<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 0-28436
OPEN MARKET, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-3214536
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
245 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02142
(Address of principal executive offices) (Zip Code)
(617) 949-7000
(Registrant's telephone number, including area code)
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 [_]
As of April 30, 1997, there were 30,662,743 shares of the Registrant's Common
Stock outstanding.
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OPEN MARKET, INC.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996 3
Consolidated Statements of Operations for the three
months ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 15
ITEM 2. Changes in Securities 15
ITEM 3. Defaults Upon Senior Securities 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 5. Other Information 15
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
EXHIBIT INDEX 16
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OPEN MARKET, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,645 $ 49,765
Marketable securities 25,243 22,268
Accounts receivable, net
of allowances of $846
and $200, respectively 14,418 5,126
Loan to founder 1,500 1,500
Prepaid expenses and other current
assets 1,523 1,468
----------- -----------
Total current assets 69,329 80,127
----------- -----------
Property, plant and equipment, at cost:
Computers and office equipment 9,704 6,194
Land & building 4,200 -
Leasehold improvements 1,105 1,081
Furniture & fixtures 594 493
----------- -----------
15,603 7,768
Less: Accumulated depreciation and
amortization 3,270 2,568
----------- -----------
12,333 5,200
Intangible assets, net (Note 3) 9,002 -
Other assets 726 475
----------- -----------
$ 91,390 $ 85,802
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,902 $ 4,338
Note payable (Note 3) 10,000 -
Accrued expenses 12,058 5,680
Deferred revenues 5,557 3,254
Current maturities of long-term
obligations 35 35
----------- -----------
Total current liabilities 31,552 13,307
----------- -----------
Long-term obligations, net of current
maturities 128 128
Commitments
Stockholders' equity:
Preferred stock, $.10 par value -
Authorized - 2,000,000 shares;
Issued and outstanding - none - -
Common stock, $.001 par value -
Authorized - 100,000,000 shares;
Issued and outstanding - 30,653,182
shares and 28,565,246 shares at
March 31, 1997 and December 31,
1996, respectively 31 28
Additional paid-in capital 136,541 114,977
Other equity (Note 3) 6,920 -
Accumulated deficit (83,782) (42,638)
----------- -----------
Total stockholders' equity 59,710 72,367
----------- -----------
$ 91,390 $ 85,802
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1997 1996
----------- -----------
REVENUES:
<S> <C> <C>
Product revenues $ 9,056 $ 2,248
Service revenues 2,302 427
----------- -----------
Total revenues 11,358 2,675
----------- -----------
COST OF REVENUES:
Product revenues 866 137
Service revenues 2,122 297
----------- -----------
Total cost of revenues 2,988 434
----------- -----------
Gross profit 8,370 2,241
----------- -----------
OPERATING EXPENSES:
Selling and marketing 7,982 4,119
Research and development 5,375 3,701
General and administrative 2,371 1,469
Acquired in-process
research & development (Note 3) 34,250 -
----------- -----------
Total operating expenses 49,978 9,289
----------- -----------
Loss from operations (41,608) (7,048)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 890 200
Interest expense (50) (19)
Other expense (36) -
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (40,804) (6,867)
----------- -----------
PROVISION FOR FOREIGN INCOME TAXES 340 -
----------- -----------
NET LOSS $(41,144) $(6,867)
=========== ===========
NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARE (NOTE 2) $ (1.39) $ (0.26)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING (NOTE 2) 29,590 26,480
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(41,144) $(6,867)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 703 358
Amortization of intangible assets 135 -
Charge associated with acquired
in-process research & development 34,250 -
Changes in assets and liabilities-
Accounts receivable (5,886) 421
Prepaid expenses and other 264 (32)
current assets
Accounts payable (436) 168
Accrued expenses 3,109 714
Deferred revenues 658 (995)
------- ------
Net cash used in operating
activities (8,347) (6,224)
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment (1,154) (731)
Issuance of loan to founder - (1,500)
Purchases of marketable
securities, net (2,975) (2,965)
Increase in other assets (124) (242)
Net cash acquired from the purchase
of Waypoint 372 -
Net cash used in the purchase of Folio (11,400) -
------- ------
Net cash used in investing
activities (15,281) (5,438)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term obligations - 634
Payments on long-term obligations - (71)
Proceeds from issuance of redeemable
convertible preferred stock, net of
issuance costs - 26,050
Proceeds from issuance of common stock 508 19
------- ------
Net cash provided by financing
activities 508 26,632
------- ------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (23,120) 14,970
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 49,765 3,712
-------- -------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 26,645 $ 18,682
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid during the period $ - $ 13
======== =======
Taxes paid during the period $ 50 $ -
======== =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITIES:
In connection with the acquisition of
Waypoint (see Note 3), the following
non-cash transaction occurred:
Fair value of assets acquired $ 9,922 $ -
Liabilities assumed (156) -
Issuance of common stock (9,548) -
Cash acquired (590) -
-------- -------
Cash acquired in acquisition,
net of acquisition costs $ (372) $ -
======== =======
In connection with the acquisition of
Folio (see Note 3), the following
non-cash transaction occurred:
Fair value of assets acquired $ 45,512 $ -
Liabilities assumed (5,682) -
Issuance of common stock (18,430) -
Issuance of note payable (10,000) -
------- -------
Cash paid for acquisition and
acquisition costs $ 11,400 $ -
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements of Open Market, Inc. (the Company)
presented herein have been prepared pursuant to the rules of the Securities and
Exchange Commission for quarterly reports on Form 10-Q and do not include all of
the information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1996, included in the Company's Form 10-K filed with the Securities and
Exchange Commission on March 31, 1997.
The consolidated financial statements and notes herein are unaudited but, in
the opinion of management, include all adjustments (consisting of normal,
recurring adjustments) necessary to present fairly the consolidated financial
position, results of operations and cash flows of the Company and its
subsidiaries.
The results of operations for the interim periods shown herein are not
necessarily indicative of the results to be expected for any future interim
period or for the entire year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application of
certain accounting policies described in this and other notes to these
consolidated financial statements.
(a) Principles of Consolidation
The accompanying consolidated financial statements reflect the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
(b) Cash, Cash Equivalents and Marketable Securities
The Company accounts for investments under Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Under SFAS No. 115, investments for which the Company has the
positive intent and ability to hold to maturity, consisting of cash equivalents
and marketable securities, are reported at amortized cost, which approximates
fair market value. Cash equivalents are highly liquid investments with
maturities of less than three months at the time of acquisition. Marketable
securities, consisting of investment grade commercial paper, corporate notes,
and obligations of certain municipalities as of March 31, 1997, have maturities
at the time of acquisition of greater than three months but less than one year.
The average maturity of the Company's marketable securities is approximately
five months.
(c) Net Loss per Common and Common Equivalent Share
For the three month period ended March 31, 1997, net loss per common and
common equivalent share is computed by dividing the net loss by the weighted
average number of common and common equivalent shares outstanding during the
period, including the weighted average number of shares to be issued or
returned as part of the Folio acquisition as
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discussed in Note 3. For the three month period ended March 31, 1996, pro forma
net loss per common and common equivalent share is computed by dividing the net
loss by the weighted average number of common and common equivalent shares
outstanding during the period, including (i) the weighted average number of
shares of common stock issuable upon conversion of all shares of Series A, B
and C redeemable convertible preferred stock and (ii) stock options granted
after March 31, 1995 and prior to the initial public offering as required by
the Securities and Exchange Commission using the treasury stock method. Other
common stock equivalents have not been included in either three month period,
as the effect would be antidilutive. Historical net loss per share data for the
three month period ended March 31, 1996 has not been presented, as such
information is not considered to be relevant or meaningful.
During the first quarter of 1997, the Financial Accounting Standards Board
adopted Statement of Financial Accounting Standards (SFAS) No. 128, Earnings
per Share, which supersedes APB Opinion No. 15. The Company does not believe
the adoption of this accounting standard will have any impact on the Company's
financial position or results of operations.
3. ACQUISITIONS
(a) Waypoint Software Corporation
On February 12, 1997, the Company acquired all of the outstanding shares of
capital stock of Waypoint Software Corporation (Waypoint), a software
development company specializing in the business-to-business industrial catalog
segment of the Internet. As payment of the purchase price, the Company issued
an aggregate of approximately 739,000 shares of its common stock to the
stockholders of Waypoint and issued options to acquire approximately 6,000
shares of the Company's common stock at $0.456 per share to Waypoint option
holders. The value of the shares of, and the options to acquire, the Company's
common stock issued in connection with the acquisition was approximately
$11,000,000 based on a weighted average market price, as defined, of the
Company's freely tradable shares. The shares issued are subject to certain
selling restrictions and, as a result, are not freely tradable. Therefore, for
purposes of calculating aggregate consideration paid, the value of the shares
issued was recorded at a discounted value. In addition, in connection with this
acquisition, the Company has entered into employment agreements with certain of
the principals of Waypoint under which the Company has agreed to pay bonuses in
an aggregate amount of $1,200,000 over two years depending on certain future
events, as defined. For financial statement purposes, this acquisition was
accounted for as a purchase, and accordingly, the results of operations of
Waypoint subsequent to February 12, 1997 are included in the Company's
consolidated statements of operations.
The aggregate purchase price of $9,922,000 consisted of the following:
Description Amount
----------------------- -----------
Common stock $9,548,000
Assumed liabilities 156,000
Acquisition costs 218,000
-------------
Total purchase price: $9,922,000
=============
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<PAGE>
The purchase price was allocated based upon the fair value of the tangible
and intangible assets acquired. These allocations represent the fair values
determined by an independent appraisal. The appraisal incorporated proven
valuation procedures and techniques in determining the fair value of each
intangible asset. The purchase price has preliminarily been allocated as
follows:
Description Amount
----------------------------------- -----------
Current assets $ 590,000
Property, plant and equipment 76,000
Other assets 6,000
In-process research & development 9,250,000
-------------
Total assets acquired: $9,922,000
=============
The in-process research and development has been expensed as a charge
against operations as of the closing of the transaction, and is included in
the accompanying consolidated statement of operations. The amount allocated
to acquired in-process research and development relates to projects that had
not yet reached technological feasibility and that, until completion of
development, have no alternative future use. These projects will require
substantial high risk development and testing prior to the reaching of
technological feasibility.
(b) Folio Corporation
On March 7, 1997, the Company acquired all of the outstanding shares of
capital stock of Folio Corporation (Folio), a leading supplier of software for
managing business-critical information. The purchase consideration was paid
in the form of approximately 1,796,000 shares of common stock (898,000 shares
issuable upon closing and an equal amount issuable in January 1998),
$10,000,000 in cash upon closing and a $10,000,000, 8% interest-bearing note,
which is payable over a period of up to two years in cash or a combination of
cash and equity depending on certain future events, as defined. The value of
the shares of the Company's common stock issued in connection with the
acquisition was approximately $25,000,000 based on a weighted average market
price, as defined, of the Company's freely tradable shares. As a portion of
the shares will not be issued until January 1998 and the shares already issued
are subject to certain selling restrictions, the shares are not freely
tradable. Therefore, for purposes of calculating aggregate consideration
paid, the value of the shares issued, including those to be issued in January
1998, was recorded at a discounted value. The purchase agreement also
contained a provision allowing for a purchase price adjustment based on the
change in the net assets of Folio from the estimated value at December 31,
1996 through the date of closing. As a result of this provision, the Company
currently estimates that, subject to resolution between the parties based on a
closing balance sheet audit, that the former stockholder of Folio will be
required to return a portion of the shares of common stock issued in the
transaction. Other equity in the accompanying consolidated balance sheet
includes the value of the shares to be issued in January 1998, net of the
value of the estimated shares to be returned upon completion of the closing
balance sheet audit. For financial statement purposes, this acquisition was
accounted for as a purchase, and accordingly, the results of operations of
Folio subsequent to March 7, 1997 are included in the Company's consolidated
statements of operations.
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<PAGE>
The aggregate purchase price of $45,512,000 consisted of the following:
Description Amount
----------------------- ------------
Common stock $18,430,000
Cash paid 10,000,000
Note payable 10,000,000
Assumed liabilities 5,682,000
Acquisition costs 1,400,000
--------------
Total purchase price: $45,512,000
==============
The purchase price was allocated based upon the fair value of the tangible
and intangible assets acquired. These allocations represent the fair values
determined by an independent appraisal. The appraisal incorporated proven
valuation procedures and techniques in determining the fair value of each
intangible asset. The purchase price has preliminarily been allocated as
follows:
Description Amount
----------------------------------- ------------
Current assets $ 4,729,000
Property, plant and equipment 6,605,000
Other assets 41,000
In-process research & development 25,000,000
Other acquired intangible assets 9,137,000
--------------
Total assets acquired: $45,512,000
==============
The in-process research and development has been expensed as a charge
against operations as of the closing of the transaction, and is included in
the accompanying consolidated statement of operations. The amount allocated
to acquired in-process research and development relates to projects that had
not yet reached technological feasibility and that, until completion of
development, have no alternative future use. These projects will require
substantial high risk development and testing prior to the reaching of
technological feasibility. The intangible assets are being amortized over
five to seven years. The Company recorded approximately $135,000 of
amortization expense relating to these intangible assets during the first
quarter of 1997.
(c) Pro forma results of operations
The following unaudited pro forma combined results of operations of the
Company assume that the Waypoint and Folio acquisitions were completed on
January 1, 1997 and 1996, respectively (in thousands, except per share data):
For the three months
ended March 31,
---------------------
1997 1996
---------- ---------
Total revenues $ 14,144 $ 6,742
Net loss (11,638) (8,359)
Net loss per share (0.37) (0.29)
These pro forma amounts represent the historical operating results of
Waypoint and Folio prior to their respective dates of acquisition, combined
with those of the Company with appropriate adjustments which give effect to
interest income, interest expense, amortization expense, as well as the
exclusion of the charge for acquired in-process research and development. For
the three month period ended March 31, 1996, the results of Waypoint have not
been included as they had not yet commenced
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operations. These pro forma results are not necessarily indicative of
operating results which would have occurred if the Waypoint and Folio
acquisitions had been operated by current management during the periods
presented.
4. STOCKHOLDERS' EQUITY
(a) 1994 Stock Incentive Plan
The 1994 Stock Incentive Plan (the 1994 Plan) allows for the issuance of up
to 13,001,000 shares of the Company's common stock through the grant of
incentive stock options, nonqualified stock options or the issuance of
restricted common stock to employees and consultants.
A summary of stock option activity under the 1994 Plan is as follows:
Number of Shares Exercise Price
Per Share
------------------- -------------------
Outstanding, December 31, 1996........ 4,967,331 $.17 - $35.13
Granted........................... 541,501 .46 - 15.75
Exercised......................... (427,500) .17 - 12.00
Terminated........................ (197,361) .25 - 21.50
------------------ ----------------
Outstanding, March 31, 1997........... 4,883,971 $.17 - $35.13
================== ================
Exercisable, March 31, 1997........... 2,023,435 $.17 - $35.13
================== ================
(b) 1996 Employee Stock Purchase Plan
Under the 1996 Employee Stock Purchase Plan (the Purchase Plan), the
Company has reserved 250,000 shares of its common stock for issuance in
accordance with the Purchase Plan. Under the terms of the Purchase Plan,
employees who meet certain eligibility requirements may purchase shares of the
Company's common stock at 85% of the closing price of the common stock on the
first or last day of each six-month offering period, whichever is lower. Upon
the completion of the first offering period on January 31, 1997, the Company
issued 24,067 shares for gross proceeds of approximately $325,000.
5. SIGNIFICANT CUSTOMERS AND RELATED PARTY TRANSACTIONS
During the first quarter of 1996, the Company recorded revenues from one
customer which accounted for 75% of the Company's total revenues for that
period. The Company did not have any customers during the first quarter of 1997
which accounted for greater than 10% of total revenues.
The Company has entered into agreements with certain stockholders which
provide for product and service revenues. The Company believes that the terms of
these transactions are on terms no less favorable to the Company than could be
obtained from unaffiliated third parties. The Company recognized revenues from
certain stockholders of approximately $721,000 for the three month period ended
March 31, 1997.
6. SUBSEQUENT EVENT
On May 13, 1997 the Company announced it had entered into a software license
and distribution agreement with Raptor Systems, Inc. of Waltham, Massachusetts,
granting exclusive worldwide marketing and distribution rights to the Company's
Axcess product for approximately $6,000,000. The Company will continue
development of the technology and has agreed to make specified product
deliverables during the remaining three quarters of 1997. Revenues from the
transaction will be recognized as the specified products are delivered and
services are rendered.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
RESULTS OF OPERATIONS
OVERVIEW
Open Market, Inc. (the Company) develops, markets, licenses and supports high
performance software products that allow its customers to engage in business-to-
consumer and business-to-business Internet commerce and to deploy Internet-based
business applications within an enterprise (Intranet). See Recent Developments.
During the first quarter of 1997, the Company completed two significant
acquisitions that represent its entry into the "front office" market. These
acquisitions were of Waypoint Software Corporation (Waypoint) and Folio
Corporation (Folio). Waypoint specializes in the business-to-business
industrial catalog segment of the Internet and Folio is a leading supplier of
software for managing business-critical information.
REVENUES
Total revenues were approximately $11,358,000 for the three months ended March
31, 1997, a significant increase from approximately $2,675,000 for the three
months ended March 31, 1996. In the first quarter of 1996, one customer
accounted for 75% of the Company's total revenues. There were no customers in
the first quarter of 1997 which accounted for more than 10% of the Company's
total revenues. While in any particular quarter a single customer may account
for a material portion of revenues, the Company does not expect that it will
derive a material portion of its future revenues from a single customer.
Product revenues were approximately $9,056,000 or 80% of total revenues for
the three months ended March 31, 1997 compared to approximately $2,248,000 or
84% of total revenues for the corresponding period of 1996. During the second
quarter of 1996, the Company began commercial shipment and recognizing revenues
on Transact/TM/, its flagship product for Internet commerce, SecureLink/TM/, a
commerce enabling technology, and Axcess/TM/, a product that manages access
control (see Recent Developments). Revenues from these products, combined with
revenues from products of Folio, which was acquired in March 1997, comprised the
majority of the Company's revenues during the first quarter of 1997. Product
revenues for the first quarter of 1996 included an initial $2 million license
fee from a reseller for the right to sublicense the Company's Web server
products. Royalty revenues from the Company's reseller arrangements are
recognized when earned. The Company believes that product revenues as a
percentage of total revenues will fluctuate on a quarterly basis.
Service revenues were approximately $2,302,000 or 20% of total revenues for
the three months ended March 31, 1997 compared to approximately $427,000 or 16%
of total revenues for the corresponding period of 1996. Service revenues relate
to (i) development, consulting and other services performed for certain
customers to assist them in their development of services and products for the
Internet and (ii) customer support services, which include postcontract customer
support, installation, training and other services related to product sales.
COST OF REVENUES
Cost of product revenues increased to approximately $866,000 for the three
month period ended March 31, 1997 from approximately $137,000 for the
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three month period ended March 31, 1996. For the three month period ended March
31, 1996, cost of product revenues consisted primarily of the costs to
distribute the products, including the cost of media on which they are
delivered. In the three month period ended March 31, 1997, cost of product
revenues also included third-party royalties for technology incorporated in
certain products of the Company. Management believes that these costs as a
percentage of product revenues may increase in the future as the Company's sales
of these products increase and as it incorporates more third-party technology in
its products.
Cost of service revenues increased to approximately $2,122,000 for the three
month period ended March 31, 1997 from approximately $297,000 for the three
month period ended March 31, 1996. Cost of service revenues consists primarily
of personnel and related costs incurred in providing development, consulting and
other services to customers. The increase is primarily attributable to costs
associated with the higher service revenues and the expansion of the Company's
consulting practice. The decrease in the gross margins from the first quarter
of 1996 to the first quarter of 1997 is primarily attributable to the opening of
a European support center and the expansion of the Company's consulting practice
during the second half of 1996. Management believes these margins will improve
during 1997 as the Company's service business expands.
OPERATING EXPENSES
Selling and marketing expenses consist primarily of the cost of sales and
marketing personnel and consultants, as well as the costs associated with
marketing programs, advertising costs and literature. These expenses increased
to approximately $7,982,000 for the three month period ended March 31, 1997,
from approximately $4,119,000 for the three month period ended March 31, 1996.
The substantial increase in these expenses for this period was primarily
attributable to increases in the number of domestic and foreign sales and
marketing personnel, sales commissions, the Company's acquisition of Folio
during the first quarter of 1997, and, to a lesser extent, the preparation and
distribution of new product sales literature. The Company intends to increase
selling and marketing expenditures in future periods.
Research and development expenses consist primarily of the cost of research
and development personnel and independent contractors, certain purchased
technology, as well as equipment and facility costs related to such activities.
These expenses increased to approximately $5,375,000 for the three month period
ended March 31, 1997, from approximately $3,701,000 for the three month period
ended March 31, 1996. The substantial increase in these periods was primarily
attributable to the Company's acquisitions of Waypoint and Folio during the
first quarter of 1997 and the hiring of additional software engineers and
consultants to develop and enhance the Company's products. Qualifying
capitalizable software development costs were immaterial in both periods, and
accordingly, the Company has charged all such expenses to research and
development in the period incurred. The Company believes that significant
investments in research and development are required to remain competitive in
the software industry. As a result, the Company intends to increase the amounts
of its research and development expenditures in the future. Certain research
and development expenditures are incurred substantially in advance of the
related revenue and in some cases do not generate revenue.
General and administrative expenses consist primarily of the cost of finance,
management and administrative personnel, as well as legal and
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other professional fees. These expenses increased to approximately $2,371,000
for the three month period ended March 31, 1997 from approximately $1,469,000
for the three month period ended March 31, 1996. The substantial increase for
these periods was primarily attributable to the Company's acquisitions of
Waypoint and Folio during the first quarter of 1997, the hiring of additional
management and administrative personnel to support the expansion of the
Company's operations and, to a lesser extent, an increase in legal and other
professional fees. The Company intends to increase general and administrative
expenditures in future periods.
In connection with the acquisitions of Waypoint in February 1997 and Folio in
March 1997, the Company allocated $9,250,000 and $25,000,000, respectively, of
the purchase price to acquired in-process research and development.
Accordingly, these costs were expensed as of the acquisition dates. The amount
allocated to acquired in-process research and development relates to projects
that had not yet reached technological feasibility and that, until completion of
development, have no alternative future use. These projects will require
substantial high risk development and testing prior to the reaching of
technological feasibility. The technology acquired in the acquisitions of
Waypoint and Folio have required, and will continue to require, substantial
additional development by the Company.
Interest income represents interest earned on cash, cash equivalents,
marketable securities and a loan to a founder. Interest income increased to
approximately $890,000 for the three month period ended March 31, 1997, from
approximately $200,000 for the three month period ended March 31, 1996. The
increase is primarily attributable to higher average investments in cash, cash
equivalents and marketable securities during the periods, primarily as a result
of the closing of the Company's initial public offering in May 1997 and the sale
of Series C Redeemable Convertible Preferred Stock in January 1997. Interest
expense was approximately $50,000 for the three month period ended March 31,
1997, compared to approximately $19,000 for the three month period ended March
31, 1996. Interest expense relates primarily to the Company's note payable
issued in conjunction with the Folio acquisition and an obligation under a
license agreement, as well as an equipment line of credit and term notes
payable, both of which were paid off during the second quarter of 1997. Other
expense of $36,000 for the first quarter of 1997 represents foreign currency
translation losses.
The Company has recorded a provision for foreign income taxes of $340,000 for
the three month period ended March 31, 1997 relating to estimated taxes due in
foreign jurisdictions. The Company has had losses for U.S. tax purposes for all
periods to date and, accordingly, there has been no provision for U.S. income
taxes.
RECENT DEVELOPMENTS
On May 13, 1997 the Company announced it had entered into a software license
and distribution agreement with Raptor Systems, Inc. of Waltham, Massachusetts,
granting exclusive worldwide marketing and distribution rights to the Company's
Axcess product for approximately $6,000,000. The Company will continue
development of the technology and has agreed to make specified product
deliverables during the remaining three quarters of 1997. Revenues from the
transaction will be recognized as the specified products are delivered and
services are rendered.
-13-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had approximately $51,888,000 in cash, cash
equivalents and marketable securities, a decrease of $20,145,000 from December
31, 1996. The Company paid $11,400,000 of cash for part of the purchase price
and the acquisition costs of Folio in March 1997.
The Company's operating activities utilized cash and cash equivalents of
approximately $8,347,000 and $6,224,000 for the three month periods ended March
31, 1997 and 1996, respectively. Accounts receivable increased by $9,292,000 to
$14,418,000 from December 31, 1996 to March 31, 1997, primarily as a result of
the timing of revenues during the quarter, the accounts receivable acquired from
Folio and the significant increase in first quarter revenues as compared to the
fourth quarter of 1996. Accrued expenses increased by $6,378,000 to $12,058,000
from December 31, 1996 to March 31, 1997, primarily as a result of liabilities
assumed in the Waypoint and Folio acquisitions and the acquisition costs
incurred with regards to these transactions, as well as a general increase in
liabilities due to the Company's increased expenditures.
The Company's investing activities used cash and cash equivalents of
approximately $15,281,000 and $5,438,000 for the three month periods ended March
31, 1997 and 1996, respectively. The principal uses for the three months ended
March 31, 1997 were the $11,400,000 paid for part of the purchase price and the
acquisition costs of Folio, a $2,975,000 increase in marketable securities and
to purchase $1,154,000 of property and equipment.
The Company's financing activities provided cash and cash equivalents of
approximately $508,000 and $26,632,000 for the three month periods ended March
31, 1997 and 1996, respectively. During the first quarter of 1996, the Company
raised $26,050,000 through the private issuance of preferred stock. During the
first quarter of 1997, the Company issued stock as a result of stock option
exercises and under the Employee Stock Purchase Plan.
Capital expenditures were approximately $1,154,000 for the three month period
ended March 31, 1997. While the Company has no material purchase commitments as
of March 31, 1997, in March 1997, the Company entered into a facility lease for
its new corporate headquarters under which the Company will pay approximately
$32,352,000 from February 1998 through February 2010. The Company estimates
that capital expenditures for the remainder of 1997 will range from
approximately $11,000,000 to $12,000,000.
At December 31, 1996, the Company had net operating loss carryforwards for
income tax purposes of approximately $39,000,000. These losses are available to
reduce federal and state taxable income, if any, in future years. These losses
are subject to review and possible adjustment by the Internal Revenue Service
and may be limited in the event of certain cumulative changes in ownership
interests of significant shareholders over a three-year period in excess of 50%.
The Company believes that it has experienced a change in ownership in excess of
50%. The Company does not believe that this change in ownership will
significantly impact the Company's ability to utilize its net operating loss
carryforwards.
The Company believes that its existing capital resources are adequate to meet
its cash requirements for at least the next 12 months. There can be no
assurance, however, that changes in the Company's plans or other events
affecting the Company's operations will not result in accelerated or unexpected
expenditures.
-14-
<PAGE>
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.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 11 Computation of Earnings Per Share.
Exhibit 27 Financial Data Schedule
(b) During the first quarter of 1997, the Company filed the following
reports on Form 8-K:
(i) Current Report on Form 8-K dated February 27, 1997 reporting
under Item 2 the Company's acquisition of Waypoint Software
Corporation.
(ii) Current Report on Form 8-K dated March 24, 1997 reporting under
Item 2 the Company's acquisition of Folio Corporation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
OPEN MARKET, INC.
(Registrant)
Date: May 13, 1997 By: /s/ Gary B. Eichhorn
--------------------
GARY B. EICHHORN,
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: May 13, 1997 By: /s/ Regina O. Sommer
--------------------
REGINA O. SOMMER,
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
-15-
<PAGE>
EXHIBIT INDEX
- ---------------
EXHIBIT NO. DESCRIPTION PAGE
- --------------- --------------------------------- ----
11 Computation of Earnings Per Share 17
27 Financial Data Schedule (EDGAR) 18
-16-
<PAGE>
EXHIBIT 11
OPEN MARKET, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
--------- ---------
Net loss........................ $(41,144) $(6,867)
========= ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Weighted average common shares
outstanding.................... 29,590 9,424
Weighted average shares to
reflect common stock options
issued after March 31, 1995,
pursuant to the treasury stock
method......................... - 3,619
Weighted average shares to
reflect the conversion of
Series A, B and C Preferred
Stock.......................... - 13,437
--------- --------
Weighted average number of
common and common equivalent
shares outstanding............. 29,590 26,480
========= ========
Net loss per common and common
equivalent share............... $ (1.39) $(0.26)
========= ========
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 26,645
<SECURITIES> 25,243
<RECEIVABLES> 15,264
<ALLOWANCES> 846
<INVENTORY> 0
<CURRENT-ASSETS> 69,329
<PP&E> 15,603
<DEPRECIATION> 3,270
<TOTAL-ASSETS> 91,390
<CURRENT-LIABILITIES> 31,552
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 59,679
<TOTAL-LIABILITY-AND-EQUITY> 91,390
<SALES> 9,056
<TOTAL-REVENUES> 11,358
<CGS> 866
<TOTAL-COSTS> 2,988
<OTHER-EXPENSES> 49,978
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50
<INCOME-PRETAX> (40,804)
<INCOME-TAX> 340
<INCOME-CONTINUING> (41,144)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,144)
<EPS-PRIMARY> (1.39)
<EPS-DILUTED> (1.39)
</TABLE>
