<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q/A
---------------
AMENDMENT NO. 1 TO
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OPEN MARKET, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3214536
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Wayside Road
Burlington, Massachusetts 01803
(Address of principal executive offices) (Zip Code)
(781) 359-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of July 31, 1998, there were 34,641,969 shares of the Registrant's Common
Stock outstanding.
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OPEN MARKET, INC.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (as restated) and
December 31, 1997. 3
Consolidated Statements of Operations for the three and six months
ended June 30, 1998 (as restated) and 1997. 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 (as restated) and 1997. 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk. 23
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 23
ITEM 2. Changes in Securities and Use of Proceeds 23
ITEM 3. Defaults Upon Senior Securities 23
ITEM 4. Submission of Matters to a Vote of Security Holders 23
ITEM 5. Other Information 24
ITEM 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
EXHIBIT INDEX 26
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
OPEN MARKET, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------------- -------------------
(As Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,423 $ 19,666
Marketable securities 12,800 10,972
Accounts receivable, net of allowances of $1,761 and $1,470, respectively
25,188 23,102
Loan to founder - 993
Prepaid expenses and other current assets 2,223 1,423
--------- ---------
Total current assets 50,634 56,156
--------- ---------
Property, plant and equipment, at cost:
Computers and office equipment 13,756 12,129
Land & building 4,200 4,200
Construction in progress - 3,300
Leasehold improvements 5,458 1,072
Furniture & fixtures 2,080 812
--------- ---------
25,494 21,513
Less: Accumulated depreciation and amortization 8,655 6,356
--------- ---------
16,839 15,157
Intangible assets, net (Note 3) 13,066 7,787
Other assets 1,957 1,774
--------- ---------
$ 82,496 $ 80,874
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 9,150 $ 5,168
Accounts payable 3,557 3,268
Note payable (Note 3) 5,000 10,000
Accrued expenses 13,476 14,440
Deferred revenues 4,359 4,390
Current maturities of long-term obligations 52 50
--------- ---------
Total current liabilities 35,594 37,316
--------- ---------
Long-term obligations, net of current maturities 54 99
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 33,165,500 shares and 30,970,791 shares at
June 30, 1998 and December 31, 1997, respectively 33 31
Additional paid-in capital 164,645 137,427
Deferred compensation (220) (275)
Other equity (Note 3) - 6,920
Accumulated deficit (117,610) (100,644)
--------- ---------
Total stockholders' equity 46,848 43,459
--------- ---------
$ 82,496 $ 80,874
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
REVENUES:
Product revenues $ 12,157 $ 12,433 $ 23,430 $ 21,489
Service revenues 4,369 3,101 8,298 5,403
------------- ------------- ------------- -------------
Total revenues 16,526 15,534 31,728 26,892
------------- ------------ ------------- -------------
COST OF REVENUES:
Product revenues 742 639 1,342 1,505
Service revenues 3,503 2,400 6,409 4,522
------------- ------------- ------------- -------------
Total cost of revenues 4,245 3,039 7,751 6,027
------------- ------------- ------------- -------------
Gross profit 12,281 12,495 23,977 20,865
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Selling and marketing 8,007 9,590 15,883 17,572
Research and development 6,568 7,461 13,344 12,836
General and administrative 3,021 3,284 5,950 5,655
Acquired in-process research & - 5,700 34,250
development (Note 3) 5,700
------------- ------------- ------------- -------------
Total operating expenses 23,296 20,335 40,877 70,313
------------- ------------- ------------- -------------
Loss from operations (11,015) (7,840) (16,900) (49,448)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE) :
Interest Income 291 710 609 1,600
Interest expense (296) (220) (536) (270)
Other expense (62) (49) (72) (85)
------------- ------------- ------------- -------------
Loss before provision for incomes taxes (11,082) (7,399) (16,899) (48,203)
------------- ------------- ------------- -------------
Provision for foreign income taxes 33 111 65 451
------------- ------------- ------------- -------------
NET LOSS $(11,115) $(7,510) $(16,964) $(48,654)
============= ============= ============= =============
NET LOSS PER SHARE - BASIC AND DILUTED (Note 2) $(0.34) $(0.24) $(.53) $(1.60)
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING - BASIC AND
DILUTED (Note 2) 32,742 31,328 32,255 30,459
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------------------------
1998 1997
------------------------ -------------------
(As Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(16,964) $(48,654)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 2,299 1,781
Amortization of intangible assets 1,019 540
Charge associated with acquired in-process research & development 5,700 34,250
Deferred Compensation 77 -
Changes in assets and liabilities-
Accounts receivable (5,196) (3,209)
Prepaid expenses and other current assets (795) 176
Accounts payable 255 (1,155)
Accrued expenses (1,631) 5,674
Deferred revenues (31) (538)
-------- --------
Net cash used in operating activities (15,267) (11,135)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,937) (2,387)
Payment from founder on loan 993 -
(Purchase) sales of marketable securities, net (1,829) 12,604
Increase in other assets (101) (1,180)
Net cash used in the purchase of ICentral (1,420) -
Net cash acquired from the purchase of Waypoint - 372
Net cash used in the purchase of Folio - (11,400)
-------- --------
Net cash used in investing activities (6,294) (1,991)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Line of Credit 3,981 -
Payments on note payable (1,818) -
Proceeds from the factoring of accounts receivable 3,128 -
Payments on long-term obligations (47) (35)
Proceeds from issuance of common stock 7,074 599
-------- --------
Net cash provided by financing activities 12,318 564
-------- --------
Net decrease in cash and cash equivalents (9,243) (12,562)
Cash and cash equivalents, beginning of period 19,666 49,765
-------- --------
Cash and cash equivalents, end of period $ 10,423 $ 37,203
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 1,010 $ 17
======== ========
Taxes paid during the period $ 41 $ 66
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
In connection with the acquisition of ICentral (see Note 3), the
following non-cash transaction occurred:
Fair value of assets acquired $ 12,086 $ -
Liabilities assumed (666) -
Issuance of common stock (10,000) -
======== ========
Cash paid for acquisition and acquisition costs $ 1,420 $ -
======== ========
</TABLE>
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<TABLE>
<S> <C> <C>
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)
Issuance of common stock for repayment of note payable (3,182) -
Issuance of common stock for repayment of note payable 5,000 -
-------- --------
Cash paid for acquisition and acquisition costs $ 1,818 $ 11,400
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(Unaudited)
1. Basis of Presentation
The consolidated financial statements of Open Market, Inc. (the Company)
presented herein have been prepared pursuant to the rules of the Securities
and Exchange Commission for quarterly reports on Form 10-Q and do not include
all of the information and note disclosures required by generally accepted
accounting principles. These statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended
December 31, 1997, included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 31, 1998.
The consolidated financial statements and notes herein are unaudited but, in
the opinion of management, include all adjustments (consisting of normal,
recurring adjustments) necessary to present fairly the consolidated financial
position, results of operations and cash flows of the Company and its
subsidiaries.
The results of operations for the interim periods shown herein are not
necessarily indicative of the results to be expected for any future interim
period or for the entire year.
In March 1999, the Company restated its June 30, 1998 and September 30, 1998
financial statements to reflect a change for the purchase price allocation
related to the 1998 acquisition of ICentral and the related amortization of
intangibles. Such restatement resulted in a decrease in net loss of $4,930
for the three and six months ended June 30, 1998 (see Note 8).
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements reflect the application of
certain accounting policies described in this and other notes to these
consolidated financial statements.
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(a) Principles of Consolidation
The accompanying consolidated financial statements reflect the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
(b) Cash, Cash Equivalents and Marketable Securities
The Company accounts for investments under Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Under SFAS No. 115, investments for which the
Company has the positive intent and ability to hold to maturity, consisting of
cash equivalents and marketable securities, are reported at amortized cost,
which approximates fair market value. Cash equivalents are highly liquid
investments with maturities of less than three months at the time of
acquisition. Marketable securities consist of investment grade commercial
paper and corporate notes, and obligations of certain municipalities as of
June 30, 1998, have maturities of greater than three months but less than one
year. The average maturity of the Company's marketable securities is
approximately seven months.
(c) Net Loss Per Share
Effective December 31, 1997, the Company adopted SFAS No. 128 Earnings Per
Share. SFAS NO. 128 establishes standards for computing and presenting
earnings per share and applies to entities with publicly held common stock or
potential common stock. The Company has applied the provisions of SFAS No. 128
and Staff Accounting Bulletin (SAB) No. 98 retroactively to all periods
presented. Weighted average shares outstanding includes the shares issued to
Reed Elsevier in January 1998 relating to the Folio acquisition. Diluted net
loss per share for the three and six months ended June 30, 1998 and 1997 are
the same as basic net loss per share as the inclusion of potential common
stock would be antidilutive. Calculations of basic and diluted net loss per
common share are as follows:
<TABLE>
<CAPTION>
(in thousands, except per share data)
Three Months Ended Six Months Ended
-------------------------- ---------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
As Restated As Restated
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $(11,115) $(7,510) $(16,964) $(48,654)
Net loss per common share basic
and diluted $ (0.34) $ (.24) $ (0.53) $ (1.60)
Weighted average common shares
outstanding-basic and diluted 32,742 31,328 32,255 30,459
Antidilutive securities that were
not included-common stock options 6,202 6,344 6,202 6,344
</TABLE>
(d) Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income. SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components in financial statements. Comprehensive income includes all
changes in equity during a period except those resulting from investments by
owners and distribution to owners. The comprehensive net loss is the same as net
loss for all periods presented.
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(e) New Accounting Standards
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires all costs associated
with pre-opening, pre-operating and organization activities to be expensed as
incurred. The Company will adopt SOP 98-5 beginning January 1, 1999. Adoption of
this Statement will not have a material impact on the Company's consolidated
financial position or results of operations.
3. Acquisitions
(a) ICentral Incorporated
On April 30, 1998, the Company acquired all of the outstanding shares of
capital stock of ICentral, Incorporated (ICentral) based in Provo, Utah.
ICentral specializes in Internet store-building products geared to small and
medium-sized businesses. As payment of the purchase price, the Company (1)
issued an aggregate of approximately 480,140 shares of the Common Stock of the
Company and (2) made a cash payment of $720 to the former stockholders of
ICentral. The value of the shares of the Company's common stock issued in
connection with the acquisition was approximately $10,000 based on a weighted
average market price, as defined. In addition, in connection with this
acquisition, the Company entered into employment agreements with certain key
employees of ICentral under which the Company agreed to pay bonuses in an
aggregate amount of $1,000, depending on certain future events, as defined. For
financial statement purposes, this acquisition was accounted for as a purchase,
and accordingly, the results of operations of ICentral subsequent to April 30,
1998 are included in the Company's consolidated statements of operations.
The aggregate purchase price of $12,086 consisted of the following:
Description Amount
- ----------- --------
Common stock $10,000
Cash 720
Assumed liabilities 666
Acquisition costs 700
--------
Total purchase price: $12,086
========
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 appraisal. The appraisal incorporated proven valuation
procedures and techniques in determining the fair value of each intangible
asset. The purchase price has preliminarily been allocated as follows:
Description Amount
- ----------- --------
Current assets $ 86
Other acquired intangible assets 6,300
In-process research & development 5,700
--------
Total assets acquired: $12,086
========
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 for the three and six months
ended June 30, 1998. The amount allocated to acquired in-process research and
development relates to projects that had not yet reached technological
feasibility and that, until completion of development, have no alternative
future use. These projects will require substantial development and testing
prior to the reaching of technological feasibility. However, there was no
-8-
<PAGE>
assurance that these projects would reach technological feasibility or develop
into products that might be sold profitably by the Company. The intangible
assets are being amortized over five years. The Company recorded approximately
$40 of amortization expense relating to these intangible assets during the
second quarter of 1998.
The results prior to the acquisition were not material to the Company
accordingly pro forma results for 1998 and 1997 were not presented.
(b) 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 of Common Stock. The shares
of Common Stock issued were subject to certain selling restrictions.
Therefore, for purposes of calculating aggregate consideration paid, the value
of the shares of Common Stock issued was recorded at a discounted value. In
addition, in connection with this acquisition, the Company entered into
employment agreements with certain of the principals of Waypoint under which
the Company agreed to pay bonuses in an aggregate amount of $1,200 over two
years depending on certain future events, as defined. The employees earned
$600 under their employment agreements in the year ended December 31, 1997
with the final payment expected in February 1999. 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:
Description Amount
- ----------- -------
Common stock $9,548
Assumed liabilities 156
Acquisition costs 218
-------
Total purchase price: $9,922
=======
The purchase price was allocated based upon the fair value of the tangible
and intangible assets acquired. These allocations represent the fair values
determined by an independent appraisal. The appraisal incorporated proven
valuation procedures and techniques in determining the fair value of each
intangible asset. The purchase price has been allocated as follows:
Description Amount
- ----------- -------
Current assets $ 590
Property, plant and equipment 76
Other assets 6
In-process research & development 9,250
-------
Total assets acquired: $9,922
=======
The in-process research and development has been expensed as a charge
against operations as of the closing of the transaction, and is included in
the accompanying Consolidated Statement of Operations for the six months ended
June 30, 1997. The amount allocated to acquired in-process research and
development relates to projects that had not yet reached technological
feasibility and that, until completion of development, have no alternative
future use. These
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projects will require 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.
(c) 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 (1) issued 897,866 shares of Common Stock of the
Company, (2) made a cash payment of $10,000, (3) agreed to issue 897,866
shares of Common Stock of the Company subject to adjustment in January 1998
and (4) 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 the Company's Common Stock
issued in connection with the acquisition was approximately $25,000 based on a
weighted average market price, as defined, of the Company's freely tradable
shares of Common Stock. The shares of Common Stock issued on March 7, 1997, as
well as the shares of Common Stock issued in January 1998 were not freely
tradable due to selling restrictions. Therefore, although 448,993 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
aggregate consideration paid, the value of the shares issued was recorded at a
discounted value at the time of issuance. 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 forfeited
270,116 shares of Common Stock of the Company to be issued in the transaction.
Other equity in the accompanying December 31, 1997 Consolidated Balance Sheet
included the value of the shares 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 was treated as a deemed asset
purchase in accordance with the Internal Revenue Code section 338 (h)(10).
The aggregate purchase price of $45,512 consisted of the following:
Description Amount
- ----------- ---------
Common stock $21,612
Cash paid 11,818
Note payable 5,000
Assumed liabilities 5,682
Acquisition costs 1,400
--------
Total purchase price: $45,512
========
The purchase price was allocated based upon the fair value of the tangible
and intangible assets acquired. These allocations represent the fair values
determined by an independent appraisal. The appraisal incorporated proven
valuation procedures and techniques in determining the fair value of each
intangible asset. The purchase price has been allocated as follows:
-10-
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Description Amount
- ----------- --------
Current assets $ 4,729
Property, plant and equipment 6,605
Other assets 41
In-process research & development 25,000
Other acquired intangible assets 9,137
--------
Total assets acquired: $45,512
========
The in-process research and development has been expensed as a charge
against operations as of the closing of the transaction, and is included in
the accompanying consolidated statement of operations. The amount allocated
to acquired in-process research and development relates to projects that had
not yet reached technological feasibility and that, until completion of
development, have no alternative future use. These projects will require
substantial development and testing prior to reaching 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 Folio
has required, and may 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 and $810 of amortization expense during
the first six months of 1998.
(d) Pro Forma Results of Operations
The following unaudited pro forma combined results of operations of the
Company assume that the Waypoint and Folio acquisitions were completed on
January 1, 1997. (in thousands, except per share data):
For the six
months
ended June 30,
1997
--------------
Total revenues $ 29,637
Net loss (17,734)
Net loss per share $ (0.56)
These pro forma amounts represent the historical operating results of
Waypoint and Folio prior to their respective dates of acquisition, combined
with those of the Company with appropriate adjustments which give effect to
interest income, interest expense, amortization expense, as well as the
exclusion of the charge for acquired in-process research and development.
These pro forma results are not necessarily indicative of operating results,
which would have occurred if the Waypoint and Folio acquisitions had been
operated by current management during the periods presented
4. 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 revenues
from certain stockholders of approximately $407 for the three and six months
ended June 30, 1998, respectively and revenues of $4,103 and $5,024 for the
three and six months ended June 30, 1997, respectively.
5. Sale of Accounts Receivable
The Company has a non-recourse factoring agreement under which it can factor
up to $8,000 of qualified accounts receivable, as defined. The Company sold
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<PAGE>
approximately $3,000 during the second quarter of 1998 and had $5,000
available under this agreement at June 30, 1998. The Company records these
transactions as a sale of financial assets in accordance with SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities, as it surrenders control to these receivables upon transfer.
6. Common Stock
On June 4, 1998, the Company announced that Intel Corporation had made an
investment in the Company, purchasing 335,852 unregistered shares of the
Company's Common Stock for an aggregate purchase price of $5,000. In addition,
the Company plans to port its Transact software to Intel Pentium(R) Processor
II-based servers running Windows NT and Intel's next-generation IA-64 processor.
The estimated costs of $1,000 associated with the port will be expensed as
incurred with a completion of the IA-64 version expected at the time of the
release of Intel's next-generation IA-64 processor. The two companies also plan
to collaborate on joint marketing activities.
7. Subsequent Events
(a) Private Placement
On July 31, 1998, Open Market, Inc. (the "Company") announced that CMG
Information Services, Inc., an investor and developer of Internet companies
("CMG") and Capital Ventures International, a fund managed by Heights Capital
Management, a leader in equity financing for emerging growth companies ("CVI"),
made a $20,000 equity investment in the Company. Pursuant to the terms of the
agreements, the Company issued an aggregate of 1,338,912 shares of Common Stock
of the Company to CMG and CVI at a price of $14.94 per share. In addition, the
Company issued to CMG and CVI warrants to purchase additional 334,728 shares of
Common Stock of the Company at a price of $16.43 per share. The Company will
file a registration statement covering all such shares of Common Stock. Included
in the terms of the agreements are certain adjustments and other provisions,
including a repurchase provision which becomes operative in the event that the
registration statement is not declared effective in a timely manner.
(b) Mortgage
In July 1998, the Company entered into a $2,800 mortgage of its Provo, Utah
building which bears interest at the prime-lending rate of 8.5%. The mortgage
principal payments are based upon a twenty year term, but a balloon payment is
required at the end of the fifth year.
8. Restatement of June 30, 1998 Financial Statements
In March 1999, the Company restated its June 30, 1998 and September 30,
1998 financial statements to reflect a change for the purchase price allocation
related to the 1998 acquisition of ICentral and the related amortization of
intangibles. This adjustment decreased the amount previously allocated to in-
process technology by $5,100, which has been capitalized as developed technology
and goodwill and will be amortized on a straight-line basis over five years. The
restatement was the result of concerns presented by the Securities and Exchange
Commission (SEC) regarding the valuation methodology used for the determination
of charges for acquired in-process research and development costs. The Company
believes that its periodic reports filed June 30, 1998 and September 30, 1998,
which included such charges related to the acquisition costs for ICentral, were
made in accordance with generally accepted accounting principles and established
industry practices
-12-
<PAGE>
at the time. In addition, the valuation of the acquired in-process research and
development was supported by an independent valuation by Arthur Andersen LLP.
The Company has not been contacted by the SEC regarding its valuation
methodology. However, in response to the SEC's new guidelines, the Company has
decided to proactively move to the new valuation methodology for its 1998
acquisition of ICentral. Therefore, the Company expensed $5,700 to in-process
research and development in the second quarter of 1998, capitalized $6,300 of
developed technology and goodwill, and amortized the developed technology and
goodwill over the 5-year estimated useful life.
The following table presents the net loss and net loss per share as originally
reported and as restated:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
-----------------------------------------------------------------------------------------
As reported As restated As reported As restated
<S> <C> <C> <C> <C>
Net loss $(16,045) $(11,115) $(21,894) $(16,964)
Net loss per share $(0.49) $(0.34) $(0.68) $(0.53)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (in thousands, except share data)
Results of Operations
Overview
Open Market, Inc. (the Company) develops, markets, licenses and supports
enterprise-class, packaged application software products and professional
services that allow its customers to engage in business-to-consumer and
business-to-business Internet commerce, information commerce and commercial
publishing. Open Market's software includes a wide spectrum of functionality
required to effectively conduct business on the Internet, allowing companies to
attract customers to their Web site, engage them in acting upon an offer,
complete a transaction and service them once a transaction has been completed.
In March 1999, the Company restated its June 30, 1998 and September 30, 1998
financial statements to reflect a change for the purchase price allocation
related to the 1998 acquisition of ICentral and the related amortization of
intangibles. Such restatement resulted in a decrease in net loss of $4,930
for the three and six months ended June 30, 1998 (see Note 8).
Revenues
Total revenues for the three months ended June 30, 1998 were approximately
$16,526 or a 6% increase when compared to $15,534 for the three months ended
June 30, 1997, which included a one-time payment to the Company for the
licensing of its Axcess software product. For the six months ended June 30,
1998, total revenues were $31,728 or an 18% increase when compared to $26,892
for the same period of the prior year.
Product revenues were $12,157 or 74% of total revenues for the three months
ended June 30, 1998 compared to $12,433 or 80% of total revenues for the three
months ended June 30, 1997. Product revenues contain two categories: (1)
software products which includes the licensing of Transact, LiveCommerce, the
Folio product suite and ShopSite products and (2) royalties revenues which
include Publisher royalties and merchant license fees. Revenues from software
products during the second quarter of 1998 were 43% of total revenues while
royalty revenues were 31% of total revenues. During the second quarter of 1998,
software product revenues
-13-
<PAGE>
were attributable to the licensing of the Company's Transact product, compared
to the second quarter of 1997 when software product revenues were attributable
to the licensing of the Company's Axcess product to Raptor Systems Inc.. Royalty
revenues for the second quarter of 1998 consisted principally of merchant
license fees.
Product revenues were $23,430 or 74% of total revenues for the six months
ended June 30, 1998 compared to $21,489 or 80% of total revenues for the six
months ended June 30,1997. During the first six months of 1997 the Company's
revenues from its products to Raptor were approximately $4,200. The total value
of the contract with Raptor was approximately $6,000. In addition, during the
first six months of 1997 the Company recorded product and royalty revenues of
$17,289 from Transact, SecureLink, and the Folio product suite, which was
acquired in March 1997.
Service revenues were approximately $4,369 or 26% of total revenues for the
three months ended June 30, 1998 compared to $3,101 or 20% of total revenues for
the three months ended June 30, 1997. Service revenues were approximately $8,298
or 26% of total revenues for the six months ended June 30, 1998 compared to
$5,403 or 20% of total revenues for the six months ended June 30, 1997. Of the
total service revenues for the three months ended June 30, 1998, 43% came from
maintenance and support and 57% came from professional services which includes
consulting, implementation, training and education. For the three months ended
June 30, 1997 maintenance and support represented 29% and professional services
represented 71% of total service revenues. The increase in maintenance and
support revenues in the three and six months of 1998 was due primarily to an
increased customer base receiving maintenance and support.
Cost of Revenues
Cost of product revenues increased to $742 for the three months ended June 30,
1998 from $639 for the three months ended June 30, 1997. Cost of product
revenues was $1,342 for the six months ended June 30, 1998 compared to $1,505
for the six months ended June 30, 1997. For all periods presented, cost of
product revenues included the costs to distribute products as well as third-
party royalties for technology incorporated into certain products of the
Company. Management believes that these costs as a percentage of product
revenues may increase in the future as the Company's sales of these products
increase and as it incorporates more third-party technology into its products.
Cost of service revenues increased to $3,503 for the three months ended June
30, 1998 from $2,400 for the three months ended June 30, 1997. Cost of service
revenues was $6,409 for the six months ended June 30, 1998 compared to $4,522
for the six months ended June 30, 1997. Cost of service revenues consists
primarily of personnel and related costs incurred in providing development,
consulting and other technical services to customers. The increase was primarily
attributable to costs associated with the higher service revenues as well as the
planned expansion of the Company's consulting business. The decrease of
approximately 3% in the gross margins on services from the three months ended
June 30, 1998 compared to the same period of the prior year was primarily
attributable to lower utilization rates from the Company's consulting business
during the period. The lower utilization rates were due principally to the
investments made during the three and six months of 1998 to expand the
consulting business. Management believes these margins will increase over the
next six months as utilization rates improve.
Operating Expenses
Selling and marketing expenses consisted primarily of the cost of sales and
marketing personnel and consultants, as well as the costs associated with
marketing programs, advertising costs and literature. Selling and marketing
expenses decreased to $8,007 and $15,883 for the three and six month periods
ended
-14-
<PAGE>
June 30, 1998, respectively, from $9,590 and $17,572 for the three and six month
periods ended June 30, 1997, respectively. The decrease in these expenses for
the three and six months was primarily attributable to decreases in the number
of sales and marketing personnel, which was due to continued integration with
Folio of the sales and marketing organization across the Company.
Research and development expenses consist primarily of the cost of research
and development personnel and independent contractors, as well as equipment and
facilities costs related to such activities. For the three months ended June 30,
1998 these expenses decreased to $6,568 from $7,461 compared to the three
months ended June 30, 1997. The decrease in expenses of $893, or 12%, was due
primarily to a reduction in the cost of independent contractors used in the
development and enhancements of the Company's products. For the six months ended
June 30, 1998, research and development expenses increased slightly to $13,344
compared to $12,836 for the six months ended June 30, 1997. The increase of $508
or 4% for the six months period was primarily attributable to higher cost
associated with employees such as salary increases partially offset by a
reduction in the costs of independent contractors. Qualifying capitalizable
software development costs were immaterial in both periods, and accordingly, the
Company has charged all such expenses to research and development in the period
incurred. The Company believes that significant investments in research and
development are required to remain competitive in the software industry. Certain
research and development expenditures are incurred substantially in advance of
the related revenue and in some cases do not generate revenue.
General and administrative expenses consist primarily of the cost of finance,
management and administrative personnel, as well as legal and other professional
fees. These expenses decreased for the three months ended June 30, 1998 to
$2,851 compared to $3,284 for the three months ended June 30, 1997. The decrease
was due mainly to a lower level of legal and professional fees. For the six
months ended June 30, 1998 these expenses increased slightly to $5,780 compared
to $5,655 for the six months ended June 30, 1997. The increase was due mainly to
amortization of goodwill associated with the Folio and ICentral acquisitions.
In connection with the acquisition of ICentral in May 1998, the Company
allocated $10,800 of the purchase price to acquired in-process research and
development. In connection with the acquisitions of Waypoint in February 1997
and Folio in March 1997, the Company allocated $9,250 and $25,000, respectively,
of the purchase price to acquired in-process research and development.
Accordingly, these costs were expensed as of the acquisition dates. The amount
allocated to acquired in-process research and development relates to projects
that had not yet reached technological feasibility and that, until completion of
development, have no alternative future use. The technologies acquired in the
acquisitions of Waypoint, Folio and ICentral have required, and will continue to
require, substantial additional development by the Company.
Interest income represents interest earned on cash, cash equivalents and
marketable securities. Interest income decreased to $290 and $609 for the three
and six month periods ended June 30, 1998, respectively, from approximately $710
and $1,600 for the three and six month periods ended June 30, 1997,
respectively. The decrease was primarily attributable to lower average
investments in cash, cash equivalents and marketable securities during the
periods. Interest expense increased to $296 and $536 for the three and six month
periods ended June 30, 1998, respectively, from approximately $220 and $270 for
the three and six month periods ended June 30, 1997, respectively. Interest
expense relates to the accounts receivable line of credit, the Company's note
payable issued in conjunction with the Folio acquisition, a non-recourse
factoring agreement as well as an obligation under a license agreement. Other
expense of $62 and $72 for the three and six month periods ended June 30, 1998
represents foreign currency translation losses.
-15-
<PAGE>
The Company has recorded a provision for foreign income taxes of $33 and $65
compared to $111 and $451 for the three and six months ended June 30, 1998, and
1997, respectively. This provision for foreign taxes related to estimated taxes
due in foreign jurisdictions. The Company has had losses for U.S. tax purposes
for all periods to date and, accordingly, there has been no provision for U.S.
income taxes.
Restatement of June 30, 1998 Financial Statements
In March 1999, the Company restated its June 30, 1998 and September 30, 1998
financial statements to reflect a change for the purchase price allocation
related to the 1998 acquisition of ICentral and the related amortization of
intangibles. This adjustment decreased the amount previously allocated to in-
process technology by $5,100, which has been capitalized as developed technology
and goodwill and will be amortized on a straight-line basis over five years.
The restatement was the result of concerns presented by the Securities and
Exchange Commission (SEC) regarding the valuation methodology used for the
determination of charges for acquired in-process research and development costs.
The Company believes that its periodic reports filed June 30, 1998 and September
30, 1998, which included such charges related to the acquisition costs for
ICentral, were made in accordance with generally accepted accounting principles
and established industry practices at the time. In addition, the valuation of
the acquired in-process research and development was supported by an independent
valuation by Arthur Andersen LLP.
The Company has not been contacted by the SEC regarding its valuation
methodology. However, in response to the SEC's new guidelines, the Company has
decided to proactively move to the new valuation methodology for its 1998
acquisition of ICentral. Therefore, the Company expensed $5,700 to in-process
research and development in the second quarter of 1998, capitalized $6,300 of
developed technology and goodwill, and amortized the developed technology and
goodwill over the 5-year estimated useful life.
The following table presents the net loss and net loss per share as originally
reported and as restated:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
-------------------------------------------------------------------------------------------
As reported As restated As reported As restated
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss $(16,045) $(11,115) $(21,894) $(16,964)
Net loss per share $ (0.49) $ (0.34) $ (0.68) $ (0.53)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Liquidity and Capital Resources
At June 30, 1998, the Company had $23,223 in cash, cash equivalents and
marketable securities; a decrease of $7,415 from December 31, 1997 the decrease
was primarily due to funding of operations.
The Company's operating activities utilized cash and cash equivalents of
approximately $15,266 and $11,135 for the six months ended June 30, 1998 and
1997, respectively. Accounts receivable increased by $2,086 to $25,188 from
December 31, 1997 to June 30, 1998, primarily as a result of the timing of
revenues during the quarter as well as the granting of extended payment terms to
certain new and long standing creditworthy customers.
-16-
<PAGE>
The Company's investing activities used cash and cash equivalents of
approximately $6,294 and $1,991 for the six months ended June 30, 1998 and 1997,
respectively. The principal use for the six months ended June 30, 1998 was the
$3,937 paid in connection with the purchase of property and equipment for use in
the normal course of business. Additionally, the Company paid $1,420 in cash for
part of the purchase price and acquisition costs of ICentral.
The Company's financing activities provided cash and cash equivalents of
approximately $12,318 and $564 for the six months ended June 30, 1998 and 1997,
respectively. During the first six months of 1998, the Company received proceeds
of 5,000 from Intel for the private sale of equity securities and proceeds of
$2,074 from the exercise of stock options and stock purchases under the
Company's Employee Stock Purchase Plan. The Company repaid $5,000 of the note
payable issued to Reed Elsevier in 1997 in connection with the Folio acquisition
with a $1,818 cash payment and the balance of $3,182 was settled by the issuance
of common stock.
The Company has an unsecured bank credit facility, which provides up to
$15,000 in financing. Borrowings under this line are limited to 80% of eligible
domestic accounts receivable and 90% of eligible foreign accounts receivable, as
defined, and bears interest at the prime lending rate (8.5% at June 30, 1998).
The Company is required to comply with certain restrictive covenants under this
agreement. During the six months of 1998 the Company increase its borrowings
under this facility to $9,150 and at June 30, 1998 there was $5,850 remaining
under this facility.
The Company has a non-recourse factoring agreement under which it can factor
up to $8,000 of qualified accounts receivable, as defined. The Company sold
approximately $3,000 during the second quarter of 1998 and had $5,000 available
under this agreement at June 30, 1998.
On July 31, 1998, Open Market, Inc. (the "Company") announced that CMG
Information Services, Inc., an investor and developer of Internet companies
("CMG") and Capital Ventures International, a fund managed by Heights Capital
Management, a leader in equity financing for emerging growth companies ("CVI"),
made a $20,000 equity investment in the Company. Pursuant to the terms of the
agreements, the Company issued an aggregate of 1,338,912 shares of Common Stock
of the Company to CMG and CVI at a price of $14.94 per share. In addition, the
Company issued to CMG and CVI warrants to purchase additional 334,728 shares of
Common Stock of the Company at a price of $16.43 per share. The Company will
file a registration statement covering all such shares of Common Stock. Included
in the terms of the agreements are certain adjustments and other provisions,
including a repurchase provision which becomes operative in the event that the
registration statement is not declared effective in a timely manner.
In July 1998, the Company entered into a $2,800 mortgage of its Provo, Utah
building which bears interest at the prime-lending rate of 8.5%. The mortgage
principal payments are based upon a twenty year term, but a balloon payment is
required at the end of the fifth year.
At December 31, 1997, the Company had net operating loss carryforwards for
income tax purposes of approximately $65,000. These losses are available to
reduce federal and state taxable income, if any, in future years. These losses
are subject to review and possible adjustment by the Internal Revenue Service
and may be limited in the event of certain cumulative changes in ownership
interests of significant shareholders over a three-year period in excess of 50%.
While the Company believes that it has experienced a change in ownership in
excess of 50%, it does not believe that this change in ownership will
significantly impact the Company's ability to utilize its net operating loss
carryforwards.
The Company believes that its existing capital resources are adequate to meet
its cash requirements for at least the next 12 months. There can be no
assurance, however, that changes in the Company's plans or other events
affecting the Company's operations will not result in accelerated or unexpected
expenditures.
Restatement of June 30, 1998 and September 30, 1998 Financial Statements
-17-
<PAGE>
In March 1999, the Company restated its June 30, 1998, and September 30,
1998 financial statements to reflect a change in the accounting treatment of the
Company's acquisition of ICentral. The restatement was the result of concerns
presented by the Securities and Exchange Commission (SEC) regarding the
valuation methodology used for the determination of charges for acquired in-
process research and development costs. The Company believes that its periodic
reports filed June 30, 1998 and September 30, 1998, which included such charges
related to the acquisition costs for ICentral, were made in accordance with
generally accepted accounting principles and established industry practices at
the time. In addition, these periodic reports were supported by an independent
valuation by Arthur Andersen, LLP.
The Company has not been contacted by the SEC regarding its valuation
methodology. However, in response to the SEC's new guidelines, the Company has
decided to proactively move to the new valuation methodology for its 1998
acquisition of ICentral. The June 30, 1998 restatement consisted of a decrease
of $5,100 in acquired in-process research and development expenses related to
the ICentral acquisition that resulted in a net loss for the 3-month and 6-month
periods of $11,015 and $16,730, respectively.
Certain Factors that may affect future results
This Quarterly Report contains certain forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
generality of the foregoing, the words "believes" ,"anticipates", "plans",
"expects", and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by forward-
looking statements made in this Quarterly Report and presented elsewhere by
management from time to time. Some of the important risks and uncertainties
which may cause the Company's operating results to differ materially or
adversely are discussed below and in the Company's Annual report on Form 10-K
for the fiscal year ended December 31, 1997 filed with the SEC.
RISK FACTORS
The Shares offered hereby involve a high degree of risk. The following
risk factors should be considered carefully in addition to the other information
included or incorporated by reference in this Prospectus before purchasing the
Shares offered hereby.
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. The introduction of product or service enhancements or new products or
services embodying new technologies, industry standards or customer requirements
could supplant or make obsolete the Company's existing products and services.
Developing Internet Market
The market for the Company's Internet products and services has only
recently begun to develop, is rapidly evolving and is characterized by an
increasing number of market entrants that have introduced and developed products
and services for Internet commerce. The Company's future operating results
depend upon the development and growth of the market for Internet-based packaged
software
-18-
<PAGE>
applications, including electronic commerce applications. The acceptance of
electronic commerce in general and, in particular, the Internet as a sales
marketing and order receipt and processing medium are highly uncertain and
subject to a number of risks. Critical issues concerning the commercial use of
the Internet (including security, reliability, cost, ease of use, quality and
service and the effect of government regulation) remain unresolved and may
impact the growth of the Internet. If the market fails to develop or develops
more slowly than expected, the Company's operating results could be materially
adversely affected.
Recent Acquisition
In April 1998, the Company completed the strategic acquisition of Icentral,
Incorporated. The Company faces challenges relating to integration of operations
such as coordinating geographically separate organizations, integrating
personnel with disparate business backgrounds and combining different corporate
cultures. There can be no assurance that the acquired business or its products
will be successful, that the Company will successfully integrate the acquired
business into the Company, or that the Company will achieve the desired
synergies from the transaction.
Product Release Schedules
Delays in the planned release of the Company's new products may adversely
affect forecasted revenues, and create operational inefficiencies resulting from
staffing levels designed to support the forecasted revenues. The Company's
failure to introduce new products, services or product enhancements on a timely
basis could delay or hinder market acceptance and allow competitors to gain
greater market share than the Company.
Government Regulation and Legal Uncertainties
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to, or commerce
on, the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet, covering issues such as user privacy, taxation and
the content of products and the nature of services. The adoption of any such
laws or regulations may decrease the growth of the Internet or inhibit
companies' ability to conduct electronic commerce, which could in turn adversely
affect the Company's business, operating results or financial condition.
Moreover, the applicability of the Internet of existing laws governing issues
such as property ownership, libel and personal privacy is uncertain. Further,
due to the encryption technology contained in the Company's products, such
products are subject to U.S. export controls. There can be no assurance that
such export controls, either in their current form or as may be subsequently
enacted, will not delay the introduction of new products or limit the Company's
ability to distribute products outside of the United States. While the Company
intends to take precautions against unlawful exportation, the global nature of
the Internet makes it difficult to effectively control the distribution of the
Company's products. In addition, federal or state legislation or regulation may
further limit levels of encryption or authentication technology. Further,
various countries regulate the import of certain encryption technology and have
adopted laws relating to personal privacy issues which could limit the Company's
ability to distribute products in those countries. Any such export or import
restrictions, new legislation or regulation or government enforcement of
existing regulations could have a material adverse impact on the Company's
business, operating results and financial condition.
-19-
<PAGE>
Complex Products; Lengthy Sales Cycles
The Company's products are complex and often involve significant investment
decisions by prospective customers. Accordingly, the license of the Company's
software products can be expected to require the Company to engage in a lengthy
sales cycle and to provide a significant level of education to prospective
customers regarding the use and benefits of the Company's products. As a
result, the Company's sales cycles may be subject to a number of significant
delays over which it has little or no control. Delays in such transactions due
to lengthy sales cycles or delays in customer production or deployment of a
system could have a material adverse effect on the Company's business, operating
results and financial condition and could be expected to cause the Company's
operating results to vary significantly from quarter to quarter.
Security
A significant barrier to market acceptance of online commerce and
communication is the concern regarding the secure exchange of valuable and
confidential information over public networks.
The Company relies on encryption and authentication technology to provide
the security and authentication necessary to effect the secure exchange of
valuable and confidential information. There can be no assurance that advances
in computer capabilities, new discoveries in the field of cryptography or other
events or developments (such as break-ins and similar disruptive problems caused
by Internet users) will not result in a compromise or breach of algorithms used
by the Company in its products to protect customer transaction data. If any such
compromise or breach were to occur, it could have a material adverse effect on
the Company's business, financial condition, and operating results.
Competition
The market for electronic commerce software is new, rapidly evolving and
intensely competitive. The Internet is characterized by an increasing number of
market entrants that have introduced or developed products and services for
commerce on the Internet. Many of the Company's competitors have greater
financial, technical and marketing resources and greater name recognition than
does the Company. The market is still new and rapidly evolving, and the
Company's operating results will be affected by the number of competitors and
their pricing strategies and market acceptance of their products.
Dependence on Personnel
The Company's future success depends in significant part upon the continued
service of its key technical and senior management personnel, and its continuing
ability to attract and retain highly qualified technical and managerial
personnel. The Company's ability to establish and maintain a position of
technology leadership in the industry depends in large part upon the skills of
its development personnel.
Pricing
Future prices that the Company is able to charge for its products may
decline from historical levels due to competitive reasons and other factors. In
the future, the Company may have to reduce the prices of its products
substantially or introduce lower-priced lines of products to gain greater market
share.
-20-
<PAGE>
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.
Fluctuations in Quarterly Operating Results
The Company's expense levels are fixed in advance and based in part on its
expectations as to future revenues. Quarterly sales and operating results will
generally depend on the volume and timing of orders received within the quarter.
The Company may be unable to adjust spending in a timely manner to compensate
for unexpected revenue shortfalls. The Company expects in the future to
experience significant fluctuations in quarterly operating results that may be
caused by many factors, including among other things, the number, timing and
significance of product enhancements and new product announcements by the
Company or its competitors, the length of the Company's sales cycle, market
acceptance of and demand for the Company's products, the pace of development of
electronic commerce conducted on the Internet, customer order deferrals in
anticipation of enhancements or new products offered by the Company or its
competitors, nonrenewal of service agreements, software defects and other
product quality problems, the Company's ability to attract and retain key
personnel, the extent of international sales, changes in the level of operating
expenses and general economic conditions. As a result, the Company's operating
results in future quarters may be below the expectations of market analysts and
investors.
Foreign Exchange
To the extent that foreign currency exchange rates fluctuate in the future,
the Company may be exposed to continued financial risk. Although the Company
attempts to limit this risk by denominating most sales in United States dollars
and limiting the amount of assets in its foreign operations, there can be no
assurance that the Company will be successful in limiting its exposure.
Volatility of Stock Price
Open Market's Common Stock is quoted on the Nasdaq National Market. The
market price of Open Market's Common Stock, like that for the shares of many
other high technology companies, has been and may continue to be volatile.
Recently, the stock market in general and the shares of software companies in
particular have experienced significant price fluctuations. These broad market
fluctuations, as well as general economic and political conditions in the United
States and internationally and factors such as quarterly fluctuations in results
of operations, the announcement of technological innovations, the introduction
of new products by the Company or its competitors and general conditions in the
computer hardware and software industries may have a significant impact on the
market price of Open Market's Common Stock.
-21-
<PAGE>
Dependence on Intellectual Property Rights
The Company's success is dependent to a significant degree on its
proprietary software technology. The Company provides its products to end users
generally under nonexclusive, nontransferable licenses for the term of the
agreement, which is usually in perpetuity. The Company's policy is to enter
into confidentiality and assignment agreements with its employees, consultants,
and vendors and generally to control access to and distribution of its software,
documentation, and other proprietary information. Notwithstanding these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's software or other proprietary information without
authorization or to develop similar software independently. Although the
Company holds three U.S. patents, issued in March, 1998, covering certain
aspects or uses of electronic commerce software, there can be no assurance as
to the degree of intellectual property protection such patents will provide.
Policing unauthorized use of the Company's products is difficult, particularly
because the global nature of the Internet makes it difficult to control the
ultimate destination or security of software or other data transmitted. The
laws of other countries may afford the Company little or no effective protection
of its intellectual property. There can be no assurance that the steps taken by
the Company will prevent misappropriation of its technology or that agreements
entered into for that purpose will be enforceable.
Risk of Infringement
The Company may, in the future, receive notices of claims of infringement
of other parties' patent, trademark, copyright, and other proprietary rights.
There can be no assurance that claims for infringement or invalidity (or claims
for indemnification from our customers resulting from infringement claims) will
not be asserted or prosecuted against the Company. In particular, claims could
be asserted against the Company for violation of patent, trademark, copyright,
or other laws as a result of the use by the Company, its customers, or other
third parties of the Company's products to transmit, disseminate, or display
information over or on the Internet. Any such claims, with or without merit,
could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays, or require
the Company to enter into royalty or licensing agreements. There can be no
assurance that such licenses would be available on reasonable terms, if at all,
and the assertion or prosecution of any such claims could have a material
adverse effect on the Company's business, financial condition, and operating
results.
Risks of Product Defects
Sophisticated software products, such as those of the Company, may contain
undetected errors or failures that become apparent when the products are
introduced or when the volume of services provided increases. There can be no
assurance that, despite testing by the Company and potential customers, errors
will not be found in the Company's products, resulting in loss of revenues,
delay in market acceptance, diversion of development resources, damage to the
Company's reputation, or increased service and warranty costs, which would have
a material adverse effect on the Company's business, financial condition, and
operating results.
Litigation
Litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's patents, copyright or
trade secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation, whether successful or unsuccessful, could result in substantial
costs and
-22-
<PAGE>
diversions of resources, either of which could have a material adverse
effect on the Company's business, financial condition, and operating results.
Litigation regarding intellectual property rights, copyrights, and patents is
increasingly common in the software industry. Intellectual property litigation
is complex and expensive, and the outcome of such litigation is difficult to
predict. In addition, the Company faces risks on other general corporate legal
matters.
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 has
developed and implemented a detailed Year 2000 test procedure into the phase
review and software release process to ensure that its software products are
Year 2000 compliant. 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. In addition, even if the Company's products are Year 2000
compliant, other systems or software used by the Company's customers may not be
Year 2000 compliant. The failure of such noncompliant third-party software or
systems could affect the performance of the Company's products, which could have
a material adverse effect on the Company's business, financial condition and
operating results.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
None
ITEM 2. Changes in Securities and Use of Proceeds.
On June 4, 1998, the Company issued 335,852 shares of the Company's Common
Stock to Intel Corporation for an aggregate purchase price of $5,000. For these
issuances, the Company has relied upon an exemption from registration under
Section 4(2) of the Securities Act. The basis for this exemption is satisfaction
of the conditions of Rule 506 under the Securities Act in that the offers and
sales satisfied all of the terms and conditions of Rule 501 and 502 under the
Securities Act, there were no more than 35 purchasers of securities from the
Company other than accredited investors, and the purchaser had such knowledge
and experience and business matters that is was capable of evaluating the merits
and risks of the prospective investment.
ITEM 3. Defaults Upon Senior Securities.
None
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Stockholders held on May 20, 1998, the
following proposals were adopted by the vote specified below:
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<PAGE>
<TABLE>
<CAPTION>
Proposal For Against Abstain Broker Nonvotes
<S> <C> <C> <C> <C>
(1).To elect two Class II Directors:
Guirez Arshad 29,032,887 56,828
Brian J. Knez 29,034,844 54,871
(2) To approve amendments to the Company's Stock
Incentive Plan increasing the number of shares
of Common Stock for issuance under such plan
from 15,201,000 to 19,201,000
19,376,356 2,248,371 144,674 7,320,314
(3) To approve amendments to the Company's
Employee Stock Purchase Plan increasing the
number of shares of Common Stock for issuance
under such plan from 250,000 to 750,000 21,038,291 115,567 151,001 7,784,856
(4) To amend the Company's 1996 Director Option
Plan 26,897,010 1,562,513 165,650 464,542
(5) To ratify the selection by the Board of
Directors of Arthur Andersen LLP as the
Company's independent public accountants for
the current year. 28,927,295 20,560 141,860
</TABLE>
ITEM 5. Other Information.
None
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) During the second quarter of 1998, the Company filed the following
reports on Form 8-K:
(1) On April 30, 1998, the Company acquired all of the
outstanding shares of capital stock of ICentral, Incorporated
(ICentral) based in Provo, Utah. ICentral specializes in
Internet store-building products geared to small and medium-
sized businesses. As payment of the purchase price, the
Company (1) issued an aggregate of approximately 480,140
shares of the Common Stock of the Company, (2) made a cash
payment of $720 to the former stockholders of ICentral. The
value of the shares of the Company's Common Stock issued in
connection with the acquisition was approximately $10,000
based on a weighted average market price, as defined. In
addition, in connection with this acquisition, the Company
entered into employment agreements with certain key employees
of ICentral under which the Company agreed to pay bonuses in
an aggregate amount of $1,000, depending on certain future
events, as defined.
(2) On June 4, 1998, the Company announced that Intel Corporation
had made an investment in the Company, purchasing 335,852
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<PAGE>
unregistered shares of the Company's Common Stock for an
aggregate purchase price of $5,000. In addition, the Company
plans to port its Transact software to Intel Pentium II-based
servers running Windows NT and Intel's next-generation IA-64
processor. The estimated costs of $1,000 million associated
with the port will be expensed as incurred with a completion
of the IA-64 version expected at the time of the release of
Intel's next-generation IA-64 processor. The two companies
also plan to collaborate on joint marketing activities.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
OPEN MARKET, INC.
(Registrant)
Date: March 31, 1999 By: /s/ Gary B. Eichhorn
------------------------
Gary B. Eichhorn
Chief Executive Officer
Date: March 31, 1999 By: /s/ Regina O. Sommer
--------------------
Regina O. Sommer,
Senior Vice President and Chief
Financial Officer
(Principal financial and accounting
officer)
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<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description Page
- ----------- ----------- ----
27 Financial Data Schedule (EDGAR) 27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 0 10,423
<SECURITIES> 0 12,800
<RECEIVABLES> 0 26,949
<ALLOWANCES> 0 1,761
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 50,634
<PP&E> 0 25,494
<DEPRECIATION> 0 8,655
<TOTAL-ASSETS> 0 82,496
<CURRENT-LIABILITIES> 0 35,594
<BONDS> 0 54
0 33
0 0
<COMMON> 0 0
<OTHER-SE> 0 46,815
<TOTAL-LIABILITY-AND-EQUITY> 0 82,496
<SALES> 12,157 23,430
<TOTAL-REVENUES> 16,526 31,728
<CGS> 742 1,342
<TOTAL-COSTS> 4,245 7,751
<OTHER-EXPENSES> 23,296 40,877
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 296 536
<INCOME-PRETAX> (11,082) (16,899)
<INCOME-TAX> 33 65
<INCOME-CONTINUING> (11,115) (16,964)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (11,115) (16,964)
<EPS-PRIMARY> (0.34) (0.53)
<EPS-DILUTED> (0.34) (0.53)
</TABLE>
