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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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)
DELAWARE 04-3214536
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
ONE WAYSIDE ROAD
BURLINGTON, MASSACHUSETTS 01803
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(781) 359-3000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
(TITLE OF CLASS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
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COMMON STOCK, $.001 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of February 27, 1998, the aggregate market value of the Registrant's
voting securities held by non-affiliates of the Registrant was approximately
$385,701,000.
The number of outstanding shares of the Registrant's Common Stock, $.001 par
value per share, as of February 27, 1998, was 31,995,070.
Documents Incorporated by Reference: Portions of the Registrant's Definitive
Proxy Statement to be filed with the Commission on or before April 29, 1998
are incorporated by reference in Part III.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
Open Market, Inc. ("Open Market" or "the Company") develops, markets,
licenses, and supports enterprise-class, application software products that
allow its customers to engage in business-to-business and business-to-consumer
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.
INDUSTRY BACKGROUND
The Internet and the World Wide Web have significantly altered the business
environment for companies of all sizes within every industry. For the first
time, businesses can reach buyers and buyers can reach businesses with
immediacy and efficiency, and with few constraints. The changes introduced by
this new commercial medium will encourage most companies to take advantage of
it or be threatened by competitors more adept at exploiting it.
Over the last five years, business use of the Internet has progressed in
stages. The focus in 1993 and 1994 was on communication-providing Web access
to users and using the Net to enhance the flow of information. It was during
this period that the term "intranet" was coined. Recognizing that prospective
buyers were becoming "wired", companies turned next to establishing a business
presence on the Web. The focus during this content stage began with Web site
content creation and now encompasses unique capabilities of the medium
including personalization, electronic communities and interactive marketing.
Having established an electronic presence and reached potential buyers,
businesses are moving to the next stage-commerce.
The Company believes that this trend towards Internet commerce will
accelerate in 1998 and that it will be applicable to the sellers of both "hard
goods" products and services as well as the sellers of "soft goods" products,
such as software and reference information. With regard to the longer term
opportunity, industry analysts such as Wessels, Arnold & Henderson, currently
project that the Internet Commerce Infrastructure opportunity will grow from
an estimated $764M in 1996 to more than $11.8B in the year 2000. Open Market
is well-positioned to take advantage of this fast-growing segment.
THE OPEN MARKET SOLUTION
Open Market's solution is comprised of application software products
complemented by maintenance, support, professional services offerings and
training, which enable customers to engage in business-to-business and
business-to-consumer Internet commerce, information commerce and commercial
publishing. Open Market's solution combines the advantages of distributed Web
servers deployed throughout a company and across the Internet with the ability
to manage business transactions and Internet applications from secure,
centrally managed sites.
Open Market's products are based upon its distinctive SecureLink
architecture which addresses the unique requirements of doing business over
the Web. SecureLink provides a selling company the freedom to establish its
electronic presence using virtually any system platform, any Web server
software and any authoring software or data repository. Similarly, SecureLink
imposes few constraints on buyers, allowing them to make purchases from any
Web-enabled client. SecureLink also functions over the established Web
communications infrastructure including firewalls and proxy servers.
STRATEGY
The Company's objective is to be a leading supplier of comprehensive,
packaged application software for Internet commerce, information commerce and
information publishing. To achieve this objective, the Company is pursuing the
following strategies:
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Broadly establish the premise that Internet commerce requires much more than
payment processing
Open Market believes that the Internet significantly alters the business
environment for companies of all sizes within every industry. In order for
Internet commerce strategies to be successful, Open Market is convinced that
comprehensive business applications with significantly more functionality than
just payment processing are required. Today, the successful leaders of
Internet commerce offer comprehensive, online order management, which usually
includes the capability to capture orders (item, price, tax and shipping
costs), process orders (authenticating buyers, determining form of payment,
processing payment and addressing fulfillment) and service orders online
(order and shipment status, transaction statements and customer service).
Provide comprehensive solutions utilizing packaged application software and
best-in-class services
The Company expects that the market for Internet commerce solutions will
rapidly move in favor of comprehensive, packaged applications. Such solutions
usually offer a faster time to market and therefore, inherently provide a
faster time to profitability. As in any maturing market, the natural evolution
is from customized to off-the-shelf solutions. A complete suite of services
will be a critical component of the ultimate success for Internet commerce
customers. The Company's product and services offerings are marketplace-driven
and reflect the best practices of customers that have been at the forefront of
Internet commerce.
Provide robust, end-to-end solutions in key markets
Open Market has recognized that in certain markets such as business-to-
business, retail and information commerce that its competitive position is
greatly enhanced by offering a robust, end-to-end solution. In 1997, the
Company completed two acquisitions that allowed it to complement its business-
to-business and information commerce solutions. These acquisitions resulted in
the introduction of the Company's LiveCommerce(TM) Internet catalog product
and deeper integration between the Folio product suite and Transact(TM). The
Company continues to evaluate opportunities for relationships with companies
who offer complementary products as well as potential technology acquisitions,
in order to round out its solutions in these and other key markets.
Leverage the Company's expertise
Since the Company began operations in April 1994, it has focused its
financial and technical resources primarily on solutions for Internet
commerce. This focus has enabled the Company to develop a substantial
knowledge-base resulting from real world experience with a large base of
customers conducting Internet commerce. This extensive experience in the
marketplace is an asset that the Company intends to exploit in a number of
ways. First, the Company believes that there is an opportunity to transfer
this knowledge-base through its consulting organization and to capitalize on
what it perceives as a growing demand for business consulting services.
Second, the Company plans to continue to enhance its product offerings by
incorporating the "best practices" and lessons learned in the marketplace into
future product releases.
Leverage the Company's established direct and indirect distribution channels
During 1996 and 1997, the Company made significant investments to establish
global direct and indirect distribution channels. The Company increased its
direct field-based sales force to 77 people worldwide and believes that its
seasoned team of sales professionals has the depth of experience required for
solution selling. In addition, the Company has developed cooperative
partnerships with Internet technology vendors, systems integrators and Web
site developers. Many of these, including commerce service providers ("CPSs")
help to extend the Company's sales and support infrastructure, post-sales
implementation capabilities and broadened market awareness for its products.
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Provide global business solutions
Open Market believes that the Internet opens up a global market to
businesses of all sizes located anywhere in the world. Consequently, the
Company has invested significantly in an infrastructure designed to offer
comprehensive services outside of the United States. For example, since
February 1997, it has operated a fully staffed Technical Support and
Professional Services center in the Netherlands. In addition, the Company
began localization of software products in 1997 and expects to continue to
make localization a high priority in 1998. The Company has established
partnerships with several of the leading distributors around the world,
including Mitsui, Mitsubishi Electronic Information Network Corporation,
Komatsu Soft, and Kanematsu Corporation in Japan; LG Software in Korea; and
Pernec Technologies in Malaysia.
Leverage the Company's intellectual property
The Company believes that its intellectual property provides Open Market
with a significant strategic advantage, both competitively and financially.
The recent issuance of three patents to the Company by the United States
Patent and Trademark Office is of significant importance to Open Market.
First, the patents improve the Company's ability to defend its market
position. Second, they enhance the Company's ability to sell the products
which are based on them: Transact 4, LiveCommerce, and the Folio(R) suite of
products. Third, these patents provide licensing opportunities. Open Market
intends to make the technology covered by these patents broadly available and
to encourage the continued rapid evolution of commerce over the Web.
PRODUCTS AND SERVICES
SOFTWARE PRODUCTS
As of December 31, 1997, Open Market has developed a comprehensive,
integrated family of software products, which include Transact, LiveCommerce,
and the Folio product suite.
Transact
Transact performs comprehensive order management for Internet commerce,
including capturing of orders (item, price, tax and shipping costs),
processing orders (authenticating buyers, determining form of payment,
processing payment and addressing fulfillment) and servicing orders online
(order and shipment status, transaction statements and customer service).
Transact was first deployed in October 1994 and was commercially released in
May 1996. The fourth version of Transact is expected to be available in the
first half of 1998. This version represents a significant re-architecture of
the product and the combined best practices from the Company's established
customer base. Its capabilities include:
. Analysis and Profiling--Transact's integrated database enables analysis
of sales, buyer behaviors and buyer profiles. It allows assessment of
the effectiveness of advertisements, special offers and other
promotions. It stores information needed to identify and target specific
groups of customers.
. Demand Generation-- Transact's digital offers and digital coupons allow
merchants to use a variety of digital media, including the Web, e-mail,
"push" technology and CD-ROM, to distribute special offers and discounts
that attract target customers to their Web site.
. Order Management--Transact provides for the secure, online capture of
orders and validation of payment and address. Transact can perform fraud
detection and check inventory before accepting orders and also supports
partial shipments and back orders.
. Fulfillment--Transact supports the offering of physical goods, digital
goods, and subscriptions. Transact provides notification when an order is
placed via an interface to enterprise systems, via a fax, an email, or a
secure Web page. As an order is processed, the customer is notified and
the online status of its order is updated. For digital goods, such as
software and information, Transact provides customers with a secure,
self-service download facility.
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. Payment--Transact supports multiple types of payment. In addition to
purchase orders, credit cards, procurement cards, micro-transactions, and
Secure Electronic Transactions ("SET"), the system can also support debit
cards, smart cards, frequent buyer points and other payment types.
Transact performs real-time authorization requests and automatic
settlement. It supports automatic subscription renewals and partial
billing and credits with payment reauthorization.
. Self-Service--Transact provides customers with personalized "Smart
Pages"--secure access to complete shipping, payment and billing
information. Transact can retrieve tracking information from a third-
party shipping company. It also allows customers to resolve payment
problems and replace forgotten passwords themselves.
. Customer Service--Transact offers customer service representatives a
comprehensive set of tools for analyzing and resolving customer issues
quickly and easily. For example, representatives can locate orders by
customer, date, item and even payment type.
. Reporting--Transact's integrated database helps companies stay abreast of
developments in their online businesses. The system provides an array of
standard reports as well as support for some of the most popular
reporting and analysis software.
Transact is sold to two types of customers: (1) corporate customers which
use the product for their own Web-based business activities and (2) CSPs which
use the product to provide Internet commerce transaction capabilities to their
business customers. Corporate customers include Disney, Time Inc., SegaSoft,
Tribune Company, USA Today, and Business Week. Transact runs on high-end UNIX
systems and the Company expects to port the software to the NT/Intel platform
sometime in the future.
CSPs include many of the world's largest telecommunications companies, such
as AT&T (which has been using Transact for more than a year as the core of its
SecureBuy service), British Telecommunications, France Telecom, Swiss PTT, and
Nippon Telegraph & Telephone. Barclay's Bank and First Union are among the
banks and other financial services firms that serve as CSPs using Transact. As
of December 31, 1997, more than thirty CSPs have purchased Open Market
software. Open Market and UPS also recently announced plans to jointly develop
and market a logistics and order tracking module for Transact.
LiveCommerce
In September 1997, Open Market introduced LiveCommerce, an application which
allows manufacturers, distributors and retailers to create and manage large
catalogs on the Web. Early customers include C&K Components and Tandy (for its
RadioShack site). In combination with Transact, LiveCommerce represents a
comprehensive Internet commerce solution for both large retailers and
industrial manufacturers in industries such as scientific equipment,
computers, office supplies, replacement parts and electronic components. The
Company first shipped LiveCommerce on October 31, 1997.
Folio Products
Open Market's Folio products allow publishers to make information available
electronically on either CD-ROM or the Internet. The products were developed
by ten-year-old Folio Corporation which Open Market acquired in March 1997.
The products are widely used by commercial publishers selling business-
critical information to industries such as tax, legal, accounting, banking and
insurance.
Open Market's Folio products include:
. Folio(R) Builder-- helps automate the process of gathering information
from multiple sources and formats into a single, secure repository--the
Folio infobase--for easy distribution and maintenance.
. Folio siteDirector(TM)-- reduces the effort required to manage and
distribute information over an intranet, extranet, and the Internet. It
is an application that converts Folio infobases to HTML and delivers
information, on demand, to Web browsers.
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. Folio SecurePublish(TM)--combines the information delivery technology
found in Folio siteDirector with Transact's Internet commerce
capabilities. SecurePublish offers a comprehensive solution for secure
commercial publishing on the Web.
. Folio VIEWS(R)--helps users easily find their way through information
collections that are hundreds of megabytes in size. Features such as
sophisticated, near-instantaneous searching, custom query templates,
highlighters, sticky notes, and bookmarks make even the largest reference
collections seem friendly and familiar.
. Folio(R) Publisher--provides a software solution for commercial
publishers that want to sell their informational content electronically.
It lets publishers (1) package robust information retrieval software with
their information and (2) provide a redistribution license and software
solution for creating commercial infobase titles. The product's
sophisticated security helps publishers protect intellectual property and
support diverse sales agreements.
. Folio(R) Integrator--contains a software developer's kit for building
commercial InfoApps, which are customized applications that integrate
diverse data types.
The combination of the Folio product suite with Transact provides a robust,
end-to-end solution for the information commerce market.
Commercial publishing customers include Reed Elsevier, Thomson Financial and
Professional Publishing Group, and Wolters-Kluwer. The Folio products are also
used to manage information by customers outside of the publishing industry,
including Novell, KPMG, PeopleSoft and Travelers Insurance.
SERVICES
Open Market believes that offering a comprehensive suite of professional
services is a critical component of the ultimate success of its customers. In
support of this belief, the Company has invested in service program
development and worldwide delivery capabilities. Open Market offers a full
suite of services to its customers, including Maintenance and Technical
Support Services, Professional Services and Education Services.
The Company supports its products from service centers in Burlington,
Massachusetts; Provo, Utah; and Amsterdam in the Netherlands.
Maintenance and Technical Support
Open Market customers have a choice in the level of support they purchase
for their Open Market products. Basic support includes technical support with
problem reporting via phone, email, fax, or the Web. It also includes product
updates and upgrades, discounts on training and a subscription to a quarterly
newsletter. Premium support includes basic support plus 7-day by 24-hour
technical support.
Professional Services
The Company has witnessed growing demand for its Professional Services as
companies recognize the need to capture the knowledge and experience that Open
Market has gained from its extensive experience in the marketplace. Open
Market's Professional Services augment solutions to meet project goals and
technical needs, including:
. Business consulting
. Internet commerce business planning
. Solution design and implementation
. Information management project consultation
. Management and execution
. Resident consulting programs for extended resource needs
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Education Services
Open Market understands that training is essential for customers who are
responsible for the management and operation of Open Market's products. Open
Market's Educational Services provide a flexible way to provide its customers
the training they need. Open Market offers training options for all current
products. Classes are held regularly at training facilities in the Open Market
regional service centers. In addition, the Company offers customized training
solutions onsite at the customer's own facility.
TECHNOLOGY
Open Market has a differentiated set of products and services that are built
upon an innovative product architecture, a fully integrated approach to
security and patented technology.
SecureLink Architecture
Open Market's products are based upon its distinctive SecureLink
architecture which addresses the unique requirements of doing business over
the Web. SecureLink provides a selling company the freedom to establish its
electronic presence using virtually any system platform, any Web server
software and any authoring software or data repository. Similarly, SecureLink
imposes few constraints on buyers, allowing them to make purchases from any
Web-enabled client. SecureLink functions over the established Web
communications infrastructure, including firewalls and proxy servers.
The standards-based, distributed characteristic of the SecureLink
architecture will become even more important with the emergence of electronic
communities. These entities will thrive by aggregating information from
multiple distributed sources and unifying it within a common commercial
infrastructure.
Security in Open Market's Commerce Architecture
Security is a primary concern for both buyers and sellers on the Internet.
Although both parties want to ensure that their communications are
appropriately secure, they will each have different requirements and different
levels of risk tolerance for securing their communication. Some typical
security concerns include privacy of the communication, authentication of the
other party and integrity of the communication. Buyers and sellers may also be
concerned about the storage of sensitive information, such as payment
credentials, as well as the prevention against unauthorized users.
Open Market's approach to security is based on four key principles:
. Understanding the business risks and expectations for security in
Internet commerce applications
. Designing with the "whole system" in mind - a system cannot be secure if
parts of it are left open
. Incorporating the best technology components for the applications
. Operating the system carefully - without proper operation, the best
security system can be compromised.
Open Market believes that advanced security technology is fundamental to the
success of Internet commerce and consequently, has made transaction and
content security a key aspect of its product strategy. Since its inception,
the Company has invested heavily in developing security expertise in order to
provide robust, highly secure product and service offerings. These offerings
are based upon the Company's flexible, multi-level security architecture,
which allows customers to select the level of security appropriate for their
applications. The Company intends to continue its focus on developing and
enhancing its security technology.
Product Development
The Company believes that its future success will depend in large part on
its ability to keep pace with technological developments in the marketplace
and address the increasingly sophisticated needs of its customers.
Accordingly, the Company intends to expand and enhance its existing product
offerings and to introduce new
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application products for the business-to-business and business-to-consumer
Internet commerce, information commerce and commercial publishing markets. The
Company's customers and partners provide significant product feedback that is
channeled into product development and innovation. While the Company expects
that certain of its new products will be developed internally, the Company
may, based on timing and cost considerations, expand its product offerings
through acquisitions. In addition, the Company has relied and will continue to
rely on external relationships and development resources for development of
certain of its products and components thereof.
Since inception, the Company has made substantial investments in product
development and related activities. As of December 31, 1997, the Company had
more than 200 employees and independent contractors devoted to product
development. The Company's research and development expenses were $27 million,
$16 million, and $7 million in 1997, 1996 and 1995, respectively. To date, the
Company has not capitalized any software development costs. The Company
expects to continue to devote substantial resources to its product development
activities.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Patents
The Company relies on trademark, copyright, patent, and trade secret laws;
employee and third-party non-disclosure agreements; and other methods to
protect its proprietary rights.
In 1998, the United States Patent and Trademark Office issued three patents
to Open Market covering its technology that is not only core to the Company's
products, but that the Company believes should have an impact on the industry
at large.
The key technologies covered by the three patents are as follows:
The Payment Patent, Patent Number 5,724,424, covers secure, real-time
payment using credit and debit cards over the Internet. It is one of the
earliest and broadest Internet payment patents yet granted, with a filing
date of December 16, 1993.
The Network Sales Patent, Patent Number 5,715,314, covers the use of
"electronic shopping carts" which merchants provide to their customers as a
way to accumulate items to purchase before checking out. This patent also
describes a method of passing of payment and purchase information through a
URL. This technology allows digital offers to be distributed on the Web,
via e-mail, CD-ROMs and over broadcast media.
The Session Identifier Patent, Patent Number 5,708,780, covers an
essential facet of Web-based marketing--the ability to analyze how users
browse through content on a Web site. Session identifiers allow businesses
to market more effectively to buyers based upon viewing patterns. Session
identifiers can also be used to limit access to specific content, such as
subscription, account information, or an organization's internal
information.
In addition to the three patents issued in 1998, Open Market is the
exclusive licensee, under a Patent and Copyright License Agreement between the
Massachusetts Institute of Technology and Open Market, Inc. dated as of
October 17, 1994, of rights to U.S. Patent No. 4,845,658 "Information Method
and Apparatus Using Simplex and Duplex Communications" issued on July 4, 1989
(the "Broadcast Patent"). The Broadcast Patent describes a method for
broadcasting digital data from a centralized data source to multiple remote
sites (using systems such as satellite, cable, Internet) with user control
over the data selected and stored from the broadcast data.
Open Market continually assesses its technology for potential patent filings
and currently has additional patent applications pending in the United States
relating to the Company's product architecture and technology. While the
Company believes that the pending patent applications relate to patentable
inventions, there can be no
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assurance that any pending or future patent applications will be granted or
that any issued patent relied upon by the Company in the future will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
or under licensing agreements will provide competitive advantages to the
Company. The Company believes that, due to the rapid pace of technological
innovation for Internet products, its ability to establish and maintain a
position of technology leadership in the industry is dependent more on the
skill of its development personnel than upon the legal protections afforded
its existing technology.
The Company's success is dependent in part upon its proprietary software
technology. There can be no assurance that its agreement with employees,
consultants, and others who participate in the development of its software
will not be breached or that the Company's trade secrets will not otherwise be
known to or independently developed by competitors. Furthermore, there can be
no assurance that the Company's efforts to protect its proprietary technology
will not fail to prevent the development and design by others of products or
technology similar to or competitive with those developed by the Company.
The Company is not aware that it is infringing on any patent or violating
any other proprietary rights of any third party relating to the Company or the
Company's products. However, the software market is characterized by frequent
and substantial intellectual property litigation. Intellectual property
litigation is complex and expensive, and the outcome of such litigation is
difficult to predict.
The Company's success will depend in part on its continued ability to obtain
and use licensed technology that is important to the functionality of its
products. An inability to continue to procure or use such technology would
likely have a material adverse effect on the Company's business, operating
results, or financial condition.
CHANNELS AND PARTNERSHIPS
The Company's objective is to achieve broad market penetration by employing
multiple distribution channels, including direct sales, OEM's, system
integrators, independent software vendors and VAR's.
The Company has offices throughout the United States and in Canada, the
United Kingdom, France, Germany, the Netherlands, Italy, Japan and Australia.
It has established distribution relationships in several other countries,
including Singapore, Malaysia, Korea, India, Brazil, South Africa and Israel.
Augmenting the Company's direct field based sales force, which at December 31,
1997 totaled 77 employees, are more than 200 business partners selling
solutions based on the Folio product suite. More than 1,000 companies have
signed up for the Company's Web commerce partner program. In addition, Open
Market's CSPs collectively have the potential to deliver the benefits of Open
Market's software to small and medium-sized businesses across the world.
CUSTOMERS AND MARKETS
Open Market's software products are used by a variety of companies across a
broad spectrum of markets, including telecommunications, financial services,
business-to-business, business-to-consumer (retail), and commercial
publishing. These businesses take advantage of Open Market's solutions either
directly by deploying the software within their own enterprises, or indirectly
by procuring services from commerce service providers (CSPs) running Open
Market software. These CSPs offer commerce services to smaller and mid-sized
companies that wish to outsource the cost and complexity associated with
implementing and maintaining this software within their own organizations.
CSPs include many of the world's largest telecommunications companies, such
as AT&T (which has been using Transact for more than a year as the core of its
SecureBuy service), British Telecommunications, France Telecom, Swiss PTT, and
Nippon Telegraph & Telephone. Barclay's Bank and First Union are among the
banks and other financial services firms that serve as CSPs using Transact. As
of December 31, 1997, more than thirty CSPs have purchased Open Market
software. Open Market and UPS also recently announced plans to jointly develop
and market a logistics and order tracking module for Transact.
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Business-to-business manufacturers and distributors use Open Market's
software to conduct Internet commerce with their partners. Open Market has a
comprehensive solution for business-to-business suppliers who not only want to
build and manage a compelling online catalog, but who also want to move to
selling products directly over the Internet. Some of Open Market's customers
in this area include: C&K Components, CIC, and Tandy.
With the growth of the Internet and the shift in Internet user demographics,
many retailers have accelerated their move to the Internet. According to a CSC
and Retail Information Systems News survey, the percentage of retailers that
are conducting commerce online has nearly doubled from 11% to 20% from just
one year ago. The business-to-consumer segment is focused on large retail and
manufacturing companies that sell physical goods directly to the consumer.
Large consumer companies such as Disney, Sony, and USA Today are using Open
Market's Transact system to handle their high-end Internet commerce needs.
Commercial publishers, including Reed Elsevier, Thomson Financial and
Professional Publishing Group and Wolters-Kluwer, use Open Market's products
to create and distribute high-value collections of professional reference
information via CD-ROM and the Internet. Corporate users of professional
information use the Folio product suite to customize, personalize, manage, and
distribute information vital to their ongoing business. Examples include
Novell, KPMG, PeopleSoft, and Travelers Insurance.
The combined approach of Folio software to organize information
electronically and Transact to capture the commercial value of that
information comprises Open Market's end-to-end information commerce solution.
For example, commercial publishers can easily combine information from
disparate sources into a single, secure repository - the Folio infobase - and
then publish it on the World Wide Web. Folio technology makes it possible to
manage, index, search, and distribute multi-gigabyte collections of free-
format information. Open Market's information commerce solution enables
corporate consumers of professional publishing information to search huge
stores of information, find exactly what they are looking for and purchase it
quickly and easily.
Folio products have been widely adopted across a broad spectrum of
industries including commercial publishers who use Folio products to publish
more than 3,500 titles containing legal, tax, accounting and banking reference
material.
COMPETITION
The market for Internet commerce software and services is relatively new,
intensely competitive, quickly evolving, and subject to rapid technological
change. The Company expects competition to continue to increase in the future.
The Company's Internet commerce products compete with two categories of
competitors. The first category is in-house custom solutions built by a
company's Information Technology group. The second category is products and
components offered by companies such as Microsoft, IBM, Netscape, Oracle,
BroadVision, Connect, InterWorld and others. Some of the Company's current and
potential competitors have longer operating histories, greater name
recognition, larger installed customer bases and significantly greater
financial, technical, and marketing resources than those of the Company. Such
competition could materially adversely affect the Company's business,
operating results or financial condition.
In addition, several companies compete with the total information publishing
solution offered by the Folio suite of products. There are companies such as
Verity and Fulcrum that offer text-search retrieval engines that are seen as
competitive products but that do not address rights management or
personalization. Other potential competitors have not yet made a transition to
the Internet and have not addressed the commerce aspects of an Internet
solution. The emergence of the Internet and the creation and adoption of new
standards such as XML are creating a new group of competitors. Some of these
competitors are large companies such as Microsoft and Lotus who have greater
name recognition and more resources at their disposal.
Competitive factors in the Internet-based software and services market
include innovative technology, breadth of product features, product quality,
marketing and distribution resources, customer service and support and price.
While the Company believes that its experience to date demonstrates its
ability to compete, there can be no assurance that the Company will be able to
compete successfully against current or future competitors.
10
<PAGE>
EMPLOYEES
As of December 31, 1997, the Company had 527 employees and independent
contractors. Of the total employees and independent contractors, 203 were in
engineering, 168 in sales and marketing, 90 in customer service and 66 in
finance and administration. 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 management personnel. Competition for highly qualified
personnel is intense and there can be no assurance that the Company will be
able to retain its key managerial and technical employees or that it will be
able to attract and retain additional highly qualified personnel in the
future. None of the Company's employees is represented by a labor union. The
Company has not experienced any work stoppages and considers its relations
with its employees to be good.
ITEM 2. PROPERTIES
Open Market's principal offices are located in Burlington, Massachusetts and
consist of approximately 120,000 square feet of office space. The Burlington
facility lease expires in February 2010. The Company also leases approximately
81,000 square feet of office space in Cambridge, Massachusetts. The majority
of the Cambridge space was sublet in February 1998 to a commercial tenant for
the balance of the lease term. The Company believes its existing facilities
are adequate to meet its future needs.
In addition, the Company owns and occupies a building which consists of
approximately 32,000 square feet in Provo, Utah. This office space is used
primarily as an engineering, marketing, sales, and customer support facility
for the Company's Folio product group.
The Company also has sales offices throughout the United States and in
Canada, the United Kingdom, France, Germany, the Netherlands, Italy, Japan,
and Australia. The Company offers support services to its customers from three
facilities located in Burlington, Massachusetts; Provo, Utah; and Amsterdam in
the Netherlands.
The Company owns substantially all equipment used in its facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not engaged in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of the year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol OMKT. The following table sets forth for the periods indicated the high
and low closing sales prices per share of the Company's Common Stock as
reported on the Nasdaq National Market during 1997 and 1996, from the time of
the Company's initial public offering.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ------- -------
<S> <C> <C>
December 31, 1997......................................... $16.750 $ 9.313
September 30, 1997........................................ $15.813 $ 9.625
June 30, 1997............................................. $13.250 $ 6.625
March 31, 1997............................................ $15.875 $ 9.000
December 31, 1996......................................... $25.500 $12.875
September 30, 1996........................................ $24.750 $11.500
June 30, 1996............................................. $42.266 $21.750
</TABLE>
11
<PAGE>
The number of stockholders of record of the Company's Common Stock on
February 27, 1998 was 353.
The Company has never paid any cash dividends on its Common Stock. The
Company currently intends to retain any earnings for future growth and
therefore does not anticipate paying any cash dividends on its Common Stock in
the foreseeable future.
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, 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 based
on a weighted average market price, as defined, of the Company's freely
tradable shares. For such issuances the Company has relied upon the exemption
from registration under Section 4(2) of the Securities Act of 1933, as amended
(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 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 each purchaser, either alone or with his
purchaser representative, had such knowledge and experience in financial and
business matters that he was capable of evaluating the merits and risks of the
prospective investments.
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 of the
Company (898,000) shares were issued at the closing and an equal amount were
issued in January of 1998), $10,000,000 in cash at the 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
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. The purchase agreement also contained a provision allowing
for a purchase price adjustment based on change in net assets of Folio from
the estimated value at December 31, 1996 through the closing date. As a result
of this provision, the former stockholder of Folio was required to return
270,116 shares of the Company's common stock issued in the transaction. For
such issuances the Company has relied upon the exemption from registration
under Section 4(2) of the Securities Act of 1933. The basis for this exemption
is satisfaction of the conditions of Rule 506 under the Securities Act.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
OPEN MARKET, INC.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues........................................ $ 61,260 $ 22,501 $ 1,806
Cost of revenues................................ 11,642 5,493 1,013
-------- -------- --------
Gross profit.................................... 49,617 17,008 793
-------- -------- --------
Selling and marketing........................... 36,554 23,810 4,517
Research and development........................ 26,732 16,393 6,717
General and administrative...................... 11,335 5,925 3,587
In-process research and development............. 34,250 -- --
-------- -------- --------
Total operating expenses........................ 108,871 46,128 14,821
-------- -------- --------
Loss from operations............................ (59,254) (29,120) (14,028)
-------- -------- --------
Interest income, net............................ 2,050 2,963 156
Other (expense)/income.......................... (218) 7 --
-------- -------- --------
Loss before foreign income taxes................ (57,422) (26,150) (13,872)
-------- -------- --------
Provision for foreign income taxes.............. 584 360 --
-------- -------- --------
Net loss........................................ $(58,006) $(26,510) $(13,872)
-------- -------- --------
Weighted average shares outstanding--basic and
diluted**...................................... 30,994 20,923 9,329
Net loss per share--basic and diluted**......... $ (1.87) $ (1.31) $ (1.49)
======== ======== ========
AT YEAR END
Cash and marketable securities.................. $ 30,638 $ 72,033 $ 3,712
Working capital................................. $ 18,840 $ 66,820 $ (5,783)
Total assets.................................... $ 80,874 $ 85,802 $ 7,947
Stockholders' equity (deficit).................. $ 43,458 $ 72,367 $(15,187)
Number of common shares outstanding............. 30,971 28,565 9,390
Number of employees and contractors............. 527 351 240
======== ======== ========
</TABLE>
- --------
** See Note 2 of Notes to Consolidated Financial Statements
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EMPLOYEE AND SHARE DATA)
RESULTS OF OPERATIONS
OVERVIEW
Open Market Inc. develops, markets, licenses and supports enterprise-class,
packaged application software products and professional services that allow
its customers to engage in business-to-business and business-to-consumer
Internet commerce, information commerce and commercial publishing. The Company
had revenues of $22.5 million in 1996 and $61.3 million in 1997. It has been
publicly held since May 1996 and employs approximately 500 people. Open
Market's leading 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.
13
<PAGE>
REVENUES
Revenues for the three-year period were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Product revenues................................... $48,168 $17,200 $ 365
Percentage of total revenues..................... 79% 76% 20%
Service revenues................................... 13,092 5,301 1,441
Percentage of total revenues..................... 21% 24% 80%
------- ------- ------
Total revenues................................. $61,260 $22,501 $1,806
======= ======= ======
Geographic split of revenues for the three-year period were as follows:
<CAPTION>
DECEMBER 31,
------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
North America...................................... 70% 83% 100%
Europe/Africa...................................... 18% 7% --
Asia/Pacific Rim................................... 10% 8% --
Other.............................................. 2% 2% --
------- ------- ------
Total revenues................................. 100% 100% 100%
======= ======= ======
</TABLE>
1997 VS. 1996
In 1997 the Company's product revenues grew 180% over 1996 product revenues.
The Company increased the unit sales of its flagship product, Transact, while
also increasing revenue from the sale of Folio products. Additionally, the
one-time licensing of the Company's Axcess technology generated significant
revenues during the year compared to 1996. LiveCommerce also began to generate
revenues in the last quarter of the year.
In addition, an increased amount of activity in the Company's recurring
revenue stream helped bring revenues to new highs. Included in the recurring
revenue stream are publisher royalty revenues and the sale of merchant
licenses.
The Company's service revenues grew by 147% over the prior year due to a
developing professional services practice as well as an increased customer
base which generated significant maintenance and support revenue. The
continued demand for consulting services in 1997 fueled the significant growth
in the services area. The consulting revenue was generated from engagements
relating to developing payment gateways, fraud modules, custom engineering as
well as other special projects which complement the Company's Internet
commerce solutions.
The geographic breakdown of the Company's total revenue became more
diversified during 1997. The North American region dropped as a percentage of
revenue but has grown by 129% since 1996. Penetration into the Europe/Africa
region was the most significant change during the year. The Company focused on
capturing the large telecommunications companies in these areas and its
success in doing so led to increased revenue from that geographic region.
Revenues from the Asian and Pacific Rim regions also increased as a percentage
of total revenues during the year due to the Company's commitment to a strong
international field organization. The revenue by region breakdown reflects
increased diversification in 1997.
No customers accounted for more than ten percent of total revenues during
1997.
1996 VS. 1995
In March 1996, the Company announced two products, Transact and Axcess,
which generated a significant portion of the Company's 1996 product revenues.
During the third quarter of 1996, in response to customer
14
<PAGE>
demands, the Company expanded its consulting practice to perform consulting
services in conjunction with the implementation of these products. In 1995,
the Company generated service revenues through development, consulting and
other services performed for customers to assist them in their development of
services and products for the Internet. In the second half of 1995, the
Company began recording product revenue for its Web server products which were
developed primarily to serve as platforms for the Company's aforementioned
product offerings.
COST OF PRODUCT REVENUES
Cost of product revenues for the three-year period were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996 1995
------ ---- ----
<S> <C> <C> <C>
Cost of product revenues................................. $2,477 $768 $44
Percentage of product revenues......................... 5% 4% 12%
</TABLE>
1997 VS. 1996
In 1997 and 1996, cost of product revenues included costs to distribute the
product, costs of media and third-party royalties for technology incorporated
within certain products. The increase in 1997 was primarily related to the
increase in revenues for the year. Management believes that these costs as a
percentage of product revenues may increase slightly in the future as sales of
these products increase and as the Company incorporates more third-party
technology in its products.
1996 VS. 1995
During 1996, the Company's cost of revenues included third-party royalties
in addition to the costs of media and distribution. During 1995, there were no
third-party royalty costs included in the cost of product revenues. The
Company's cost of product revenues as a percentage of product revenues had
decreased during this period of time due to increased product sales.
COST OF SERVICE REVENUES
Cost of service revenues for the three-year period were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996 1995
------ ------ ----
<S> <C> <C> <C>
Cost of service revenues............................... $9,166 $4,725 $969
Percentage of service revenues....................... 70% 89% 67%
</TABLE>
1997 VS. 1996
Service costs consist of personnel and related costs incurred in providing
support, consulting, development and other services to customers. The 1997
cost of service revenues included the delivery of all services from the
European support center as well as product training courses. The cost of
service revenues as a percentage of total service revenues was significantly
reduced during 1997. This reduction was principally due to a realization of
investments made in 1996. The Company built an infrastructure to support its
customers during 1996 by increasing headcount and opening its support center
in Europe. During 1997, the Company improved utilization rates of its
consulting group thus improving gross profits. A growing consulting practice
has led to better utilization rates and more efficient projects for the
services business. The Company continued to increase the number of consultants
throughout the year in order to meet the needs of its customers. The Company
plans to continue improving the margins in its service business.
15
<PAGE>
1996 VS. 1995
In 1996 and 1995, the cost of service revenues consisted primarily of
personnel and related costs incurred providing support, consulting,
development and other services to customers. In response to customer interest
for consulting services, the Company increased its number of consultants
during the second half of 1996. During the fourth quarter of 1996, the Company
opened its European support center as a result of its foreign expansion and
the need for a local support presence.
OPERATING EXPENSES
Operating expenses for the three-year period were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Selling and marketing.............................. $ 36,554 $23,810 $ 4,517
Research and development........................... 26,732 16,393 6,717
General and administrative......................... 11,335 5,925 3,587
In-process research and development................ 34,250 -- --
-------- ------- -------
Total operating expenses......................... $108,871 $46,128 $14,821
======== ======= =======
</TABLE>
1997 VS. 1996
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 and literature. The substantial increase in these expenses
in 1997 from 1996 was primarily attributable to the increase in the number of
sales and marketing personnel from the acquisition of Folio. Other costs
included in selling and marketing are the preparation and distribution of new
product sales literature and an increase in facilities from foreign sales
offices which opened during 1997. Selling and marketing expenses also
increased due to the commissions expense on significantly larger revenues. The
Company's domestic sales strategy consists primarily of a direct sales force
for Internet commerce products and a combination of a direct sales force and
channel partners for its Folio products. The Company's international sales
strategy consists of a direct sales force and channel partners to distribute
all of its products. The investments the Company has made in the selling and
marketing functions will be capable of supporting operations in 1998. The
Company expects selling and marketing expenses to decrease as a percentage of
revenues.
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 facilities costs related to such
activities. The substantial increase in these expenses in 1997 from 1996 was
primarily attributable to the increase in the number of research and
development personnel from the acquisitions of Folio and Waypoint. The Company
continued the hiring of additional software engineers and consultants to
develop and enhance the Company's products during 1997, in addition to those
added through the acquisitions. Internationalization costs for the Company's
various products also contributed to the increased research and development
costs. Qualifying capitalizable software development costs were immaterial in
all periods, and accordingly, the Company has charged all such expenses to
research and development in the period incurred. The Company expects research
and development expenses to decrease as a percentage of revenues.
General and administrative expenses consist primarily of the cost of
finance, management and administrative personnel, as well as legal and other
professional fees. The substantial increase in these expenses in 1997 from
1996 was primarily attributable to the increase in the number of general and
administrative personnel from the acquisition of Folio. Other items that
contributed to increased costs were amortization of goodwill (as a result of
the acquisition of Folio), increased legal fees, as well as the expansion of
the Company's operations. Additionally, the Company recorded a higher bad debt
provision which was in proportion with its increased revenues. With the recent
announcement of the Company's patents, there is a possibility of increased
legal and other expenses associated with patent related issues. The Company
expects the general and administrative expenses to decrease as a percentage of
revenues.
16
<PAGE>
The in-process research and development has been expensed as a charge
against operations in the first quarter of 1997, and is included in the
accompanying consolidated statement of operations. The amount allocated to
acquired in-process research and development from the Waypoint and Folio
acquisitions 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 development and testing
prior to reaching technological feasibility. However, there can be no
assurance that these projects will reach technological feasibility or develop
into products that may be sold profitably by the Company. The technology
acquired has required, and will continue to require, substantial additional
development by the Company.
1996 VS. 1995
The substantial increase in selling and marketing expenses in 1996 and 1995
was primarily attributable to the increase in the number of sales and
marketing personnel, preparation and distribution of new product sales
literature, increase in promotional and advertising expenses and an increase
in facilities related costs from a new sales headquarters and foreign sales
offices opened during 1996.
The substantial increase in research and development expenses in 1996 and
1995 was primarily attributable to the hiring of additional software engineers
and consultants to develop and enhance the Company's products as well as
increased costs related to equipment and facilities.
The increase in general and administrative expenses in 1996 and 1995
resulted primarily from the hiring of additional management and administrative
personnel and, to a lesser extent, an increase in legal and other professional
fees as well as the expansion of the Company's operations.
NON-OPERATING INCOME
Non-operating income for the three-year period were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996 1995
------ ------ ----
<S> <C> <C> <C>
Interest income........................................ $2,827 $3,042 $242
Interest expense....................................... (777) (79) (86)
Other (expense)/income................................. (218) 7 --
------ ------ ----
Total non-operating income........................... $1,832 $2,970 $156
====== ====== ====
</TABLE>
1997 VS. 1996
Interest income represents interest earned on cash, cash equivalents,
marketable securities and a loan to a founder of the Company. The decrease in
interest income in 1997 is attributable to lower average investments in cash,
cash equivalents and marketable securities, primarily as a result of funding
operations and capital expenditures as well as the Folio acquisition. Interest
expense represents interest accrued on the Company's note payable related to
the Folio acquisition in the first quarter of 1997, borrowing under the
Company's line-of-credit and an obligation under a license agreement. Other
expense represents foreign currency exchange losses.
1996 VS. 1995
The increase in interest income in 1996 was attributable to higher average
investments in cash, cash equivalents and marketable securities, primarily as
a result of the closing of the Company's initial public offering in May 1996
and the sale of Series C Redeemable Convertible Preferred Stock in January
1996. Interest expense represented interest payable on the Company's equipment
line of credit and term note payable, which were paid off during 1996, and an
obligation under a license agreement. Other income represents foreign currency
exchange gains.
17
<PAGE>
PROVISION FOR INCOME TAXES
Provision for income taxes for the three-year period were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Provision for income taxes................................... $584 $360 $--
</TABLE>
1997 VS. 1996
The Company has had domestic losses for tax purposes for the period from
inception to December 31, 1997. During 1997, the Company recorded a provision
for foreign income taxes of $584 compared to $360 for 1996. These expenses
relate to governmental withholding taxes in certain foreign jurisdictions and
income taxes for the Company's foreign operations. The Company anticipates
that the provision for income taxes will fluctuate in the future and is
dependent upon the geographic location of future sales and the associated
withholding taxes in certain countries. The provision for income taxes will
also fluctuate when the Company becomes subject to taxes in the United States.
1996 VS. 1995
The provision for taxes in 1996 was related to the geographic location of
sales associated with the withholding taxes in certain countries. There was no
provision for income taxes prior to 1996 as the Company had no material
foreign operations or revenues.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had approximately $30,638 in cash, cash
equivalents and marketable securities, a decrease of $41,395 from December 31,
1996. The Company established an unsecured line of credit arrangement with a
bank during 1997, which provides up to $15,000 in financing of which $10,000
is a line of credit and $5,000 is available to fund letters of credit.
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 December 31, 1997). The
Company is required to comply with certain restrictive covenants under this
agreement. There were $5,168 of borrowings outstanding and $9,832 available
under the line as of December 31, 1997.
The Company's operating activities utilized cash and cash equivalents of
approximately $28,815, $27,053 and $4,060 during 1997, 1996 and 1995,
respectively. Deferred revenues, which provided approximately $4,390 of cash
for operating activities from inception through December 31, 1997, represents
cash received from customers for product and service revenues in advance of
revenue recognition by the Company. Deferred revenues will fluctuate based
upon the timing of cash receipts relative to the recognition of product and
service revenues. There can be no assurance that certain deferred revenues
will be recognized as revenues in future periods and that the Company will not
be required to refund certain cash payments received from its customers.
The Company's investing activities used cash and cash equivalents of
approximately $7,646, $28,663 and $2,967 for the years ended December 31,
1997, 1996 and 1995, respectively. The Company used $11,400 in the acquisition
of Folio during the first quarter of 1997. Additional funds were used to
invest in the Company's worldwide headquarters, computer equipment and other
property and equipment. Some of the investing activities were funded by the
sale of marketable securities during 1997.
18
<PAGE>
The Company's financing activities provided cash and cash equivalents of
approximately $6,168, $101,814 and $10,103 for the years ended December 31,
1997, 1996 and 1995, respectively. In 1997, the Company derived the majority
of its funding from a line of credit and prior to 1997, the primary source of
funding was from the initial public offering in May 1996 and the private sales
of equity securities.
Capital expenditures were approximately $7,000 during 1997 and these were
used to fund the purchase of certain property and equipment as well as the
leasehold improvements of a new headquarters facility. The Company has no
material purchase commitments as of December 31, 1997. The Company estimates
that capital expenditures in 1998 will be approximately $4,000 to $5,000 and
plans to continue investing in the required technology and facilities to keep
the Company up-to-date with changing technology.
At December 31, 1997, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $65,000. These losses
are available to reduce federal and state taxable income, if any, in future
years. The Company does not have any foreign loss carryforwards to offset
future income. The domestic loss carryforwards 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. It is the
Company's objective to become a profitable enterprise and to realize the
benefits of its deferred tax assets. However, in evaluating the realizability
of these deferred tax assets, management has considered the Company's short
operating history, the volatility of the market in which it competes, the
operating losses incurred to date and believes that given the significance of
this evidence, a full valuation reserve against its deferred tax assets is
required as of December 31, 1997 and 1996.
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.
----------------
This Annual Report contains 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 forgoing, 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 from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results." The Company may seek
additional funding through public or private financing. There can be no
assurance, however, that additional financing will be available from any of
these sources or will be available on terms acceptable to the Company.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Annual Report and presented elsewhere by management from time to time.
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 which 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, which may also lengthen
the sales cycle.
19
<PAGE>
Developing Internet market
The market for the Company's Internet products and services has only
recently begun to develop and is rapidly evolving. If the market fails to
develop or develops more slowly than expected, the Company's operating results
could be materially adversely affected.
Recent acquisitions
In February 1997 and March 1997, the Company completed the strategic
acquisitions of Waypoint and Folio, respectively. 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.
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 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.
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.
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 companies in new and rapidly evolving markets.
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.
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.
20
<PAGE>
Accounting standards
Accounting standards, including those promulgated by the American Institute
of Certified Public Accountants ("AICPA") and the Financial Accounting
Standards Board ("FASB"), change frequently. The AICPA issued Statement of
Position No. 97-2 on revenue recognition, which the Company has adopted and
does not believe will impact its operating results. The recently adopted FASB
pronouncements on reporting comprehensive income and disclosure about segments
of an enterprise and related information also have not had a material effect
on the Company's results of operations. There can be no assurance that these
or future pronouncements will not impact the Company's future operating
results.
Litigation
Litigation regarding intellectual property rights, copyrights, and patents
is increasingly common in the software industry. In addition, the Company
faces risks on other general corporate legal matters.
Inflation
To date, inflation has not had a significant impact on the Company's
operations. While management expects this trend to continue in the short-term,
the long-term outlook is uncertain.
Year 2000 Compliance
The Company recognizes that it must ensure that its products and operations
will not be adversely impacted by Year 2000 software failures which can arise
in time-sensitive software applications which utilize a field of two digits to
define the applicable year. In such applications, a date using "00" as the
year may be recognized as the year 1900 rather than the year 2000. The Company
is in the process of identifying anticipated costs, problems and uncertainties
associated with resolving Year 2000 issues. Although management does not
expect Year 2000 issues to have a material, adverse impact on the Company's
business or future results of operations, there can be no assurance that there
will not be interruptions of operations, other limitations of system or
product functionality or that the Company will not incur significant costs to
avoid such interruptions or limitations.
21
<PAGE>
FINANCIAL INFORMATION BY QUARTER (UNAUDITED)
The following table sets forth certain unaudited quarterly financial data
for 1996 and 1997. In the opinion of management, the unaudited quarterly
information has been prepared on the same basis as the audited Consolidated
Financial Statements and includes all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of the information
for the periods presented. The quarterly operating results are not necessarily
indicative of results of operations for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 30, 1996 1996 1997 1997 1997 1997
-------- -------- -------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenues........ $ 2,248 $ 3,002 $ 5,250 $ 6,700 $ 9,056 $12,433 $11,859 $14,820
Service revenues........ 427 1,706 1,456 1,712 2,302 3,101 3,872 3,817
------- ------- ------- ------- -------- ------- ------- -------
Total revenues........ 2,675 4,708 6,706 8,412 11,358 15,534 15,731 18,637
------- ------- ------- ------- -------- ------- ------- -------
Cost of Revenues:
Product revenues........ 137 132 147 352 866 639 468 504
Service revenues........ 297 1,160 1,303 1,965 2,122 2,400 2,294 2,350
------- ------- ------- ------- -------- ------- ------- -------
Total cost of
revenues............. 434 1,292 1,450 2,317 2,988 3,039 2,762 2,854
------- ------- ------- ------- -------- ------- ------- -------
Gross profit.......... 2,241 3,416 5,256 6,095 8,370 12,495 12,969 15,783
------- ------- ------- ------- -------- ------- ------- -------
Operating Expenses:
Selling and marketing... 4,119 5,162 6,347 8,182 7,982 9,590 9,417 9,565
Research and
development............ 3,701 3,927 4,264 4,501 5,375 7,461 7,107 6,789
General and
administrative......... 1,469 1,512 1,638 1,306 2,371 3,284 3,021 2,659
In-process research and
development............ -- -- -- -- 34,250 -- -- --
------- ------- ------- ------- -------- ------- ------- -------
Total operating
expenses............. 9,289 10,601 12,249 13,989 49,978 20,335 19,545 19,013
------- ------- ------- ------- -------- ------- ------- -------
Loss from operations.. (7,048) (7,185) (6,993) (7,894) (41,608) (7,840) (6,576) (3,230)
------- ------- ------- ------- -------- ------- ------- -------
Interest income......... 200 571 1,163 1,108 890 710 719 509
Interest expense........ (19) (45) (8) (7) (50) (220) (287) (220)
Other (expense)/income.. -- -- (7) 14 (36) (49) (95) (39)
------- ------- ------- ------- -------- ------- ------- -------
Loss before income
taxes................ (6,867) (6,659) (5,845) (6,779) (40,804) (7,399) (6,239) (2,980)
------- ------- ------- ------- -------- ------- ------- -------
Provision for foreign
income taxes........... -- -- 25 335 340 111 133 --
------- ------- ------- ------- -------- ------- ------- -------
Net loss.............. $(6,867) $(6,659) $(5,870) $(7,114) $(41,144) $(7,510) $(6,372) $(2,980)
======= ======= ======= ======= ======== ======= ======= =======
</TABLE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Open Market, Inc.:
We have audited the accompanying consolidated balance sheets of Open Market,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the three-year
period ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Open Market, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 2, 1998
23
<PAGE>
OPEN MARKET, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 19,666 $ 49,765
Marketable securities................................... 10,972 22,268
Accounts receivable, net of allowance for doubtful
accounts of $1,470 and $200 in 1997 and 1996,
respectively........................................... 23,102 5,126
Prepaid expenses and other current assets............... 1,423 1,468
Loan to Founder......................................... 993 1,500
--------- --------
Total current assets.................................. 56,156 80,127
--------- --------
Property and equipment, at cost:
Computers and office equipment.......................... 12,129 6,194
Land and building....................................... 4,200 --
Construction in progress................................ 3,300 --
Leasehold improvements.................................. 1,072 1,081
Furniture and fixtures.................................. 812 493
--------- --------
21,513 7,768
Less--Accumulated depreciation and amortization........... 6,356 2,568
--------- --------
15,157 5,200
--------- --------
Intangible assets......................................... 7,787 --
Other assets.............................................. 1,774 475
--------- --------
Total assets.......................................... $ 80,874 $ 85,802
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations............. $ 50 $ 35
Line of credit.......................................... 5,168 --
Accounts payable........................................ 3,268 4,338
Accrued expenses........................................ 14,440 5,680
Deferred revenues....................................... 4,390 3,254
Note payable............................................ 10,000 --
--------- --------
Total current liabilities............................. 37,316 13,307
--------- --------
Long-term obligations, net of current maturities.......... 99 128
--------- --------
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--30,971,000 and 28,565,000
shares in 1997 and 1996, respectively................. 31 28
Additional paid-in capital.............................. 137,427 114,977
Other equity............................................ 6,920 --
Deferred compensation................................... (275) --
Accumulated deficit..................................... (100,644) (42,638)
--------- --------
Total stockholders' equity............................ 43,459 72,367
--------- --------
Total liabilities and stockholders' equity............ $ 80,874 $ 85,802
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Revenues:
Product revenues......................... $ 48,168 $ 17,200 $ 365
Service revenues......................... 13,092 5,301 1,441
---------- ---------- ---------
Total revenues......................... 61,260 22,501 1,806
---------- ---------- ---------
Cost of revenues:
Product revenues......................... 2,477 768 44
Service revenues......................... 9,166 4,725 969
---------- ---------- ---------
Total cost of revenues................. 11,643 5,493 1,013
---------- ---------- ---------
Gross profit........................... 49,617 17,008 793
---------- ---------- ---------
Operating expenses:
Selling and marketing.................... 36,554 23,810 4,517
Research and development................. 26,732 16,393 6,717
General and administrative............... 11,335 5,925 3,587
In-process research and development...... 34,250 -- --
---------- ---------- ---------
Total operating expenses............... 108,871 46,128 14,821
---------- ---------- ---------
Loss from operations................... (59,254) (29,120) (14,028)
Interest income............................ 2,827 3,042 242
Interest expense........................... (777) (79) (86)
Other (expense)/income..................... (218) 7 --
---------- ---------- ---------
Loss before provision for income
taxes................................. (57,422) (26,150) (13,872)
Provision for income taxes................. 584 360 --
---------- ---------- ---------
Net loss............................... $ (58,006) $ (26,510) $ (13,872)
========== ========== =========
Net loss per share--basic and diluted...... $ (1.87) $ (1.31) $ (1.49)
========== ========== =========
Weighted average common equivalent shares
outstanding--basic and diluted............ 30,994,000 20,923,000 9,329,000
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------------------------------------------
REDEEMABLE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK OTHER EQUITY
-------------------- ----------------- -------------------- TOTAL
$.001 ADDITIONAL COMMON DEFERRED STOCKHOLDERS'
NUMBER CARRYING NUMBER PAR PAID-IN SHARES CARRYING COMPEN- ACCUMULATED EQUITY
OF SHARES VALUE OF SHARES VALUE CAPITAL EQUIVALENTS VALUE SATION DEFICIT (DEFICIT)
---------- -------- ---------- ----- ---------- ----------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1994........ 1,850,000 $ 1,850 9,336,000 $ 9 -- -- -- -- $ (1,292) $ (1,283)
Issuance of
Series B
redeemable
convertible
preferred
stock, net of
issuance costs
of $64......... 1,731,000 9,355 -- -- -- -- -- -- (64) (64)
Repurchase and
retirement of
restricted
common stock... -- -- (74,000) -- -- -- -- -- -- --
Exercise of
common stock
options........ -- -- 128,000 -- 32 -- -- -- -- 32
Net loss........ -- -- -- -- -- -- -- -- (13,872) (13,872)
---------- -------- ---------- --- -------- ------- ------ ----- --------- --------
Balance, December
31, 1995........ 3,581,000 11,205 9,390,000 9 32 -- -- -- (15,228) (15,187)
Issuance of
Series C
redeemable
convertible
preferred
stock, net of
issuance costs
of $900........ 2,695,000 26,950 -- -- -- -- -- -- (900) (900)
Conversion of
redeemable
convertible
preferred stock
into common
stock.......... (6,276,000) (38,155) 13,437,000 13 38,142 -- -- -- -- 38,155
Issuance of
common stock in
initial public
offering, net
of
underwriters'
commission and
issuance costs
of $6,673...... -- -- 4,600,000 5 76,122 -- -- -- -- 76,127
Exercise of
common stock
options........ -- -- 1,138,000 1 470 -- -- -- -- 471
Issuance of
common stock
purchase
warrant (Note
6(h)).......... -- -- -- -- 211 -- -- -- -- 211
Net loss........ -- -- -- -- -- -- -- -- (26,510) (26,510)
---------- -------- ---------- --- -------- ------- ------ ----- --------- --------
Balance, December
31, 1996........ -- -- 28,565,000 28 114,977 -- -- -- (42,638) 72,367
Exercise of
common stock
options........ -- -- 710,000 1 355 -- -- -- -- 356
Employee stock
purchase plan.. -- -- 59,000 -- 658 -- -- -- -- 658
Issuance of
common stock in
Waypoint
acquisition.... -- -- 739,000 1 9,548 -- -- -- -- 9,549
Issuance of
common stock in
Folio
acquisition,
net of purchase
price
adjustment..... -- -- 898,000 1 11,509 628,000 6,920 -- -- 18,430
Deferred
compensation
related to
stock options.. -- -- -- -- 380 -- -- (380) -- --
Compensation
expense........ -- -- -- -- -- -- -- 105 -- 105
Net loss........ -- -- -- -- -- -- -- -- (58,006) (58,006)
---------- -------- ---------- --- -------- ------- ------ ----- --------- --------
Balance, December
31, 1997........ -- $ -- 30,971,000 $31 $137,427 628,000 $6,920 $(275) $(100,644) $ 43,459
========== ======== ========== === ======== ======= ====== ===== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(58,006) $(26,510) $(13,872)
Adjustments to reconcile net loss to net cash
used in operating activities--
Depreciation and amortization................... 3,797 1,723 808
Amortization of intangible assets............... 1,351 -- --
Write-off of in-process research and
development.................................... 34,250 -- --
Compensation expense............................ 105 -- --
Issuance of common stock purchase warrant....... -- 211 --
Changes in assets and liabilities--
Accounts receivable............................. (14,565) (3,900) (1,226)
Prepaid expenses and other current assets....... 472 (949) (526)
Accounts payable................................ 1,907 2,980 1,287
Accrued expenses................................ 2,382 3,039 2,583
Deferred revenues............................... (508) (3,647) 6,886
-------- -------- --------
Net cash used in operating activities............ (28,815) (27,053) (4,060)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment............. (3,846) (4,525) (2,864)
Increase in construction-in-progress............ (3,300) -- --
Repayment (issuance) of loan to Founder......... 507 (1,500) --
Sales (purchases) of marketable securities...... 11,296 (22,268) --
Cash acquired from Waypoint acquisition......... 372 -- --
Cash paid in Folio acquisition.................. (11,400) -- --
Increase in other assets........................ (1,275) (370) (103)
-------- -------- --------
Net cash used in investing activities............ (7,646) (28,663) (2,967)
-------- -------- --------
Cash flows from financing activities:
Borrowings under the line of credit............. 5,168 -- --
Proceeds (payments) from long-term obligations.. (14) (834) 780
Proceeds from the issuance of redeemable
convertible preferred stock, net of issuance
costs.......................................... -- 26,050 8,241
Proceeds from bridge financing.................. -- -- 1,050
Proceeds from the exercise of common stock
options........................................ 356 471 32
Proceeds from the employee stock purchase plan.. 658 -- --
Proceeds from issuance of common stock, net of
underwriters' commissions and issuance costs... -- 76,127 --
-------- -------- --------
Net cash provided by financing activities........ 6,168 101,814 10,103
-------- -------- --------
Foreign exchange effect on cash and cash
equivalents..................................... 194 (45) --
Net (decrease)/increase in cash and cash
equivalents..................................... (30,099) 46,053 3,076
Cash and cash equivalents, beginning of year..... 49,765 3,712 636
-------- -------- --------
Cash and cash equivalents, end of year........... $ 19,666 $ 49,765 $ 3,712
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid during year....................... $ 53 $ 79 $ 86
======== ======== ========
Taxes paid during year.......................... $ 270 $ -- $ --
======== ======== ========
Supplemental schedule of non-cash financing
activities:
Conversion of bridge financing into redeemable
convertible preferred stock.................... $ -- $ -- $ 1,050
======== ======== ========
Conversion of preferred stock into common
stock.......................................... $ -- $ 38,155 $ --
======== ======== ========
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.
27
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) OPERATIONS
Open Market, Inc. develops, markets, licenses and supports enterprise-class,
packaged application software products and professional services that allow
its customers to engage in business-to-business and business-to-consumer
Internet commerce, information commerce and commercial publishing. The Company
has been publicly held since May 1996 (NASDAQ:OMKT) and employs approximately
500 people. 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.
The Company is subject to risks common to growing technology-based
companies, including rapid technological change, a developing Internet market,
recent acquisitions, product release schedules, competition from substitute
products and larger companies, dependence on key personnel, limited operating
history, quarterly operating results and the successful development and
marketing of commercial products and services.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of the following significant accounting policies described in this note and
elsewhere in the accompanying notes to consolidated financial statements.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
(b) Revenue Recognition
The Company recognizes revenue in accordance with the provisions of
Statement of Position No. 91-1 (SOP 91-1), Software Revenue Recognition. The
Company generates revenue from licensing the rights to use its software
products to end users, porting its products to hardware manufacturers'
operating environments and sublicense fees from resellers. The Company also
generates service revenues from the sale of postcontract customer support and
the sale of certain consulting and development services.
In October 1997, the Financial Accounting Standards Board issued SOP 97-2,
Software Revenue Recognition, which supersedes SOP 91-1 and is effective for
transactions entered into in fiscal years beginning after December 15, 1997.
The adoption of this will not have a material impact on the Company's results
of operations.
Revenues from software license agreements are recognized upon delivery of
the software if there are no significant post-delivery obligations, and
payment is fixed and determinable. If an acceptance period is required,
revenues are recognized upon customer acceptance. The Company enters into
reseller arrangements for certain products that typically provide for
sublicense fees payable to the Company based on a percentage of the Company's
list price. Royalty and sublicense revenues from the Company's reseller
arrangements are recognized when earned, either on a per-unit basis as
reported to the Company by its licensees, or, with regards to guaranteed
minimums, upon shipment of the master copy of all software to which the
guaranteed minimum sublicense fees
28
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
relate, if there are no significant post-delivery obligations. Revenues for
post-contract customer support are recognized ratably over the term of the
support period, which is typically one year. Revenues from development and
consulting services are recognized upon customer acceptance or the period in
which services are provided, if customer acceptance is not required, and the
revenues are fixed and determinable.
Cost of product revenues consists of costs to distribute the product,
including the cost of the media on which it is delivered and royalty payments
to third-party vendors. Cost of service revenues consists primarily of
consulting and support personnel salaries and related costs.
Deferred revenues represent cash received from customers for products and
services in advance of revenue recognition.
(c) 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 original maturities of less than three months. Marketable securities are
investment-grade securities with original maturities of greater than three
months but less than one year. The average maturity of the Company's
marketable securities is approximately nine months at December 31, 1997. To
date, the Company has not recorded any realized gains or losses.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- -------
<S> <C> <C>
Cash and cash equivalents--
Commercial paper and corporate bonds...................... $12,714 $38,322
Cash...................................................... 4,406 1,215
Money market accounts..................................... 1,946 5,640
State and municipal securities............................ 600 2,000
U.S. government and agency securities..................... -- 2,588
------- -------
Total cash and cash equivalents......................... $19,666 $49,765
======= =======
Marketable securities--
Corporate and other debt securities....................... $ 5,022 $15,250
State and municipal bonds................................. 3,950 2,019
U.S. government and agency securities..................... 2,000 4,999
------- -------
Total marketable securities............................. $10,972 $22,268
======= =======
</TABLE>
(d) Depreciation and Amortization
The Company provides for depreciation and amortization using the straight-
line method to allocate the cost of property and equipment over their
estimated useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -----------
<S> <C>
Building...................................................... 25 Years
Computers and office equipment................................ 3-5 Years
Leasehold improvements........................................ Lease term
Furniture and fixtures........................................ 7 Years
</TABLE>
29
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Construction in progress represents the Company's leasehold improvements for
the Burlington facility which opened in February 1998.
(e) Research and Development Expenses
The Company has evaluated the establishment of technological feasibility of
its products in accordance with SFAS No. 86, Accounting for the Costs of
Computer Software To Be Sold, Leased or Otherwise Marketed. The Company sells
products in a market that is subject to rapid technological change, new
product development and changing customer needs; accordingly, the Company has
concluded that technological feasibility is not established until the
development stage of the product is nearly complete. The Company defines
technological feasibility as the completion of a working model. The time
period during which costs could be capitalized, from the point of reaching
technological feasibility until the time of general product release, is very
short, and consequently, the amounts that could be capitalized are not
material to the Company's financial position or results of operations.
Therefore, the Company has charged all such costs to research and development
in the period incurred.
(f) 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 to be
issued to Reed Elsevier in January 1998 relating to the Folio acquisition.
Diluted net loss per share for the years ended 1997, 1996 and 1995 is the same
as basic net loss per share as the inclusion of the potential common stock
equivalents would be antidilutive. Calculations of basic and diluted net loss
per common share are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net loss..................................... $(58,006) $(26,510) $(13,872)
Accretion of preferred stock discount........ -- (900) (64)
-------- -------- --------
Net loss applicable to common stockholders... $(58,006) $(27,410) $(13,936)
======== ======== ========
Net loss per common share--basic and
diluted..................................... $ (1.87) $ (1.31) $ (1.49)
======== ======== ========
Weighted average common shares outstanding--
basic and diluted........................... 30,994 20,923 9,329
======== ======== ========
Antidilutive securities that were not
included--common stock options.............. 6,237 4,967 4,904
======== ======== ========
</TABLE>
30
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(g) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet risk and credit
risk concentrations. The Company has no significant off-balance-sheet risk or
credit risk concentrations. The Company maintains its cash and cash
equivalents with several financial institutions and invests in investment-
grade securities. The Company maintains reserves for the potential write-off
of accounts receivable. The Company recorded revenues of greater than 10% of
total revenues from the following customers:
<TABLE>
<CAPTION>
PERCENTAGE OF CUSTOMER
REVENUES
SIGNIFICANT -------------------------
YEAR ENDED CUSTOMERS A B* C
---------- ----------- ------- -------- -------
<S> <C> <C> <C> <C>
December 31, 1996.................. 1 -- -- 18%
December 31, 1995.................. 2 33% 16% --
</TABLE>
- --------
* This customer is a related party as discussed in Note 9.
The Company did not have a customer with revenues greater than 10% of total
revenues in the year ended December 31, 1997.
(h) Postretirement Benefits
The Company has no obligations for postretirement benefits.
(i) Financial Instruments
The estimated fair values of the Company's financial instruments, which
include cash equivalents, marketable securities, accounts receivable, accounts
payable, line of credit and long-term debt, approximate their carrying value.
(j) Use of Estimates
The preparation of the accompanying consolidated financial statements
required the use of certain estimates by management in determining the
Company's assets, liabilities, revenues and expenses. Actual results could
differ from those estimates.
(k) New Accounting Standards
In June 1997, the FASB issued SFAS No. 130 Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on
an annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997.
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 requires certain financial
and supplementary information to be disclosed on an annual and interim basis
for each reportable segment of an enterprise. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. Unless impracticable,
companies would be required to restate prior period information upon adoption.
The Company does not believe the adoption of these accounting pronouncements
will have a material impact on the Company's results of operations or
financial position.
31
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(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 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. 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 over two years depending on
certain future events, as defined. The employees earned $600 under their
employment agreements in the year ended December 31, 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
shares of common stock of the Company issued to the former stockholders of
Waypoint have been registered for resale pursuant to a registration statement
on Form S-3 declared effective by the Securities and Exchange Commission on
June 11, 1997.
The aggregate purchase price of $9,922 consisted of the following:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- ------
<S> <C>
Common stock.......................................................... $9,548
Assumed liabilities................................................... 156
Acquisition costs..................................................... 218
------
Total purchase price: $9,922
======
</TABLE>
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:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- ------
<S> <C>
Current assets....................................................... $ 590
Property, plant and equipment........................................ 76
Other assets......................................................... 6
In-process research and development.................................. 9,250
------
Total assets acquired: $9,922
======
</TABLE>
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
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
32
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
substantial development and testing prior to the reaching of technological
feasibility. However, there was no assurance that these projects would reach
technological feasibility or develop into products that might be sold
profitably by the Company. The technology acquired in the acquisition of
Waypoint has required, and may require, substantial additional development by
the Company.
(b) Folio Corporation
Pursuant to a Stock Purchase Agreement dated as of February 20, 1997 (the
"Stock Purchase Agreement"), 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 of the Company in January 1998 and (iv) issued a
promissory note of the Company in the original principal amount of $10,000
payable in either cash or a combination of cash and common stock of the
Company. The value of the shares of common stock of the Company 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 to be issued in January 1998, net of the forfeited shares. 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:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- -------
<S> <C>
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
=======
</TABLE>
33
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- -------
<S> <C>
Current assets...................................................... $ 4,729
Property, plant and equipment....................................... 6,605
Other assets........................................................ 41
In-process research and development................................. 25,000
Other acquired intangible assets.................................... 9,137
-------
Total assets acquired: $45,512
=======
</TABLE>
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
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
development and testing prior to reaching technological feasibility. However,
there can be no assurance that these projects will reach technological
feasibility or develop into products that may be sold profitably by the
Company. The technology acquired in the acquisition of Folio has required, and
will continue to require, substantial additional development by the Company.
The intangible assets are being amortized over five to seven years. The
Company recorded approximately $1,351 of amortization expense relating to
these intangible assets during 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:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Total revenues........................................ $ 64,005 $ 41,275
--------- ---------
Net loss.............................................. (26,773) (34,411)
========= =========
Net loss per share--basic and diluted................. $ (0.85) $ (1.48)
========= =========
</TABLE>
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 in-process research and development. For the year
ended December 31, 1996, the results of Waypoint have not been included as
Waypoint had not yet commenced 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.
34
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) LONG-TERM OBLIGATIONS
(a) Line-of-Credit Arrangement
The Company has an unsecured credit facility arrangement with a bank, which
provides up to $15,000 in financing of which $10,000 is a line of credit and
$5,000 is available to fund letters of credit. 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 December 31, 1997). The Company is required to comply
with certain restrictive covenants under this agreement. There was $9,832
available under this facility as of December 31, 1997.
(b) Obligation Under License Agreement
During 1994, the Company entered into a license agreement with a university
to utilize certain patented computer software. The Company recorded the
present value of the future commitments under contract, $217, as a component
of research and development expense during 1994. The balance of the obligation
was $149 and $163 at December 31, 1997 and 1996, respectively. The obligation
will be repaid in annual installments of $52 through 2002.
(5) INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes, the objective of which is to recognize the amount of current and
deferred income taxes payable or refundable at the date of the financial
statements as a result of all events that have been recognized in the
accompanying consolidated financial statements, as measured by enacted tax
laws.
The provision for income taxes for the years ended December 31, 1997 and
1996 consists of foreign income and withholding taxes.
At December 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $65,000, which expire through
2011. The Company also has certain tax credits available to offset future
federal and state income taxes, if any. Net operating loss carryforwards and
credits are subject to review and possible adjustments by the Internal Revenue
Service and may be limited in the event of certain cumulative changes in
excess of 50% in the ownership interests of significant stockholders over a
three-year period. The Company believes 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 components of the Company's deferred tax asset are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Net operating loss carryforwards............................ $26,000 $15,600
Tax credit carryforwards.................................... 1,400 367
Temporary differences....................................... 2,021 547
Amortization of intangibles................................. 9,790 --
------- -------
39,211 16,514
Less--valuation allowance................................... 39,211 16,514
------- -------
Net deferred tax assets..................................... $ -- $ --
======= =======
</TABLE>
It is the Company's objective to become a profitable enterprise and to
realize the benefits of its deferred tax assets. However, in evaluating the
realizability of these deferred tax assets, management has considered the
35
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Company's short operating history, the volatility of the market in which it
competes, the operating losses incurred to date, and believes that given the
significance of this evidence, a full valuation reserve against its deferred
tax assets is required as of December 31, 1997 and 1996. The increase in the
valuation allowance during these periods primarily relates to the Company's
operating results.
(6) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Preferred Stock
In April 1996, the Company's Board of Directors authorized the issuance of
up to 2,000,000 shares of $.10 par value preferred stock. At December 31,
1997, no shares are issued and outstanding.
(b) Common Stock
In April 1996, the stockholders authorized the issuance of up to 100,000,000
shares of common stock. At December 31, 1997, there are 15,551,000 shares
reserved for issuance under the Company's option and stock purchase plans.
(c) Initial Public Offering
In May 1996, the Company completed an initial public offering of 4,600,000
shares of its common stock at $18.00 per share. The Company received net
proceeds of approximately $76,127 after deducting the underwriters' commission
and issuance costs. Upon the closing of the initial public offering, all
shares of the Company's Series A, B and C redeemable convertible preferred
stock automatically converted into 13,437,000 shares of the Company's common
stock.
(d) 1994 Stock Incentive Plan
During 1994, the Company's Board of Directors adopted the 1994 Stock
Incentive Plan (the Incentive Plan). Under the Incentive Plan, as amended, the
Company has reserved and may issue up to 15,201,000 shares of common stock or
options to purchase common stock. As of December 31, 1997, there are 1,254,000
shares available for issuance under the Incentive Plan.
RESTRICTED COMMON STOCK
In 1994, the Company sold 5,813,000 shares of restricted common stock to
employees at $.00033 per share. These shares were subject to repurchase
agreements and were scheduled to vest over a four-year period. The Company
could have repurchased any unvested shares of common stock held by these
individuals upon the termination of their employment at $.00033 per share.
During 1995, the Company repurchased 74,000 shares of unvested common stock.
All of the unvested shares became vested upon the completion of the Company's
initial public offering in May 1996.
OPTIONS
Under the terms of the Incentive Plan, the Board of Directors may grant
incentive stock options or nonqualified stock options to purchase shares of
the Company's common stock. The purchase price and vesting schedule applicable
to each option grant are determined by the Board of Directors. Options
generally vest over a four-year period and expire 10 years from the date of
grant.
36
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company records deferred compensation when stock options are granted at
an exercise price per share that is less than the fair market value on the
date of the grant. Deferred compensation is recorded in an amount equal to the
excess of the fair market value per share over the exercise price multiplied
by the number of options granted. During 1997, the Company recorded $330 of
deferred compensation for the grant of 30,000 options as described above.
Compensation of $55 was recognized as an expense in 1997 and the remaining
amount will be recognized over the estimated vesting period of the underlying
options. Additionally, in connection with the modification of a certain option
agreement, the Company recorded $50 in compensation expense in 1997.
The following is a summary of the stock option activity:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE PRICE
SHARES PER SHARE
---------- -------------
<S> <C> <C>
Outstanding, December 31, 1994..................... -- --
Granted.......................................... 5,032,000 $0.36
Exercised........................................ (128,000) 0.25
---------- -----
Outstanding, December 31, 1995..................... 4,904,000 $ 37
Granted.......................................... 1,469,000 11.21
Exercised........................................ (1,138,000) 0.41
Terminated....................................... (268,000) 3.74
---------- -----
Outstanding, December 31, 1996..................... 4,967,000 $3.38
Granted.......................................... 2,708,000 11.17
Exercised........................................ (710,000) 0.50
Terminated....................................... (728,000) 9.44
---------- -----
Outstanding, December 31, 1997..................... 6,237,000 $6.38
========== =====
Exercisable, December 31, 1997..................... 2,107,000 $2.86
========== =====
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE PRICE NUMBER EXERCISE PRICE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PER SHARE OUTSTANDING PER SHARE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
1995.................... $ 0.17-$1.50 2,765,000 7.64 $ 0.43 1,632,000 $ 0.37
1996.................... $4.00-$35.13 1,123,000 8.35 $11.51 458,000 $11.35
1997.................... $0.25-$15.75 2,349,000 9.41 $10.94 17,000 $13.13
--------- ---------
6,237,000 2,107,000
========= =========
</TABLE>
(e) The 1996 Director Option Plan
In April 1996, the Company's Board of Directors approved the 1996 Director
Option Plan (the Director Plan) whereby the Company has reserved and may issue
up to 100,000 shares of common stock. Under the terms of the Director Plan,
each newly elected director will be granted an option to purchase that number
of shares of common stock determined by dividing $100 by the option exercise
price, at the then fair market value, as defined. In addition, commencing with
the 1997 annual meeting of the stockholders and for every annual meeting of
stockholders thereafter, each director who is not a founder or employee of the
Company will be granted an option to purchase that number shares of common
stock determined by dividing $30 by the option exercise price. These options
vest over a four-year period and expire 10 years from the date of grant at the
then fair market value. The
37
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
vesting of these options will accelerate upon a change of control, as defined.
At December 31, 1997, there were 27,000 options outstanding under the Director
Plan.
(f) The 1996 Employee Stock Purchase Plan
In April 1996, the Company's Board of Directors approved the 1996 Employee
Stock Purchase Plan (the Purchase Plan) whereby, the Company has reserved and
may issue up to an aggregate of 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. In January 1997, July 1997, and January 1998 the Company issued 24,000,
35,000 and 63,000 shares, respectively for gross proceeds of approximately
$325, $333 and $543, respectively. At December 31, 1997 there are 128,000
shares available for issuance under the plan.
(g) Pro Forma Disclosure of Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the
measurement of the fair value of stock options or warrants granted to
employees to be included in the statement of operations or, alternatively,
disclosed in the notes to consolidated financial statements. The Company has
determined that it will continue to account for stock-based compensation for
employees under Accounting Principles Board Opinion No. 25 and elect the
disclosure-only alternative under SFAS No. 123. The Company records the fair
market value of stock options and warrants granted to nonemployees in the
consolidated statement of operations. The Company has computed the pro forma
disclosures required under SFAS No. 123 for stock options granted in 1997,
1996 and 1995 using the Black-Scholes option pricing model. The weighted
average assumptions used for 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate.................. 5.75%-6.88% 5.54%-6.76% 5.63%-7.49%
Expected dividend yield.................. -- -- --
Expected life............................ 7 years 7 years 7 years
Expected volatility...................... 70% 70% 70%
</TABLE>
The total value of the options granted to employees and stock issued under
the employee stock purchase plan during 1997, 1996 and 1995 was computed as
approximately $16,943, $9,716 and $1,056, respectively. Of these amounts
approximately $8,908, $4,725 and $244 would be charged to operations for the
years ended December 31, 1997, 1996 and 1995, respectively. The remaining
amount, approximately $13,838, would be amortized over the remaining vesting
periods. The pro forma effect of these option grants for the years ended
December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net loss, as reported......................... $(58,006) $(26,510) $(13,872)
======== ======== ========
Net loss, pro forma........................... $(66,914) $(31,235) $(14,116)
======== ======== ========
Net loss per share--basic and diluted
As reported................................. $ (1.87) $ (1.31) $ (1.49)
======== ======== ========
Pro forma................................... $ (2.16) $ (1.54) $ (1.52)
======== ======== ========
</TABLE>
38
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The resulting pro forma compensation expense may not be representative of
the amount to be expected in future years as the pro forma expense may vary
based upon the number of options granted. The Black-Scholes option pricing
model was developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In addition,
option pricing models require the input of highly subjective assumptions,
including expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
(h) Common Stock Purchase Warrant
During September 1996, the Company issued a stock purchase warrant to one of
its customers for the purchase of 100,000 shares of the Company's common stock
at an exercise price of $25.00 per share. The warrant expired on December 31,
1997. At the time of issuance, the Company recorded a charge of $211,
representing the fair market value of the warrant, as calculated using the
Black-Scholes option pricing model.
(7) REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company's Board of Directors authorized 7,500,000 shares of preferred
stock and designated 1,850,000, 1,850,000 and 3,000,000 of such shares as
Series A, B and C redeemable convertible preferred stock, respectively (Series
A, B and C Preferred Stock). The Company's Series A, B and C Preferred Stock
were issued as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
DATE DESCRIPTION SHARES SHARE
---- ------------------------ --------- ---------
<S> <C> <C> <C>
June 1994..................... Series A Preferred Stock 1,850,000 $ 1.000
April, August and October
1995......................... Series B Preferred Stock 1,731,000 $ 5.405
January and March 1996........ Series C Preferred Stock 2,695,000 $10.000
</TABLE>
In connection with the Company's initial public offering (Note 6(c)), all
outstanding shares of redeemable convertible preferred stock were converted
into 13,437,000 shares of common stock. The Series A, B and C Preferred Stock
had the following rights, preferences and privileges. The Series A, B and C
Preferred Stock had liquidation preference over common stock in the event of a
liquidation, dissolution or winding up of the Company. At the request of the
majority of the Series A, B and C Preferred Stockholders, the Company would
have been required to redeem these shares for the redemption price plus any
declared but unpaid dividends. The Series A, B and C Preferred Stock were also
entitled to vote with the common stockholders as a single class, as defined,
and to receive dividends declared or paid on any shares of common stock in
preference to dividends on common stock. The Series A, B and C Preferred
Stockholders also had registration rights and the right of first refusal to
purchase any new securities offered by the Company, as defined. These rights,
preferences and privileges terminated upon the completion of the Company's
initial public offering.
39
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(8) COMMITMENTS
(a) Facilities
The Company leases its facilities and certain equipment under operating
leases that expire through February 2010. The future minimum lease commitments
at December 31, 1997, net of sublease income, are as follows:
<TABLE>
<S> <C>
Year Ended December 31,
1998............................................................... $ 3,216
1999............................................................... 3,053
2000............................................................... 3,034
2001............................................................... 3,015
2002............................................................... 2,678
Thereafter......................................................... 18,428
-------
$33,424
=======
</TABLE>
Rent expense included in the accompanying consolidated statements of
operations was approximately $2,670, $1,903 and $478 for the years ended
December 31, 1997, 1996 and 1995.
(b) Employment Agreement
The Company has entered into an employment agreement with an executive
officer that provides for bonus and severance benefits for a year upon
termination of employment, under certain circumstances, as defined. In
connection with the Waypoint acquisition (see Note 3(a)), the Company entered
into certain employment agreements.
(9) RELATED PARTY TRANSACTIONS
The Company has entered into agreements with certain stockholders that
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 product
and service revenues from related parties of approximately $6,129, $2,500 and
$295 during the years ended December 31, 1997, 1996 and 1995, respectively.
The Company had related party accounts receivable of approximately $182, $95
and $331 and related party deferred revenue of approximately $81, $600 and
$1,605 included in the accompanying consolidated balance sheets as of December
31, 1997, 1996 and 1995, respectively, from certain stockholders.
On February 5, 1996, the Company loaned $1,500 to a founder and director of
the Company. The loan is nonrecourse, secured by a pledge of 375,000 shares of
common stock, and bears interest at a rate of 5.61% per annum. The founder and
director repaid $507 of principal in 1997 reducing the loan balance to $993.
Interest receivable of $161 is included in prepaid expenses and other current
assets. The loan, as amended, is due and payable no later than November 1998.
The loan and accrued interest was paid in full subsequent to year end.
(10) EMPLOYEE BENEFIT PLAN
In October 1995, the Company adopted a 401(k) savings and investment plan
(the 401(k) Plan) for eligible employees. Each participant may elect to
contribute up to 15% of his or her compensation for the plan year, subject to
certain limitations, as defined. Company matching contributions are made to
the plan at the discretion
40
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
of the Board of Directors. There have been no discretionary contributions made
by the Company to the 401(k) Plan to date.
(11) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------- ------
<S> <C> <C>
Payroll and related expenses................................. $ 6,169 $3,084
Professional and consulting fees............................. 1,899 916
All other.................................................... 6,372 1,680
------- ------
$14,440 $5,680
======= ======
</TABLE>
(12) DEFERRED REVENUES
Deferred revenues consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1996
------ ------
<S> <C> <C>
Payments for future product deliverables...................... $ 726 $ 632
Prepaid sublicense fees....................................... 1,601 1,317
Prepaid service revenues...................................... 2,063 1,305
------ ------
$4,390 $3,254
====== ======
</TABLE>
(13) GEOGRAPHIC INFORMATION
Revenues by geographic destination as a percentage of total revenues are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
North America................................................ 70% 83% 100%
Europe/Africa................................................ 18 7 --
Asia and Pacific Rim......................................... 10 8 --
Other........................................................ 2 2 --
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
The Company's subsidiaries represent less than 10% of the consolidated total
revenues, net loss or assets.
(14) SUBSEQUENT EVENTS
In January of 1998, the Company's Board of Directors adopted a Shareholder
Protection Rights Plan declaring a dividend of one right for each share of the
Company's common stock outstanding at the close of business on February 12,
1998. The rights entitle the Company's shareholders to purchase one one-
thousandth of a share of a series of junior participating preferred stock of
the Company at an exercise price of $65.00. The rights become exercisable in
the event that another party acquires or announces its intention to acquire
beneficial ownership of 18% or more of the Company's common stock. Such
percentage may, at the Board's discretion, be
41
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
lowered, although in no event may it be lower than 10%. In the event of such
an acquisition or similar event, each right, except those owned by the
acquirer, will enable the holder of the right to purchase that number of
common shares of the Company which equals the exercise price of the right
divided by one-half of the market price of the common stock. In addition, if
the Company is involved in a merger or other transaction with another party in
which it is not the surviving corporation, or it sells or transfers 50% or
more of its assets or earning power to another party, each right will entitle
its holder to purchase that number of shares of common stock of the other
party which equals the exercise price of the right divided by one-half of the
market price of such common stock. The rights expire ten years from the date
of the grant.
42
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item appears in sections captioned "Director
Compensation," "Compensation Committee Interlocks and Insider Participation,"
"Report of the Compensation Committee on Executive Compensation," "Stock
Performance Graph," "Compensation of Executive Officers," "Employment
Agreement," "Executive Retention Agreements," "Option Grants Table" and
"Aggregated Option Exercises and Year-End Option Table" in the 1998 Proxy
Statement. Such information is incorporated herein by reference in the
Company's Proxy Statement to be delivered to stockholders in connection with
the Annual Meeting of Stockholders to be held on May 20, 1998 (the "1998 Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item appears in sections captioned "Election of
Directors," "Other Executive Officers" and "Compliance with Section 16(a) of
the Securities Act of 1934" in the 1998 Proxy Statement. Such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item appears in sections "Security Ownership of
Certain Beneficial Owners and Management" in the 1998 Proxy Statement. Such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item appears in sections "Directors'
Compensation" and "Certain Transactions" in the 1998 Proxy Statement. Such
information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets--As of December 31, 1997 and 1996
Consolidated Statements of Operations--For the years ended December
31, 1997, 1996 and 1995
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit)--For the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Cash Flows--For the years ended December
31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
The following financial statement schedules are filed as part of this
report and should be read in conjunction with the consolidated
financial statements:
43
<PAGE>
Report of Independent Public Accountants on Schedule
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
(3) Exhibits. The Exhibits listed in the Exhibit Index immediately
preceding such Exhibits are filed as part of this Annual Report on
Form 10-K.
(b) Reports on Form 8-K.
None.
44
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Open Market, Inc.
/s/ Regina O. Sommer
By: _________________________________
REGINA O. SOMMER
Senior Vice President
and Chief Financial Officer
Date: March 28, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE SECURITIES ACT OF
1934, AS AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS
ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED BELOW ON THE DATES
INDICATED.
<TABLE>
<S> <C>
SIGNATURE TITLE
DATE
/s/ Gary B. Eichhorn President, Chief March 28, 1998
- ------------------------------------- Executive Officer
GARY B. EICHHORN and Director
(Principal
Executive Officer)
/s/ Regina O. Sommer Senior Vice March 28, 1998
- ------------------------------------- President and Chief
REGINA O. SOMMER Financial Officer
(Principal
Financial and
Accounting Officer)
/s/ Gulrez Arshad Director March 28, 1998
- -------------------------------------
GULREZ ARSHAD
/s/ Thomas H. Bruggere Director March 28, 1998
- -------------------------------------
THOMAS H. BRUGGERE
/s/ Shikhar Ghosh Director March 28, 1998
- -------------------------------------
SHIKHAR GHOSH
</TABLE>
45
<PAGE>
SIGNATURE TITLE DATE
<TABLE>
<S> <C>
/s/ David K. Gifford Director March 28, 1998
- -------------------------------------
DAVID K. GIFFORD
/s/ Brian J. Knez Director March 28, 1998
- -------------------------------------
BRIAN J. KNEZ
/s/ William S. Kaiser Director March 28, 1998
- -------------------------------------
WILLIAM S. KAISER
/s/ Eugene F. Quinn Director March 28, 1998
- -------------------------------------
EUGENE F. QUINN
</TABLE>
46
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 Stock Purchase Agreement, dated as of February 4, 1997, among Waypoint
Software Corporation, the stockholders listed on Schedule I attached
thereto and Registrant.(1)
2.2+ Stock Purchase Agreement, dated as of February 20, 1997, among Folio
Corporation, Reed Elsevier, Inc. and Registrant.(2)
3.1 Amended and Restated Certificate of Incorporation of the Registrant.(3)
3.2 Amended and Restated By-laws of the Registrant.(3)
4.1 Specimen Certificate for shares of Common Stock, $.001 par value, of
the Registrant.(3)
4.2 Form of Rights Certificate.(4)
4.3 Rights Agreement, dated as of January 26, 1998 between Open Market,
Inc. and BankBoston N.A.(5)
10.1 1994 Stock Incentive Plan, as amended.(3)#
10.2 1996 Employee Stock Purchase Plan.(3)#
10.3 1996 Director Option Plan.(3)#
10.4 Employment Agreement between the Registrant and Gary B. Eichhorn,
dated November 7, 1995.(3)#
10.5 Incentive Stock Option Agreement dated November 10, 1995, between the
Registrant and Gary B. Eichhorn.(3)#
10.6 Invention and Non-Disclosure Agreement dated November 10, 1995,
between the Registrant and Gary B. Eichhorn.(3)
10.7 Promissory Note dated February 5, 1996 in the principal amount of
$1,500,000 issued by David K. Gifford to the Registrant.(3)
10.8 Pledge Agreement dated February 5, 1996, between the Company and David
K. Gifford.(3)
10.9 Allonge to Term Note between David K. Gifford and Registrant dated
November 19, 1997.
10.10+ Master Agreement, dated as of August 23, 1995, by and between FTP
Software, Inc. and the Registrant.(3)
10.11+ Development and Services Agreement dated as of January 1, 1995 by and
between Time Inc. New Media and the Registrant, as amended.(3)
10.12+ Master Development Agreement, dated as of February 21, 1995, by and
between Conde Net, Inc. and the Registrant.(3)
10.13+ TMS Software License Agreement, dated as of February 27, 1996, by and
between Tribune Interactive Network Services and the Registrant.(3)
10.14+ License Agreement dated October 17, 1994 by and between Massachusetts
Institute of Technology and the Registrant.(3)
10.15+ Software License Agreement, effective March 15, 1996, by and between
Novell, Inc. and the Registrant.(3)
10.16+ Master Development Agreement, dated as of May 22, 1995, by and between
Parade Net, Inc. and the Registrant.(3)
10.17+ OEM Master License Agreement, dated June 30, 1995, by and between RSA
Data Security, Inc. and the Registrant.(3)
10.18+ Public Key Patent License, effective as of September 6, 1995, by and
between Caro-Kann Corporation and the Registrant.(3)
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.19 Start-Up Services Agreement, dated as of February 27, 1996, by and
between the Registrant and Tribune Interactive Network Services.(3)
10.20 Founder's Agreement dated June 8, 1994 by and between David K. Gifford
and the Registrant.(3)#
10.21+ License and Exclusive Distribution Agreement dated as of April 10,
1996 by and between Time Inc. New Media and the Registrant.(3)
10.22+ Promissory Note dated as of March 7, 1997 by and between Reed
Elsevier, Inc. and Registrant.
10.23 Lease between Wayside Realty Trust and Registrant dated March 11,
1997.
10.24 Loan and Security Agreement between Silicon Valley Bank and Registrant
dated September 26, 1997.(6)
10.25 Export-Import Bank Loan and Security Agreement between Silicon Valley
Bank and Registrant dated September 26, 1997.(6)
10.26* Form of Executive Retention Agreement entered into by the Registrant,
on one hand, and each of the following executive officers of the
Registrant, Kurt L. Freidrich, Gail F. Goodman, Thomas A. Nephew,
Regina O. Sommer, Peter Y. Woon, Daniel E. Ross, R. William Bennett,
Robert C. Weinberger, Curtis D. Allen, Lawrence C. Stewart and Michael
S. Messier on the other hand.#
21.1* Subsidiaries of the Registrant.
23.1* Consent of Arthur Andersen LLP.
</TABLE>
- --------
* Filed herewith.
# Denotes management contract or compensatory plan or arrangement.
+ Confidential treatment requested as to certain portions which have been
omitted and filed separately with the Securities and Exchange Commission.
(1) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated February 27, 1997.
(2) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated March 24, 1997.
(3) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 as filed with the Securities and Exchange Commission on April 10,
1996 and amended on April 29, 1996 and May 14, 1996 (File No. 333-03340).
(4) Incorporated by reference to Exhibit B to Exhibit 1 to the Registrant's
Form 8-A filed January 30, 1998.
(5) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated January 30, 1998.
(6) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q dated November 14, 1997.
(d) Financial Statement Schedules
The financial statement schedules required are included as part of Item
(a)(2) above.
48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Open Market Inc.:
We have audited, in accordance with generally accepted auditing standards, the
financial statements of Open Market, Inc. and subsidiaries included in this
10-K and have issued our report thereon dated February 2, 1998. Our audits
were made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. This Schedule is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subject to the auditing
procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states, in all material respects, the
financial data required to be set forth in relation to the basic consolidated
financial statements taken as a whole.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 2, 1998
<PAGE>
OPEN MARKET, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Allowance for doubtful accounts
<TABLE>
<CAPTION>
BALANCE BALANCE
AT AT END
BEGINNING OF
OF PERIOD ADDITIONS DEDUCTIONS OTHER* PERIOD
--------- --------- ---------- ------ -------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995 $-- $ 25 $-- $-- $ 25
==== ====== ==== ==== ======
Year Ended December 31, 1996 $ 25 $ 175 $-- $-- $ 200
==== ====== ==== ==== ======
Year Ended December 31, 1997 $200 $1,473 $733 $530 $1,470
==== ====== ==== ==== ======
</TABLE>
* Other represents allowance for doubtful accounts acquired in the Folio
acquisition.
<PAGE>
EXHIBIT 10.26
FORM OF EXECUTIVE RETENTION AGREEMENT
The following persons are party to the attached agreement with the Company as of
the date set forth:
NAME DATE CONDITIONS VARYING FROM STANDARD AGREEMENT
- ---- ---- ------------------------------------------
Kurt L. Friedrich 12/1/97 None
Gail F. Goodman 12/1/97 None
Thomas A. Nephew 12/1/97 None
Regina O. Sommer 12/1/97 None
Peter Y. Woon 12/1/97 None
Daniel E. Ross 12/4/97 None
R. William Bennett 12/5/97 None
Robert C. Weinberger 12/8/97 None
Curtis D. Allen 12/9/97 None
Lawrence C. Stewart 12/19/97 None
Michael S. Messier 12/31/97 None
<PAGE>
EXECUTIVE RETENTION AGREEMENT
THIS EXECUTIVE RETENTION AGREEMENT is made as of ____________ __, 1997 by
and between Open Market, Inc., a Delaware corporation (the "Company"), and
____________________ (the "Executive").
The Board of Directors of the Company (the "Board") has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions.
(a) The "Effective Date" shall mean the first date during the Change
of Control Period (as defined in Section 1(b)) on which a Change of Control (as
defined in Section 2) occurs. 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 the "Effective Date" shall mean the date immediately
prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing
on the date hereof and ending on the second anniversary of the date hereof;
provided, however, that commencing on the date one year after the date hereof,
and on each annual anniversary of such date (such date and each annual
anniversary thereof shall be hereinafter referred to as the "Renewal Date"),
unless previously terminated, the Change of Control Period shall be
automatically extended so as to terminate two years from such Renewal Date,
unless at least 90 days prior to the Renewal Date the Company shall give notice
to the Executive that the
-1-
<PAGE>
Change of Control Period shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"))(a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of
either (i) the then-outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then-outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company, or (iv)
any acquisition by any corporation pursuant to a transaction which satisfies the
criteria set forth in clauses (i), (ii) and (iii) of subsection (c) of this
Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequently
to the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, 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 other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 50% of,
respectively, the then-outstanding shares of common stock and the combined
voting power of the then-outstanding voting securities entitled to vote
generally in the election of directors of the corporation resulting from such
Business Combination (which as used in this Section 2(c) shall include, without
limitation, a corporation which as a result of such transaction owns the Company
or all or substantially all of the Company's assets either directly or through
one or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the Outstanding
Company Common Stock and Outstanding Company Voting
-2-
<PAGE>
Securities, as the case may be, (ii) no Person (excluding any corporation
resulting from such Business Combination or any employee benefit plan (or
related trust) of the Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 50% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such Business Combination, or the combined voting power of the
then-outstanding voting securities of such corporation and (iii) at least half
of the members of the board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board, providing for
such Business Combination.
3. Employment Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the first anniversary of such
date (the "Employment Period"). Except as provided in Section 1(a), nothing in
this Agreement shall, prior to the Effective Date, impose upon the Company any
obligation to retain the Executive as an employee. In addition, nothing in this
Agreement shall restrict the Executive from terminating his employment with the
Company, and no such termination by the Executive shall be deemed a breach of
this Agreement.
4. Terms of Employment.
(a) Position and Duties.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties and responsibilities shall be substantially commensurate in all material
respects with the most significant of those held, exercised and assigned at any
time during the 120-day period immediately preceding the Effective Date and (B)
the Executive's services shall be performed at the location where the Executive
was employed immediately preceding the Effective Date or any office or location
less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions, and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this
-3-
<PAGE>
Agreement. It is expressly understood and agreed that to the extent that any
such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation.
(i) Base Salary. During the Employment Period, the Executive
shall receive an annual base salary ("Annual Base Salary"), which shall be paid
at a monthly rate, at least equal to twelve times the highest monthly base
salary paid or payable, including any base salary which has been earned but
deferred, to the Executive by the Company and its affiliated companies in
respect of the twelve-month period immediately preceding the month in which the
Effective Date occurs. During the Employment Period, the Annual Base Salary
shall be reviewed no more than 12 months after the last salary increase awarded
to the Executive prior to the Effective Date. Any increase in Annual Base Salary
shall not serve to limit or reduce any other obligation to the Executive under
this Agreement. Annual Base Salary shall not be reduced after any such increase
and the term Annual Base Salary as utilized in this Agreement shall refer to
Annual Base Salary as so increased. As used in this Agreement, the term
"affiliated companies" shall include any company controlled by, controlling or
under common control with the Company.
(ii) Annual Bonus. During the Employment Period, in addition to
Annual Base Salary, the Executive shall be entitled to receive such annual bonus
as may be determined by the Board of Directors, but in no event less than the
annual bonus paid or payable in respect of the full fiscal year immediately
preceding the Effective Date.
(iii) Incentive Plans. During the Employment Period, the
Executive shall be entitled to participate in all incentive plans, practices,
policies and programs applicable generally to other peer Executives of the
Company and its affiliated companies, but in no event shall such plans,
practices, policies and programs provide the Executive with benefits which are
less favorable, in the aggregate, than the most favorable of such plans,
practices, policies and programs in effect for the 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 peer executives of the Company and its affiliated
companies.
(iv) Welfare Benefit, Savings and Retirement Plans. During the
Employment Period, the Executive and/or the Executive's family, as the case may
be, shall be eligible for participation in and shall receive all benefits under
welfare benefit, savings and retirement plans, practices, policies and programs
provided by the Company and its affiliated companies (including, without
limitation, medical, prescription, dental, disability, employee life, group
life, split-dollar life, accidental death and travel accident insurance plans
and programs) to the extent applicable generally to other peer executives of the
Company, but in no event shall such
-4-
<PAGE>
plans, practices, policies and programs provide the Executive with benefits
which are less favorable, in the aggregate, than the most favorable of such
plans, practices, policies and programs in effect for the 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 peer executives of the Company and its affiliated
companies.
(v) Expenses. During the Employment Period, the Executive
shall be entitled to receive reimbursement for all reasonable expenses incurred
by the Executive in accordance with the policies, practices and procedures of
the Company in effect immediately prior to the Effective Date.
(vi) Vacation. During the Employment Period, the Executive
shall be entitled to paid vacation in accordance with the plans, policies,
programs and practices of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the Executive
with benefits which are less favorable, in the aggregate, than the most
favorable of such plans, practices, policies and programs in effect for the
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 peer executives of the Company and
its affiliated companies.
5. Termination of Employment.
(a) Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 12(b) of this Agreement of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company shall
terminate effective on the 30th day after receipt of such notice by the
Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for six (6) months as a result of
incapacity due to mental or physical illness which is determined to be total and
permanent by a physician selected by the Company or its insurers and acceptable
to the Executive or the Executive's legal representative.
(b) Cause. Subject to Section 5(d), the Company may terminate the
Executive's employment during the Employment Period for Cause. For purposes of
this Agreement, "Cause" shall mean:
(i) the willful failure of the Executive to perform
substantially the
-5-
<PAGE>
Executive's duties with the Company (other than any such failure resulting
from incapacity due to physical or mental illness), which failure is not
cured within 30 days after a written demand for substantial performance is
delivered to the Executive by the Board which specifically identifies the
manner in which the Board believes that the Executive has not substantially
performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct
or gross misconduct which is materially and demonstrably injurious to the
Company.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent
in any material respect with the Executive's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 4(a) of this Agreement, or any
other action by the Company which results in a diminution in such position,
authority, duties or responsibilities, excluding for this purpose an
isolated, insubstantial and inadvertent action not taken in bad faith and
which is remedied by the Company promptly after receipt of notice thereof
given by the Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 4(b) of this Agreement or any other provision hereof
requiring a payment or provision of a benefit to the Executive, other than
an isolated, insubstantial and inadvertent failure not occurring in bad
faith and which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any
office or location other than as provided in Section 4(a)(i)(B) hereof or
the Company's requiring the Executive to travel on Company business to a
substantially greater extent than required immediately prior to the
Effective Date;
(iv) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this
Agreement; or
(v) any failure by the Company to comply with and satisfy
Section 11(c) of this Agreement.
-6-
<PAGE>
(d) Notice of Termination.
(i) Any termination by the Company for Cause, or by the
Executive for Good Reason, shall be effected by Notice of Termination to the
other party hereto given in accordance with Section 12(b) of this Agreement. For
purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than thirty days after the
giving of such notice). 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 circumstances in enforcing the
Executive's or the Company's rights hereunder.
(ii) Any Notice of Termination for Cause 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. Prior to any Notice of Termination for
Cause being given (and prior to any termination for Cause being effective), the
Executive shall be entitled to a hearing before the Board, or a committee
thereof, at which he may, at his election, be represented by counsel and at
which he shall have a reasonable opportunity to be heard. Such hearing shall be
held on not less than fifteen days prior written notice to the Executive stating
the Board's intention to terminate the Executive for Cause and stating in detail
the particular event(s) or circumstance(s) which the Board believes
constitute(s) Cause for termination.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, subject, in the case of
termination by the Company for Cause, to the Company's compliance with Section
5(d)(ii); (ii) if the Executive's employment is terminated by the Company other
than for Cause or Disability, the Date of Termination shall be the date on which
the Company notifies the Executive of such termination; and (iii) if the
Executive's employment is terminated by reason of death or Disability, the Date
of Termination shall be the date of death of the Executive or the Disability
Effective Date, as the case may be.
6. Obligations of the Company Upon Termination.
(a) Good Reason; Other Than for Cause or Disability. If, during the
Employment Period, the Company shall terminate the Executive's employment other
than for Cause or Disability or the Executive shall terminate employment for
Good Reason:
-7-
<PAGE>
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid, (2) the product
of (x) the higher of (I) the highest annual cash bonus paid to the
Executive in the last two fiscal years prior to the Effective Date and (II)
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 Employment Period, if any (such higher
amount being referred to as the "Highest Annual Bonus") and (y) a fraction,
the numerator of which is the number of days in the current fiscal year
through the Date of Termination, and the denominator of which is 365 and
(3) any compensation previously deferred by the Executive (together with
any accrued interest or earnings thereon) and any accrued vacation pay, in
each case to the extent not theretofore paid (the sum of the amounts
described in clauses (1), (2), and (3) shall be hereinafter referred to as
the "Accrued Obligations"); and
B. the amount equal to one-half of the sum of (x) the
Executive's Annual Base Salary and (y) the Highest Annual Bonus;
(ii) for six (6) months after the Executive's Date of Termination, or
such longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those which would have
been provided to them in accordance with the plans, programs, practices and
policies described in Section 4(b)(iv) of this Agreement (excluding any savings
and/or retirement plans) if the Executive's employment had not been terminated
or, if more favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies and their families, provided, however, that if the
Executive becomes reemployed with another employer and is eligible to receive
medical or other welfare benefits under another employer-provided plan, the
medical and other welfare benefits described herein shall be secondary to those
provided under such other plan during such applicable period of eligibility.
For purposes of determining eligibility (but not the time of commencement of
benefits) of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to have
remained employed until six (6) months after the Date of Termination and to have
retired on the last day of such period;
(iii) to the extent not theretofore paid or provided, the Company
shall timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive was as of the date of
such termination eligible to receive under any plan, program, policy or practice
or contract or agreement of the Company and its affiliated
-8-
<PAGE>
companies (such other amounts and benefits shall be hereinafter referred to as
the "Other Benefits"); and
(iv) outstanding options to purchase shares of Common Stock of the
Company (or shares of capital stock for which such shares of Common Stock have
been exchanged in a Business Combination) held by the Executive shall become
immediately exercisable; provided, however, that if, during the nine-month
period subsequent to the date of 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 unvested shares of capital stock for which such shares of Common
Stock have been exchanged in a Business Combination), as provided for in this
Section 6(a)(iv), 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 6(a)(iv) are revoked and
shall have no force or effect.
(b) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination.
(c) Disability. If the Executive's employment is terminated by reason
of the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination.
(d) Cause or Other than for Good Reason. If the Executive's employment
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) his Annual Base Salary through the Date of
Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid
or not yet provided. If the Executive voluntarily terminates employment during
the Employment Period, excluding a termination for Good Reason, this Agreement
shall terminate without further obligations to the Executive, other than for
Accrued Obligations and the timely payment or provision of Other Benefits. In
such case, all Accrued Obligations shall be paid to the Executive in a lump sum
in cash within 30 days of the Date of Termination.
-9-
<PAGE>
7. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 12(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is
otherwise entitled to receive under any plan, policy, practice or program of or
any contract or agreement with the Company or any of its affiliated companies at
or subsequent to the Date of Termination shall be payable in accordance with
such plan, policy, practice or program or contract or agreement except as
explicitly modified by this Agreement.
8. Full Settlement; Release of Claims. 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. In no
event shall the Executive be obligated to seek other employment or take any
other action by way of mitigation of the amounts payable to the Executive under
any of the provisions of this Agreement and such amounts shall not be reduced
whether or not the Executive obtains other employment. Except in such cases
where the Executive is found by a court of competent jurisdiction to have acted
in bad faith, the Company agrees to pay as incurred, to the full extent
permitted by law, all legal, accounting and other fees and expenses (including,
without limitation, of expert witnesses) which the Executive may reasonably
incur (i) as a result of any contest (regardless of the outcome thereof) by the
Company, the Executive or others of the validity or enforceability of, or
liability under, any provision of this Agreement or any guarantee of performance
thereof (including as a result of any contest by the Executive about the amount
of any payment pursuant to this Agreement), plus in each case 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 (the "Code") and
(ii) in connection with the Executive's performance of his obligations under
Section 9(c). Notwithstanding any other provision to the contrary herein, the
Company shall not be required to make any payments hereunder to the Executive
unless and until the Executive enters into a mutually satisfactory mutual
release pursuant to which the Company and Executive release such other (and
their respective affiliates) from all claims related to employment and the
termination thereof.
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding and
except as set forth below, in the event it shall be determined that any payment
or distribution by the Company to or for the benefit of the Executive (whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise, but determined without regard to any additional payments
required under this Section 9)(a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties are incurred by
the
-10-
<PAGE>
Executive with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing
provisions of this Section 9(a), if it shall be determined that the Executive is
entitled to a Gross-Up Payment, but that the Executive, after taking into
account the Payments and the Gross-Up Payment, would not receive a net after-tax
benefit of at least $50,000 (taking into account both income taxes and any
Excise Tax) as compared to the net after-tax proceeds to the Executive resulting
from an elimination of the Gross-Up Payment and a reduction of the Payments, in
the aggregate, to an amount (the "Reduced Amount") such that the receipt of
Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall
be made to the Executive and the Payments, in the aggregate, shall be reduced to
the Reduced Amount.
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by Arthur
Andersen LLP or such other certified public accounting firm as may be designated
by the Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder).
All fees and expenses of the Accounting Firm shall be borne solely by the
Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall
be paid by the Company to the Executive within five days of the receipt of the
Accounting Firm's determination. Any determination by the Accounting Firm shall
be binding upon the Company and the Executive. As a result of the uncertainty
in the application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies pursuant to
Section 9(c) and the Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
-11-
<PAGE>
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten business days after the Executive is
informed in writing of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which it gives such notice to the Company (or such shorter
period ending on the date that any payment of taxes with respect to such claim
is due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the Executive
shall:
(i) give the Company any information reasonably requested by
the Company and available to the Executive relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect
to such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions
of this Section 9(c), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct the Executive to pay the tax claimed and sue for a refund or to contest
the claim in any permissible manner, and the Executive agrees to prosecute such
contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with
-12-
<PAGE>
respect to such advance; and further provided that any extension of the statute
of limitations relating to payment of taxes for the taxable year of the
Executive with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 9(c), the Executive becomes entitled to receive
any refund with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 9(c)) promptly pay to the
Company the amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the Executive
of an amount advanced by the Company pursuant to Section 9(c), a determination
is made that the Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify the Executive in writing of its
intent to contest such denial of refund prior to the expiration of 30 days after
such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring or withholding any amounts or
benefits otherwise payable or to be provided to the Executive under this
Agreement.
11. Successors.
(a) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
-13-
<PAGE>
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid.
12. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
[Name of Executive]
c/o Open Market, Inc.
245 First Street
Cambridge, MA 02142
If to the Company:
Open Market, Inc.
245 First Street
Cambridge, MA 02142
Attention: Chairman of Compensation Committee
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant
-14-
<PAGE>
to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c) of this Agreement, shall not be deemed to be a waiver
of such provision or right or any other provision or right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, subject to Section 1(a) hereof, prior to the Effective Date, the
Executive's employment and/or this Agreement may be terminated by either the
Executive or the Company, by written notice to the other, at any time prior to
the Effective Date, in which case the Executive shall have no further rights or
obligations under this Agreement. From and after the Effective Date this
Agreement shall supersede any other agreement between the parties with respect
to the subject matter hereof.
(g) Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators in Boston, Massachusetts, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court of competent jurisdiction.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
[Name of Executive]
Open Market, Inc.
By:
-----------------------------------
Its:
----------------------------------
-15-
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OR COUNTRY OF INCORPORATION
---------------------------------
<S> <C> <C>
1) Open Market Securities, Inc. Massachusetts
One Wayside Road
Burlington, Massachusetts
2) Open Market UK Limited United Kingdom
77 St. Martin's Lane
London, England
3) Open Market France SARL France
8 Rue de Berri
Paris, France
4) Open Market Germany GmbH Germany
Merkurhaus Frankfurt
Am Hauptbahnhof 12
Frankfurt, Germany
5) Open Market Pty Limited Australia
P.O. Box R1608
Royal Exchange NSW
Sydney, Australia
6) Open Market Internet Software B.V. The Netherlands
Wegalaan 32
2132 JC Hoofddorp
The Netherlands
7) Folio Corporation Utah
5072 North 300 West
Provo, Utah
8) Waypoint Software Corporation Massachusetts
180 Canal Street
Boston, Massachusetts
9) Open Market Japan KK Japan
Kasumigaseki BID.35F
3-2-5, Kasumigaseki Chiyoda-KU
Tokyo, Japan
10) Open Market Italy s.r.l. Italy
Milano, Italy
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K into the Company's previously filed
registration statements File No. 333-06821 on Form S-8, File No. 333-28323 on
Form S-3, File No. 333-32447 on Form S-3, File No. 333-32448 on Form S-8, and
File No. 333-45973 on Form S-3.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 19,666
<SECURITIES> 10,972
<RECEIVABLES> 23,102
<ALLOWANCES> 1,470
<INVENTORY> 0
<CURRENT-ASSETS> 56,156
<PP&E> 21,513
<DEPRECIATION> 6,356
<TOTAL-ASSETS> 80,874
<CURRENT-LIABILITIES> 37,316
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 43,428
<TOTAL-LIABILITY-AND-EQUITY> 80,874
<SALES> 48,168
<TOTAL-REVENUES> 61,260
<CGS> 2,477
<TOTAL-COSTS> 11,643
<OTHER-EXPENSES> 108,871
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 777
<INCOME-PRETAX> (57,422)
<INCOME-TAX> 584
<INCOME-CONTINUING> (58,006)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (58,006)
<EPS-PRIMARY> (1.87)
<EPS-DILUTED> (1.87)
</TABLE>
