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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A-2
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-28455
ONDISPLAY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 68-0391052
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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12667 ALCOSTA BOULEVARD
SUITE 300
SAN RAMON, CALIFORNIA
(ADDRESS OF PRINCIPAL OFFICE)
94583
(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 480-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and, (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, on March 3, 2000 was approximately $982,138,000 based on the
closing sale price of the Common Stock as reported on the Nasdaq National
Market. Shares of Common Stock held by each executive officer, each director,
each affiliate of an executive officer or director and each person who owns 10%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates of the registrant. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
On March 3, 2000, the registrant had outstanding 20,175,507 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report 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 report 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.
The forward-looking statements in this report involve risks, uncertainties and
other factors which may cause our actual results, performance or achievements,
or industry results, to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking
statements. These risks, uncertainties and other factors are discussed in Item 7
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Risk Factors."
ITEM 1. 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, Alta VistaShopping.com, FASTXchange, Harbinger Corporation, Moore
North America Ltd., Order Trust, PurchasePro.com, SciQuest.com, TPN Register,
TRIP.com, Travelocity.com, Vignette Corporation 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.
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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.
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;
- Integration -- integrating e-business portals and e-marketplaces with
operational systems to synchronize and automate services and
transactions;
- Exchange -- enabling the exchange of business documents, including
purchase orders and invoices, for secure, real-time business process
automation;
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, integration, and exchange of
dynamic information and services.
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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 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
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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 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
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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 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
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or changes prices on its Web site, CenterStage eSyndicate would
automatically update dealers on the changes relevant to them.
- XML Connect(TM) -- Our XML Connect product is a free, downloadable
software product that allows e-commerce participants -- including
buyers, suppliers and e-marketplaces -- to establish secure, reliable,
guaranteed XML business document exchange, without the need to install
and manage closed or proprietary XML servers. With XML Connect acting as
a standardized XML transport, e-commerce participants can achieve secure
online document exchange quickly and easily.
A chemical supplies e-marketplace, for example, may use XML Connect to
quickly establish secure online document exchange with multiple suppliers
of laboratory equipment. The e-marketplace and each of its suppliers
would simply download the free XML Connect product, and then use XML
Connect to select and schedule documents for exchange.
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PRODUCT FEATURES BENEFITS
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CenterStage eContent - Rapid, automated content - Quick access to rich, relevant
aggregation from diverse content from the most appropriate
sources source available
- Access to structured and - Fresh content delivered automatically
unstructured data - Reduces deployment cost by not
- Easy-to-use interface requiring programmer support
- Expandable to many concurrent - Supports data from a variety of
users sources and multiple concurrent users
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CenterStage - Automated transaction exchange - Time and cost savings from
eBizXchange between market participants elimination of manual processes
- Support for "loose" - Exchange transactions with multiple
collaboration trading partners without requiring
- Support for "tight" changes to the partner's
collaboration models using infrastructure
industry standards - Rapidly facilitates business
- High-volume execution transactions using reliable, highly
environment secure connections
- Quick and reliable business exchange
processing
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CenterStage eIntegrate - Automated, rapid integration - Reduces manual integration processes
of e-business portal with - Support for high transaction volumes
internal applications with complex business process routing
- Expandable, real-time - Flexibility to route transactions and
execution messages while optimizing existing
- Integration with industry enterprise infrastructures
leading message brokers - Tight integration with leading
- PeopleSoft, Oracle and SAP enterprise resource planning
Integration Toolkits applications
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CenterStage eNotify - Customer request-based - Proactive, permission-based
notification interaction to engage and retain
- Event-based execution customers
- Delivery of alerts via email - Notifications based on fresh,
and pager relevant content
- Immediate, reliable notification
using customer's preferred medium
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CenterStage eSyndicate - Automated content publication - Customized information based on
based upon user subscriptions company specific requirements
- Content publishing in multiple - Flexibility to syndicate content to a
formats wide range of market participants
- Continuous routing of dynamic - Automatic support for fast-changing
data using industry standards information
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[INSERT E-BUSINESS PORTALS GRAPHIC]
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.
[INSERT E-MARKETPLACES GRAPHIC]
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;
- 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.
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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.
[INSERT 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 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 December 31,
1999 who have purchased CenterStage products for use in e-business portal or
e-marketplace applications.
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AltaVistaShopping.com Moore North America Ltd.
Aspect Development OrderTrust
Carlson Travel Group Orlando Sentinel Communications
Classified Ventures PurchasePro.com
Corporate Software and Technologies RMI.NET
Extricity Software, Inc. SciQuest.com
Fashionmall.com TPN Register
FASTXchange Travelocity.com
Harbinger Corporation TRIP.com
W.W. Grainger, Inc. Vignette Corporation
</TABLE>
No customer accounted for more than 10% of our revenues in the year ended
December 31, 1999. For the year ended December 31, 1998, one customer accounted
for 13% of total revenue and a second customer accounted for 11%.
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,
California and in offices located in the following metropolitan areas: Atlanta,
Boston, Denver, Farmington, Connecticut, Houston, Indianapolis, Kansas City,
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Los Angeles, Mt. Laurel, New Jersey, Vienna, Virginia and West Orange, New
Jersey. 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 are expanding 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 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 business to business integration market, we
encounter competition from webMethods and Vitria Technology, Inc. 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
10
<PAGE> 11
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 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 December 31, 1999, we employed 175 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.
OBERON ACQUISITION
OnDisplay acquired Oberon Software Incorporated on March 21, 2000. Oberon
offers software solutions designed to help its customers automate the
integration of multiple application software offerings. Oberon's solutions
enable the connection of customers and suppliers, the automation of internal
business processes required to work effectively with customers and suppliers,
and the ability to rapidly respond to changes in these relationships. This is
accomplished through Oberon's e-Enterprise suite of integration products, a
visual integration development environment and suite of intelligent applications
and technology adapters. Together, these simplify the integration of business
applications, and a growing network of third-party application and service
partners. Oberon's products and services are designed to support each state of
e-business integration; including intra-enterprise, business-to-business,
business-to-consumer and e-marketplace.
11
<PAGE> 12
EXECUTIVE OFFICERS
The following table sets forth information concerning our executive
officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark Pine.............................. 45 Chairman of the Board and Chief Executive Officer
Venkat Mohan........................... 47 President, Chief Operating Officer and Director
David Larson........................... 52 Vice President and Chief Financial Officer
Trung Dung............................. 33 Chief Technology Officer
Olivier Sermet......................... 35 Sr. Vice President, Worldwide Field Operations
Carol Richwood......................... 39 Vice President, Corporate Controller
Santi Pierini.......................... 37 Vice President, Global Product Management
Peter Buzzard.......................... 33 Vice President of Product Marketing
Janet Azevedo.......................... 40 Vice President of Human Resources
</TABLE>
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 and became a director in January 2000. 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.
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.
12
<PAGE> 13
Olivier Sermet has been our Sr. Vice President, Worldwide Field Operations
since February 2000 and served as our Vice President, Worldwide Field Operations
from 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.
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.
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.
ITEM 2. PROPERTIES
We sublease approximately 38,000 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, Farmington, Connecticut,
Houston, Indianapolis, Kansas City, Missouri, Los Angeles, Mt. Laurel and West
Orange, New Jersey and Vienna, Virginia. 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.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable. No matters were submitted to a vote of security holders
from December 17, 1999, the date upon which the registrant first became subject
to Section 13 or 15(d) of the Securities Exchange Act of 1934, through December
31, 1999, the end of our fourth quarter.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock has been traded on the Nasdaq National Market under the
symbol ONDS since our initial public offering on December 17, 1999. Prior to
that time there was no public market for our Common Stock. The following table
sets forth for the period indicated the high and low sale prices of the Common
Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1999
Fourth Quarter (from December 17)......................... $104.56 $77.00
</TABLE>
On March 3, 2000, there were approximately 175 holders of record of the Common
Stock.
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 our agreement with a secured lender, we may not
pay cash dividends without the lender's prior approval.
14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data for the three years in the period ended
December 31, 1999 and the balance sheet data at December 31, 1998 and 1999 are
derived from our Financial Statements that have been audited by
PricewaterhouseCoopers LLP, independent accountants, and are included commencing
at page 32 in this report. The statement of operations data for the period from
inception through December 31, 1996 and the balance sheet data at December 31,
1996 and 1997 are derived from our Financial Statements audited by
PricewaterhouseCoopers LLP, that are not included in this report.
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 14, 1996
(DATE OF INCEPTION) YEAR ENDED DECEMBER 31,
TO DECEMBER 31, ------------------------------------
1996 1997 1998 1999
---------------------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNT)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
License revenues.......................... $ -- $ 265 $ 2,229 $ 6,839
Service revenues.......................... -- -- 1,114 4,259
---------- ---------- ---------- ----------
Total revenues.................. -- 265 3,343 11,098
---------- ---------- ---------- ----------
Cost of license revenues.................. -- -- 2 7
Cost of service revenues.................. -- -- 1,618 4,251
---------- ---------- ---------- ----------
Total cost of revenues.......... -- 1,620 4,258
---------- ---------- ---------- ----------
Gross profit.............................. -- 265 1,723 6,840
Operating expenses:
Sales and marketing..................... 42 2,810 5,747 11,917
Research and development................ 393 1,986 2,636 4,714
General and administrative.............. 182 1,158 1,201 3,418
Amortization of deferred stock-based
compensation......................... -- -- 618 3,697
---------- ---------- ---------- ----------
Total operating expenses........ 617 5,954 10,202 23,746
---------- ---------- ---------- ----------
Loss from operations...................... (617) (5,689) (8,479) (16,906)
Interest income and other, net............ 46 173 174 532
Interest expense.......................... (1) (18) (43) (394)
---------- ---------- ---------- ----------
Net loss.................................. $ (572) $ (5,534) $ (8,348) $ (16,768)
========== ========== ========== ==========
Net loss per share -- basic and diluted... $ (0.17) $ (1.62) $ (2.34) $ (3.70)
========== ========== ========== ==========
Shares used in per share calculation --
basic and diluted....................... 3,400,000 3,410,313 3,572,353 4,533,282
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1996 1997 1998 1999
------ ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................ $2,751 $ 3,900 $ 4,648 $109,617
Working capital.......................................... 2,663 3,748 4,584 107,140
Total assets............................................. 2,986 4,710 8,253 117,102
Long-term debt, less current portion..................... 3 128 240 2,338
Mandatorily redeemable convertible preferred stock....... 3 10,200 18,982 --
Accumulated deficit...................................... (572) (6,106) (14,454) (31,222)
Total stockholders' equity (deficit)..................... 2,838 (6,098) (13,729) 106,697
</TABLE>
15
<PAGE> 16
ITEM 7. 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. Words such as "intend,"
"anticipate," "believe," "estimate," "plan" and "expect" and similar expressions
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 report. Our actual results and the timing of events could
differ materially from those anticipated in these forward-looking statements as
a result of various factors, including those set forth under "Risk Factors"
below and elsewhere in this report.
OVERVIEW
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, $3.3 million and $11.1 million for the years
ended December 31, 1997, 1998, and 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 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 175 as of December 31, 1999. As a result
of these expenses, we have incurred net losses in each fiscal quarter since
inception and, as of December 31, 1999, had an accumulated deficit of $31.2
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 December 31, 1999, we have recorded aggregate deferred stock-based
compensation of $33.5 million in connection with stock option grants. 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
16
<PAGE> 17
options granted through December 31, 1999, of $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.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as a percentage
of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1999 1998
------ ------
<S> <C> <C>
License revenues............................................ 61.6% 66.7%
Service revenues............................................ 38.4 33.3
------ ------
Total revenues.................................... 100.0 100.0
Cost of license revenues.................................... -- --
Cost of service revenues.................................... 38.4 48.5
Total cost of revenues............................ 38.4 48.5
------ ------
Gross profit................................................ 61.6 51.5
------ ------
Operating expenses:
Sales and marketing....................................... 107.4 171.9
Research and development.................................. 42.5 78.9
General and administrative................................ 30.8 35.9
Amortization of deferred stock-based compensation......... 33.3 18.5
------ ------
Total operating expenses.......................... 214.0 305.2
------ ------
Loss from operations........................................ (152.3) (253.6)
Interest income and other, net.............................. 1.2 3.9
------ ------
Net loss.................................................... (151.1)% (249.7)%
====== ======
</TABLE>
YEARS ENDED DECEMBER 31, 1998 AND 1999
Revenues
Our revenues are derived from software licenses and related services. Our
revenues were $3.3 million and $11.1 million for the years ended December 31,
1998 and 1999. In 1998 two customers accounted for more than 10.0% of our total
revenues. In 1999 no customer accounted for more than 10.0% of our total
revenues.
License Revenues. Our license revenues were $2.2 million and $6.8 million
for 1998 and 1999, and represented 66.7% and 61.6% of total revenues. 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 1998, license revenues were derived primarily from
enterprise resource planning markets.
Service Revenues. Our service revenues were $1.1 million and $4.3 million
for 1998 and 1999, and represented 33.3% and 38.4% of total revenues. The
increase in 1999 service revenues, compared to the 1998 service revenues, 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.
17
<PAGE> 18
Cost of Revenues
Our cost of revenues was $1.6 million, representing 48.5% of revenues, and
$4.3 million, representing 38.4% of revenues, for 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 and the
extent to which we utilize outside subcontractors to perform our service work.
Operating Expenses
Sales and Marketing. Our sales and marketing expenses increased 107.4% from
$5.7 million, representing 171.9% of revenues, in 1998 to $11.9 million,
representing 107.4% of revenues, in 1999. This dollar increase was primarily due
to an increase of approximately $3.7 million in compensation and recruiting
expenses, resulting principally from increased staffing and higher sales
commissions related to the period to period increase in revenues, and increased
spending of $1.5 million 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
78.8% from $2.6 million, representing 78.9% of revenues, in 1998 to $4.7
million, representing 42.5% of revenues, in 1999. This dollar increase was
primarily due to an increased personnel costs of approximately $900,000 as well
as increased costs related to contract development personnel of approximately
$823,000. 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
increased 184.6% from $1.2 million, representing 35.9% of revenues in 1998, to
$3.4 million, representing 30.8% of revenues, in 1999. This dollar increase was
primarily due to increased personnel costs of approximately $777,000, facilities
expansion costs of approximately $446,000, professional and outside service fees
of approximately $586,000, and other 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.
Amortization of Deferred Stock-Based Compensation. During 1998 and 1999, we
recorded deferred compensation of $2.2 million and $31.3 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 $618,000 and
$3.7 million for 1998 and 1999.
Loss From Operations. For 1999 we had an operating loss of $16.9 million
compared to an operating loss of $8.5 million for 1998. The increase in our
operating loss from the prior year period was the result of our operating
expenses increasing $13.5 million, the largest components of which were the $6.2
million increase in sales and marketing expenses and the $3.1 million increase
in amortization of stock-based compensation, while gross profit increased $5.1
million.
Interest Income and Other. Our Interest income and other was $174,000 and
$532,000 for 1998 and 1999. The increase in interest income was primarily the
result of higher average cash balances available for investment.
Interest Expense. Our interest expense was $43,000 and $394,000 for 1998
and 1999. Increased interest expense resulted from additional borrowings and
higher capital lease obligations during 1999; including the expense related to
the valuation of warrants granted to a lender as part of these borrowings.
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<PAGE> 19
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 $2.8 million and
$5.7 million, in 1997 and 1998. This increase was primarily due to our
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 $2.0 million in 1998.
Research and Development. Our research and development expenses were $2.0
million and $2.6 million, in 1997 and 1998. These increases were primarily due
to the increase in the number of software developers, 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 $644,000 in 1998.
General and Administrative. Our general and administrative expenses were
$1.2 million in both 1997 and 1998. These expenses remained flat from 1997 to
1998, as we directed our resources toward growing our sales and marketing and
our research and development organizations, rather than expanding our 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 $5.7 million and $8.5
million for 1997 and 1998. The year to year 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 $173,000 and
$174,000 in 1997 and 1998. Interest income and other was earned from the
investment of cash generated from the proceeds of preferred stock sales.
Interest Expense. Our interest expense was $18,000 and $43,000 in 1997 and
1998. Interest expense resulted from a financing agreement established in June
1997 to purchase equipment.
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<PAGE> 20
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited statement of operations data for
the eight quarters in the two year period ended December 31, 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, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
License revenues........................ $ 445 $ 431 $ 692 $ 661 $ 628 $ 1,309 $ 2,081 $ 2,821
Service revenues........................ 87 189 376 462 922 796 832 1,709
------- ------- ------- ------- ------- ------- ------- -------
Total revenues.................. 532 620 1,068 1,123 1,550 2,105 2,913 4,530
Cost of license revenue................. -- -- 1 1 1 2 2 2
Cost of service revenue................. 114 356 484 664 877 1,101 644 1,629
Total cost of revenue........... 114 356 485 665 878 1,103 646 1,631
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............................ 418 264 583 458 672 1,002 2,267 2,899
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing................... 1,092 1,296 1,737 1,622 1,600 2,493 2,838 4,986
Research and development.............. 673 682 648 633 738 900 1,187 1,889
General and administrative............ 194 167 324 516 564 686 641 1,527
Amortization of deferred stock-based
compensation........................ 77 117 182 242 322 447 782 2,146
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses........ 2,036 2,262 2,891 3,013 3,224 4,526 5,448 10,548
Loss from operations.................... (1,618) (1,998) (2,308) (2,555) (2,552) (3,524) (3,181) (7,649)
Interest income and other............... 39 17 59 59 85 -- 150 297
Interest expense........................ (10) (11) (11) (11) (12) (71) (162) (149)
------- ------- ------- ------- ------- ------- ------- -------
Net loss................................ $(1,589) $(1,992) $(2,260) $(2,507) $(2,479) $(3,595) $(3,193) $(7,501)
======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL REVENUES
License revenues........................ 83.6% 69.5% 64.8% 58.9% 40.5% 62.2% 71.4% 62.3%
Service revenues........................ 16.4 30.5 35.2 41.1 59.5 37.8 28.6 37.7
------- ------- ------- ------- ------- ------- ------- -------
Total revenues.................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of license revenue................. -- -- -- -- -- -- -- --
Cost of service revenue................. 21.4 57.4 45.5 59.2 56.6 52.4 22.2 36.0
Total cost of revenue........... 21.4 57.4 45.4 59.2 56.6 52.4 22.2 36.0
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............................ 78.6 42.6 54.6 40.8 43.4 47.6 77.8 64.0
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing................... 205.3 209.0 162.6 144.4 103.2 118.4 97.4 110.7
Research and development.............. 126.5 110.0 60.7 56.4 47.6 42.8 40.7 41.9
General and administrative............ 36.5 26.9 30.3 45.9 36.4 32.6 22.0 33.9
Amortization of deferred stock-based
compensation........................ 14.5 18.9 17.0 21.5 20.8 21.2 26.8 47.6
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses........ 382.7 364.8 270.7 268.3 208.0 215.0 187.0 234.2
Loss from operations.................... (304.1) (322.3) (216.1) (227.5) (164.6) (167.4) (109.2) (169.8)
Interest income and other............... 7.3 2.8 5.5 5.2 5.4 -- 5.2 6.6
Interest expense........................ (1.9) (1.8) (1.0) (0.9) (0.7) (3.4) (5.6) (3.3)
------- ------- ------- ------- ------- ------- ------- -------
Net loss................................ (298.7)% (321.3)% (211.6)% (223.2)% (159.9)% (170.8)% (109.6)% (166.5)%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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<PAGE> 21
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
At December 31, 1999 we had cash and equivalents of $109.6 million,
compared to $4.6 million at December 31, 1998, an increase of $105 million.
In December 1999, we completed our initial public offering of 3,500,000
shares of common stock and, concurrently, completed a private offering of
300,000 shares of common stock, generating total net proceeds of $97.6 million.
During 1999 we generated an additional $16.4 million from the sale of preferred
stock. We also raised $3.0 million from the issuance of long-term debt, and had
financed equipment purchases totaling approximately $729,000.
During 1999 $11.2 million in cash was used in operating activities
primarily to fund ongoing operations.
In 1999, our investing activities consisted of purchases of property and
equipment. Capital expenditures, including those under capital leases, totaled
$1.4 million.
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 we have working capital 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
21
<PAGE> 22
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 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 was charged
with the responsibility of formulating and implementing our year 2000 readiness
and applied a phased approach to analyzing our operations and relationships as
they relate to the year 2000 problem. The phases of our year 2000 program were
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;
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 all of the phases of our program and have not experienced
any year 2000 issues.
Cost of Product and Internal Systems Preparation
To date, the total cost of year 2000 preparation and remediation 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
22
<PAGE> 23
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 called 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. To date we have found none
of our suppliers to be year 2000 noncompliant. 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.
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.
RISK FACTORS
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 December 31, 1999, we had an accumulated deficit
of approximately $31.2 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 $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
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<PAGE> 24
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."
We may need to raise additional capital that may not be available on terms
favorable to us, if at all.
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.
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.
Our revenues depend on a limited number of product lines.
Most of our revenues in 1998 and 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.
Additionally, upon completion of this offering, we will offer an
Oberon-developed product, eEnterprise. 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;
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<PAGE> 25
- 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 fluctuations could have an
accentuated effect on our net operating results in some future periods. While
the average sales cycle for our CenterStage products has been approximately 75
days, our sales cycles could 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, rapidly evolving and susceptible to significant
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
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<PAGE> 26
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,
especially because experienced and skilled personnel are in short supply.
Competition for key personnel is intense, particularly in the San Francisco
Bay Area, where our headquarters are 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, M. Pine, and founder and Chief Technical
Officer, T. Dung. The loss of M. Pine's or T. 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.
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<PAGE> 27
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 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;
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- 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 damage 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 limitation 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.
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.
28
<PAGE> 29
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 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 jurisdiction whose laws
do not currently apply to our business, or the application of existing laws and
regulations to Internet and on-line businesses.
Our planned international operations may not be successful and will make us
susceptible to various risks.
We began our international operations in the fourth quarter of 1999 by
hiring our initial employees 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 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.
We could incur problems in connection with our pending acquisition of Oberon
Software.
We will need to overcome significant issues in order to realize any
benefits or synergies from the acquisition of Oberon Software, Inc., including
the timely, efficient and successful execution of a number of post-merger
events. Key events include:
- integrating the operations of the two companies;
- retaining and assimilating the key personnel of each company;
29
<PAGE> 30
- offering the existing products and services of each company to the other
company's customers
- retaining the existing customers and strategic partners of each company;
- developing new services that utilize the assets of both companies; and
- maintaining uniform standards, controls, procedures and policies.
The successful execution of these post-merger events will involve
considerable risk and may not be successful. These risks include:
- the potential disruption of the combined company's ongoing business and
distraction of its management;
- the difficulty of incorporating acquired technology and rights into the
combined company's products and services;
- unanticipated expenses related to technology integration;
- the impairment of relationships with employees and customers as a result
of any integration of new management personnel; and
- potential unknown liabilities associated with the acquired business.
We may not succeed in addressing these risks or any other problems
encountered in connection with the merger. If the benefits of the merger do not
exceed the costs associated with the merger, including any dilution to our
stockholders resulting from the issuance of shares in connection with the
merger, our financial results, including earnings per share, could be adversely
affected.
30
<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ONDISPLAY, INC.
Report of Independent Accountants........................... 32
Balance Sheet............................................... 33
Statement of Operations..................................... 34
Statement of Changes in Stockholders' Equity (Deficit)...... 35
Statement of Cash Flows..................................... 36
Notes to Financial Statements............................... 37
</TABLE>
31
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
OnDisplay, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, changes in stockholders' equity (deficit) and cash flows present
fairly, in all material respects, the financial position of OnDisplay, Inc. at
December 31, 1999 and 1998 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 16, 2000
32
<PAGE> 33
ONDISPLAY, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 4,648 $109,617
Accounts receivable, net of allowance for doubtful
accounts of $250 in 1998 and $728 in 1999.............. 2,600 4,419
Prepaid and other current assets.......................... 96 1,171
-------- --------
Total current assets.............................. 7,344 115,207
Property and equipment, net................................. 720 1,581
Deposits and other assets................................... 189 314
-------- --------
Total assets...................................... $ 8,253 $117,102
======== ========
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 386 $ 1,262
Accrued liabilities....................................... 823 2,989
Deferred revenue.......................................... 1,402 2,617
Current portion of long term debts........................ 149 1,199
-------- --------
Total current liabilities......................... 2,760 8,067
-------- --------
Long term debts, net of current portion..................... 240 2,338
-------- --------
Total liabilities................................. 3,000 10,405
-------- --------
Commitments (Note 4)
Preferred stock, Series A, B and C, $0.001 par value:
Authorized: 11,600,000 shares issued and outstanding:
8,891,554 shares at December 31, 1998 and none at
December 31, 1999...................................... 18,982 --
-------- --------
equity (deficit) Common stock, $0.001 par value:
Authorized: 25,000,000 shares; issued and outstanding:
4,133,751 and 19,647,303 at December 31, 1998 and
December 31, 1999...................................... 1 16
Additional paid-in capital.................................. 2,328 168,866
Deferred stock-based compensation........................... (1,604) (29,175)
Notes receivable from shareholders.......................... -- (1,788)
Accumulated deficit......................................... (14,454) (31,222)
-------- --------
Total stockholders' equity (deficit).............. 5,253 106,697
-------- --------
Total liabilities, preferred stock and
stockholders' equity (deficit).................. $ 8,253 $117,102
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE> 34
ONDISPLAY, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
License revenues....................................... $ 265 $ 2,229 $ 6,839
Service revenue........................................ -- 1,114 4,259
---------- ---------- ----------
Total revenue................................ 265 3,343 11,098
---------- ---------- ----------
Cost of license revenue................................ -- 2 7
Cost of service revenues............................... -- 1,618 4,251
---------- ---------- ----------
Total cost of revenues....................... -- 1,620 4,258
---------- ---------- ----------
Gross profit........................................... 265 1,723 6,840
Operating expenses:
Sales and marketing.................................. 2,810 5,747 11,917
Research and development............................. 1,986 2,636 4,714
General and administrative........................... 1,158 1,201 3,418
Amortization of deferred stock-based compensation.... -- 618 3,697
---------- ---------- ----------
Total operating expenses..................... 5,954 10,202 23,746
---------- ---------- ----------
Loss from operations................................... (5,689) (8,479) (16,906)
Interest income and other.............................. 173 174 532
Interest expense....................................... (18) (43) (394)
---------- ---------- ----------
Net loss............................................... $ (5,534) $ (8,348) $ (16,768)
========== ========== ==========
Net loss per share -- basic and diluted................ $ (1.62) $ (2.34) $ (3.70)
========== ========== ==========
Shares used in per share calculation -- basic and
diluted.............................................. 3,410,313 3,572,353 4,533,282
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE> 35
ONDISPLAY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES TOTAL
COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE STOCKHOLDERS'
------------------- PAID-IN STOCK-BASED FROM ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL COMPENSATION SHAREHOLDERS DEFICIT (DEFICIT)
---------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997..... 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)
Conversion of Mandatorily
Redeemable Convertible
Preferred Stock to common
stock....................... 10,615,293 11 35,381 -- -- -- 35,392
Issuance of common stock in
connection with initial
public offering, net of
issuance costs.............. 3,500,000 4 89,763 -- -- -- 89,767
Issuance of common stock in
connection with private
placement................... 300,000 -- 7,812 -- -- -- 7,812
Issuance of common stock in
connection with options
exercised................... 1,163,563 -- 2,170 -- (1,788) -- 382
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........................ -- -- 121 -- -- -- 121
Deferred compensation related
to stock options grants..... -- -- 31,268 (31,268) -- -- --
Amortization of deferred
stock-based compensation.... -- -- -- 3,697 -- -- 3,697
Net loss...................... -- -- -- -- -- (16,768) (16,768)
---------- --- -------- -------- ------- -------- --------
Balances, December 31,
1999........................ 19,647,303 $16 $168,866 $(29,175) $(1,788) $(31,222) $106,697
========== === ======== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE> 36
ONDISPLAY, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(5,534) $(8,348) $(16,768)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 123 306 518
Loss from sale of property and equipment............... -- 9 --
Provision for doubtful accounts........................ -- 250 478
Amortization of deferred stock-based compensation...... -- 618 3,697
Amortization of discount related to warrants issued in
connection with long term loan....................... -- -- 121
Issuance of common stock in connection with services
rendered............................................. -- -- 38
Change in operating assets and liabilities:
Accounts receivable.................................. (187) (2,661) (2,297)
Prepaid and other current assets..................... (96) 43 (1,075)
Accounts payable..................................... 125 166 876
Accrued liabilities.................................. 163 627 2,166
Deferred revenue..................................... 11 1,391 1,215
Other long term assets............................... -- (189) (125)
------- ------- --------
Net cash used in operating activities............. (5,395) (7,788) (11,156)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (428) (219) (650)
Proceeds from sales of property and equipment............. -- 3 --
------- ------- --------
Net cash used in investing activities............. (428) (216) (650)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales and lease back of property and
equipment.............................................. 200 -- --
Proceeds from issuance of preferred stock................. 6,800 8,782 16,410
Proceeds from issuance of common stock, net............... -- 107 97,961
Principal payment under capital lease obligations......... (28) (129) (78)
Proceeds from borrowings under long term loan received.... -- -- 3,000
Repayment of long term loan............................... -- -- (503)
Repurchases of unvested common stock...................... -- (8) (15)
------- ------- --------
Net cash provided by financing activities......... 6,972 8,752 116,775
------- ------- --------
Net increase in cash and cash equivalents................... 1,149 748 104,969
Cash and cash equivalents at beginning of year.............. 2,751 3,900 4,648
------- ------- --------
Cash and cash equivalents at end of year.................... $ 3,900 $ 4,648 $109,617
======= ======= ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under capital lease
obligations............................................ $ 196 $ 337 $ 729
======= ======= ========
Deferred stock-based compensation......................... $ -- $ 2,222 $ 31,268
======= ======= ========
Issuance of common stock for notes receivable from
shareholders........................................... $ -- $ -- $ 1,788
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE> 37
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS:
OnDisplay, Inc. (the "Company") develops and markets 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 align information systems of business
allies without modification to existing applications or to migrate rapidly from
their existing systems to new enterprise applications. The Company operates in a
single business segment and does not have any separately reportable business
segments as of December 31, 1999.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:
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 reserves 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 no
excessive at December 31, 1998 and 1999.
At December 31, 1999 two customers accounted for 21% and 15% of accounts
receivable and at December 31, 1998 two different customers accounted for 24%
and 12% of accounts receivable.
The Company derives most of its license service and support revenues from
one suite of products.
In 1997, these customers represented 21%, 30% and 37% of total revenues and
in 1998 two customers represented 11% and 13% of total revenues. No customer
accounted for more than 10% of total revenues in 1999.
Fair value of financial instruments
The carrying amounts of certain 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.
37
<PAGE> 38
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 installation and training and for such
services sold separately, the Company recognizes revenue as the related services
are performed.
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" certain 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 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
38
<PAGE> 39
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
disclosure-only provisions of SFAS 123. Under APB No. 25, compensation expense
is based on the difference, if any, on the date of 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 nonvested common stock,
options, warrants and preferred stock. Options, warrants, common stock subject
to repurchase 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.
Antidilutive securities not included in net loss per share calculation for
the periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
--------- ---------- ---------
<S> <C> <C> <C>
Common stock subject to repurchase............... -- 377,732 1,154,521
Common stock options............................. 1,602,750 1,366,188 2,986,985
Warrants......................................... -- -- 85,537
Preferred Stock.................................. 6,690,476 8,891,554 --
--------- ---------- ---------
8,293,226 10,635,474 4,227,043
========= ========== =========
</TABLE>
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 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 believes the adoption
of 98-9 will not have a material impact on its results of operation.
39
<PAGE> 40
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- BALANCE SHEET ACCOUNTS:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Property and equipment Computer hardware................... $ 869 $1,510
Computer software........................................ 177 428
Furniture and fixtures................................... 93 510
Leasehold improvements................................... 13 83
------ ------
1,152 2,531
Less: accumulated depreciation and amortization.......... (432) (950)
------ ------
$ 720 $1,581
====== ======
</TABLE>
Included in property and equipment at December 31, 1998 and 1999 is
approximately $537,000 and $1,266,000 of computer equipment purchased under
capital leases. Accumulated amortization of assets acquired under capital leases
is approximately $241,000 and $479,000 at December 31, 1998 and 1999.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1999
---- ------
(IN THOUSANDS)
<S> <C> <C>
Accrued liabilities Accrued commissions..................... $275 $1,413
Accrued professional fees................................. 132 565
Accrued vacation.......................................... 190 372
Accrued bonuses........................................... 226 372
Other..................................................... -- 267
---- ------
$823 $2,989
==== ======
</TABLE>
NOTE 4 -- COMMITMENTS:
Operating lease
The Company leases various facilities under operating leases expiring
through 2004. Under these leases, the Company is responsible for maintenance and
insurance.
The minimum lease payments, net of sublease income, required under these
operating leases are as of December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $1,012
2001........................................................ 884
2002........................................................ 559
2003........................................................ 114
2004........................................................ 99
------
$2,668
======
</TABLE>
Rent expense, net of sublease income, for the years ended December 31,
1999, 1998 and 1997 approximately was $740,000, $270,000 and $186,000,
respectively.
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, 1999, the Company had a total of approximately
$537,000 under this line. In February 1999, the Company entered into
40
<PAGE> 41
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
As of December 31, 1999, the Company had drawn a total of approximately
$729,000 under this line.
Future minimum lease payment under capital lease agreements as of December
31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $1,048
2001........................................................ 486
------
Total minimum lease payments................................ 1,534
Less amount representing interest........................... 494
------
Present value of minimum lease payments..................... 1,040
Less: current portion....................................... (784)
------
$ 256
======
</TABLE>
NOTE 5 -- LONG TERM DEBT:
Long term debt consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
----- -------
<S> <C> <C>
Long term loan............................................ $ -- $ 2,497
Capital lease obligations (see Note 4).................... 389 1,040
----- -------
389 3,537
Less: current portion..................................... (149) (1,199)
----- -------
$ 240 $ 2,338
===== =======
</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. The amounts borrowed are collateralized by
substantially all of the Company's assets. Dividends declared by the Company are
subject to the approval of the lender under this loan agreement.
Annual maturities under the loan as of December 31, 1999 are as follows (in
thousands):
<TABLE>
<S> <C>
FISCAL YEARS ENDING DECEMBER 31,
2000........................................................ $ 943
2001........................................................ 1,068
2002........................................................ 486
------
Total............................................. $2,497
======
</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, no Company matching contributions have
been made to date.
41
<PAGE> 42
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- PREFERRED STOCK:
As of December 31, 1998 the convertible preferred stock comprises:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SHARES ANNUAL LIQUIDATION
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>
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
42
<PAGE> 43
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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
Under the Company's 1996 Stock Plan as amended, 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 (110% for qualified incentive stock options in certain 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 certain 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, subject to 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,
41,394 and 71,554 in 1997, 1998 and 1999.
43
<PAGE> 44
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1997, 1998 and 1999, the Company's repurchase rights
applied to none, 377,732 and 1,154,521 shares of common stock outstanding.
Activity under the Plan is set forth below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
NUMBER OF SHARES AVERAGE
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.......................... 2,425,000 -- -- --
Options granted.......................... (3,152,650) 3,152,650 $4.88 15,395,700
Options exercised........................ -- (1,163,563) $1.86 (2,170,000)
Options repurchased...................... 71,554 -- -- --
Options cancelled........................ 368,260 (368,290) $0.46 (168,245)
---------- ---------- ----- -----------
Balances, December 31, 1999................ 182,225 2,986,985 $4.45 $13,302,277
========== ========== ===== ===========
</TABLE>
For financial reporting purposes, the Company has determined that the
estimated value of common stock was in excess of the exercise price, which was
considered to be the fair market value as of the date of grant for 781,750
options issued in 1998 and 3,152,650 options issued in 1999. In connection with
the grants of such options, the Company has recognized deferred compensation of
approximately $2,220,000 in 1998 and $31,268,000 in 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 $3,697,000 in the year ended December 31, 1999.
Future amortization based on options granted through December 31, 1999 is
expected to be $15,441,000 and $7,987,000, $4,166,000 and $1,581,000 in the
years 2000, 2001, 2002 and 2003.
44
<PAGE> 45
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Options outstanding and vested by exercise price at December 31, 1999 are
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS CURRENTLY
------------------------------------ VESTED
WEIGHTED ------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE VESTED PRICE
-------- ----------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.10................................. 482,500 6.86 $0.10 386,078 $0.10
$0.21................................. 49,000 8.18 $0.21 22,659 $0.21
$0.40................................. 254,250 9.02 $0.40 36,402 $0.40
$0.80................................. 123,835 9.43 $0.80 -- $0.80
$1.20................................. 51,000 9.55 $1.20 -- $1.20
$2.50................................. 314,500 9.69 $2.50 -- $2.50
$5.00................................. 163,000 9.72 $5.00 -- $5.00
$6.50................................. 812,400 9.82 $6.50 -- $6.50
$8.00................................. 736,500 9.95 $8.00 -- $8.00
--------- -------
2,986,985 445,139
========= =======
</TABLE>
At December 31, 1997 and 1998, 130,844 and 381,707 options at a weighted
average prices of $0.10 and $0.10 were vested.
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 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>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss:
As reported........................................ $(5,534) $(8,348) $(16,768)
Pro forma.......................................... $(5,542) $(8,364) $(17,039)
Basic and diluted net loss per share:
As reported........................................ $ (1.62) $ (2.34) $ (3.70)
Pro forma.......................................... $ (1.62) $ (2.34) $ (3.76)
</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>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate................................. 6.3% 5.0% 5.2%
Expected life........................................... 5 years 5 years 5 years
Expected dividends...................................... $ -- $ -- $ --
</TABLE>
The weighted average per share fair value of common stock options granted
during 1997, 1998 and 1999 were $0.10, $0.27 and $12.23.
Employee stock purchase plan
In September 1999, the Company adopted an employee stock purchase plan (the
"Purchase Plan"). 1,500,000 shares of common stock have been reserved for
issuance under the Purchase Plan (subject to an annual increase), none of which
had been issued at December 31, 1999.
45
<PAGE> 46
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- WARRANTS:
As part of a long-term borrowing agreement entered into in February 1999,
the Company issued a warrant to purchase an aggregate of 85,537 shares of common
stock at an exercise price of $6.05 per share. The warrant were exercisable upon
grant and expire in January 2009.
The Company valued the warrant using the Black-Scholes method. The fair
value of $535,000 is amortized to interest expense over the term of the
long-term loan.
NOTE 10 -- INCOME TAXES:
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $23,800,000 and $18,600,000 for Federal and California purposes,
respectively, available to reduce future taxable income, if any. These
carryforwards expire through 2019 and 2004 for Federal and California purposes,
respectively, if not utilized beforehand.
At December 31, 1999, the Company had research and development credit
carryforwards of approximately $479,000 and $302,000 for Federal and California
income tax purposes, respectively. The research and development credit
carryforwards expire beginning in the year 2011.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain 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,
-------------------
1998 1999
------- --------
<S> <C> <C>
Net operating losses.................................... $ 4,761 $ 9,181
Research and development credits........................ 548 678
Depreciation and amortization........................... (10) 9
Accrued liabilities..................................... 467 875
Other................................................... -- 1
------- --------
5,766 10,745
Less: valuation allowance............................... (5,766) (10,745)
------- --------
$ -- $ --
======= ========
</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.
46
<PAGE> 47
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The difference between the Company's effective income tax rate and the
federal statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Statutory tax benefit................................. $(1,882) $(2,838) $(5,701)
Permanent differences -- non-deductible expenses...... 79 364 33
State taxes, net of federal tax benefit............... (327) (510) (756)
Stock option compensation............................. -- -- 1,257
Research and development experimentation credit....... (273) (276) (266)
Change in valuation allowance......................... 2,402 3,138 4,979
Other................................................. 1 122 454
------- ------- -------
Net tax provision..................................... $ -- $ -- $ --
======= ======= =======
</TABLE>
NOTE 11 -- SUBSEQUENT EVENT:
The Company entered into a merger agreement with Oberon Software
Incorporated ("Oberon") on January 17, 2000. The Company expects the merger,
which will be accounted for under the purchase method, to be completed by March
31, 2000.
47
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following table sets forth certain information regarding the
Company's directors.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION AT ONDISPLAY SINCE
---- --- --------------------- -----
<S> <C> <C> <C>
Class I directors whose terms expire
at the 2000 annual meeting of
stockholders:
John Mandile...................... 39 Director 1996
Christopher Spray................. 44 Director 1996
Class II directors whose terms
expire at the 2001 annual meeting of
stockholders:
Timothy Barrows(1)................ 43 Director 1996
Promod Haque(1)(2)................ 52 Director 1997
Venkat Mohan...................... 47 President, Chief Operating Officer and
Director 1999
Class III directors whose terms
expire at the 2002 annual meeting of
stockholders:
Mark Pine......................... 45 Chairman, Chief Executive Officer and
Director 1996
Margaret Taylor(2)................ 49 Director 1999
Carmine Villani(2)................ 57 Director 1997
</TABLE>
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
There is no family relationship between any director or executive
officer of the Company.
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.
-48-
<PAGE> 49
Venkat Mohan became our President and Chief Operating Officer in
November 1999 and became a director in January 2000. 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 Chief Operating Officer 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.
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
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 & Chief Executive Officer of Vermeer Technologies, In., 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.
DIRECTOR COMPENSATION
Directors currently do not receive any cash compensation from OnDisplay
for their services as members of the Board, but are reimbursed for expenses in
connection with attendance at Board 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 January 1999, we granted Mr. Villani an
option to purchase 20,000 shares at a per share exercise price of $0.40. In
March 1999, we granted Ms. Taylor an option to
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<PAGE> 50
purchase 30,000 shares at a per share exercise price of $0.40. In December 1999,
we granted options to Mr. Barrows, Mr. Haque and Mr. Spray each to purchase
30,000 shares at a per share exercise price of $8.00.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Neither of the members of the compensation committee is currently or has
been, at any time since the formation of the Company, an officer or employee of
the Company. The two members of the compensation committee are general partners
of venture capital investment funds that participated in private stock
financings by the Company in 1999, as described in Item 13 "Certain
Relationships and Related Transactions -- Private Stock Financings." No
executive officer of the Company serves, or served in fiscal 1999, as a member
of the board of directors or compensation committee of any entity that has or
had one or more executive officers serving as a member of the Company's Board or
compensation committee.
EXECUTIVE OFFICERS
Information concerning the Company's executive officers is set forth
under the caption "Executive Officers" in Item 1 of this Report.
-50-
<PAGE> 51
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's executive officers and directors, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file reports of ownership and changes in ownership with
the Securities and Exchange Commission ("Commission") and the National
Association of Securities Dealers, Inc. Such persons are required to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on its
review of the copies of such forms received by it, or written representations
from certain reporting persons, the Company believes that during fiscal 1999 all
executive officers and directors of the Company complied with all applicable
filing requirements, except as follows. The automatic conversion of convertible
preferred stock into common stock occasioned by the closing of our initial
public offering required the filing of Forms 4 by holders of the convertible
preferred stock. These filings by the following persons were late: Atlas
Venture, Christopher Spray, John Mandile, Margaret Taylor, Matrix IV
Entrepreneurs Fund, L.P., and Matrix Partners IV, L.P. In addition, amended
Forms 3, disclosing beneficial ownership of OnDisplay equity securities, were
filed by Trung Dung and Oliver Sermet.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation of the chief executive
officer of the Company and the four other most highly compensated executive
officers during the year ended December 31, 1999. This Report refers to these
five executives as OnDisplay's "Named Executive Officers." Mr. Mohan joined the
Company in November, 1999. Mr. Deppe resigned as an executive officer in
February 2000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
NAME AND PRINCIPAL POSITION ANNUAL COMPENSATION SHARES
----------------------- UNDERLYING
SALARY ($) BONUS ($) OPTIONS (#)
---------- --------- ------------
<S> <C> <C> <C>
Mark Pine.......................................... 180,000 159,000 250,000
Chairman of the Board and Chief Executive Officer
Mark Deppe......................................... 163,750 75,375 50,000
Vice President, Software Development
Olivier Sermet..................................... 189,844 45,626 60,000
Vice President, Worldwide Field Operations
Santi Pierini...................................... 180,639 17,286 55,000
Vice President, Global Product Management
Venkat Mohan....................................... 25,852 165,312 350,000
President and Chief Operating Officer`
</TABLE>
Figures in the column captioned "salary" include sales commissions.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information relating to stock options
granted to each of OnDisplay's Named Executive Officers during the fiscal year
ended December 31, 1999. All of these options were granted under our 1996 stock
plan and have a term of 10 years, subject to earlier termination in the event
the optionee's services terminate. The exercise price of each option is equal to
the fair market value of the common stock on the date of grant, as determined by
the Board. Each option in the table was granted prior to
-51-
<PAGE> 52
our initial public offering on December 17, 1999. The options vest over a four
year period from the date of grant but may be exercised at any time in part or
in full. If the optionee exercises an option to purchase shares that are
unvested and the optionee's services to OnDisplay terminate before all the
purchased shares have vested, we have the right to repurchase at the original
exercise price the shares that remain unvested.
The potential realizable value in the table is calculated by assuming
that the price of our common stock increases from $28.00 per share at assumed
appreciation rates of 5% and 10%, compounded annually, over the 10-year term of
the option, and subtracting from that result the option exercise price. These
assumed appreciation rates comply with the rules of the Securities and Exchange
Commission and do not represent our prediction of the performance of our stock
price. The base of $28.00 per share was the initial offering price of OnDisplay
common stock in our public offering on December 17, 1999.
-52-
<PAGE> 53
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL OPTIONS RATES OF
SHARES GRANTED TO STOCK APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS DURING PER PRICE EXPIRATION ----------------------------
NAME GRANTED PERIOD SHARE DATE 5% 10%
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mark Pine .......... 250,000 7.93% $ 2.50 09/09/09 $10,384,203 $16,535,108
Mark Deppe ......... 50,000 1.59% $ 4.22 09/28/09 $ 1,936,756 $ 3,083,960
Olivier Sermet ..... 60,000 1.90% $ 3.45 09/28/09 $ 2,399,362 $ 3,820,583
Santi Pierini ...... 55,000 1.74% $ 7.17 12/13/09 $ 1,866,062 $ 2,971,391
Venkat Mohan ....... 350,000 11.10% $ 6.50 11/08/09 $12,257,432 $19,517,912
</TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND VALUES OF UNEXERCISED OPTIONS
AT FISCAL YEAR END
The following table sets forth for each of OnDisplay's Named Executive
Officers information relating to option exercises during the fiscal year ended
December 31, 1999 and the number and value of securities underlying vested and
unvested options they held at December 31, 1999. As discussed in the text above
the preceding table, all options are fully exercisable from the date of grant,
but the underlying shares vest over a four year period. Some of the shares
purchased by exercising options in fiscal 1999 have not vested. Although all the
option exercises occurred prior to our public offering on December 17, 1999, the
"Value Realized for Exercised Options" is based on $28.00 per share, the initial
public offering price. The "Value of Unexercised In-the-Money Options" at
December 31, 1999 is based on $90.875 per share, the closing market price on
December 31, 1999. In each case, the per share exercise price is subtracted and
the resulting amount is multiplied by the applicable number of shares.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES VALUE OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON REALIZED DECEMBER 31, 1999 DECEMBER 31, 1999
EXERCISE OF FOR EXERCISED ---------------------------- ----------------------------
NAME OPTIONS OPTIONS ($) VESTED UNVESTED VESTED UNVESTED
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mark Pine .......... 125,000 $ 3,187,500 -- 125,000 $ -- $11,046,850
Mark Deppe ......... -- $ -- 294,844 137,656 $26,764,441 $12,289,746
Olivier Sermet ..... 185,000 $ 5,176,000 -- 50,000 $ -- $ 4,340,750
Santi Pierini ...... 76,000 $ 2,118,250 -- 49,000 $ -- $ 4,060,875
Venkat Mohan ....... 100,000 $ 2,150,000 -- 250,000 $ -- $21,093,750
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Common Stock of the Company as of December 31, 1999, as
to (i) each person who is known by the Company to own beneficially more than 5%
of the outstanding shares of Common Stock, (ii) each director and nominee for
director of the Company, (iii) each of the executive officers named in the
Summary Compensation Table below and (iv) all directors and executive officers
of the Company as a group.
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<PAGE> 54
Unless otherwise indicated, the address for each stockholder in the
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 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.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED*
------------------------------------
BENEFICIAL OWNER NUMBER PERCENT
---------- ----------------------
<S> <C> <C>
Matrix Partners IV, L.P.(1)........................... 2,951,165 15.02%
Bay Colony Corporate Center
1000 Winter Street, Suite 4500
Waltham, MA 02154
Norwest Venture Partners VI, L.P...................... 2,594,181 13.20%
245 Lytton Avenue, Suite 250
Palo Alto, CA 94111
Atlas Venture Fund II, L.P............................ 2,390,784 12.17%
222 Berkeley Street
Boston, MA 02116
Amerindo Investment Advisors, Inc. And affiliates(2).. 1,664,963 8.47%
One Embarcadero, Suite 2300
San Francisco, CA 94111
Mark Pine(3).......................................... 1,585,275 8.07%
Trung Dung............................................ 987,175 5.02%
Venkat Mohan(4)....................................... 350,000 1.78%
Mark Deppe (5) ....................................... 496,250 2.53%
Olivier Sermet(6)..................................... 235,000 1.20%
Santi Pierini(7)...................................... 125,000 **
Timothy Barrows(8).................................... 2,981,165 15.17%
Promod Haque(9)....................................... 2,624,181 13.36%
John Mandile(10)...................................... 154,405 **
Christopher Spray(11)................................. 2,420,784 12.32%
Margaret Taylor....................................... 55,000 **
Carmine Villani....................................... 40,000 **
All directors and executive officers as a group (16
persons) 12,429,235 63.26%
</TABLE>
*Stock options held by the persons in the table are fully exercisable and are
therefore included in the table because the underlying shares are deemed to be
beneficially owned under the rules of the Securities and Exchange Commission.
However, some of the shares underlying options, as well as some shares that are
held by such persons as a result of option exercises, are not fully vested. See
"Executive Compensation -- Option Grants in Last Fiscal Year." Shares underlying
options are deemed to be outstanding for the purpose of computing the percentage
beneficially owned by the holder of the option, but are not deemed to be
outstanding for the purpose of computing any other person's beneficial ownership
percentage.
** Less than 1% of the outstanding shares of common stock.
(1) Includes 147,559 shares held by the Matrix IV Entrepreneurs Fund, L.P.
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<PAGE> 55
(2) Amerindo Investment Advisors Inc. and its affiliates, which manages the
accounts holding these shares, disclaims beneficial ownership of the
shares.
(3) Includes 246,000 shares beneficially held by trusts for the benefit of
M. Pine's minor children and other family members. Also includes 125,000
shares of common stock issuable upon the exercise of stock options.
(4) Includes 250,000 shares of common stock issuable upon the exercise of
stock options.
(5) Includes 50,000 shares of common stock issuable upon the exercise of
stock options.
(6) Includes 50,000 shares of common stock issuable upon the exercise of
stock options.
(7) Includes 49,000 shares of common stock issuable upon the exercise of
stock options.
(8) Includes shares held by Matrix Partners IV, L.P. and Matrix IV
Entrepreneurs Fund, L.P. T. 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. Also includes 30,000 shares of
common stock issuable upon the exercise of stock options.
(9) Includes shares held by Norwest Venture Partners VI, L.P. P. Haque, a
general partner of Norwest Venture Partners VI, L.P., disclaims
beneficial ownership of the shares held by Norwest Venture Partners VI,
L.P., except to the extent of his proportionate pecuniary interest
therein. Also includes 30,000 shares of common stock issuable upon the
exercise of stock options.
(10) Includes 42,500 shares of common stock issuable upon the exercise of
stock options.
(11) Includes shares held by Atlas Venture Fund II, L.P. C. 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. Also includes 30,000
shares of common stock issuable upon the exercise of stock options.
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<PAGE> 56
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PRIVATE STOCK FINANCINGS
In August 1999, OnDisplay sold to various investors 1,723,739 shares of
preferred stock at a purchase price of $9.52 per share. Each share of preferred
stock converted into one share of common stock in OnDisplay's initial public
offering in December 1999.
In December 1999, OnDisplay sold to various investors, in private
transactions occurring concurrently with the initial public offering, an
aggregate of 300,000 shares of common stock at a purchase price of $26.04, which
equaled the initial public offering price, less the underwriter discount. These
shares are "restricted" under Rule 144 and not currently freely tradable.
The following holders of more than 5% of our outstanding stock purchased
shares in these private offerings, which purchases may be attributed to the
directors of OnDisplay indicated in the table:
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- ------------
<S> <C> <C>
HOLDERS OF MORE THAN 5%:
Amerindo Investment Advisers, Inc. and affiliates(1) .... 52,521 26,783
Matrix Partners IV, L.P(2) .............................. 137,214 15,920
Atlas Venture Fund II, L.P. ............................. 52,521 --
Norwest Venture Partners VI, LP. ........................ 119,088 30,862
DIRECTORS:
Timothy Barrows (3) ..................................... 137,214 15,920
Christopher Spray (4) ................................... 52,521 --
Promod Haque (5) ........................................ 119,088 30,362
</TABLE>
(1) Amerindo Investment Advisors Inc. and its affiliates, which manages the
accounts holding these shares, disclaims beneficial ownership of the
shares.
(2) Includes shares purchased by the Matrix IV Entrepreneurs Fund, L.P.
(3) Consists of shares purchased 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 purchased by Matrix Partners IV, L.P
and Matrix IV Entrepreneurs Fund, L.P., except to the extent of his
proportionate pecuniary interest therein.
(4) Consists of shares purchased 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 purchased by Atlas Venture Fund II, L.P., except
to the extent of his proportionate pecuniary interest therein.
(5) Consists of 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 purchased by Norwest Venture Partners VI, LP,
except to the extent of his proportionate pecuniary interest therein.
-56-
<PAGE> 57
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 option held by
each of them:
<TABLE>
<CAPTION>
NAME AMOUNT NUMBER OF SHARES
---- ------ ----------------
<S> <C> <C>
Mark Pine...................... $ 312,500 125,000
Venkat Mohan................... $ 650,000 100,000
Trung Dung..................... $ 325,000 50,000
David Larson................... $ 500,000 100,000
</TABLE>
Each loan was made under a full-recourse promissory note secured by
pledge of the purchased shares. The notes will mature in June 2001 and bear
interest at 5.66% compounded semiannually and payable at maturity. Some of the
shares purchased have not vested. OnDisplay has the right to repurchase unvested
shares if the executive's employment terminates under some circumstances.
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<PAGE> 58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits
The following financial statements are filed as part of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors....................................... 32
Balance Sheet........................................................ 33
Statement of Operations.............................................. 34
Statement of Stockholder's Equity (Deficit).......................... 35
Statement of Cash Flows.............................................. 36
</TABLE>
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange commission are not required under the
related instructions or are inapplicable, and therefore have been omitted. See,
however, Exhibit 27.1 Financial Data Schedule.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<S> <C>
*3.1(b) Certificate of Incorporation
*4.1(b) Bylaws
*10.1(a) Third Restated Investor Rights Agreement dated August 2, 1999
*10.1(b) Amendment to Third Restated Investor Rights Agreement dated September 9, 1999
**10.1(c) Amendment to Third Restated Investor Rights Agreement dated December 14, 1999
**10.1(d) Amendment to Third Restated Investor Rights Agreement dated December 21, 1999
*10.2 1996 Stock Plan and forms of agreements thereunder
**10.2(a) Amended and Restated 1996 Stock Plan
*10.3 1999 Employee Stock Purchase Plan
*10.4 Form of Director and Executive Officer Indemnification Agreement
*10.5 Sublease between the registrant and Irwin Home Equity Corporation
dated December 2, 1998 for office space located at 12667 Alcosta
Boulevard, San Ramon, California
*10.6 Sublease between registrant and Knutson Mortgage Corporation
dated September 17, 1996 for office space located at 2682 Bishop
Drive, San Ramon, California
*10.7 Master Equipment Lease Agreement dated February 25, 1999 between
registrant and Comdisco, Inc.
*10.8 Senior Loan and Security Agreement dated June 2, 1997 between the
registrant and Phoenix Leasing, Inc.
**23.1 Consent of PricewaterhouseCoopers LLP, independent accountants
**24.1 Power of Attorney (page 56 of original filing)
**27.1 Financial Data Schedule
</TABLE>
* Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-1 (Reg. No. 333-26889) as declared
effective by the Commission on December 17, 1999.
** Filed with Original Form 10-K.
(b) Reports on Form 8-K. The Company did not file any reports on Form
8-K during the quarter ended December 31, 2000.
-58-
<PAGE> 59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ONDISPLAY, INC.
By: /s/ DAVID LARSON
------------------------------------------------
Vice President Finance, Chief Financial Officer
Date: May 3, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons in the
capacities indicated on May 3, 2000:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ MARK PINE*
- -----------------------------------
Mark Pine Chief Executive Officer and Chairman of
the Board
/s/ DAVID LARSON
- -----------------------------------
David Larson Vice President Finance, Chief Financial
Officer
/s/ CHRISTOPHER SPRAY*
- -----------------------------------
Christopher Spray Director
/s/ TIMOTHY BARROWS*
- -----------------------------------
Timothy Barrows Director
/s/ VENKAT MOHAN*
- -----------------------------------
Venkat Mohan Director
/s/ JOHN MANDILE*
- -----------------------------------
John Mandile Director
/s/ CARMINE VILLANI*
- -----------------------------------
Carmine Villani Director
/s/ PROMOD HAQUE*
- -----------------------------------
Promod Haque Director
/s/ MARGARET TAYLOR*
- -----------------------------------
Margaret Taylor Director
</TABLE>
By /s/ DAVID LARSON
--------------------------------
David Larson
Attorney in Fact
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