<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
---------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-28436
OPEN MARKET, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 04-3214536
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
One Wayside Road
Burlington, Massachusetts 01803
(Address of principal executive offices) (Zip Code)
(781) 359-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of April 30, 1999, there were 35,985,156 shares of the Registrant's Common
Stock outstanding.
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OPEN MARKET, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998. 3
Consolidated Statements of Operations for the three months ended March 31,
1999 and 1998. 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998. 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk. 18
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities and Use of Proceeds 18
ITEM 3. Defaults Upon Senior Securities 18
ITEM 4. Submission of Matters to a Vote of Security Holders 18
ITEM 5. Other Information 18
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBIT INDEX 20
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
OPEN MARKET, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
As Restated
March 31, December 31,
1999 1998
-------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,876 $ 19,921
Marketable securities 14,854 14,958
Accounts receivable, net of allowances of $2,514 and $2,523, respectively 22,717 28,250
Prepaid expenses and other current assets 2,160 1,892
-------------------- -------------------
Total current assets 57,607 65,021
-------------------- -------------------
Property, plant and equipment, at cost:
Computers and office equipment 15,013 14,743
Leasehold improvements 5,379 5,421
Land & building 4,200 4,200
Furniture & fixtures 2,130 2,157
-------------------- -------------------
Total property and equipment 26,722 26,521
Less: Accumulated depreciation and amortization 12,152 11,093
-------------------- -------------------
Net property and equipment 14,570 15,428
Long-term marketable securities 710 1,510
Intangible assets, net 10,906 11,627
Other assets 1,372 1,372
-------------------- -------------------
$ 85,165 $ 94,958
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 10,350 $ 11,000
Note payable - 5,000
Accounts payable 2,329 2,848
Accrued expenses 11,698 13,692
Deferred revenues 4,719 4,548
Current maturities of long-term obligations 96 88
-------------------- -------------------
Total current liabilities 29,192 37,176
-------------------- -------------------
Long-term obligations, net of current maturities 2,764 2,789
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 35,785,000 shares and 35,291,000 shares at
March 31, 1999 and December 31, 1998, respectively 36 35
Additional paid-in capital 187,530 186,074
Accumulated deficit (134,357) (131,116)
-------------------- -------------------
Total stockholders' equity 53,209 54,993
-------------------- -------------------
$ 85,165 $ 94,958
==================== ===================
</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)
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<CAPTION>
Three Months Ended
March 31,
--------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
REVENUES:
Product revenues $10,075 $11,273
Service revenues 5,521 3,929
----------------- ----------------
Total revenues 15,596 15,202
----------------- ----------------
COST OF REVENUES:
Product revenues 635 600
Service revenues 3,904 2,906
----------------- ----------------
Total cost of revenues 4,539 3,506
----------------- ----------------
Gross profit 11,057 11,696
----------------- ----------------
OPERATING EXPENSES:
Selling and marketing 7,411 7,876
Research and development 4,482 6,776
General and administrative 2,359 2,929
----------------- ----------------
Total operating expenses 14,252 17,581
----------------- ----------------
Loss from operations (3,195) (5,885)
----------------- ----------------
OTHER INCOME (EXPENSE) :
Interest income 284 318
Interest expense (139) (240)
Other expense (147) (10)
----------------- ----------------
Loss before provision for incomes taxes (3,197) (5,817)
----------------- ----------------
Provision for foreign income taxes 43 32
----------------- ----------------
NET LOSS $(3,240) $(5,849)
================= ================
NET LOSS PER SHARE BASIC AND DILUTED (Note 2(e)) $(0.09) $(0.18)
================= ================
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING - BASIC AND
DILUTED (Note 2(e)) 35,316 31,769
================= ================
</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)
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<CAPTION>
Three Months Ended
March 31,
-----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,240) $(5,849)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,059 1,194
Amortization of intangible assets 720 405
Deferred Compensation - 28
Changes in assets and liabilities-
Accounts receivable 5,532 (533)
Prepaid expenses and other current assets (267) (157)
Accounts payable (519) 1,542
Accrued expenses (1,993) (2,441)
Deferred revenues 171 (2,517)
------------------ ------------------
Net cash provided by (used in) operating activities 1,463 (8,328)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (201) (2,219)
Payment from founder on loan - 993
Sales(purchase)of marketable securities, net 904 (2,252)
Increase in other assets - 10
------------------ ------------------
Net cash provided by (used in) investing activities 703 (3,468)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments)proceeds from Line of Credit (650) 7,136
Payments on note payable (5,000) (1,818)
Payments on long-term obligations (17) (2)
Proceeds from issuance of common stock 1,456 1,248
------------------ ------------------
Net cash (used in) provided by financing activities (4,211) 6,564
------------------ ------------------
Net decrease in cash and cash equivalents (2,045) (5,232)
Cash and cash equivalents, beginning of period 19,921 19,666
------------------ ------------------
Cash and cash equivalents, end of period $17,876 $14,434
================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 547 $ 855
================== ==================
Taxes paid during the period $ 44 $ 21
================== ==================
Supplemental Disclosure Of Non-Cash Investing Activities:
Payment of note payable through issuance of common stock - $ 3,182
=========================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 1998, included in the Company's Annual Report on Form 10-K/A filed with the
Securities and Exchange Commission on April 2, 1999.
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 Incorporated (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.
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements reflect the application of
certain accounting policies described in this and other notes to these
consolidated financial statements.
(a) Principles of Consolidation
The accompanying consolidated financial statements reflect the accounts of the
Company and its wholly-owned subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation.
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(b) Revenue Recognition
The Company applies Statement of Position No. 97-2, Software Revenue
Recognition, which superseded Statement of Position 91-1. The Company
generates revenue from licensing the rights to use its software products to
end users 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.
Revenues from software license agreements are recognized upon delivery of the
software if there is evidence of an agreement, there are no significant post-
delivery obligations, and the payment is fixed, determinable and probable. 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 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. Service revenue, which includes education, implementation
and consulting services, is recognized in the period services are provided, if
customer acceptance is not required, there is evidence of an agreement, the
revenues are fixed and determinable and collectibility is probable.
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 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
March 31, 1999, have maturities of greater than three months but less than one
year. The average maturity of the Company's marketable securities is
approximately eleven months.
(d) Translation of Foreign Currencies
The accounts of the Company's foreign subsidiaries are translated in
accordance with SFAS No. 52, Foreign Currency Translation. In translating the
accounts of the foreign subsidiaries into U.S. dollars, assets and liabilities
are translated at the rate of exchange in effect at year-end, while
stockholders' equity is translated at historical rates. Revenue and expense
accounts are translated using the weighted average rate in effect during the
year. Foreign currency translation and transaction gains or losses for the
foreign subsidiary are included in the accompanying consolidated statements of
operations since the functional currency of these subsidiaries is the U.S.
-7-
<PAGE>
dollar. The Company had no sales denominated in foreign currencies in the
three months ended March 31, 1999 and 1998.
(e) 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 months ended March 31, 1999 and 1998 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>
Three Months Ended
--------------------------------
March 31, March 31,
1999 1998
--------------------------------
(in thousands, except per share data)
<S> <C> <C>
Antidilutive securities
that were not included
- - common stock options 6,784 6,208
</TABLE>
(f) 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.
(g) Disclosures about Segments of an Enterprise
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information in the fiscal year ended December 31,
1998. SFAS No. 131 establishes standards for reporting information
regarding operating segments in annual financial statements and requires
selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS No. 131 also establishes
standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available
for evaluation by the chief operating decision maker, or decision making
group, in making decisions how to allocate resources and assess
performance. The Company's chief decision-maker, as defined under SFAS No.
131, is a combination of the Chief Executive Officer and the Chief
Financial Officer. To date, the Company has viewed its operations and
manages its business as principally one operating segment. As a result,
the financial information disclosed herein, represents all of the material
financial information related to the Company's principal operating segment.
3. Restructuring
In the fourth quarter of 1998, the Company implemented a restructuring plan
to better align its operating costs with its anticipated future revenue
-8-
<PAGE>
stream. The major component of the restructuring charge relates to the
elimination of approximately 67 employees across the following functions:
Engineering (27), Marketing (17), General and Administrative (22) and
Services (1). In addition, 10 employees moved from Engineering to
Consulting. Other components related to the exiting of certain contractual
arrangements for porting and product integration that resulted from a
change in product strategy. Other charges included the write-off of
unutilized software, originally intended for use by the sales force but not
implemented due to the reduction in marketing personnel.
<TABLE>
<S> <C>
Employee severance, benefits and related costs.......... $ 1,260
Write-off of assets..................................... 294
Termination costs of certain contractual arrangements... 488
--------
Total.................................................... $ 2,042
========
</TABLE>
At March 31, 1999, approximately $671 of accrued restructuring charges
remained, which is comprised of approximately $294 of severance-related
costs and $377 of contractual costs. The total cash impact of the
restructuring amounted to approximately $1,748. The total cash paid as of
March 31, 1999 was approximately $1,044 and the remaining amount will be
paid during 1999.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Results of Operations
Overview
Open Market 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. Open
Market's Internet commerce 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 customers
in acting upon a commercial offer, complete a secure transaction and
service customers once a transaction has been completed.
This section of the Quarterly Report may include historical information and
certain forward-looking statements. Please review below the information
contained under the heading "Certain Factors That May Affect Future
Operating Results" that addresses certain risks and uncertainties that
could cause the Company's future operating results to differ from those
indicated by any forward looking statements made by the Company or others.
The Company recommends that the business and historical discussions put
forth in this section be read together with the discussion of such risks
and uncertainties. In addition, the following discussion should be read in
conjunction with the consolidated financial statements and the notes
thereto, and the information included elsewhere herein. All dollar amounts
presented in the following discussion are presented in thousands, except
share and per share amounts and employee data.
Revenues
Total revenues for the three months ended March 31, 1999 were approximately
$15,596, or a 3% increase when compared to $15,202 for the three months
ended March 31, 1998.
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<PAGE>
Product revenues decreased approximately 10% to $10,075, or 65% of total
revenues, for the three months ended March 31, 1999, compared to $11,273,
or 74% of total revenues, for the same period of the prior year. Product
revenues include: (1) software products, which include the licensing of
Transact, the Company's flagship product for Internet commerce,
LiveCommerce and the Folio and ShopSite product suites, and (2) royalty
revenues, which include Folio publisher royalties and Transact merchant
fees. The decrease in product revenues was attributed primarily to a
decrease in Folio publisher royalties. The 36% comparative decrease in
publisher royalties/merchant fees from the same period of the prior year
was attributable primarily to three large multi-year Folio publisher
royalty contracts that were consummated in the first quarter of 1998. The
publisher royalty decrease was partially offset by a 41% increase in
software product revenues.
Service revenues increased to $5,521, or 35% of total revenues, for the
three months ended March 31, 1999, from $3,929, or 26% of total revenues,
for the three months ended March 31, 1998. Of the total service revenues
for the three months ended March 31, 1999 and 1998, 38% and 43% came from
maintenance and support services, respectively, which include product
maintenance and technical support, and 62% and 57%, respectively, was
attributable to professional services, which include consulting,
implementation, and education services. Professional service revenues
increased as a percentage of total service revenues for the three months
ended March 31, 1999 primarily due to increased demand for consulting
services across the Company's customer base. Increases in demand for
consulting and other services often result from new software product sales.
Additionally, the increase in demand for consulting services is attributed
to improvements in the Company's design and execution in marketing and
delivering these services.
Cost of Revenues
Cost of product revenues increased to $635, or 6% of total product
revenues, for the three months ended March 31, 1999, from $600, or 5% of
total product revenues, for the same period in the prior year. The increase
in cost of product revenues was primarily due to increased costs for third
party licensing royalties. Cost of product revenues includes the costs to
distribute products, costs of media on which products are delivered,
royalties for third-party technology that is embedded in certain products
of the Company, and royalties for the resale of third-party software
products. Management believes that these costs as a percentage of product
revenues will remain in the range of 6% to 10% for the foreseeable future
as the Company incorporates more third-party technology into its products
and continues to resell third-party software products with its Internet
commerce solutions.
Cost of service revenues increased approximately 34% to $3,904 for the
three months ended March 31, 1999, from $2,906 for the same period of the
prior year. Cost of service revenues consists primarily of personnel and
related costs incurred in providing development, consulting, and other
technical services to customers. The increase in cost was consistent with
the approximate 40% growth in service revenues from the same period of the
prior year. Additionally, service revenue gross margin increased
approximately 3% in the three months ended March 31, 1999 from the same
prior year period. The increase was attributed primarily to higher resource
utilization rates and improved cost management in the delivery of
professional services. Management believes that the service gross margin
may fluctuate over the next few quarters depending upon such factors as
resource utilization rates and growth in the consulting business.
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 $7,411 for the three-month period ended
March 31, 1999
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as compared to $7,876 in the comparable period of the prior year. The
decrease in these expenses was attributable primarily to decreases in
salaries and other employee-related expenses related, in part, to the
Company's restructuring that took place in the fourth quarter of fiscal
1998. As a result, selling and marketing headcount for the three-months
ended March 31, 1999 declined approximately 12% from the same period of the
prior year.
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 March 31, 1999, these expenses decreased to $4,482 from $6,776 for
the three months ended March 31, 1998. The decrease in expenses of
approximately 34% was attributable primarily to both a reduction in
employee-related expenses and the cost of outside contractors as certain
development projects came to fruition. In the first quarter of fiscal 1998,
the Company was actively engaged in dual research and development projects
related to the next generation Transact 4 and Folio 4 products. Research
and development headcount for the three-months ended March 31, 1999
declined approximately 37% from the prior year as a result of the
completion of those projects.
Qualifying capitalized software development costs were immaterial in both
periods. 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 revenues
and in some cases do not generate revenues.
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 March 31, 1999, to $2,359 from $2,929 for the three months ended
March 31, 1998. The decrease of approximately 20% was due mainly to
decreases in employee-related expenses and outside consulting expenses.
General and administrative headcount for the three-months ended March 31,
1999 declined approximately 15% as compared to the same period of the prior
year primarily as a result of the Company's restructuring in the fourth
quarter of fiscal 1998.
Interest income represents interest earned on cash, cash equivalents and
marketable securities. Interest income decreased to $284 in the three
months ended March 31, 1999 from approximately $318 in the same period of
the prior year. The decrease was primarily attributable to lower
average investments in cash, cash equivalents and marketable securities
during the period. Interest expense decreased to $139 from $240 for the
three-month periods ended March 31, 1999 and 1998, respectively. Interest
expense relates to the Company's accounts receivable line of credit, the
Company's note payable issued in conjunction with the Folio acquisition,
the mortgage on the Company's Provo, Utah facility, as well as an
obligation under a license agreement. Other expense of $147 for the three-
month period ended March 31, 1999 represents foreign currency translation
losses.
The Company recorded a provision for foreign income taxes of $42 compared
to $32 for the three-months ended March 31, 1999 and 1998, respectively.
This provision was recorded for 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.
Liquidity and Capital Resources
At March 31, 1999, the Company had $33,440 in cash, cash equivalents and
marketable securities, which represents a decrease of $2,949 from December
31, 1998.
The Company's operating activities provided cash of approximately $1,463
for the three months ended March 31, 1999. The decrease in accounts
receivable of approximately $5,532 from December 31, 1998 to March 31, 1999
was attributable primarily to the collection of
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<PAGE>
several extended-term contracts and improvement in the Company's overall
cash management and collection practices.
The Company's investing activities provided cash of approximately $703 for
the three months ended March 31, 1999, which was related primarily to sales
of marketable securities of $904. The principle uses of cash for investing
activities during the period were for purchases related to property, plant,
and equipment.
The Company's financing activities utilized cash of approximately $4,211
for the three months ended March 31, 1999. The principal use of cash for
financing activities during the period was a $5,000 payment for the note
payable issued to Reed Elsevier in 1997 in connection with the acquisition
of the Folio Corporation. This use of cash was partially offset by proceeds
of $1,456 from the exercise of stock options under the Company's 1994 Stock
Incentive Plan and stock purchases under the Company's Employee Stock
Purchase Plan.
The Company has an unsecured bank credit facility that 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 (7.75%
at March 31, 1999). The Company is required to comply with certain
restrictive covenants under this agreement. During the three months ended
March 31, 1999, the Company decreased its borrowings under this facility to
$10,350 from $11,000 at December 31, 1998. At March 31, 1999, $4,650
remained available to the Company under this facility.
At December 31, 1998, the Company had net operating loss carryforwards for
income tax purposes of approximately $96,000. 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 that are 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.
Year 2000 Compliance
Background
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 date-sensitive software applications that 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.
State of Readiness
With respect to the Company's internal systems, 80% of the Company's
mission critical information technology systems are considered to be Year
2000 compliant, as defined by the criteria established by the British
Standards Institute. With respect to the Company's software products, the
Company has developed and implemented a detailed Year 2000 test procedure
for the phase review and software release process to ensure that its
software products are Year 2000 compliant. The execution of this test
procedure began in October 1998 and management expects that such testing
will continue throughout 1999. Additionally, approximately 90% of the
Company's embedded product vendors
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are already considered to be Year 2000 compliant, based wholly on external
and internal testing of such embedded products. As a result, management
expects that the Company and its key vendors will be positioned to
successfully meet all Year 2000 compliance issues for the Company's
products.
Related Costs
Management has assessed the related costs for Year 2000 compliance to be in
the range of $700-$1,000. To date, the Company has incurred costs of
approximately $600 for its Year 2000 projects. Such costs may include
those for research and development, capital equipment, outside software
tools, outside contractors, and other internal resources that may be
assigned to the project. Management acknowledges that these costs may be
subject to reassessment as testing of the Company's products and mission
critical systems is completed and compliance is fully achieved.
Perceived Risks
At the present time, management does not expect Year 2000 issues to have a
material adverse impact on the Company's business or future results of
operations. However, there can be no assurance that there will not be
interruptions of operations or other limitations of system or product
functionality, or that the Company will not incur significant costs to
avoid such interruptions or limitations. For example, such interruptions
or limitations may include disruptions in customer service and technical
support facilities, interruptions to customer access to on-line products
and services, information or other communications, delays in manufacturing
and shipping of products, and other interruptions or delays in the day-to-
day operations of the Company. In addition, even if the Company's products
are Year 2000 compliant, other systems or software used by the Company's
domestic and international customers may not be Year 2000 compliant. The
failure of any such non-compliant third-party software or systems contained
in such operating environments may negatively affect the performance of the
Company's products, which may lead to increased costs associated with
correcting technical problems, lost sales, or other negative consequences
resulting from customer dissatisfaction, including litigation. Such
failure may have a material adverse effect on the Company's business,
financial condition and operating results.
Contingency Plans
In order to avoid such material adverse effects, the Company will continue
to seek business relationships only with those entities that are actively
and successfully addressing Year 2000 issues. If the inability of certain
existing vendors or customers to successfully address Year 2000 issues
begins to present adverse business effects for the Company, management may
elect to suspend such business relationships until such time that such
vendors or customers become fully compliant.
Certain Factors That May Affect Future Results
Introduction
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
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Company's Annual Report on Form 10-K/A for the fiscal year ended December
31, 1998 filed with the SEC.
Rapid Technological Change
The computer software industry is characterized by rapid technological
change. As a result, there is uncertainty about the widespread acceptance
of new products that can cause significant delays in the sales cycle. The
Company must continue to upgrade its own technologies and commercialize
products and services incorporating such technologies that may also
lengthen the sales cycle. The introduction of product or service
enhancements or new products or services embodying new technologies,
industry standards, or customer requirements could supplant or make
obsolete the Company's existing products and services.
Developing Internet Market
The market for the Company's Internet products and services has only
recently begun to develop, is rapidly evolving and is characterized by an
increasing number of market entrants that have introduced and developed
products and services for Internet commerce. The Company's future
operating results depend upon the development and growth of the market for
Internet-based packaged software 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.
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 may 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, 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
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<PAGE>
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 that
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.
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 was to occur,
it could have a material adverse effect on the Company's business,
financial condition, and operating results.
Competition
The market for Internet 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 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
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<PAGE>
position of technology leadership in the industry depends in large part
upon the skills of its development personnel.
Pricing
Future prices that the Company is able to charge for its products may
decline from historical levels due to competitive reasons and other
factors. In the future, the Company may have to reduce the prices of its
products substantially or introduce lower-priced lines of products to gain
greater market share.
Limited Operating History
The Company has a limited operating history. The Company's ability to
successfully market its existing products and to develop and market new
products must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly 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;
non-renewal 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 combined with general economic and
political conditions in the United States and abroad, 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.
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<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 non-exclusive, non-transferable 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 several U.S. patents,
including the 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 would 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.
Risk 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 diversions of resources, which may 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
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<PAGE>
difficult to predict. In addition, the Company faces risks on other general
corporate legal matters.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Hedging. The accounts of the Company's foreign
subsidiaries are translated in accordance with SFAS No. 52, Foreign
Currency Translation. In translating the accounts of the foreign
subsidiaries into U.S. dollars, assets and liabilities are translated at
the rate of exchange in effect at year-end, while stockholders' equity is
translated at historical rates. Revenue and expense accounts are translated
using the weighted average exchange rate in effect during the year. Foreign
currency translation and transaction gains or losses for the Company's
subsidiaries are included in the accompanying consolidated statements of
operations since the functional currency for the Company's subsidiaries is
the U.S. dollar.
Investment Portfolio. The Company does not invest in derivative financial
instruments that meet the high credit quality standards, as specified in
the Company's investment policy guidelines; the policy also limits the
amount of credit exposure of any one issue, issuer, and type of investment.
See "Note 2--Summary of Significant Accounting Policies" in the Notes to
Consolidated Financial Statements.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No. 27 - Financial Data Schedule
(b) On March 4/th/, 1999 the Company filed a report on Form 8-K
dated February 17/th/, 1999 to disclose that on February
17/th/, 1999, the Company approved an amendment to the Rights
Agreement dated January 26/th/, 1988. (The "Rights Agreement")
between the Company and Bank Boston N.A., as Rights Agent, the
eliminating provisions relating to the ability of newly
elected directors to redeem rights under the Rights Agreement.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
OPEN MARKET, INC.
(Registrant)
Date: May 14, 1999 By: /s/ Gary Eichhorn
-------------------------------
Gary Eichhorn
President, Chief Executive Officer
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<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
---------- ----------- ----
27 Financial Data Schedule (EDGAR) 21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10Q AND IS
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</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 17,876
<SECURITIES> 14,854
<RECEIVABLES> 22,717
<ALLOWANCES> 2,514
<INVENTORY> 0
<CURRENT-ASSETS> 57,607
<PP&E> 26,722
<DEPRECIATION> 12,152
<TOTAL-ASSETS> 85,165
<CURRENT-LIABILITIES> 29,192
<BONDS> 0
0
0
<COMMON> 36
<OTHER-SE> 53,173
<TOTAL-LIABILITY-AND-EQUITY> 85,165
<SALES> 10,075
<TOTAL-REVENUES> 15,596
<CGS> 635
<TOTAL-COSTS> 4,539
<OTHER-EXPENSES> 14,252
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 139
<INCOME-PRETAX> (3,197)
<INCOME-TAX> 43
<INCOME-CONTINUING> (3,240)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (3,240)
<EPS-PRIMARY> (0.09)
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