<PAGE>
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, 1998
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)
DELAWARE 04-3214536
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE WAYSIDE ROAD
BURLINGTON, MASSACHUSETTS 01803
(Address of principal executive offices) (Zip Code)
(781) 359-3000
(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, 1998, there were 32,135,621 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, 1998 and 3
December 31, 1997
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
ITEM 3. Quantitative and Qualitative Discussion about
Market Risk. 17
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
ITEM 2. Changes in Securities and Use of Proceeds. 17
ITEM 3. Defaults Upon Senior Securities. 17
ITEM 4. Submission of Matters to a Vote of Security Holders. 17
ITEM 5. Other Information. 18
ITEM 6. Exhibits and Reports on Form 8-K. 18
SIGNATURES 19
EXHIBIT INDEX 20
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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,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,434 $ 19,666
Marketable securities 13,224 10,972
Accounts receivable, net of allowances of $1,842 and $1,470, respectively 23,635 23,102
Loan to founder - 993
Prepaid expenses and other current assets 1,580 1,423
----------- -----------
Total current assets 52,873 56,156
----------- -----------
Property, plant and equipment, at cost:
Computers and office equipment 12,410 12,129
Land & building 4,200 4,200
Construction in progress - 3,300
Leasehold improvements 5,194 1,072
Furniture & fixtures 1,928 812
----------- -----------
23,732 21,513
Less: Accumulated depreciation and amortization 7,550 6,356
----------- -----------
16,182 15,157
Intangible assets, net (Note 3) 7,382 7,787
Other assets 1,764 1,774
----------- -----------
$ 78,201 $ 80,874
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 12,304 $ 5,168
Accounts payable 4,810 3,268
Note payable (Note 3) 5,000 10,000
Accrued expenses 11,999 14,440
Deferred revenues 1,873 4,390
Current maturities of long-term obligations 48 50
----------- -----------
Total current liabilities 36,034 37,316
----------- -----------
Long-term obligations, net of current maturities 99 99
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 - 32,079,247 shares and 30,970,791 shares at March 31, 1998 and
December 31, 1997, respectively
31 31
Additional paid-in capital 148,778 137,427
Other equity (Note 3) - 6,920
Deferred compensation (247) (275)
Accumulated deficit (106,494) (100,644)
----------- -----------
Total stockholders' equity 42,068 43,459
----------- -----------
$ 78,201 $ 80,874
=========== ===========
</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,
-------------------------------------------
1998 1997
------------------ -------------------
REVENUES:
<S> <C> <C>
Product revenues $11,273 $ 9,056
Service revenues 3,929 2,302
------------------ -------------------
Total revenues 15,202 11,358
------------------ -------------------
COST OF REVENUES:
Product revenues 600 866
Service revenues 2,906 2,122
------------------ -------------------
Total cost of revenues 3,506 2,988
------------------ -------------------
------------------ -------------------
Gross profit 11,696 8,370
------------------ -------------------
OPERATING EXPENSES:
Selling and marketing 7,876 7,982
Research and development 6,776 5,375
General and administrative 2,929 2,371
Acquired in-process research &
development (Note 3) - 34,250
------------------ -------------------
Total operating expenses 17,581 49,978
------------------ -------------------
------------------ -------------------
Loss from operations (5,885) (41,608)
------------------ -------------------
OTHER INCOME (EXPENSE):
Interest income 318 890
Interest expense (240) (50)
Other expense (10) (36)
------------------ -------------------
Loss before provision for income taxes (5,817) (40,804)
------------------ -------------------
Provision for foreign income taxes 32 340
------------------ -------------------
NET LOSS $(5,849) $(41,144)
================== ===================
NET LOSS PER SHARE - BASIC AND DILUTED
(Note 2) $(0.18) $(1.39)
================== ===================
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING
- BASIC AND DILUTED (Note 2) 31,769 29,590
================== ===================
</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,
----------------------------------------------
1998 1997
------------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,849) $ (41,144)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,194 703
Amortization of intangible assets 405 135
Charge associated with acquired in-process research
& development - 34,250
Deferred compensation 28
Changes in assets and liabilities-
Accounts receivable (533) (5,886)
Prepaid expenses and other current assets (157) 264
Accounts payable 1,542 (436)
Accrued expenses (2,441) 3,109
Deferred revenues (2,517) 658
------------------ -------------------
Net cash used in operating activities (8,328) (8,347)
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,219) (1,154)
Payment of loan from founder 993 -
Purchases of marketable securities, net (2,252) (2,975)
Increase in other assets 10 (124)
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 (3,468) (15,281)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceed (payment) from line of credit 7,136 -
Proceed (payment) on note payable (1,818) -
Proceed (payment) on long-term obligations (2) -
Proceed from issuance of common stock 1,248 508
------------------ -------------------
Net cash provided by financing activities 6,564 508
------------------ -------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,232) (23,120)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,666 49,765
------------------ -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,434 $ 26,645
================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 855 $ -
================== ===================
Taxes paid during the period $ 21 $ 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) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, 1997, included in the Company's Form 10-K filed with the Securities and
Exchange Commission on March 31, 1998.
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, 1998, have maturities of greater than three months but less
than one year. The average maturity of the Company's marketable securities
is approximately nine months.
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<PAGE>
(c) Net Loss per Share
Effective December 31, 1997, the Company adopted SFAS No. 128 Earnings
Per Share. SFAS NO. 128 establishes standards for computing and presenting
earnings per share and applies to entities with publicly held common stock
or potential common stock. The Company has applied the provisions of SFAS
No. 128 and Staff Accounting Bulletin (SAB) No. 98 retroactively to all
periods presented. Weighted average shares outstanding includes the shares
issued to Reed Elsevier in January 1998 relating to the Folio acquisition.
Diluted net loss per share for the periods ended March 31, 1998 and 1997 are
the same as basis net loss per share as the inclusion of potential common
stock equivalents would be antidilutive. Calculations of basic and diluted
net loss per common share are as follows:
March 31, 1998 1997
Net loss $(5,849) $(41,144)
Net loss per common share basic and $(0.18) $(1.39)
diluted
Weighted average common shares 31,769 29,590
outstanding - basic and diluted
Antidilutive securities that were not 6,208 4,884
included - common stock options
(d) Comprehensive income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income",
effective January 1, 1998. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in financial
statements. The Company's comprehensive loss for the three month periods
ended March 31, 1998 and 1997, are the same as the Company's actual net
loss. The components of the Company's comprehensive income are as follows:
Three months ended March 31, 1998 1997
Net loss $(5,849) $(41,144)
Foreign currency translation - -
adjustments, net of income taxes
Comprehensive loss $(5,849) $(41,144)
(e) New accounting standards
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The Company will adopt SOP 98-5 beginning January 1,
1999. Adoption of this Statement will not have a material impact on the
Company's consolidated 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
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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 based on a weighted average market
price, as defined, of the Company's freely tradable shares. The shares
issued were subject to certain selling restrictions and, as a result, were
not freely tradable at the time of issuance. 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 entered into employment agreements with certain of
the principals of Waypoint under which the Company agreed to pay bonuses in
an aggregate amount of $1,200 over two years depending on certain future
events, as defined. The employees earned $600 under their employment
agreements in 1997. 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 consisted of the following:
Description Amount
----------- ------
Common stock $9,548
Assumed liabilities 156
Acquisition costs 218
------
Total purchase price: $9,922
======
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 been allocated
as follows:
Description Amount
----------- ------
Current assets $ 590
Property, plant and equipment 76
Other assets 6
In-process research & development 9,250
------
Total assets acquired: $9,922
======
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.
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<PAGE>
(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. As payment of the purchase
price, the Company (I) issued 897,866 shares of common stock of the Company
(II) made a cash payment of $10,000 (III) agreed to issue 897,866 shares of
common stock in January 1998 and (iv) issued a promissory note of the
Company in the original principal amount of $10,000 in either cash or a
combination of cash and common stock of the Company. The value of the shares
of the Company's common stock issued or reserved for issuance was
approximately $25,000 based on a weighted average market price, as defined,
of the Company's freely tradable shares. The shares issued on March 7, 1997,
as well as the shares issued in January 1998 were not freely tradable due to
selling restrictions. Therefore, although 448,933 and 538,342 shares were
registered by the Company in August 1997 and February 1998, respectively,
upon the request of the former stockholder of Folio as required under the
terms of the Stock Purchase Agreement, for purposes of calculating the
aggregate consideration paid, the value of such shares was recorded at a
discount. The Stock Purchase Agreement provided 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
adjustment, the former stockholder of Folio forfeited 270,116 shares of
common stock of the Company to be issued in the transaction. Other equity in
the accompanying consolidated balance sheet includes the value of the shares
issued in January 1998, net of the forfeited shares. In the first quarter of
1998, the Company repaid $5,000 on the note payable, of which $1,818 was
paid in cash and $3,182 was settled by the issuance of the Company's common
stock. 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. For tax purposes, this transaction will be treated
as a deemed asset purchase in accordance with the Internal Revenue Code
Section 338(h)(10).
The aggregate purchase price of $45,512 consisted of the following:
Description Amount
----------- ------
Common stock $18,430
Cash paid 10,000
Note payable 10,000
Assumed liabilities 5,682
Acquisition costs 1,400
-------
Total purchase price: $45,512
=======
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 been allocated
as follows:
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<PAGE>
Description Amount
----------- -------
Current assets $ 4,729
Property, plant and equipment 6,605
Other assets 41
In-process research & development 25,000
Other acquired intangible assets 9,137
-------
Total assets acquired: $45,512
=======
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 $405 and $135 of
amortization expense relating to these intangible assets during the first
quarters of 1998 and 1997, respectively.
(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. (in thousands, except per share data):
For the three months
ended March 31,1997
--------------------
Total revenues $ 14,144
Net loss (11,638)
Net loss per share (0.37)
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.
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. SUBSEQUENT EVENT
On April 29, 1998, the Company acquired all of the outstanding shares of
capital stock of ICentral, Incorporated, based in Provo, Utah for approximately
$10,000 in Open Market common stock and $1,000 in cash. In addition in
connection with this acquisition, the Company has entered into employment
agreements with certain of the key employees of ICentral under which the Company
has agreed to pay bonuses in an aggregate amount of $1,000 depending on certain
future events. The acquisition will be accounted for as a purchase, with a
significant portion of the purchase price being allocated to in-process research
and development and expensed at the time of closing.
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<PAGE>
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
enterprise-class, packaged application software products and professional
services that allow its customers to engage in business-to-consumer and
business-to-business Internet commerce, information commerce and commercial
publishing. Open Market's software includes a wide spectrum of functionality
required to effectively conduct business on the Internet, allowing companies to
attract customers to their Web site, engage them in acting upon an offer,
complete a transaction and service them once a transaction has been completed.
REVENUES
Total revenues for the period ended March 31, 1998 were $15,202, an increase
of $3,844 or 34% when compared to the same period of the prior year.
Product revenues were $11,273 or 74% of total revenue for the first quarter
of 1998 versus product revenue of $9,056 or 80% of total revenues for the
corresponding period of 1997. Product revenues contain two categories (1)
software products which includes the licensing of Transact, LiveCommerce and the
Folio product suite and (2) royalty revenues which include guaranteed minimum
and pay as you go Folio Publishing royalties and merchant license fees. For the
first quarter of 1998 software products were 24% and royalty revenues were 50%
of total revenue. Included in the 50% of royalty revenues were the guaranteed
minimum royalties from three large Folio Publishers that renewed their contracts
during the first quarter of 1998 as well as several other small to medium size
Folio Publishers. In addition, the Company recorded revenue from merchant
license fees which also contributed to the first quarter royalty revenue. The
Company believes that the split between software products and royalty revenue
will continue to fluctuate on a quarterly basis. Contributing to the fluctuation
in the royalty revenue are the number and timing of renewal contracts which
occur primarily in the first and fourth quarter of each year as well as the ramp
of merchant licenses.
Revenues from Transact, SecureLink and Axcess, 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.
Service revenues were $3,929 or 26% of total revenues for the three months
ended March 31, 1997 compared to $2,302 or 20% of total revenues for the
corresponding period of 1997. Of the total service revenue, 43% came from
maintenance and support and 57% came from professional services which includes
consulting, implementation, training and education, for the period ended March
31, 1998. For the period ended March 31, 1997 maintenance and support
represented 32% and professional services represented 67% of total service
revenue. The increase in maintenance and support revenues in 1998 was due
primarily to an increased customer base receiving maintenance and support.
COST OF REVENUES
Cost of product revenues decreased to $600 for the three months ended March
31, 1998 from $866 for the three months ended March 31,
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<PAGE>
1997. The decrease in cost of product revenue was due mainly to the higher
content of revenues such as royalties and merchant license fees revenues which
have little or no product cost. Management believes that the cost of product
revenues will continue to be in a range of 5% to 7% of product revenues,
depending upon the amount of third party technology it incorporates into its
products.
Cost of service revenues increased to $2,906 for the three months ended
March 31, 1998 from $2,122 for the three months ended March 31, 1997. Cost of
service revenues consists primarily of personnel and related costs incurred in
providing professional services such as development, consulting and other
technical services to customers. The increase in cost was consistent with a
higher level of service revenues as well as additional investments in resources
for the planned expansion of the Company's consulting business.
OPERATING EXPENSES
Selling and marketing expenses consist primarily of the cost of sales and
marketing personnel as well as the costs associated with marketing programs,
advertising costs and literature. These expenses decreased slightly to
approximately $7,876 for the three months ended March 31, 1998, from
approximately $7,982 for the three months ended March 31, 1997. The
decrease in these expenses for this period was primarily attributable to a
reduction in headcount and headcount related costs as a result of a workforce
re-balancing completed in January 1998.
The Company believes that its selling and marketing expenditures will
continue to fluctuate consistent with revenue.
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 $6,776 for the three months ended
March 31, 1998, from approximately $5,375 for the three months ended March 31,
1997. The increase of $1,401 was due to (1) higher cost associated with salary
increases and other personnel related expenses (2) an increase in the use of
consultants for the localization and enhancement of 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. 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 of the cost of finance,
management and administrative personnel, as well as legal, bad debt reserve,
amortization of goodwill and other professional fees. These expenses increased
to approximately $2,929
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<PAGE>
for the three months ended March 31, 1998 from $2,371 for the three months ended
March 31, 1997. The increase in 1998 was primarily attributable to the hiring of
additional personnel to support the Company's operations and the amortization of
goodwill associated with the Folio acquisition.
In connection with the acquisitions of Waypoint in February 1997 and Folio
in March 1997, the Company allocated $9,250 and $25,000, 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.
Interest income represents interest earned on cash, cash equivalents,
marketable securities and to a lesser extent a loan to a founder. Interest
income decreased to approximately $318 for the three months ended March
31, 1998, from approximately $890 for the three months ended March 31,
1997. The decrease is primarily attributable to lower average investments in
cash, cash equivalents and marketable securities during the periods, primarily
as a result of funding operations.
Interest expense was approximately $240 and $50 for the three months ended
March 31, 1998 and 1997, respectively. Interest expense relates primarily to the
Company's note payable issued in conjunction with the Folio acquisition, an
obligation under a license agreement, and interest on an account receivables
line of credit. Other expense of $10 and $36 for the first quarter of 1998 and
1997 represents foreign currency translation losses.
The Company has recorded a provision for foreign income taxes of $32 and
$340 for the three months ended March 31, 1998 and 1997, respectively,
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 April 29, 1998 the Company acquired all of the outstanding shares of capital
stock of ICentral Incorporated, based in Provo, Utah. ICentral is a provider of
ShopSite, an industry leading, easy-to-use, browser-based, store building
software. The Company purchased ICentral for approximately $10,000 in Open
Market common stock and $1,000 in cash. In addition, in connection with this
acquisition, the Company has entered into employment agreements with certain of
the key employees of ICentral under which the Company has agreed to pay bonuses
in an aggregate amount of $1,000 depending on certain future events. The
acquisition will be accounted for as a purchase, with a significant portion of
the purchase price being allocated to in-process research and development and
expensed at the time of closing.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had approximately $27,658 in cash, cash
equivalents and marketable securities, a decrease of $2,980 from December 31,
1997.
-13-
<PAGE>
The Company's operating activities utilized cash and cash equivalents of
approximately $8,328 and $8,347 for the three months ended March 31, 1998
and 1997, respectively. The change during the first quarter of 1998
in deferred revenue of $2,517 related to the recognition of certain product
and service revenue. Deferred revenues will fluctuate based upon the timing of
cash receipts relative to the recognition of product and service revenues.
The Company's investing activities used cash and cash equivalents of
approximately $3,468 and $15,281 for the three month periods ended March 31,
1998 and 1997, respectively. For March 31, 1998 the principal uses were an
increase in property and equipment of $2,219 with a majority of these funds
charged to leasehold improvements for the completion of the Company's new
corporate headquarters and an increase of $2,252 for the purchase of marketable
securities. Partially offsetting these uses was $993 received from a founder for
the repayment on an outstanding loan.
The Company's financing activities provided cash and cash equivalents of
approximately $6,564 and $508 for the three month periods ended March 31, 1998
and 1997, respectively. During the first quarter of 1998, the Company received
proceeds of $7,136 from its line of credit and proceeds of $1,248 from the
exercise of stock options and the stock purchase under the Employee Stock
Purchase Plan. Also in connection with the Folio acquisition, the Company issued
a $10 million note payable to Reed Elsevier payable in either cash or a
combination of cash and common stock of the Company. The Company repaid $5,000
of the note payable through a $1,818 cash payment and the balance of $3,182 was
settled by the issuance of common stock.
The Company has an unsecured credit facility arrangement with a bank, which
provides up to $15,000 in financing. Borrowings under this line are limited to
80% of eligible domestic accounts receivable and 90% of eligible foreign
accounts receivable, as defined, and bear interest at the prime lending rate
(8.5% at March 31, 1998). The Company is required to comply with certain
restrictive covenants under this agreement. There was $2,696 available under
this facility as of March 31, 1998.
At December 31, 1997, the Company had net operating loss carryforwards for
income tax purposes of approximately $65,000. 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%.
While the Company believes that it has experienced a change in ownership in
excess of 50%, it 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.
Certain Factors that may affect future results
This Quarterly Report contains certain forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
generality of the foregoing, the words "believes" ,"anticipates", "plans",
"expects", and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially
-14-
<PAGE>
from those indicated by forward-looking statements made in this Quarterly Report
and presented elsewhere by management from time to time. Some of the important
risks and uncertainties which may cause the Company's operating results to
differ materially or adversely are discussed below and in the Company's Annual
report on Form 10-K for the fiscal year ended December 31, 1997 filed with the
SEC.
Rapid Technological Change
The computer software industry is characterized by rapid technological
change. As a result, there is uncertainty about the widespread acceptance of new
products that can cause significant delays in the sales cycle. The Company must
continue to upgrade its own technologies and commercialize products and services
incorporating such technologies that may also lengthen the sales cycle. The
introduction of product or service enhancements or new products or services
embodying new technologies, industry standards or customer requirements could
supplant or make obsolete the Company's existing products and services.
Developing Internet Market
The market for the Company's Internet products and services has only
recently begun to develop, is rapidly evolving and is characterized by an
increasing number of market entrants that have introduced and developed products
and services for Internet commerce. If the market fails to develop or develops
more slowly than expected, the Company's operating results could by materially
adversely affected.
Recent Acquisitions
In February 1997, March 1997 and April 1998, the Company completed the
strategic acquisitions of Waypoint Corporation, Folio Corporation and ICentral,
Incorporated, respectively. The Company faces challenges relating to integration
of operations such as coordinating geographically separate organizations,
integrating personnel with disparate business backgrounds and combining
different corporate cultures. There can be no assurance that these businesses or
their products will be successful, that the Company will successfully integrate
these businesses into the Company, or that the Company will achieve the desired
synergies from the transactions.
Product Release Schedules
Delays in the planned release of the Company's new products may adversely
affect forecasted revenues, and create operational inefficiencies resulting from
staffing levels designed to support the forecasted revenues. The Company's
failure to introduce new products, services or products enhancements on a timely
basis could delay or hinder market acceptance and allow competitors to gain
greater market share than the Company.
-15-
<PAGE>
Competition
The Internet is characterized by an increasing number of market entrants
that have introduced or developed products and services for commerce on the
Internet. Many of the Company's competitors have greater financial, technical
and marketing resources and greater name recognition than does the Company. The
market is still new and rapidly evolving, and the Company's operating results
will be affected by the number of competitors and their pricing strategies and
market acceptance of their products.
Dependence on Personnel
The Company's future success depends in significant part upon the continued
service of its key technical and senior management personnel, and its continuing
ability to attract and retain highly qualified technical and managerial
personnel. The Company's ability to establish and maintain a position of
technology leadership in the industry depends in large part upon the skills of
its development personnel.
Pricing
Future prices that the Company is able to charge for its products may
decline from historical levels due to competitive reasons and other factors. In
the future, the Company may have to reduce the prices of its products
substantially or introduce lower-priced lines of products to gain greater market
share.
Limited Operating History
The Company has a limited operating history. The Company's ability to
successfully market its existing products and to develop and market new products
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly in
new and rapidly evolving markets.
Fluctuations in Quarterly Operating Results
The Company's expense levels are fixed in advance and based in part on its
expectations as to future revenues. Quarterly sales and operating results will
generally depend on the volume and timing of and ability to fulfill orders
received within the quarter. The Company may be unable to adjust spending in a
timely manner to compensate for unexpected revenue shortfalls. The Company
expects in the future to experience significant fluctuations in quarterly
operating results that may be caused by many factors, and as a result, the
Company's operating results in future quarters may be below the expectations of
market analysts and investors.
Foreign Exchange
To the extent that foreign currency exchange rates fluctuate in the future,
the Company may be exposed to continued financial risk. Although the Company
attempts to limit this risk by denominating most sales in United States dollars
and limiting the amount of assets in its foreign operations, there can be no
assurance that the Company will be successful in limiting its exposure.
-16-
<PAGE>
Volatility of Stock Price
The Open Market Common Stock is quoted on the Nasdaq National Market. The
market price of the Open Market Common stock, like that for the shares of many
other high technology companies, has been and may continue to be volatile.
Recently, the stock market in general and the shares of software companies in
particular have experienced significant price fluctuations. These broad market
fluctuations, as well as general economic and political conditions and factors
such as quarterly fluctuations in results of operations, the announcement of
technological innovations, the introduction of new products by the Company or
its competitors and general conditions in the computer hardware and software
industries may have significant impact on the market price of the Open Market
Common Stock.
Litigation
Litigation regarding intellectual rights, copyrights, and patents is
increasingly common in the software industry. Intellectual property litigation
is complex and expensive, and the outcome of such litigation is difficult to
predict. In addition, the Company faces risks on other general legal matters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On January 5, 1998 and March 7, 1998, the Company issued 897,866 and
220,701 shares, respectively, of the Company's Common Stock to Reed
Elsevier Inc., the former stockholder of Folio Corporation ("Folio"),
in connection with the Company's acquisition of Folio in March 1997.
For these issuances, the Company has relied upon an exemption from
registration under Section 4(2) of the Securities Act. The basis for
this exemption is satisfaction of the conditions of Rule 506 under the
Securities Act in that the offers and sales satisfied all of the terms
and conditions of Rule 501 and 502 under the Securities Act, there
were no more than 35 purchasers of securities from the Company other
than accredited investors, and the purchaser had such knowledge and
experience and business matters that is was capable of evaluating the
merits and risks of the prospective investment.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
-17-
<PAGE>
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 10 Amendment No. 1 dated as of April 15, 1998 to the
Employment Agreement dated as of November 7, 1995 by and
between Gary B. Eichhorn and Open Market, Inc.
Exhibit 27 Financial Data Schedule
(b) During the first quarter of 1998, the Company filed the following
report on Form 8-K:
(i) The Company filed a Current Report on Form 8-K dated January 26,
1998 (the "Current Report on Form 8-K") reporting that the Board
of Director of the Company had declared a dividend distribution
of one Right for each outstanding share of the Company's Common
Stock to stockholders of record at the close of business on
February 12, 1998. Each Right entitles the registered holder to
purchase from the Company one one-thousandth of a share of Series
A Junior Participating Preferred Stock, $.10 par value, at a
purchase price of $65.00, in cash, subject to adjustment. The
description and terms of the Rights are set forth in a Rights
Agreement ( the "Rights Agreement") between the Company and
BankBoston N.A., as Rights Agent. The Rights Agreement was filed
with the SEC as an exhibit to the Current Report on Form 8-K.
-18-
<PAGE>
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 14, 1998 By: /s/ Gary B. Eichhorn
-----------------------------
GARY B. EICHHORN,
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: May 14, 1998 By: /s/ Regina O. Sommer
-----------------------------
REGINA O. SOMMER,
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
-19-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. DESCRIPTION
- ----------- -----------
10 Amendement No. 1 dated as of April 15, 1998 to the
Employment Agreement dated as of November 7, 1995
by and between Gary B. Eichhorn and Open
Market, Inc
27 Financial Data Schedule (EDGAR)
<PAGE>
Exhibit 10
AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
This Amendment No. 1 dated as of April 15, 1998 (the "Amendment") to the
Employment Agreement dated as of November 7, 1995 (the "Agreement") by and
between Gary B. Eichhorn and Open Market, Inc. (the "Company"), is entered into
by and between Gary B. Eichhorn and the Company.
For valuable consideration, receipt of which is hereby acknowledged, the
parties hereby agree as follows:
1. The Executive and the Company hereby confirm that the Executive's annual
Base Salary and Annual Bonus for the Employment Year December 7, 1997
through December 7, 1998 shall be as specified in the minutes of the
Compensation Committee of the Board of Directors for the meeting held on
February 3, 1998 (which minutes shall not be subject to amendment for
purposes of this provision).
2. Subparagraphs 2(b) and (c) of the Agreement are hereby deleted in their
entirety and the following shall be inserted in lieu thereof:
(b) Notwithstanding the foregoing, on each anniversary of the
Commencement Date commencing with the second anniversary of such date,
Executive's employment hereunder shall be automatically extended for one
(1) year unless either Executive or the Company shall have given written
notice to the other of a desire that such automatic extension not occur,
which notice was given no later than ninety (90) days prior to the relevant
anniversary of the Commencement Date. If the Company gives Executive such
written notice, Executive shall be entitled to an aggregate payment,
payable as follows: (i) if a Change of Control (as defined below) has not
occurred prior to the termination upon expiration of the Employment Term,
in twelve substantially equal monthly installments after the expiration of
the Employment Term or (ii) if a Change of Control has occurred prior to or
upon termination upon the expiration of the Employment Term, in a lump-sum
within thirty (30) days after the expiration of the Employment Term, equal
in all cases to the sum of (x) the annual Base Salary in effect immediately
prior to such expiration, plus (y)(A) if a Change of Control has not
occurred prior to termination upon the expiration of the Employment Term,
the Annual Bonus payable pursuant to Paragraph 4 for the Employment Year
(as defined below) or full fiscal year, as the case may be, immediately
preceding such expiration date, or (B) if a
<PAGE>
Change of Control has occurred prior to or upon the termination upon
expiration of the Employment Term, the greater of (1) the Annual Bonus
payable pursuant to Paragraph 4 for the Employment Year, or full fiscal
year, as the case may be, immediately preceding such expiration date or (2)
one half of the Highest Annual Bonus (as defined in Paragraph 11),
provided, however, in all cases that the Company shall not be obligated
-------- -------
to make, and the Executive shall not be entitled to receive, such post-
employment payments if (x) the Company does not elect to extend the
Executive's employment for "Cause" (as defined in Paragraph 9) provided the
Company provides a Notice of Termination no later than the date of
expiration of the Employment Term or (y) such failure to extend by the
Company occurs after December 7, 2000.
(c) In addition, if the Company gives Executive such written notice
and as a result Executive is entitled to receive the post-employment
payment described in subparagraph (b) of this Paragraph 2, then effective
upon the date of expiration of the Employment Term, any options held by
Executive entitling him to purchase securities of the Company (or shares of
capital stock for which securities of the Company have been exchanged in a
Business Combination (as defined below)), which are then subject to
vesting, then (i) if a Change of Control has not occurred prior to the
termination upon the expiration of the Employment Term, then and to the
extent such options are subject to vesting, such options shall be
automatically modified to accelerate such vesting by one year, and (ii) if
a Change of Control has occurred prior to the termination upon the
expiration of the Employment Term, then such options shall be automatically
accelerated and become immediately exercisable in full.
Notwithstanding the above provisions of this subparagraph 2(c)(ii), if
during the nine month period subsequent to the date of the Amendment No. 1
to this Agreement, if (a) a Change of Control (as defined below) occurs as
a result of a Business Combination and (b) the acquiring entity and the
Company desire to account for such Business Combination as a "pooling-of-
interests" business combination, as defined by Accounting Principles Board
Opinion No. 16 (or its successor) and (c) the right to acceleration of the
exercisability of all outstanding unvested options to purchase common stock
of the Company (or shares of capital stock for which such shares of common
stock of the Company have been exchanged in a Business Combination)
precludes the Business Combination to be accounted for as a pooling-of-
interests business combination, as determined by the Company's Chief
Financial Officer, then the provisions of this subparagraph 2(c) are
revoked and shall have no force or effect, but any options held by
Executive entitling him to purchase securities of the Company (or shares of
capital stock for
-2-
<PAGE>
which such shares of common stock of the Company have been exchanged in a
Business Combination), which options are subject to vesting, shall be
automatically modified to accelerate such vesting by one year.
3. Paragraph 4 of the Agreement is hereby amended by adding the following as
subparagraph (c):
(c) In the event of the occurrence of a Change of Control (as defined
below), in addition to Executive's rights under other provisions of this
Agreement, following the occurrence of the Change of Control (the
"Effective Date"), Executive shall be entitled to receive such annual bonus
for the one year period commencing on the Effective Date as may be
determined by the Board of Directors, but in each event no less than the
annual bonus paid or payable in respect of the last full fiscal year
preceding the Effective Date the amount of which bonus was determined by
the Compensation Committee prior to such Change of Control.
4. Paragraph 5 of the Agreement is amended by adding the following as
subparagraph (d):
(d) Benefits Following a Change of Control. In the event of the
occurrence of a Change of Control, in addition to Executive's rights under
other provisions of this Agreement, for the one year period commencing on
the Effective Date, (i) Executive shall be entitled to participate in all
incentive plans, practices, policies and programs, all benefits under
welfare benefit, savings and retirement plans, practices, policies and
programs (including, without limitation, medical, prescription, dental,
disability, employee life, group life, split-dollar life, accidental death
and travel accident insurance plans and programs) and paid vacation in
accordance with the plans, practices, policies and programs provided by the
Company and its affiliated companies applicable generally to senior
executives of the Company and its affiliated companies, but in no event
shall such plans, practices, policies and programs provide the Executive
with benefits less favorable, in the aggregate, than the most favorable of
such plans, practices, policies and programs in effect for Executive at any
time during the 120-day period immediately preceding the Effective Date or,
if more favorable to the Executive, those provided generally at any time
after the Effective Date to other senior executives of the Company and its
affiliated companies, and (ii) Executive shall be entitled to receive
reimbursement for all reasonable expenses incurred by him in accordance
with the policies, practices and procedures of the Company in effect
immediately prior to the Effective Date.
-3-
<PAGE>
5. Subparagraph 7(b) of the Agreement is hereby amended by deleting the first
two sentences thereof and inserting in their place the following:
Executive shall be considered to be totally and permanently disabled
hereunder if he is absent from his duties with the Company on a full-time
basis for six (6) months as a result of incapacity due to mental or
physical illness or injury which is determined to be total and permanent by
a physician selected by the Company or its insurers and acceptable to the
Executive or his legal representative.
6. Paragraph 8 of the Agreement is hereby amended by adding at the end of the
second paragraph thereof the following:
, except as otherwise provided in this Agreement.
7. The definition of "Good Reason" in Paragraph 8 of the Agreement is hereby
amended by deleting the word "or" at the end of clause (v), deleting the
period at the end of clause (vi) and inserting in lieu thereof the
following:
; or
(vii) after a Change of Control, the Company's requiring the Executive to
travel on Company business to a substantially greater extent than required
immediately prior to the Change of Control.
8. The definition of a "Change of Control" in Paragraph 8 of the Agreement is
hereby amended to include the following after the word "Director" in the
seventh line of Section (i) on page 8 of the Agreement:
, but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by or on behalf of
a "person" (as such term is used in Section 13(d) of the Exchange Act or
any successor provision) other than the Board of Directors.
9. Paragraph 9 of the Agreement is hereby amended by adding at the end of the
first paragraph thereof the following:
Any Notice of Termination for Cause given after the occurrence of a Change
of Control must be given within ninety (90) days of the Board learning of
the event(s) or circumstance(s) which the Board believes constitute(s)
Cause.
-4-
<PAGE>
10. Paragraph 9 of the Agreement is hereby further amended by deleting clause
(2) thereof and inserting in lieu thereof the following:
(2) a period of thirty (30) days has elapsed since delivery of
such notice during which Executive was afforded an opportunity to cure the
reasons for the Company's intention to terminate for Cause.
11. Paragraph 10 of the Agreement is hereby amended by adding at the end
thereof the following:
The failure by the Executive or the Company to set forth in the Notice of
Termination any fact or circumstance which contributes to a showing of Good
Reason or Cause shall not waive any right of the Executive or the Company,
respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting such fact or circumstance in enforcing his or
the Company's rights hereunder.
12. Clause (ii) of Subparagraph 11(a) of the Agreement is hereby deleted
through the words "Termination Date" and the following shall be inserted in
lieu thereof:
(ii)(A) if a Change of Control has not occurred prior to the
effective date of such termination, the Annual Bonus payable pursuant to
Paragraph 4 for the Employment Year or full fiscal year, as the case may
be, which ended immediately preceding such Termination Date or (B) if a
Change of Control has occurred prior to or on the Termination Date, then
the greater of (1) the Annual Bonus payable pursuant to Paragraph 4 for the
Employment Year, or full fiscal year, as the case may be, which ended
immediately preceding such Termination Date or (2) one half of the Highest
Annual Bonus:
13. Subparagraph 11(a) is further amended by adding at the end of such
subparagraph the following:
The "Highest Annual Bonus" shall mean the higher of (1) the highest annual
cash bonus paid to Executive in the last two fiscal years prior to the date
of the Change of Control and (2) the annual bonus paid or payable
(including any bonus or portion thereof which has been earned but deferred
(and annualized for any fiscal year consisting of less than twelve full
months or during which the Executive was employed for less than twelve full
months), for the most recently completed fiscal year during the one year
period after the date of a Change of Control, if any.
-5-
<PAGE>
14. Paragraph 14 of the Agreement is hereby amended by deleting the last
sentence thereof and the following shall be inserted in lieu thereof:
The amount due to Executive (or his estate) under this Paragraph 14 in
payment of any bonus, other than the Annual Bonus, shall be a
proportionate amount of the bonus that would otherwise have been due
to Executive as if such termination had not occurred, and which
proportion shall be based on the number of elapsed days in the
applicable bonus period prior to the Termination Date. The amount due
to Executive (or his estate) under this Paragraph 14 in payment of the
Annual Bonus shall be (i) if a Change of Control has not occurred
prior to the effective date of such termination, then a proportionate
amount of the bonus that would otherwise have been due to Executive as
if such termination had not occurred, or (ii) if a Change of Control
has occurred prior to or on the effective date of such termination,
then a proportionate amount of the greater of (x) the Annual Bonus
payable pursuant to Paragraph 4 for the Employment Year ended
immediately preceding such Termination Date or (y) the Highest Annual
Bonus, and which proportion in all cases shall be based on the number
of elapsed days in the applicable bonus period prior to the
Termination Date.
15. Paragraph 12 of the Agreement is hereby deleted in its entirety and the
following shall be inserted in lieu thereof:
"Effect of Termination upon Equity Compensation. In the event (a)
----------------------------------------------
Executive's employment hereunder is terminated by him for a Good Reason or
by the Company other than for either Cause or total and permanent
disability, and (b) the Executive is entitled to the payments provided in
Paragraph 11, then effective upon the Termination Date, any options held by
Executive entitling him to purchase securities of the Company (or shares of
capital stock for which securities of the Company have been exchanged in a
Business Combination), which options are subject to vesting, shall become
immediately exercisable in full."
Notwithstanding the above, if during the nine-month period subsequent
to the date of the Amendment No. 1 to this Agreement, (a) a Change of
Control occurs as a result of a Business Combination and (b) the acquiring
entity and the Company desire to account for such Business Combination as a
"pooling-of-interests" business combination, as defined by Accounting
Principles Board Opinion No. 16 (or its successor) and (c) the right to the
acceleration of the exercisability of all outstanding unvested options to
purchase Common Stock of the Company (or shares of capital stock for which
securities of the Company have been exchanged in a Business Combination)
precludes the Business Combination to be accounted for as a pooling-of-
interests business combination, as determined by the Company's Chief
Financial Officer, then the provisions of this Section 2 are revoked and
shall have no force or effect, but any options held by Executive entitling
him to purchase securities of the Company (or shares of capital stock for
which
-6-
<PAGE>
securities of the Company have been exchanged in a Business Combination),
which options are subject to vesting, shall be automatically modified to
accelerate such vesting by one year.
16. Paragraph 18 is hereby amended by changing the title thereof to
"Mitigation; Full Settlement" and the following shall be inserted at the
end of such paragraph:
The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim,
right or action which the Company may have against the Executive (under
this Agreement or otherwise) or others.
17. Paragraph 19(1) is hereby amended by adding at the end of such paragraph
the following:
The Company shall pay such fees and expenses as incurred. Notwithstanding
the first sentence of this paragraph, Executive shall have no obligation to
reimburse the Company with respect to any fees or expenses incurred after a
Change of Control. In addition, after a Change of Control, the Company
shall pay interest on any delayed payment at the applicable Federal rate
provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986,
as amended.
18. The Agreement is further amended by adding the following as Section 20:
20. Termination Prior to Change of Control. Anything in this
--------------------------------------
Agreement to the contrary notwithstanding, if a Change of Control occurs
and if the Executive's employment with the Company is terminated prior to
the date on which the Change of Control occurs, and if it is reasonably
demonstrated by the Executive that such termination of employment (i) was
at the request of a third party who has taken steps reasonably calculated
to effect a Change of Control or (ii) otherwise arose in connection with or
anticipation of a Change of Control, then for all purposes of this
Agreement such termination shall be treated as occurring after a Change of
Control.
-7-
<PAGE>
19. Except as amended hereby, the Agreement shall remain in full force and
effect.
20. This Amendment may be executed in one or more counterparts, each of which
shall be deemed to be an original, but all of which shall be one and the
same document.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the day
and year first written above.
OPEN MARKET, INC.
/s/ Regina O. Sommer
--------------------------------------
Name: Regina O. Sommer
Title: Senior Vice President
and Chief Financial Officer
/s/ Gary B. Eichhorn
-----------------------------------------
Gary B. Eichhorn
-8-
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<PAGE>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 14,434
<SECURITIES> 13,224
<RECEIVABLES> 23,635
<ALLOWANCES> 1,842
<INVENTORY> 0
<CURRENT-ASSETS> 52,873
<PP&E> 23,732
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<COMMON> 31
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<TOTAL-LIABILITY-AND-EQUITY> 78,201
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