURRENTLY
- ----------------------------------------------- EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.10 766,438 7.8 years 0.10 381,707 $0.10
$0.21 342,750 8.2 years 0.21 3,327 $0.21
$0.40 257,000 9.5 years 0.40 -- --
--------- -------
1,366,188 385,034
========= =======
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Had compensation cost for the Plan
F-16
<PAGE> 83
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
been determined based on the fair value at grant date for all awards consistent
with the provisions of SFAS No. 123, the impact on the Company's financial
statements would be (in thousands) as follows:
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 14, 1996 YEAR ENDED DECEMBER 31,
TO ------------------------
DECEMBER 31, 1996 1997 1998
----------------- --------- ---------
<S> <C> <C> <C>
Net loss:
As reported............................................. $ (572) $(5,534) $(8,348)
Pro forma............................................. $ (572) $(5,542) $(8,364)
Basic and diluted net loss per share:
As reported........................................... $(0.17) $ (1.62) $ (2.34)
Pro forma............................................. $(0.17) $ (1.62) $ (2.34)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted average assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate................................. 5.85% 6.31% 5.0%
Expected life........................................... 5 years 5 years 5 years
Expected dividends...................................... $ -- $ -- $ --
</TABLE>
The weighted average per share fair value of common stock options granted
during 1996, 1997 and 1998 were $0.04, $0.10 and $0.27.
EMPLOYEE STOCK PURCHASE PLAN
In September 1999, the Company adopted an employee stock purchase plan (the
"Purchase Plan"), which will become effective upon the closing of the initial
public offering. 1,500,000 shares of common stock have been reserved for
issuance under the Purchase Plan, open to an annual increase, none of which have
been issued as of September 30, 1999.
NOTE 9. WARRANTS:
As part of a long-term borrowing agreement entered into in February 1999,
the Company is committed to issue warrants to purchase an aggregate of 85,537
shares of Series C preferred stock at an exercise price of $6.05 per share. The
warrants are exercisable immediately upon grant and expire in January 2009.
The Company valued the warrant using the Black-Scholes method. The fair
value of $535,000 will be amortized to interest expense over the term of the
long-term loan.
NOTE 10. INCOME TAXES:
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $11,800,000 and $12,300,000 for Federal and California purposes,
respectively, available to reduce future taxable income, if any. These
carryforwards expire through 2011 and 2004 for Federal and California purposes,
respectively, if not utilized beforehand.
At December 31, 1998, the Company had research and development credit
carryforwards of approximately $372,000 and $176,000 for Federal and California
income tax purposes, respectively. The research and development credit
carryforwards expire beginning in the year 2004.
F-17
<PAGE> 84
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in some situations where changes occur in the stock
ownership of a company. In the event the Company has had a change in ownership,
utilization of the carryforwards could be restricted.
Temporary differences which gave rise to significant portions of deferred
tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Net operating losses........................................ $ 2,312 $ 4,761
Research and development credits............................ 272 548
Depreciation and amortization............................... (3) (10)
Other....................................................... 47 467
------- -------
2,628 5,766
Valuation allowance......................................... (2,628) (5,766)
------- -------
$ -- $ --
======= =======
</TABLE>
Due to uncertainty of realizing the benefits of the deferred tax assets,
the Company has provided a valuation allowance against the net deferred tax
assets.
The difference between the Company's effective income tax rate and the
federal statutory rate is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 14, 1996 YEAR ENDED NINE MONTHS ENDED
(DATE OF INCEPTION) DECEMBER 31, SEPTEMBER 30,
TO ----------------- ---------------------
DECEMBER 31, 1996 1997 1998 1998 1999
------------------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statutory tax benefit............... (194) (1,882) (2,838) (1,986) (3,151)
Permanent
differences -- non-deductible
expenses............................ 1 79 364 273 693
State taxes, net of federal tax
benefit........................... (33) (327) (510) (356) (565)
Research and development
experimentation credit............ -- (273) (276) (207) (238)
Change in valuation allowance....... 226 2,402 3,138 2,276 3,621
Other............................... -- 1 122 -- (360)
------ ------- ------- ------- -------
Net tax provision................... $ -- $ -- $ -- $ -- $ --
====== ======= ======= ======= =======
</TABLE>
NOTE 11. UNAUDITED PRO FORMA LOSS PER SHARE AND PRO FORMA STOCKHOLDERS' EQUITY
(DEFICIT):
Pro forma basic net loss per share has been computed as described in Note 2
and also gives effect to common equivalent shares from preferred stock that will
convert upon the closing of the Company's initial public offering (using the
as-if-converted-method).
F-18
<PAGE> 85
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
A reconciliation of the numerator and denominator used in the calculation
of pro forma basic and diluted net loss per share follow:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
PRO FORMA NET LOSS PER SHARE, BASIC AND DILUTED:
Net loss.................................................... $(8,348,000) $(9,267,000)
----------- -----------
Shares used in computing net loss per share, basic and
diluted................................................ 3,572,353 3,966,598
Adjustment to reflect the effect of the assumed conversion
of mandatorily redeemable convertible preferred
stock.................................................. 7,602,141 8,987,317
Shares used in computing pro forma net loss per share,
basic and diluted...................................... 11,174,494 12,953,915
----------- -----------
Pro forma net loss per share, basic and diluted........... $ (0.75) $ (0.72)
=========== ===========
</TABLE>
If the offering contemplated by this Prospectus is consummated as
contemplated, all of the convertible preferred stock outstanding as of the
closing date will be converted into an aggregate of approximately 10,615,293
shares of common stock based on the shares of mandatorily redeemable convertible
preferred stock outstanding at September 30, 1999. Unaudited pro forma
stockholders' equity at September 30, 1999, as adjusted for the conversion of
preferred stock, is disclosed on the balance sheet.
NOTE 12. SUBSEQUENT EVENT (UNAUDITED):
INITIAL PUBLIC OFFERING
In September 1999, the Company's Board of Directors authorized the Company
to file a registration statement with the Securities and Exchange Commission for
the purpose of an initial public offering of the Company's common stock. Upon
the completion of this offering, if requirements set forth in its Certificate of
Incorporation are met, the Company's preferred stock will be converted into
common stock, and all outstanding shares of preferred stock will be cancelled
and retired. Upon the conversion of the preferred stock, all rights to accrued
and unpaid dividends will be waived.
STOCK OPTION GRANTS
Subsequent to September 30, 1999, we issued options to purchase
approximately 1.5 million shares of common stock at exercise prices of $6.50 and
$8.00 per share. As a result, we will record deferred stock-based compensation
of approximately $23 million in the fourth quarter of 1999. This compensation
will be amortized over the four-year vesting period of the options. Future
amortization based on options granted through December 15, 1999 is expected to
be $2.1 million for the three months ended December 31, 1999, and $15.4 million
in 2000, $8.0 million in 2001, $4.2 million in 2002 and $1.6 million in 2003.
F-19
<PAGE> 86
LOGO
3,500,000 SHARES
COMMON STOCK
---------------------------------------------
PROSPECTUS
---------------------------------------------
ROBERTSON STEPHENS
DEUTSCHE BANC ALEX. BROWN
SG COWEN
UNTIL JANUARY 11, 2000, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 87
LOGO
3,500,000 SHARES
COMMON STOCK
OnDisplay, Inc. is offering 3,500,000 shares of its common stock. This is
our initial public offering, and no public market currently exists for our
shares. We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "ONDS".
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public Offering Price....................................... $28.00 $98,000,000
Underwriting Discounts and Commissions...................... $ 1.96 $ 6,860,000
Proceeds to OnDisplay, Inc.................................. $26.04 $91,140,000
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
OnDisplay has granted the underwriters a 30-day option to purchase up to an
additional 525,000 shares of its common stock to cover over-allotments.
------------------------
ROBERTSON STEPHENS INTERNATIONAL DEUTSCHE BANK
SG COWEN
The date of this prospectus is December 17, 1999
<PAGE> 88
UNDERWRITING AND PLAN OF DISTRIBUTION
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Deutsche Bank AG, London Alex. Brown and
Societe Generale S.A., have severally agreed with OnDisplay, under the terms and
conditions of the underwriting agreement, to purchase the number of shares of
common stock set forth opposite their respective names below. The underwriters
are committed to purchase and pay for all shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
FleetBoston Robertson Stephens Inc. and BancBoston Robertson
Stephens International Limited............................ 1,400,000
Deutsche Banc Alex. Brown and Deutsche Bank AG, London...... 1,225,000
S.G. Cowen Securities Corporation and Societe Generale
S.A....................................................... 875,000
---------
Total............................................. 3,500,000
=========
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus and to some dealers at a price less a
concession of not more than $1.16 per share, of which $0.10 may be reallowed to
other dealers. After the completion of this offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
reduction shall change the amount of proceeds to be received by us as set forth
on the cover page of this prospectus.
Over-Allotment Option
We have granted to the underwriters an option, exercisable during the
30-day period after the date of this prospectus, to purchase up to 525,000
additional shares of common stock at the same price per share as we will receive
for the 3,500,000 shares that the underwriters have agreed to purchase from us.
To the extent that the underwriters exercise the option, each of the
underwriters will have a firm commitment to purchase approximately the same
percentage of additional shares that the number of shares of common stock to be
purchased by it shown in the above table represents as a percentage of the total
number of shares offered hereby. If purchased, the additional shares will be
sold by the underwriters on the same terms as those on which the shares are
being sold.
Indemnity
The underwriting agreement contains covenants of indemnity among the
underwriters and OnDisplay against some civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements
Our stockholders and option holders have agreed, for a period of 180 days
after the date of this Prospectus, not to offer, pledge, sell, offer to sell,
contract to sell, sell any option or contract to purchase, purchase any option
to sell, grant any option right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any of the shares of common stock or any
securities convertible into, or exercisable or exchangeable for, common stock,
owned as of the date of this prospectus or later acquired directly by the
holders or with respect to which they have or later acquire the power of
disposition, without the prior written consent of the underwriters. However, the
underwriters may, in their sole discretion and at any time without notice,
release all or any portion of the securities covered by lock-up agreements.
There are no agreements between the underwriters and any of our shareholders
providing consent by the
61
<PAGE> 89
underwriters to the sale of shares prior to the expiration of the lock-up
period. In addition, we have agreed that during the lock-up period, we will not,
open to some exceptions, issue, sell, contract to sell, or otherwise dispose of,
any shares of common stock, any options or warrants to purchase any shares of
common stock or any securities convertible into, exercisable for or exchangeable
for shares of common stock other than OnDisplay's sale of shares in this
offering, the issuance of common stock upon the exercise of outstanding options
or warrants, and our issuance of option and shares under existing employee stock
option and stock purchase plans, without the prior written consent of the
underwriters.
BancBoston Capital Inc. has agreed, for a period of three years after the
date of this prospectus, not to offer, pledge, sell, offer to sell, contract to
sell, sell any option or contract to purchase, or otherwise transfer or dispose
of, directly or indirectly, 110,135 shares of OnDisplay capital stock held by
it. In addition, 99,949 shares of OnDisplay capital stock held by BancBoston
Capital Inc., will be similarly restricted from sale or transfer for a period of
four years after the date of this prospectus.
Future Sales
In addition, we have agreed that until 180 days after the date of this
prospectus, we will not, without prior written consent of FleetBoston Robertson
Stephens Inc., with some exceptions, offer, sell, contract to sell or otherwise
dispose of any shares of common stock, any options to purchase any share of
common stock or any securities convertible into, exercisable for or exchangeable
for shares of common stock other than our sale of shares in this offering, the
issuance of shares of common stock upon the exercise of outstanding options and
the grant of options to purchase shares of common stock under existing employee
stock option or stock purchase plans. See "Shares Eligible For Future Sale."
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Reserved Shares
At our request, some of the underwriters have reserved up to 5.0% of the
shares of common stock for sale at the initial public offering price to our
directors, officers or employees, and to persons who are otherwise associated
with us and our affiliates, and who have advised us of their desire to purchase
shares in the offering. In addition, the underwriters intend to reserve, at the
initial public offering price, up to 5% of the shares of common stock in this
offering for holders of our Series C preferred stock who have contractual rights
to participate in the offering. As a result, the number of shares of common
stock available for sale to the general public in the offering will be reduced
to the extent of sales of shares to any of the persons for whom they have been
reserved. Any shares not so purchased will be offered by the underwriters to the
general public on the same basis as all other shares of common stock in the
offering. We have agreed to indemnify those underwriters against some
liabilities and expenses, including liabilities under the Securities Act, in
connection with the sales of these reserved shares.
No Prior Public Market
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the common stock
offered hereby will be determined through negotiations between us and the
representatives. Among the factors to be considered in such negotiations are
prevailing market conditions, OnDisplay financial information, market valuations
of other companies that we and the representatives of the underwriters believe
to be comparable to us, estimates of our business potential, the present state
of our development and other factors deemed relevant.
Stabilization
The representatives have advised us that, pursuant to Regulation M under
the Exchange Act, some persons participating in the offering may engage in
transactions, including stabilizing bids, syndicate
62
<PAGE> 90
covering transactions or the imposition of penalty bids which may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the common stock on behalf of
the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "syndicate covering transaction" is the bid for or the purchase
of the common stock on behalf of the underwriters to reduce a short position
incurred by the underwriters in connection with the offering. A "penalty bid" is
an arrangement permitting the representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with the
offering if the common stock originally sold by the underwriter or syndicate
member is purchased by the representatives in a syndicate covering transaction
and has therefore not been effectively placed by the underwriter or syndicate
member. The representatives have advised us that these transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
OnDisplay by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Some legal matters in connection with this offering will be
passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto,
California. As of September 30, 1999, some members of Wilson Sonsini Goodrich &
Rosati, Professional Corporation, directly or through an investment partnership,
beneficially owned an aggregate of 43,155 shares of common stock of OnDisplay.
Mario M. Rosati, our Secretary, is a member of Wilson Sonsini Goodrich & Rosati.
EXPERTS
The financial statements of OnDisplay, Inc. at December 31, 1997, and 1998,
and September 30, 1999, and for each of the two years in the period ended
December 31, 1998, the nine months ended September 30, 1999 and for the period
from August 14, 1996 to December 31, 1996 included in this prospectus have been
so included in reliance on the report of PricewaterhouseCoopers, LLP,
independent accountants, given upon the authority of said firm as experts in
accounting and auditing.
63
<PAGE> 91
LOGO
3,500,000 SHARES
COMMON STOCK
---------------------------------------------
PROSPECTUS
---------------------------------------------
ROBERTSON STEPHENS INTERNATIONAL
DEUTSCHE BANK
SG COWEN
UNTIL JANUARY 11, 2000, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
