<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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)
<TABLE>
<S> <C>
DELAWARE 68-0391052
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
12667 ALCOSTA BOULEVARD
SUITE 300
SAN RAMON, CALIFORNIA 94583
(ADDRESS OF PRINCIPAL OFFICE) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 355-3200
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 [ ]
On April 18, 2000, the registrant had outstanding 22,135,979 shares of
Common Stock.
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<PAGE> 2
ONDISPLAY, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements................................ 3
Condensed Consolidated Balance Sheets at December
31, 1999 and March 31, 2000........................ 3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1999 and March 31,
2000............................................... 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1999 and March 31,
2000............................................... 5
Notes to the Condensed Consolidated Financial
Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................... 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 21
Item 6. Exhibits and Reports on Form 8-K.................... 22
SIGNATURES.................................................. 22
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ONDISPLAY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $109,617 $114,371
Short-term investments...................................... -- 10,977
Accounts receivables, net................................... 4,419 5,112
Prepaids and other current assets........................... 1,171 1,046
-------- --------
Total Current Assets.............................. 115,207 131,506
Property and equipment, net................................. 1,581 4,014
Intangible assets........................................... -- 189,247
Deposits and other assets................................... 314 523
-------- --------
Total Assets...................................... $117,102 $325,290
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 4,251 $ 8,127
Deferred revenue............................................ 2,617 7,768
Current portion of long-term debt........................... 1,199 2,382
-------- --------
Total Current Liabilities......................... 8,067 18,277
Long-term debt.............................................. 2,338 4,513
-------- --------
Total Liabilities................................. 10,405 22,790
STOCKHOLDERS' EQUITY
Common Stock................................................ 16 19
Additional paid-in capital.................................. 168,866 385,539
Deferred stock-based compensation........................... (29,175) (24,913)
Notes receivable from shareholders.......................... (1,788) (1,788)
Accumulated deficit......................................... (31,222) (56,357)
-------- --------
Total Stockholders' Equity........................ 106,697 302,500
-------- --------
Total Liabilities and Stockholders' Equity........ $117,102 $325,290
======== ========
</TABLE>
The accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
3
<PAGE> 4
ONDISPLAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 2000
------- --------
<S> <C> <C>
License revenues............................................ $ 628 $ 4,665
Service revenues............................................ 922 2,376
------- --------
Total revenues.................................... 1,550 7,041
Cost of license revenues.................................... 1 2
Cost of service revenues.................................... 877 2,393
------- --------
Total cost of revenues............................ 878 2,395
Gross profit................................................ 672 4,646
------- --------
Operating expenses:
Sales and marketing....................................... 1,600 7,349
Research and development.................................. 738 2,327
General and administrative................................ 564 1,904
Amortization of deferred stock-based compensation......... 322 4,262
Purchased in-process research and development............. -- 15,300
------- --------
Total operating expenses.......................... 3,224 31,142
------- --------
Loss from operations........................................ (2,552) (26,496)
Interest income and other................................... 85 1,507
Interest expense............................................ (12) (146)
------- --------
Net loss.................................................... $(2,479) $(25,135)
======= ========
Net loss per share -- basic and diluted..................... $ (0.59) $ (1.30)
======= ========
Shares used in per share calculation -- basic and diluted... 4,203 19,343
======= ========
</TABLE>
The accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
4
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ONDISPLAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 2000
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(2,479) $(25,135)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 100 208
Provision for doubtful accounts........................ -- 5
Amortization of deferred stock-based compensation...... 322 4,262
Amortization of discount related to warrants issued in
connection with long term loan........................ -- 45
Purchased in-process research and development.......... -- 15,300
Change in operating assets and liabilities:
Accounts receivable.................................. 1,052 (222)
Prepaid and other current assets..................... (109) 307
Accounts payable..................................... 3 (32)
Accrued liabilities.................................. (258) 295
Deferred revenue..................................... (405) 5,151
Other long term assets............................... (46) (198)
------- --------
Net cash used in operating activities............. (1,820) (14)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in a business combination................... -- 3,453
Acquisition of property and equipment..................... (235) (974)
Purchase of short-term investments........................ -- (10,977)
------- --------
Net cash used in investing activities............. (235) (8,498)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net............... 31 13,590
Principal payment under capital lease obligations......... (28) (99)
Repayment of long term loan............................... -- (225)
------- --------
Net cash provided by financing activities......... 3 13,266
------- --------
Net (decrease) increase in cash and cash equivalents........ (2,052) 4,754
Cash and cash equivalents at beginning of period............ 4,648 109,617
------- --------
Cash and cash equivalents at end of period.................. $ 2,596 $114,371
======= ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under capital lease
obligations............................................ $ -- $ 828
======= ========
Fair value of common stock issued and transaction costs
for acquisition of Oberon Software Inc................. $ -- $206,175
======= ========
</TABLE>
The accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
5
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ONDISPLAY, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
NOTE 1 -- GENERAL AND BASIS OF FINANCIAL STATEMENTS
OnDisplay, Inc. (the "Company") develops and markets software 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 use our solutions 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 March 31, 2000.
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and are presented in accordance with the rules and regulations of the
Securities and Exchange Commission applicable to interim financial information.
Accordingly, certain footnote disclosures have been condensed or omitted. In the
Company's opinion, the interim unaudited condensed consolidated financial
statements reflect all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the Company's financial
position as of December 31, 1999 and March 31, 2000, and its results of
operations and cash flows for the three months ended March 31, 1999 and 2000.
The results of operations for these periods are not necessarily indicative of
results that may be expected for the year ending December 31, 2000. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited financial statements and notes thereto contained in its
Form 10-K for the year ended December 31, 1999.
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.
NOTE 2 -- NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss 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 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
--------------
1999 2000
----- -----
<S> <C> <C>
Common stock subject to repurchase.......................... 420 820
Common stock options........................................ 645 3,108
Warrants.................................................... -- 85
Preferred Stock............................................. 8,883 --
</TABLE>
NOTE 3 -- COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for
6
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ONDISPLAY, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
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.
NOTE 4 -- RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133 was
effective for all fiscal quarters beginning with the quarter ending June 30,
1999. SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the Financial Accounting
Standards Board issued SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133"
("SFAS 137"). SFAS 137 deferred the effective date until the first fiscal
quarter ending June 30, 2000. The Company has not engaged in hedging activities
or invested in derivative instruments.
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-9 "Modification of SOP 97-2, "Software
Revenue Recognition" and the Company adopted the statement for all transactions
entered into in fiscal 2000. The adoption of this statement did not have a
material impact on the Company's operating results, financial position or cash
flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") and amended it in March 2000. The Company is required to adopt the
provisions of SAB 101 in its second fiscal quarter of 2000. While SAB 101 does
not supercede the software industry specific revenue recognition guidance, which
the Company believes it is in compliance with, the SEC Staff has recently
informally indicated its views related to SAB 101 which may change current
interpretations of software revenue recognition requirements. The Company
believes the adoption of SAB 101 will not have a material impact on the
Company's financial position and results of operations.
NOTE 5 -- BUSINESS COMBINATIONS
On March 31, 2000, the Company acquired 100 percent of the outstanding
stock and assumed all outstanding stock options of privately held Oberon
Software Inc. ("Oberon"), a leading provider of business process automation
software, in exchange for approximately 1,960,500 shares of the Company's common
stock. The total cost of the acquisition, including transaction costs, was
approximately $206,175,000.
The acquisition was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16. Accordingly, the results of
operations of Oberon will be included with those of the Company for periods
subsequent to the date of acquisition, and the acquired net assets were recorded
at their estimated fair values at the effective date of the acquisition. The
following table presents the allocation of the purchase price (in thousands):
<TABLE>
<S> <C>
In-process research and development......................... $ 15,300
Acquired technology......................................... 5,100
Excess of costs over fair value of net assets acquired...... 184,147
Net fair value of tangible assets acquired and liabilities
assumed................................................... 1,628
--------
$206,175
========
</TABLE>
In connection with the transaction, the Company incurred a charge of $15.3
million for the write-off of in-process research and development in the
consolidated statement of operations for the three months ended March 31, 2000.
The amounts allocated to acquired technology are being amortized over a
three-year period. The excess of cost over fair value of net assets acquired is
being amortized over a four-year period.
7
<PAGE> 8
ONDISPLAY, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
The pro forma combined results of operations of OnDisplay, Inc and Oberon
for the three months ended March 31, 1999 and 2000 after giving effect to
certain pro forma adjustments are as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 2000
-------- --------
<S> <C> <C>
Revenue................................................ $ 2,818 $ 8,240
Operating loss......................................... (30,975) (27,393)
Net loss............................................... (30,866) (26,783)
Basic net loss per share............................... (5.01) (1.26)
</TABLE>
The pro forma results are not necessarily indicative of the actual results
of operations that would have occurred had the acquisition of Oberon occurred on
January 1, 1999 or of future results.
NOTE 6 -- COMMON STOCK
In December 1999, the Company completed its initial public offering of
3,500,000 shares of common stock, in additional to a concurrent private
placement of 300,000 shares, and realized proceeds of $97.6 million. In January
2000, the underwriters exercised their overallotment option for 525,000 shares
resulting in additional proceeds of $13.6 million.
8
<PAGE> 9
ITEM 2. 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. The Company's actual results and the timing of certain
events may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a discrepancy include,
but are not limited to, those discussed in "Other Factors Affecting Operating
Results, Liquidity and Capital Resources" below, as well as Risk Factors
included in the Company's Annual Report on Form 10-K, as amended, initially
filed with the Securities and Exchange Commission ("SEC") on March 24, 2000.
OVERVIEW
Substantially all of our revenues since inception are 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, Europe and Singapore. 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 or 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.
We completed our acquisition of Oberon Software on March 31, 2000, the last
day of the quarter. The transaction was a stock-for-stock merger, accounted for
using the purchase method of accounting. In connection with the acquisition, we
allocated $189.2 million to acquired intangible assets and goodwill and recorded
a one-time charge of $15.3 million for purchased in-process research and
development. The acquired intangible assets and goodwill will be amortized over
from three to four years. Included in our future expenses will be amortization
of acquired intangible assets and goodwill of $35.8 million in 2000, $47.7
million in 2001 and 2002, $46.5 million in 2003 and $11.5 million in 2004.
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 65 as of December 31, 1998,
to 175 as of December 31, 1999, and to 297, including 90 as a result of our
acquisition of Oberon Software, as of March 31, 2000. As a result of these
expenses, we have incurred net losses in each fiscal quarter since inception
and, as of March 31, 2000, had an accumulated deficit of $56.4 million,
including a one time charge of $15.3 million for purchased in-process research
and development. 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
9
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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 March 31, 2000, 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 future expenses will be stock-based compensation as a result of
stock options granted through December 31, 1999, of $11.1 million in the
remaining nine months of 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 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>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 2000
------- -------
<S> <C> <C>
License revenues............................................ 40.5% 66.3%
Service revenues............................................ 59.5 33.7
------ ------
Total revenues.................................... 100.0 100.0
Cost of license revenues.................................... -- --
Cost of service revenues.................................... 56.6 34.0
------ ------
Total cost of revenues............................ 56.6 34.0
------ ------
Gross profit................................................ 43.4 66.0
------ ------
Operating expenses:
Sales and marketing....................................... 103.2 104.4
Research and development.................................. 47.6 33.1
General and administrative................................ 36.4 27.0
Amortization of deferred stock-based compensation......... 20.8 60.5
Purchased in-process research and development............. -- 217.3
------ ------
Total operating expenses.......................... 208.0 442.3
Loss from operations........................................ (164.6) (376.3)
Interest income and other................................... 5.5 21.4
Interest expense............................................ (0.8) (2.1)
------ ------
Net loss.................................................... (159.9)% (357.0)%
====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Revenues
Our revenues are derived from software licenses and related services. Our
revenues were $7.0 million for the three months ended March 31, 2000, $1.6
million for the year earlier quarter and $4.5 million in the fourth quarter of
1999.
License Revenues. Our license revenues were $4.7 million for the three
months ended March 31, 2000, $628,000 for the year earlier quarter and $2.8
million for the fourth quarter of 1999, and represented 66.3%, 40.5% and 62.3%,
respectively, of total revenues. These dollar increases reflected continued
market acceptance
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<PAGE> 11
of our CenterStage products in the e-commerce markets, and an increase in the
size and productivity of the sales force.
Service Revenues. Our service revenues were $2.4 million for the three
months ended March 31, 2000, $922,000 for the year earlier quarter and $1.7
million for the fourth quarter of 1999, and represented 33.7%, 59.5% and 37.7%,
respectively, of total revenues. These dollar increases were primarily due to
increases in our customer base and service contracts performed during these
periods. We expect that the proportion of our service revenues to total revenues
will fluctuate in the future, depending in part on our customers' breadth and
scope of implementation and the mix of products implemented.
Cost of Revenues
Our cost of revenues was $2.4 million for the three months ended March 31,
2000, $878,000 for the year earlier quarter and $1.6 million for the fourth
quarter of 1999, representing 34.0%, 56.6% and 36.0%, respectively, of total
revenues. These dollar increases were primarily due to increases 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,
exceeded service revenues in the three months ended March 31, 2000 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 to $7.3
million for the three months ended March 31, 2000 from $1.6 million for the year
earlier quarter and $5.0 million for the fourth quarter of 1999, representing
104.4%, 103.2% and 110.1%, respectively, of total revenues. The increase in
sales and marketing was primarily due to increased headcount, increased
commissions on higher sales, increased travel and expanded marketing programs.
Compared to the year earlier and preceding quarter, compensation and related
expenditures increased $3.4 million and $1.1 million, respectively, expenditures
for travel increased $716,000 and $547,000, respectively, and expenditures on
marketing programs increased $1.1 million and $384,000, respectively. We believe
sales and marketing will continue to increase in future periods as we increase
our sales force and expand our marketing programs.
Research and Development. Our research and development expenses increased
to $2.3 million for the three months ended March 31, 2000 from $738,000 for the
year earlier quarter and $1.9 million for the fourth quarter in 1999,
representing 33.1%, 47.6% and 41.7%, respectively, of total revenues. These
increases were substantially all the result of increased personnel costs. We
believe that research and development expenditures will increase substantially
in future periods due to the addition of the Oberon Software engineering group
and our continued development of additional products and enhancement of 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 to $1.9 million for the three months ended March 31, 2000 from
$564,000 for the year earlier quarter and $1.5 million for the fourth quarter of
1999, representing 27.0%, 36.4% and 33.7%, respectively, of total revenues. The
increase over the year earlier quarter was due to increased personnel costs of
$518,000, professional and outside services of $269,000 and an increase in our
allowance for doubtful accounts of $335,000. The increase over the preceding
quarter was due to increased professional and outside services costs of
$137,000, an increase in our allowance for doubtful accounts of $290,000 offset
by a decrease in personnel costs of $84,000 resulting from increased headcount
offset by certain non-recurring expenses incurred in the fourth quarter of 1999.
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. We have recorded
deferred compensation for the difference between the exercise price of certain
stock option grants and the deemed fair value of our common
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<PAGE> 12
stock at the time of such grants. We are amortizing this amount over the vesting
periods of the applicable options, resulting in amortization expense of $4.3
million for the three months ended March 31, 2000, $322,000 for the year earlier
quarter and $2.1 million for the fourth quarter of 1999.
Purchased In-Process Research and Development. In connection with our March
31, 2000 acquisition of Oberon Software, $15.3 million of the purchase price was
allocated to in-process research and development, for which technological
feasibility had not been achieved and which had no alternative future use. This
in-process research and development was written off to operating expense.
Loss From Operations. For the three months ended March 31, 2000 we had an
operating loss of $25.1 million compared to an operating loss of $2.5 million
for the year earlier quarter and $7.5 million for the fourth quarter of 1999.
The increase in our operating loss from the prior year periods was the result of
operating expenses increasing $27.9 million over the year earlier quarter and
$20.6 million over the preceding quarter. The largest components of the increase
were the one time charge in the three months ended March 31, 2000 of $15.3
million for purchased in-process research and development, the increase in sales
and marketing expenses of $5.7 million over the year earlier quarter and $2.4
million over the preceding quarter and the increase in amortization of
stock-based compensation of $3.9 million over the year earlier quarter and $2.1
million over the preceding quarter. The increase was offset in part by higher
gross profits which increased $4.0 million over the year earlier quarter and
$1.7 million over the preceding quarter.
Interest Income and Other. Our interest income and other was $1.5 million
for the three months ended March 31, 2000, $85,000 for the year earlier quarter
and $297,000 for the fourth quarter in 1999. The increases in interest income
were primarily the result of higher average cash balances available for
investment.
Interest Expense. Our interest expense was $146,000 for the three months
ended March 31, 2000, $12,000 for the year earlier quarter and $149,000 for the
fourth quarter of 1999. The increase in interest expense resulted from
additional borrowings and higher capital lease obligations; including the
expense related to the valuation of warrants granted to a lender as part of
these borrowings.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000 we had cash and cash equivalents and short-term
investments of $125.3 million, compared to $109.6 million at December 31, 1999,
an increase of $15.7 million.
In December 1999, we completed our initial public offering of common stock.
In January 2000, the underwriters exercised their overallotment option for
525,000 shares resulting in additional proceeds of $13.6 million.
Net cash used in operating activities was $14,000 for the three months
ended March 31, 2000. Net cash used in operating activities in 2000 reflects an
increase in deferred revenue of $5.2 million which includes prepaid maintenance
and services as well as funds received for license transactions which have not
yet been recognized as revenue. This is offset by the net loss for the quarter,
excluding the non-cash charges related to in-process research and development
and amortization of deferred stock-based compensation.
For the three months ended March 31, 2000 capital expenditures, including
those under capital leases, totaled $1.8 million. Cash of approximately $3.5
million was received as a result of the purchase of Oberon Software.
We believe that we have working capital sufficient to meet our operational
and capital expenditure requirements for at least the next twelve months.
YEAR 2000 COMPLIANCE
The Company established a program to address the impact of the year 2000
date transition on its operations. We established a year 2000 compliance team,
composed of high-level representatives of the product, information systems and
general and administrative departments to evaluate our internal and external
systems. The team was charged with the responsibility of formulating and
implementing our year 2000
12
<PAGE> 13
readiness and analyzed our operations and relationships as they related to the
year 2000 problem. The total cost of year 2000 preparation and remediation have
not been material.
The Company currently knows of no significant year 2000 related failures
which occurred in either its products or its internal systems as a result of the
date change from December 31, 1999 to January 1, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133 was
effective for all fiscal quarters beginning with the quarter ending June 30,
1999. SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the Financial Accounting
Standards Board issued SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133"
("SFAS 137"). SFAS 137 deferred the effective date until the first fiscal
quarter ending June 30, 2000. The Company has not engaged in hedging activities
or invested in derivative instruments.
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-9 "Modification of SOP 97-2, "Software
Revenue Recognition" and the Company adopted the statement for all transactions
entered into in fiscal 2000. The adoption of this statement did not have a
material impact on the Company's operating results, financial position or cash
flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") and amended it in March 2000. The Company is required to adopt the
provisions of SAB 101 in its second fiscal quarter of 2000. While SAB 101 does
not supercede the software industry specific revenue recognition guidance, which
the Company believes it is in compliance with, the SEC Staff has recently
informally indicated its views related to SAB 101 which may change current
interpretations of software revenue recognition requirements. The Company
believes the adoption of SAB 101 will not have a material impact on the
Company's financial position and results of operations.
OTHER FACTORS AFFECTING OPERATING RESULTS, LIQUIDITY AND CAPITAL RESOURCES
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 March 31, 2000, we had an accumulated deficit of
approximately $56.4 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 2001.
These losses could impede our ability to compete effectively by creating doubt
among our potential customers as to our long-term viability, and cause a
decrease in the market price of our common stock. Although our revenues have
grown in recent quarters, there can be no assurance that we can sustain these
growth rates, or that these growth rates are indicative of future revenue growth
rates. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Our quarterly operating results are volatile and difficult to predict and if we
fail to meet the expectations of public market analysts and investors, the
market price of our common stock may decrease significantly.
Our quarterly operating results have varied in the past and may vary
significantly in the future. Because our business is evolving rapidly and we
have a limited operating history, we have little experience in forecasting our
revenues. Since our operating results are volatile and difficult to predict, we
believe that
13
<PAGE> 14
period-to-period comparisons of our operating results are not a reliable
indication of our future performance. 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. We cannot accurately
predict our financial results for any quarter until very late in that quarter.
In addition, we may 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 could 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.
Substantially all of our revenues have been derived from software licenses
and service fees from one suite of products, CenterStage. 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.
The market into which we sell our products is rapidly evolving. Therefore,
the level of market acceptance our products will attain is difficult to
forecast. Market acceptance could be seriously impeded in the following
circumstances:
- broad standards for conducting e-business emerge and become widely
adopted, thus reducing the need for our infrastructure products;
- information services departments of potential customers choose instead to
create their e-business portals and e-marketplaces internally or use
third-party professional developers to create and maintain their sites;
- competitors develop products, technologies or capabilities that render
our CenterStage products and related services obsolete or noncompetitive
or that shorten the life cycles of these products and services;
- our CenterStage products do not meet customer performance needs or fail
to remain free of significant software defects or bugs; or
- we are unable to recruit and retain the additional sales personnel needed
to effectively market our CenterStage products.
Furthermore, to remain competitive, software products like ours typically
require frequent updates that add new features. There can be no assurance that
we will succeed in creating and selling updated or new versions of our
CenterStage products. A decline in demand for, or in the average selling price
of, our CenterStage products would have a direct negative effect on our primary
source of revenues and could cause our stock price to fall.
The market for e-business portals and e-marketplaces is new and emerging and if
it does not grow as rapidly as we anticipate or fails to emerge at all, our
planned growth and financial objectives will not be met.
Our success is dependent on the emergence of the market for e-business
portals and e-marketplaces. We are planning to dedicate all of our sales,
marketing and product development efforts toward e-business portals and
e-marketplaces. If these markets do not develop as rapidly as we expect, our
planned growth and financial
14
<PAGE> 15
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.
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
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.
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.
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
15
<PAGE> 16
- identify and move into suitable office space to expand our facilities.
We cannot be certain that our systems, procedures or controls will be
adequate to support our current or future operations or that our management will
be able to manage expansion and still achieve the rapid execution necessary to
meet our growth expectations. Failure to manage our growth effectively could
diminish our growth prospects and could result in lost opportunities as well as
operating expenses exceeding the amount budgeted.
If we fail to adequately respond to rapid technological changes, our existing
products will become obsolete or unmarketable.
New approaches to gather, exchange, integrate, personalize and syndicate
information over the Internet based on new technologies and industry standards
could render our CenterStage products obsolete and unmarketable. We believe that
to succeed we must enhance our CenterStage products, develop new products on a
timely basis to keep pace with technological developments and satisfy the
increasingly sophisticated requirements of our customers. Therefore, we cannot
be certain that we will successfully respond to technological change, evolving
industry standards or customer requirements. If we are unable to adequately
respond to these changes, our revenues and market share could rapidly decline.
In connection with the introduction of new products and enhancements, we have
experienced development delays and related cost overruns, which are not unusual
in the software industry. We could encounter these problems or more serious
delays in the future. Any delays in developing and releasing new products or
enhancements to our CenterStage products could result in:
- customer dissatisfaction;
- cancellation of orders and license agreements;
- negative publicity;
- loss of revenues;
- slower market acceptance; and
- legal action by customers against us.
Our CenterStage products are designed to work on a variety of hardware and
software platforms used by our customers. However, these products may not
operate well with future versions of hardware and 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
16
<PAGE> 17
our software contains undetected errors or we fail to meet our customers'
expectations in a timely manner we could experience:
- loss of or delay in revenues and loss of market share;
- loss of customers;
- failure to achieve market acceptance;
- diversion of development resources;
- diversion of customer support resources;
- negative publicity;
- increased service and warranty costs;
- legal actions by customers against us; and
- increased insurance costs.
Because our customers use our CenterStage products for mission-critical
applications, errors or defects in or other performance problems associated with
these products could result in financial or other 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.
17
<PAGE> 18
There has been a substantial amount of litigation in the software industry
regarding intellectual property rights. It is possible that in the future third
parties may claim that our current or future products infringe their
intellectual property. We expect that software developers will increasingly be
susceptible to infringement claims as the number of products and competitors in
our industry segment grows and the functionality of products in different
industry segments overlaps. Any intellectual property claims, with or without
merit, could be time-consuming, result in costly litigation, cause product
shipment delays or require us to enter into royalty or licensing agreements. Any
royalty or licensing agreements, if required, may not be available on terms
acceptable to us, or may not be available at all, which could jeopardize the
viability of our business.
There is substantial risk that future regulations could be enacted that either
directly restrict our business or indirectly impact our business by limiting the
growth of Internet commerce.
As Internet commerce evolves, we expect federal, state or foreign agencies
to adopt regulations covering many issues, including user privacy, pricing,
content and quality of products and services. If enacted, these laws, rules or
regulations could limit the market for our CenterStage products and related
services, which could adversely affect our operating results and business
prospects. Although many of these regulations may not apply to our business
directly, we expect that laws regulating the solicitation, collection or
processing of personal/consumer information could indirectly affect our
business. The Telecommunications Act of 1996 prohibits some types of information
and content from being transmitted over the Internet. The prohibition's scope
and the liability associated with a Telecommunications Act violation are
currently unsettled. In addition, although substantial portions of the
Communications Decency Act were held to be unconstitutional, we are unsure
whether similar legislation will be enacted and upheld in the future. It is
possible that legislation could expose companies involved in Internet commerce
to liability, which could limit the growth of Internet commerce generally.
Legislation like the Telecommunications Act and the Communications Decency Act
could dampen the growth of Internet usage and decrease its acceptance as a
commercial medium. Moreover, the applicability to the Internet 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.
We could incur problems in connection with our 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;
- offering the existing products and services of each company to the other
company's customers;
18
<PAGE> 19
- 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.
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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relate primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio. By policy, we place our investments with high credit
quality issuers, invest only in U.S. Government securities and marketable
securities with active secondary or resale markets to ensure portfolio liquidity
and, with the exception of the U.S. Government and its agencies, limit the
amount of credit exposure to any one issuer. The portfolio's average weighted
maturity may not exceed 6 months and the maximum maturity of any single
obligation may not exceed 13 months. Investment maturities are staggered within
the portfolio in order to minimize the need to sell securities to meet liquidity
requirements and the portfolio includes only marketable securities with active
19
<PAGE> 20
secondary or resale markets to ensure portfolio liquidity. We have no
investments denominated in foreign country currencies and therefore are not
subject to foreign currency risk on such investments.
The Company accounts for its investment instruments in accordance with
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"). All cash equivalent,
short term and long term investments are treated as "available for sale" under
SFAS 115.
The table below presents principal amounts and related weighted average
interest rates for our investment portfolio. All securities at March 31, 2000
mature in one year or less and are classified as short-term.
SHORT-TERM INVESTMENTS
(DOLLAR AMOUNTS IN THOUSANDS):
<TABLE>
<CAPTION>
AVERAGE
INTEREST
FAIR VALUE RATE
---------- --------
<S> <C> <C>
Commercial Paper......................................... $ 69,776 5.82%
United States Government Agencies........................ 30,107 6.13%
Corporate notes and bonds................................ 8,074 6.41%
--------
$107,957
========
</TABLE>
Currently, the majority of our sales and expenses are denominated in U.S.
dollars and, as a result, we have not experienced significant foreign exchange
gains and losses to date.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By a special meeting of the shareholders on March 30, 2000 our stockholders
approved the following proposals:
- The Company's issuance of shares of OnDisplay common stock to
stockholders of Oberon Software Incorporated in connection with the
merger of a wholly-owned subsidiary of OnDisplay with Oberon. The
Stockholders' vote on this proposal was 14,618,080 shares FOR; 429 shares
AGAINST; and 5,875 shares ABSTAINED from voting.
- The Company's 1996 Stock Plan was amended to increase the number of
shares of common stock issuable under the plan from 4,975,000 to
6,975,000 shares. The Stockholders' vote on this amendment was 13,592,826
shares FOR; 1,030,742 shares AGAINST; and 816 shares ABSTAINED from
voting.
- The Company's 1999 Employee Stock Purchase Plan was approved. The
Stockholders' vote on this amendment was 14,033,455 shares FOR; 587,184
shares AGAINST; and 3,745 shares ABSTAINED from voting.
ITEM 5. OTHER INFORMATION
None.
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
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
- ------- -----------------------
<C> <S>
Agreement between Registrant and Oberon Software Inc. dated
*2.1 January 17, 2000.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference to the Company's Form 8-K filed on February 1, 2000
(File No. 000-28455).
(b) Reports on Form 8-K.
(i) Report on Form 8-K filed on February 1, 2000 containing Agreement
between Registrant and Oberon Software Inc. dated January 17, 2000 and text
of press release dated January 18, 2000, announcing the proposed merger of
the Company and Oberon Software Inc.
(ii) Report on Form 8-K filed on February 23, 2000 containing
financial statements and pro forma financial information for the Company
and Oberon Software Inc.
(iii) 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
------------------------------------
David Larson
Vice President and Chief Financial
Officer
By: /s/ CAROL RICHWOOD
------------------------------------
Carol Richwood
Vice President and Controller
Date: May 15, 2000
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER OF FISCAL 2000
AS FILED IN THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31,
2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 114,371
<SECURITIES> 10,977
<RECEIVABLES> 5,844
<ALLOWANCES> 732
<INVENTORY> 0
<CURRENT-ASSETS> 131,506
<PP&E> 5,172
<DEPRECIATION> 1,158
<TOTAL-ASSETS> 325,290
<CURRENT-LIABILITIES> 18,277
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 302,481
<TOTAL-LIABILITY-AND-EQUITY> 325,290
<SALES> 7,041
<TOTAL-REVENUES> 7,041
<CGS> 2,395
<TOTAL-COSTS> 2,395
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 146
<INCOME-PRETAX> (25,135)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,135)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,135)
<EPS-BASIC> (1.30)
<EPS-DILUTED> (1.30)
</TABLE>
