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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
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)
ONE WAYSIDE ROAD, BURLINGTON, 01803
MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
</TABLE>
(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 October 31, 2000, there were 46,699,443 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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<S> <C> <C>
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 (Unaudited)............................. 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 2000 and 1999 (Unaudited)...... 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 (Unaudited)............. 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...................................................... 29
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 30
ITEM 2. Changes in Securities and Use of Proceeds................... 30
ITEM 3. Defaults Upon Senior Securities............................. 30
ITEM 4. Submission of Matters to a Vote of Security Holders......... 30
ITEM 5. Other Information........................................... 30
ITEM 6. Exhibits and Reports on Form 8-K............................ 30
SIGNATURES............................................................ 31
EXHIBIT INDEX......................................................... 32
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OPEN MARKET, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 18,656 $ 19,258
Marketable securities..................................... 11,671 13,033
Accounts receivable (net of allowance for doubtful
accounts of $4,317 and $2,870 respectively)............. 30,878 27,609
Prepaid expenses and other current assets................. 4,671 4,264
--------- ---------
Total current assets.................................... 65,876 64,164
--------- ---------
Property, plant and equipment, at cost:
Computers and office equipment............................ 19,968 17,535
Leasehold improvements.................................... 5,594 5,527
Land & building........................................... 4,200 4,200
Furniture & fixtures...................................... 2,590 2,304
--------- ---------
Total property and equipment............................ 32,352 29,566
Less: Accumulated depreciation and amortization............. 19,087 16,043
--------- ---------
Net property and equipment.............................. 13,265 13,523
Long-term marketable securities............................. 1,491 1,487
Intangible assets, net...................................... 6,361 8,657
Other assets................................................ 1,081 1,372
--------- ---------
$ 88,074 $ 89,203
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations............... $ 50 $ 108
Line of credit............................................ 9,949 10,350
Accounts payable.......................................... 4,222 5,657
Accrued expenses.......................................... 16,871 13,773
Deferred revenues......................................... 8,730 6,700
--------- ---------
Total current liabilities............................... 39,822 36,588
--------- ---------
Long-term obligations, net of current maturities............ 2,623 2,657
Stockholders' equity:
Preferred stock, $.10 par value--
Authorized--2,000 shares; Issued and
outstanding--none..................................... -- --
Common stock, $.001 par value--
Authorized--300,000 shares; Issued and
outstanding--46,697 shares and 44,098 shares at
September 30, 2000 and December 31, 1999,
respectively.......................................... 47 44
Additional paid-in capital................................ 222,819 214,783
Deferred compensation..................................... (244) (329)
Accumulated deficit....................................... (176,993) (164,540)
--------- ---------
Total stockholders' equity.............................. 45,629 49,958
--------- ---------
$ 88,074 $ 89,203
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Product revenues.................................. $11,035 $12,589 $42,108 $ 36,837
Service revenues.................................. 11,302 8,012 31,569 20,920
-------- ------- -------- --------
Total revenues.................................. 22,337 20,601 73,677 57,757
COST OF REVENUES:
Product revenues.................................. 2,086 850 6,772 2,628
Service revenues.................................. 10,493 4,986 27,180 14,334
-------- ------- -------- --------
Total cost of revenues.......................... 12,579 5,836 33,952 16,962
-------- ------- -------- --------
Gross profit.................................... 9,758 14,765 39,725 40,795
OPERATING EXPENSES:
Selling and marketing............................. 12,608 8,539 35,717 26,396
Research and development.......................... 6,426 5,514 18,884 16,624
General and administrative........................ 4,158 3,559 11,017 9,462
-------- ------- -------- --------
Total operating expenses........................ 23,192 17,612 65,618 52,482
Loss from operations............................ (13,434) (2,847) (25,893) (11,687)
Gain on investment................................ 997 -- 13,318 --
Interest income................................... 340 286 1,066 909
Interest expense.................................. (183) (170) (358) (502)
Other expense..................................... (83) 26 (202) (127)
-------- ------- -------- --------
Loss before provision for income taxes.............. (12,363) (2,705) (12,069) (11,407)
Provision for income taxes.......................... 34 71 384 216
-------- ------- -------- --------
Net loss............................................ $(12,397) $(2,776) $(12,453) $(11,623)
======== ======= ======== ========
Net loss per share-basic and diluted (Note 2(e)).... $ (0.27) $ (0.06) $ (0.28) $ (0.27)
======== ======= ======== ========
Weighted average number of common and common
equivalent shares outstanding-basic and diluted
(Note 2(e))....................................... 45,785 42,837 45,050 42,445
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(12,453) $(11,623)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 3,044 3,470
Amortization of intangible assets....................... 2,296 2,541
Deferred Compensation................................... 85 684
Changes in assets and liabilities:
Accounts receivable..................................... (3,269) (705)
Prepaid expenses and other current assets............... (407) (1,718)
Accounts payable........................................ (1,435) 1,709
Accrued expenses........................................ 3,098 (2,211)
Deferred revenues....................................... 2,030 2,496
Cash used for merger related costs...................... -- (1,898)
-------- --------
Net cash used in operating activities................. (7,011) (7,255)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (2,786) (1,437)
Sales (purchases) of marketable securities, net........... 1,358 2,568
Increase in other assets.................................. 291 58
-------- --------
Net cash (used in) provided by investing activities..... (1,137) 1,189
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit, net........................... (401) (650)
Payments on note payable.................................. -- (5,000)
Proceeds from the issuance of redeemable convertible
preferred stock, net of issuance costs.................. -- 4,500
Payments on long-term obligations......................... (92) (132)
Proceeds from employee stock purchase plan................ 938 1,125
Proceeds from exercise of stock options................... 7,101 3,858
-------- --------
Net cash provided by financing activities............... 7,546 3,701
-------- --------
Net decrease in cash and cash equivalents................... (602) (2,365)
-------- --------
Cash and cash equivalents, beginning of period.............. 19,258 21,735
-------- --------
Cash and cash equivalents, end of period.................... $18,656 $ 19,370
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period........................... $ 351 $ 192
======== ========
Taxes paid during the period.............................. $ 91 $ 13
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION
The consolidated financial statements of Open Market, Inc. (the "Company")
presented herein have been prepared pursuant to the rules of the Securities and
Exchange Commission for quarterly reports on Form 10-Q and do not include all of
the information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1999,
included in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 30, 2000.
The consolidated financial statements and notes herein are unaudited but, in
the opinion of management, include all adjustments (consisting of normal,
recurring adjustments) necessary to present fairly the consolidated financial
position, results of operations and cash flows of the Company and its
subsidiaries.
The results of operations for the interim periods shown herein are not
necessarily indicative of the results to be expected for any future interim
period or for the entire year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain accounting policies described in this and other notes to these
consolidated financial statements.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements reflect the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
(B) REVENUE RECOGNITION
The Company recognizes revenue in accordance with Statement of Position
(SOP) 97-2, SOFTWARE REVENUE RECOGNITION, as amended by SOP 98-4 and SOP 98-9.
The Company generates revenue from two sources: license fees for the use of its
products and service revenues for implementation, support, consulting and
training related to its products.
The Company executes separate contracts that govern the terms and conditions
of each software license and maintenance arrangement and each professional
service arrangement. These contracts may be an element in a multiple element
arrangement. Revenues under multiple element arrangements, which may include
several different software products or services sold together, are allocated to
each element based on the residual method in accordance with the Statement of
Position 98-9, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN
ARRANGEMENTS.
The Company uses the residual method when fair value does not exist for one
of the delivered elements in a multiple element arrangement. Under the residual
method, the fair value of the undelivered elements is deferred and subsequently
recognized. The Company has established sufficient vendor specific objective
evidence for the value of professional services, training and maintenance and
support services based on the price charged when these elements are sold
separately. Accordingly,
6
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
software license revenue is recognized under the residual method in arrangements
in which software is licensed with professional services, training and
maintenance and support 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 or determinable and
collection is 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 revenue from education, implementation and
consulting services, is recognized in the period services are provided, if 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.
(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 90 days at the time of acquisition. Marketable
securities consist of investment grade commercial paper, corporate notes, and
obligations of certain municipalities with original maturities of greater than
90 days. The average maturity of the Company's marketable securities was
approximately 3 months at September 30, 2000 and 5 months at December 31, 1999.
(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 period-end, while
stockholders' equity is translated at historical rates. Revenue and expense
accounts are translated using the weighted average rate in effect during the
period. Foreign currency translation and transaction gains or losses for the
foreign subsidiaries are included in the accompanying consolidated statements of
operations since the functional currency of these subsidiaries is the U.S.
dollar. The Company had accounts receivable of $1,260 and $1,036 denominated in
foreign currency as of September 30, 2000 and December 31, 1999, respectively.
7
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) NET INCOME (LOSS) PER SHARE
The Company applies 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.
Basic net loss per share is calculated by dividing net loss by the weighted
average number of common shares outstanding. For the three months ended
September 30, 2000 and 1999, basic outstanding shares were 45,785,000 and
42,837,000, respectively. For the nine months ended September 30, 2000 and 1999,
basic outstanding shares were 45,050,000 and 42,445,000 respectively. Diluted
net loss per share for the three months and nine months ended September 30, 2000
and 1999 are the same as basic net loss per share, as the inclusion of potential
common stock would be anti-dilutive.
(F) COMPREHENSIVE INCOME (LOSS)
SFAS 130, REPORTING COMPREHENSIVE INCOME, requires disclosure of all
components of comprehensive income (loss) on an annual and interim basis.
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. The comprehensive net loss is the same as reported net
loss for all periods presented.
(G) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND SIGNIFICANT CUSTOMERS
The Company applies SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION which 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.
The Company has three reportable segments (1) Transact/ShopSite, including
the licensing and services of Transact and ShopSite products,
(2) content-centric eBusiness applications, including the licensing and services
of Content Server, Content Centre, Personalization Centre, Catalog Centre,
Integration Centre and Satellite Server and (3) other, which includes the
publishing product suite and other discontinued software products.
During the three and nine months ended September 30, 2000 and 1999, no
customer accounted for more than 10% of the Company's revenues. No customer
accounted for more than 10% of the Company's accounts receivable balance at
September 30, 2000 and December 31, 1999.
8
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OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table presents the Company's revenues for its reportable
segments for the three and nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Transact/ShopSite product revenues........ $ 967 $ 9,710 $13,365 $28,076
Content-centric eBusiness application
product revenues........................ 8,901 1,808 25,269 2,887
Other product revenues.................... 1,167 1,071 3,474 5,874
------- ------- ------- -------
Total product revenues.................. 11,035 12,589 42,108 36,837
------- ------- ------- -------
Transact/ShopSite service revenues........ 7,315 6,483 22,752 16,377
Content-centric eBusiness application
service revenues........................ 3,900 1,000 8,385 2,155
Other service revenues.................... 87 529 432 2,388
------- ------- ------- -------
Total service revenues.................. 11,302 8,012 31,569 20,920
------- ------- ------- -------
Total revenues.......................... $22,337 $20,601 $73,677 $57,757
======= ======= ======= =======
</TABLE>
The following table presents geographical revenues from sources in total and
as a percent of total revenues for the three and nine months ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------- -----------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North America........... $12,675 57% $14,503 70% $44,757 61% $41,529 72%
Europe.................. 2,405 11% 1,942 9% 6,973 9% 5,764 10%
UK...................... 2,911 13% 1,496 7% 6,980 10% 4,134 7%
Netherlands............. 1,586 7% 68 0% 2,753 4% 287 1%
Italy................... 1,463 6% 922 5% 4,584 6% 2,155 4%
Asia.................... 679 3% 738 4% 5,242 7% 2,011 3%
Other................... 618 3% 932 5% 2,388 3% 1,877 3%
------- --- ------- --- ------- --- ------- ---
$22,337 100% $20,601 100% $73,677 100% $57,757 100%
======= === ======= === ======= === ======= ===
</TABLE>
All of the Company's product sales are shipped from its facilities located
in the United States. As of September 30, 2000 and December 31, 1999 all of the
Company's assets relate to the Transact/ ShopSite and content-centric eBusiness
application segments, except for $7,309 and $10,173, respectively, which are
attributable to the other product revenue segment. Substantially all of the
Company's long-lived assets are located in the United States.
9
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OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) NEW ACCOUNTING STANDARDS
The Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 101, REVENUE RECOGNITION, in December 1999. The Company is required to
adopt this new accounting guidance through a cumulative charge to operations, in
accordance with Accounting Principles Board Opinion (APB) No. 20, ACCOUNTING
CHANGES, no later than the fourth quarter of fiscal 2000. The Company believes
that the adoption of the guidance provided in SAB No. 101 will not have a
material impact on future operating results.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS
No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. SFAS No. 133 is not expected to have
a material impact on the Company's consolidated financial statements.
(I) RECLASSIFICATIONS
Certain amounts have been reclassified in the prior period consolidated
financial statements to conform to the current period's presentation.
3. SPECIAL CHARGES
As a result of the acquisition of FutureTense, Inc. (FutureTense), a
software internet content management and delivery company during the fourth
quarter of 1999 (See Note 4), the Company incurred one-time costs related to the
merger of $4,328. These costs comprised professional fees and other charges of
$3,353 and costs to exit contractual obligation and asset impairments of $975.
The total cash impact related to the transaction was $3,394 of which $3,057 was
paid as of September 30, 2000. The remainder is expected to be paid by the end
of the year.
4. ACQUISITIONS
Effective October 15, 1999, the Company completed a merger with FutureTense.
The Company issued 7,346,210 shares of its common stock to the holders of
outstanding FutureTense stock, and of this total, 734,621 shares were placed in
escrow. Each FutureTense share was exchanged for .384 shares of the Company's
common stock. In addition, the Company assumed FutureTense employee stock
options and warrants that converted into options to acquire 1,124,628 shares of
Company common stock. As of the date of the consummation of the merger the
common stock issued by the Company and the converted options had an aggregate
market value of $111,180. The merger has been accounted for as a pooling of
interests and, accordingly, all prior period financial statements presented
herein have been restated as if the merger took place at the beginning of such
periods. In addition, in connection with this acquisition, the Company entered
into employment agreements in 1999 with key employees from FutureTense.
10
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OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. ACQUISITIONS (CONTINUED)
In accordance with Accounting Principles Board Opinion (APB) No. 16, the
following information presents Statement of Operations data for the periods
preceding the merger:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Open Market
Revenues................................ $18,014 $52,160
Net Loss................................ (1,086) (6,251)
FutureTense
Revenues................................ $ 3,022 $ 6,032
Net Loss................................ (1,692) (5,374)
</TABLE>
5. INVESTMENT IN SIGHTPATH, INC.
In June 1998, Open Market, Inc. and SightPath, Inc. (formerly known as
Clearview Technologies, Inc.) entered into an agreement whereby Open Market
assigned to SightPath rights to a pending patent application by David Gifford, a
founder of Open Market, Inc. and SightPath, Inc., in exchange for 291,667 shares
of Series A Convertible Preferred Stock of SightPath, Inc..
On March 29, 2000, Cisco Systems, Inc. announced a definitive agreement to
acquire all outstanding shares and options of SightPath, Inc. in exchange for
Cisco common stock. The merger was effective as of May 16, 2000 and the
conversion ratio was .7933703 which resulted in the issuance of 231,399 common
shares of Cisco Systems, Inc. Approximately 10% of the shares will be held in
escrow for a period of one year. At May 16, 2000, the Company realized a net
gain on investment of $12,071, or $0.25 per share, based on a closing price of
$60.563 per common share. On June 30, 2000, the Company then recognized an
unrealized gain on investment of $625 to record the fair value of $63.563 per
common share of Cisco Systems, Inc. On August 4, 2000, the Company sold 208,259
shares of Cisco Systems, Inc. common stock for an average price of $65.35 per
share resulting in proceeds of $13,609 and an additional net gain on investment
of $997.
6. CONTINGENCIES
CLASS ACTION SUIT
The Company is aware of six putative class actions that were filed between
June 14, 2000 and August 10, 2000, against the Company and certain of its
officers and directors in the United States District Court for the District of
Massachusetts. These actions, each filed on behalf of an alleged class of
Company shareholders who purchased their common stock between November 8, 1999
and April 18, 2000, allege violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The
plaintiffs are seeking monetary damages and other appropriate relief. The
defendants believe they have meritorious defenses to the foregoing matters, but
cannot predict their outcome. Plaintiffs have notified defendants of their
intention to file a single, consolidated complaint to which the defendants shall
have 45 days to respond.
11
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OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. SUBSEQUENT EVENTS
RESTRUCTURING
On October 10, 2000, the Company announced that it will be taking steps,
which include a workforce reduction, a shift in its professional services model
and a divestiture of its ShopSite business, intended to reduce expenses and
align investments with new strategies for profitability and long-term revenue
growth. The Company will record a restructuring charge of $6 million to
$7 million in the fourth quarter of 2000, which includes goodwill related to
ShopSite of approximately $3.3 million. This restructuring charge is intended to
reduce expenses by $3 million to $4 million per quarter.
SALE OF FACILITY IN PROVO, UTAH
On October 27, 2000, the Company completed the sale of its facility in
Provo, Utah, which includes the building, land, and furniture, for $4,100 from
which the Company repaid its outstanding mortgage of $2,679 on the property and
will realize a net gain from the sale of $150 in the fourth quarter of 2000.
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS TOGETHER WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND
THE RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT. THE FOLLOWING FINANCIAL
DATA IS PRESENTED IN THOUSANDS.
OVERVIEW
We develop and provide content-centric eBusiness application software that
enables our customers to effectively manage interactions with their site
visitors, customers, and channels. Our customers use our software products to
build and operate a wide variety of internet, intranet, and extranet
applications, including applications that enhance employee productivity, inform
and entertain site visitors, sell goods and services, build customer
relationships, and strengthen distribution channels. Using our software
products, our customers can deliver information and services in any internet
format, including traditional Web content, streaming media, email, text messages
and XML data streams, and to any internet device, including personal computers,
personal digital assistants, customer or channel partner systems, mobile
telephones and other wireless devices.
Our software products acquire, manage, and deliver a broad range of
information assets employed by internet applications, including articles,
product descriptions, images, media clips, visitor profiles and preferences,
customer segment definitions, personalization rules, promotions, business rules,
orders and other asset types defined by our customers. We accelerate the
business processes associated with these assets by providing flexible workflow
capabilities, rich application functionality, and web browser user interfaces
for business users. We enable our customers to integrate their eBusiness
applications with their existing systems, exchanging information assets and
business rules, and extending the services of those systems directly to
employees, customers, and partners. And, we provide unique high performance
dynamic content delivery capabilities, enabling our customers to provide
personalized user experiences on a large scale.
We recognize revenue in accordance with Statement of Position (SOP) 97-2,
SOFTWARE REVENUE RECOGNITION, as amended. We generate revenues from two sources:
license fees for the right to use our products and service revenues for
technical support, consulting and training related to our products. We recognize
license fee revenues upon licensing and delivery of the software if there is
persuasive evidence of an agreement, there are no significant post-delivery
obligations and customer acceptance is not required. If the license is subject
to customer acceptance or significant post-delivery obligations, we defer the
revenue recognition of the license fee until customer acceptance has occurred or
the post-delivery obligations have been met. We typically execute separate
contracts that govern the terms and conditions of each software license and
maintenance arrangement and each professional service arrangement. We have
established sufficient vendor specific objective evidence for the value of
professional services, training, and maintenance and support services based on
the price charged when these elements are sold separately. Accordingly, software
license revenue is recognized under the residual method in arrangements in which
software is licensed with professional services, training, and maintenance and
support services. Under the residual method, the fair value of the undelivered
elements is deferred and subsequently recognized.
We also enter into reseller arrangements for certain of our products that
typically provide for sublicense fees payable to us based on a percentage of our
list price. We recognize these sublicense revenues from resellers when earned,
either on a per-unit basis or, for guaranteed minimums, upon shipment of the
master copy of all our software to which the guaranteed sublicense fee minimums
relate, if there are no significant post-delivery obligations.
The Company will be adopting SAB No. 101, REVENUE RECOGNITION. The Company
believes that the adoption of the guidance provided in SAB No. 101 will not have
a material impact on future operating results.
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Our service revenues derive from a wide variety of contracted services for
technical support, consulting and training related to our products. We charge
fees for maintenance and support based on a percentage, generally 16% to 22% of
the corresponding license fee, and recognize these fees ratably over the life of
the contract. Our maintenance agreements provide for product upgrades and
enhancements and technical support in the form of telephone or on-site
assistance. These agreements are renewable at the election of the customer.
Accordingly, our maintenance and technical support revenues are typically a
function of new product licenses and the annual renewal of maintenance
agreements. We also generate revenues from professional services, which include
implementation and technical consulting, and from education services, including
on-site and online training services. We recognize revenues from professional
and education services as such services are performed.
We report our revenues according to three operating segments:
Transact/ShopSite, content-centric eBusiness applications and other revenue. Our
Transact/ShopSite revenues include license fees and service revenues from our
Transact and ShopSite products. Our content-centric eBusiness revenues include
license fees and service revenues from our Content Server suite of integrated
products. The other revenues relate, historically, to license fees and service
revenues generated from the software publishing tools acquired from Folio and
other products, certain of which have been discontinued. Subsequent to
June 1999, other revenues relate primarily to the royalties received from
NextPage in accordance with our strategic arrangement.
Our cost of product revenues consists of costs to distribute our products,
including the cost of the media on which our products are delivered and royalty
payments to third-party vendors for technology that is incorporated into our
products. Our cost of service revenues consists primarily of the salaries and
related costs of our technical personnel.
Software development costs that qualified to be capitalized were immaterial
in all periods. Accordingly, we have charged all such expenses to research and
development in the period incurred.
Our customer base is diversified, with no single customer representing
greater than 10% of our total revenues for the three and nine months ended
September 30, 2000 and 1999.
RESULTS OF OPERATIONS
REVENUES
<TABLE>
<CAPTION>
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- % CHANGE FROM ------------------- % CHANGE FROM
2000 1999 PRIOR YEAR 2000 1999 PRIOR YEAR
-------- -------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Transact/ShopSite revenues......... $ 8,282 $16,193 (49)% $36,117 $44,453 (19)%
Content-centric eBusiness
application revenues............. 12,801 2,808 356 % 33,654 5,042 567 %
Other revenues..................... 1,254 1,600 (22)% 3,906 8,262 (53)%
------- ------- ------- -------
Total revenues..................... $22,337 $20,601 8 % $73,677 $57,757 28 %
======= ======= ======= =======
</TABLE>
For the three and nine months ended September 30, 2000, total revenues grew
$1,736 and $15,920, respectively, from the comparable prior year periods.
14
<PAGE>
PRODUCT REVENUES
<TABLE>
<CAPTION>
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- % CHANGE FROM ------------------- % CHANGE FROM
2000 1999 PRIOR YEAR 2000 1999 PRIOR YEAR
-------- -------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Transact/ShopSite product
revenue.......................... $ 967 $ 9,710 (90)% $13,365 $28,076 (52)%
Content-centric eBusiness
application product revenue...... 8,901 1,808 392 % 25,269 2,887 775 %
Other product revenue.............. 1,167 1,071 9 % 3,474 5,874 (41)%
------- ------- ------- -------
Total product revenue.............. $11,035 $12,589 (12)% $42,108 $36,837 14 %
======= ======= ======= =======
</TABLE>
For the three months ended September 30, 2000, total product revenues
decreased $1,554 as compared to the same period of the prior year. Product
revenues for the period accounted for approximately 49% of total revenues
compared to 61% in the prior year. The decrease was primarily a result of a 90%
decline in Transact licensing revenues as compared to the same period of the
prior year. Two factors contributed to the decline in Transact revenues, 1) the
realignment of the North American sales organization led to fewer orders being
closed and 2) the average revenue generated by Transact licenses declined
because of a decrease in demand from our enterprise customers. Growth in
content-centric eBusiness application product revenues of $7,093 or 392%
partially offset the decline in the Transact revenues.
Total product revenues for the nine months ended September 30(,) 2000
increased $5,271 or 14% as compared to the same period of the prior year.
Product revenues for the period accounted for approximately 57% of total
revenues as compared to 64% in the prior year. For the nine months ended
September 30, 2000, Transact/ShopSite product revenue declined $14,711 or 52% as
compared to the nine months ended September 30, 1999. The decrease was primarily
a result of a decline in demand for our Transact product from our enterprise
customers. During the nine months ended September 30, 2000, the number of
Transact licenses sold to our enterprise customers declined when compared to the
same period of the prior year. Growth in the content-centric eBusiness
application product revenues of $22,382 or 775% was due primarily to an increase
in the number of units sold as well as higher average revenue per unit.
Other product revenue for the three and nine months represented royalty
revenue from the NextPage master distribution agreement for the Folio software
products. In June 1999, we formed a strategic relationship with NextPage and
granted NextPage, for a three-year period, exclusive worldwide marketing and
distribution rights for the software publishing tools we acquired from Folio.
This relationship allowed us to reduce our cost structure and provided us with
minimum royalty payments from NextPage of $1,167 per quarter through June 2002.
SERVICE REVENUES
<TABLE>
<CAPTION>
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- % CHANGE FROM ------------------- % CHANGE FROM
2000 1999 PRIOR YEAR 2000 1999 PRIOR YEAR
-------- -------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Transact/ShopSite service
revenue.......................... $ 7,315 $6,483 13 % $22,752 $16,377 39 %
Content-centric eBusiness
application service revenue...... 3,900 1,000 290 % 8,385 2,155 289 %
Other service revenue.............. 87 529 (84)% 432 2,388 (82)%
------- ------ ------- -------
Total service revenue.............. $11,302 $8,012 41 % $31,359 $20,920 51 %
======= ====== ======= =======
</TABLE>
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<PAGE>
For the three months ended September 30, 2000, total service revenues
increased $3,290 as compared to the same period of the prior year. Service
revenues accounted for 51% of total revenues as compared to 39% of the prior
year period. The growth in the Transact/ShopSite service revenue was due
primarily to an increase in professional service revenue from consulting
projects that were entered into throughout the year. Content-centric eBusiness
application service revenues increased as a result of new content product
license business, as well as an increase in maintenance and support revenue from
new customers and renewals from installed customers. Other service revenues for
the three months ended September 30, 2000 declined 84%. The decline was due to
the elimination of service revenue related to the Folio publishing segment. We
do not expect to derive significant Folio service revenues during the term of
the strategic arrangement with NextPage.
For the nine months ended September 30, 2000, total service revenues
increased $10,439 or 51% as compared to the same period of the prior year. The
growth of $6,375 or 39% in the Transact/ ShopSite service revenue for the nine
months was due to increases in consulting and maintenance and support revenues
as compared to the same period of the prior year. Content-centric eBusiness
application service revenues increased by $6,230 as a direct result of new
content product license business, as well as increases in maintenance and
support revenue from new customers and renewals from installed customers. Other
service revenues for the nine months ended September 30, 2000 declined 82%. The
decline was due to the elimination of service revenue related to the Folio
publishing segment.
COST OF PRODUCT REVENUES
<TABLE>
<CAPTION>
THREE-MONTHS NINE-MONTHS
ENDED ENDED SEPTEMBER
SEPTEMBER 30, 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cost of product revenues.................................... $2,086 $850 $6,772 $2,628
Percentage of total product revenues........................ 19% 7% 16% 7%
Product gross margin........................................ 81% 93% 84% 93%
</TABLE>
Cost of product revenues consist primarily of third party licensing
royalties related to our products.
For the three and nine months ended September 30, 2000, cost of product
revenues increased primarily as a result of growth in content-centric eBusiness
application product revenues and an increase in costs for third party licensing
royalties related to our products. Our content-centric eBusiness application
products carry higher third party costs than our Transact products. As a result,
we believe that our cost of product revenues as a percentage of product revenues
will be in the range of 16% to 20% for the foreseeable future.
COST OF SERVICE REVENUES
<TABLE>
<CAPTION>
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cost of service revenues................................. $10,493 $4,986 $27,180 $14,334
Percentage of total service revenues..................... 93% 62% 86% 69%
Service gross margin..................................... 7% 38% 14% 31%
</TABLE>
Costs of service revenues consist primarily of costs for personnel and
outside consultants.
For the three months ended September 30, 2000, cost of service revenues
increased primarily as a result of growth in our professional services business
and increased costs related to outside consulting
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<PAGE>
expenses and personnel recruitment. For the three months ended September 30,
2000, outside consulting expenses increased $3,299 and travel, recruiting, and
training costs increased $475 from the comparable prior year period. The
decrease in service gross margin was attributed primarily to our increased use
of outside consultants to meet increased demand for our consulting services.
For the nine months ended September 30, 2000, cost of service revenues
increased to $27,180 from $14,334 in the comparable prior year period. The
increase is primarily a result of the additional headcount needed to meet the
demand for our consulting services. Specifically, employee related expenses
increased $1,537 and consulting expense increased $8,668. The decrease in
service gross margin is attributable to the increase in the use of outside
consultants to meet our customers needs.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- % CHANGE FROM ------------------- % CHANGE FROM
2000 1999 PRIOR YEAR 2000 1999 PRIOR YEAR
-------- -------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Selling and marketing.............. $12,608 $ 8,539 48 % $35,717 $26,396 35 %
Research and development........... 6,426 5,514 17 % 18,884 16,624 14 %
General and administrative......... 3,393 2,662 27 % 8,721 6,862 27 %
Amortization of intangibles........ 765 897 (15)% 2,296 2,600 (12)%
------- ------- ------- -------
Total operating expenses........... $23,192 $17,612 32 % $65,618 $52,482 25 %
======= ======= ======= =======
</TABLE>
SELLING AND MARKETING
Selling and marketing expenses consist primarily of the cost of sales and
marketing personnel and outside marketing consultants, as well as the costs
associated with marketing programs, industry tradeshows, sales seminars,
advertising, and product literature.
For the three months ended September 30, 2000, selling and marketing
expenses increased to $12,608 from $8,539 in the comparable prior year period.
The increase was attributed primarily to increases in employee-related expenses,
recruiting fees, and marketing and promotional efforts. For the three months
ended September 30, 2000, we realized increases of $1,456 in employee related
expenses over the same period last year, which included an increase of $623 for
commission expenses related to the increase in revenues. Also, for the three
months ended September 30, 2000, recruiting fees increased $239 from the
comparable prior year period as a result of aggressive hiring efforts related to
the reorganization of our North American field sales organization.
For the nine months ended September 30, 2000, selling and marketing expenses
increased to $35,717 from $26,396 as compared to the prior year period. The
increase was primarily attributed to an increase in employee related costs of
$4,445. Also contributing to the increase was an additional $2,414 of marketing
and promotional expenses, $1,064 of travel and sales meeting expenses, $384 of
office related expenses, and $883 of recruiting and relocation expenses compared
to the same period last year.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of the cost of research
and development personnel and independent contractors, certain licensed
technology and equipment and facilities costs related to such activities.
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<PAGE>
For the three months ended September 30, 2000, research and development
expenses increased to $6,426 from $5,514 in the comparable prior year period.
The increased headcount needed for new product enhancements and releases in the
third quarter resulted in increased costs of approximately $691 from the
comparable prior year period. In addition, for the three months ended
September 30, 2000, recruiting expenses increased approximately $154 from the
comparable prior year period to meet hiring needs in the research and
development organization.
For the nine months ended September 30, 2000, research and development
expenses increased to $18,884 from $16,624 in the comparable prior year period.
The increase is primarily attributed to additional headcount needed for new
product releases as well as product enhancements throughout the current year
which resulted in an increase of $785 in employee related expenses, $488 in
consulting expense and $316 in hardware leases. Also contributing to the
increase in research and development expenses, was an increase in localization
expense of $314 in order to meet the needs of our international customers.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of the cost of
finance, management and administrative personnel and legal and other
professional fees.
For the three months ended September 30, 2000, general and administrative
expenses increased to $3,393 from $2,662 in the comparable prior year period.
The increase was attributed primarily to an increase in bad debt expense and the
related allowance for doubtful accounts of $747, which have increased in
proportion to the increase in the accounts receivable balance.
For the nine months ended September 30, 2000, general and administrative
expenses increased to $8,721 from $6,862 in the comparable prior year period.
The increase was primarily attributed to an increase in bad debt expense and the
related allowance for doubtful accounts of $1,940. In addition, there was an
increase in office related expenses of $963, which includes office rental
expense and utilities expense. The increase was slightly offset by a decrease in
depreciation expense of $533, which can be attributed to the retirement of fixed
assets and a decrease in capital expenditures.
AMORTIZATION OF INTANGIBLES
For the three months ended September 30, 2000, amortization of intangibles,
primarily resulting from the acquisitions or mergers of Folio, ICentral and
Mission Critical, an acquisition by FutureTense, decreased to $765 from $897 in
the comparable prior year period. The decrease was attributed to fully amortized
intangible assets of FutureTense at the end of fiscal 1999.
For the nine months ended September 30, 2000, amortization of intangibles
decreased to $2,296 from $2,600. The decrease was attributed to fully amortized
intangible assets of FutureTense at the end of fiscal 1999.
NON-OPERATING INCOME (EXPENSE)
Interest income represents interest earned on cash, cash equivalents and
marketable securities.
For the three months ended September 30, 2000, interest income increased to
$340 from $286 in the comparable prior year period. The increase was primarily a
result of higher average returns on investments in cash, cash equivalents and
marketable securities.
For the nine months ended September 30, 2000, interest income increased to
$1,066 from $909 in the comparable prior year period. The increase was primarily
a result of higher average returns on investments in cash, cash equivalents and
marketable securities.
Interest expense relates to the interest charged on our line-of-credit and
long-term obligations.
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<PAGE>
For the three months ended September 30, 2000, interest expense increased to
$183 from $170 in the comparable prior year period.
For the nine months ended September 30, 2000, interest expense decreased to
$358 from $502 in the comparable prior year period. The decrease was attributed
primarily to the retirement of a note payable in 1999 related to the Folio
acquisition.
Other income/expense primarily represents foreign currency translation gains
and losses.
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, requires disclosure of all
components of comprehensive income on an annual and interim basis. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. In our case, the changes in equity included in comprehensive income are
comprised of the reported net income for all periods' presented and unrealized
gains on investments.
For the three months ended September 30, 2000, we recorded a gain on
investment of $997 on the sale of 208,259 shares of Cisco stock sold on
August 4, 2000.
For the nine months ended September 30, 2000, we realized a gain on
investment of $13,318, of which $12,321 was realized on the conversion of
291,667 shares of SightPath, Inc. preferred stock (formerly known as Clearview
Technologies) to 208,259 shares of Cisco Systems common stock on May 16, 2000
and the remaining $997 was realized on August 4, 2000 when the shares of Cisco
were sold for an average price of $65.35 per share.
PROVISION FOR INCOME TAXES
For the three months ended September 30, 2000, provision for income taxes
decreased to $34 from $71 in the comparable prior year period. These amounts are
provisions for foreign income taxes.
For the nine months ended September 30, 2000, provision for income taxes
increased to $384 from $216 in the comparable prior year period. Approximately
$250 related to income taxes on the gain on our investment in SightPath, Inc.
preferred stock.
Generally, this provision relates to the amount of estimated taxes due in
foreign jurisdictions for our foreign operations and certain withholding taxes.
We incurred losses for U.S. tax purposes for all periods to date and,
accordingly, there has been no provision for U.S. income taxes. We believe that
the provision for income taxes will fluctuate in the future and will be
dependent upon the geographical locations of future sales and the associated
withholding taxes in those countries. The provision for income taxes will also
fluctuate when we become eligible for corporate income taxation in the United
States.
NET INCOME/LOSS
For the three months ended September 30, 2000, net loss was $12,397, or
$0.27 per share, including a net gain of $997, or $0.02 per share, from our sale
of 208,259 shares of Cisco Systems, Inc. common stock. Excluding the net gain
from investment, net loss was $13,393, or $0.29 loss per share. This compared to
a net loss of $2,776, or $0.06 loss per share, for the three months ended
September 30, 1999.
For the nine months ended September 30, 2000 and 1999, net loss was $25,521,
or $0.57 loss per share, excluding the net gain from investment, and $11,623, or
$0.27 loss per share, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we had $30,327 in cash, cash equivalents and
marketable securities, a decrease of $1,964 from December 31, 1999.
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<PAGE>
Our operating activities used cash and cash equivalents of $7,011 and $7,255
for the nine months ended September 30, 2000 and 1999, respectively, to fund our
operations. The decrease in cash used in operating activities resulted from an
increase in our accrued expenses of $5,309 and a decrease in prepaid expenses
and other current assets of $1,311. Offsetting this decrease are several
factors, which include an increase in accounts receivable of $2,564 and a
decrease in accounts payable of $3,144.
Our investing activities for the nine months ended September 30, 2000 used
cash and cash equivalents of $1,137 as compared to our investment activities for
the comparable prior year period that provided cash and cash equivalents of
$1,189. For the nine months ended September 30, 2000, the primary source of cash
from investing activities was $1,358 from the sale of marketable securities.
Specifically, we realized a gain of $13,609 from the sale of our shares of Cisco
Systems, Inc. common stock on August 4, 2000. This was offset by purchases of
property and equipment in the amount of $2,786. In the comparable prior year
period, the primary source of cash from investing activities was $2,568 related
to the sale of marketable securities, which was partially offset by purchases of
property and equipment of $1,437.
Our financing activities provided cash and cash equivalents of $7,546 and
$3,701 for the nine months ended September 30, 2000 and 1999, respectively. For
the nine months ended September 30, 2000, the primary source of cash from
financing activities was $8,039 from the issuance of common stock under our
stock option and stock purchase plans. This was partially offset by payments
made on our line of credit of $401. In the comparable prior year period, cash
and cash equivalents provided by financing activities consisted of $4,500
related to the sale of redeemable preferred stock and $4,983 from the issuance
of common stock under our stock option and stock purchase plans. These
provisions were partially offset by the repayment of a $5,000 note payable in
connection with the Folio acquisition.
In July 1998, we obtained a $2,800 mortgage loan, on a Provo, Utah building,
which bears interest at the fixed rate of 8.5%. The mortgage principal payments
are based upon a 20-year term with a balloon payment of $2,468 due on June 19,
2003. On October 27, 2000, the Company sold the facility and repaid its
outstanding mortgage of $2,679.
We have an unsecured credit facility arrangement with a bank that provides
up to $15,000 in financing in the form of a demand line of credit. Borrowings
under this line are limited to 80% of eligible domestic accounts receivable and
90% of eligible foreign accounts receivable, as defined, and bear interest at
the prime lending rate, which was 9.5% at September 30, 2000. We are required to
comply with certain restrictive covenants under this agreement and the line is
collateralized by our accounts receivable. We were in compliance with all such
covenants as of September 30, 2000. At September 30, 2000, our borrowings under
this facility were $9,949 with availability of $5,051 under this line. This line
expired on October 1, 2000 and the Company is currently negotiating the terms
for the renewal of this line.
At December 31, 1999, we had net operating loss carry-forwards for income
tax purposes of approximately $127,000. 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 we believe that we have experienced a change in ownership in excess of
50%, we do not believe that this change in ownership will significantly impact
our ability to use our net operating loss carry-forwards.
We believe that our existing capital resources are adequate to meet our cash
requirements for at least the next 12 months. There can be no assurance,
however, that changes in our plans or other events affecting our operations will
not result in accelerated or unexpected expenditures.
20
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EURO CURRENCY
On January 1, 1999, certain member countries of the European Union (EU)
established fixed conversion rates between their existing currencies and the
EU's common currency, the euro. The former currencies of the participating
countries are scheduled to remain legal tender as denominations of the euro
until January 1, 2002, when the euro will be adopted as the sole legal currency.
We continue to assess the impact that the conversion to the euro will have
on our European operations. We are evaluating the potential impact in several
areas of our business, including the ability of our information systems to
handle euro-denominated transactions and the impact on exchange costs and
currency exchange rate risks. We are also evaluating the impact that
cross-border price transparencies, which may affect the ability to price
products differently in various countries, will have on our gross margin.
Although we are still in the assessment phase, the conversion to the euro is not
expected to have a material impact on our operations or financial position.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
INTRODUCTION
This quarterly report on Form 10-Q contains certain forward-looking
statements. For this purpose, any statements we have used that are not
statements of historical fact may be considered forward-looking statements. We
have used "believes," "anticipates," "plans," "expects," and similar
expressions. There are a number of important factors that could cause our actual
results to differ materially from those indicated by forward-looking statements
made in this quarterly report and those presented elsewhere by management from
time to time. Some of the important risks and uncertainties that may cause our
operating results to differ materially or adversely are discussed below.
WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND THESE LOSSES MAY CONTINUE IN THE
FUTURE WHICH COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.
We have experienced operating losses in each quarterly and annual period
since our inception and these operating losses may continue in the future. We
incurred net losses of $62.5 million for the year ended December 31, 1997,
$37.0 million for the year ended December 31, 1998, and $19.8 million for the
year ended December 31, 1999. As of September 30, 2000, our accumulated deficit
was $177 million. We expect to continue to make significant investments to
broaden the range of our product offerings and expand our sales and marketing
and technical personnel. These efforts will require significant capital
expenditures, a substantial portion of which we will make long before any
corresponding revenue may be realized. We may never achieve profitability, and
if we do achieve profitability in any period, we may not be able to sustain or
increase profitability on a quarterly or annual basis.
OUR OPERATING RESULTS ARE LARGELY DEPENDENT UPON THE CONTINUED DEVELOPMENT AND
GROWTH OF INTERNET COMMERCE.
The market for our Internet products and services is rapidly evolving and
has an increasing number of market entrants that have introduced and developed
products and services for Internet commerce that compete with ours. Our future
operating results depend upon the development and growth of the market for
Internet-based packaged software applications, including electronic commerce
applications. The widespread acceptance of the Internet as a sales, marketing,
order receipt and processing medium is highly uncertain and subject to a number
of risks. The following critical issues remain unresolved and may impact the
growth of Internet commerce:
- security;
- reliability;
21
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- ease of use;
- service; and
- government regulation.
If the Internet commerce market fails to continue to develop or develops
more slowly than expected, our business and prospects will suffer.
WE MAY HAVE DIFFICULTY IN PREDICTING OUR QUARTERLY RESULTS, AND THE MARKET PRICE
OF OUR COMMON STOCK MAY DECLINE IF OUR OPERATING RESULTS DO NOT MEET
EXPECTATIONS.
Our operating results in recent quarters have fallen below the expectations
of some securities analysts and investors and may not meet such expectations in
future quarters. As a result, the market price of our common stock may decline.
We have difficulty predicting our quarterly results in part because the sales
cycle for our products is lengthy. The licensing of our products generally
involves a significant commitment of resources by our prospective customers, and
we are often required to provide a significant level of education to them
regarding the use and benefits of our products. This process can be time
consuming. The lengthy delays associated with the sales cycle affect the timing
of our revenue recognition and make it difficult to predict our quarterly
results.
IF WE FAIL TO MAINTAIN AND STRENGTHEN OUR RELATIONSHIPS WITH SYSTEMS
INTEGRATORS, WE MAY NOT ACHIEVE EXPECTED REVENUE GROWTH.
Our prospective customers often rely on third-party systems integrators to
develop, deploy and manage their integrated e-business solutions. A substantial
portion of our revenues are influenced by systems integrators that either
incorporate our products into their solution for the prospective customer or
otherwise recommend our product as an independent solution. If a significant
number of these systems integrators adopt a different product or technology as
part of their integrated solution instead of our products, we may not achieve
expected revenue growth. We cannot assure you that that our efforts to continue
to expand indirect sales in this manner will be successful. In addition, we
cannot be sure that such systems integrators will be able to successfully
support our products within their overall solutions, and our revenues may vary
depending on their ability to offer such support.
IF LIMITATION ON THE ONLINE COLLECTION OF PROFILE INFORMATION ARE IMPOSED, THE
UTILITY OF THE PERSONALIZATION FUNCTIONALITY OF OUR PRODUCTS WOULD BE LIMITED
AND WE MAY NOT ATTRACT A SIGNIFICANT NUMBER OF NEW CUSTOMERS.
One of the principal features of our products is the ability to develop and
maintain profiles of online users to assist business managers in personalizing
content and commercial offers to be displayed to specific online users. The
resistance of online users to providing personal data and any future laws and
regulations prohibiting use of personal data gathered online without express
consent or requiring businesses to notify their Web site visitors of the
possible dissemination of their personal data could limit the utility of our
products. These types of laws or regulations could heighten privacy concerns by
requiring businesses to notify Web site users that the data captured from them
online may be used by marketing entities to direct product messages to them.
While we are not aware of any laws or regulations of this type currently in
effect or in development in the United States, other countries and political
entities, including the European Union and its member states, have adopted legal
requirements imposing restrictions on the collection, use and processing of
personal data. It is possible that similar legal requirements could be adopted
in the United States. If the privacy concerns of consumers are not adequately
addressed, the effectiveness of our products could be impaired and we may not
attract new customers and the revenues they represent.
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IF OUR PRODUCTS FAIL TO ADEQUATELY SAFEGUARD THE SECURITY AND PRIVACY OF
CUSTOMER TRANSACTION DATA, OUR REPUTATION COULD BE DAMAGED, AND WE COULD LOSE
EXISTING AND PROSPECTIVE CUSTOMERS AND EXISTING AND POTENTIAL REVENUES.
A significant barrier to electronic commerce and communications has been the
ability to securely transmit confidential information over the Internet. The
concerns over the security of transactions conducted on the Internet and the
privacy of users may inhibit the growth of the Internet generally, and
electronic commerce in particular. In addition, Internet usage could decline if
any well-publicized compromise of security occurred. We may be required to
expend significant capital and other resources to develop products that
adequately protect our customers against such security breaches or to alleviate
problems caused by such breaches. We rely on certain encryption and
authentication technology to provide secure transmission of confidential
information. We cannot assure you that advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments will
not result in a compromise or breach of the algorithms we use to protect
customer transaction data. If any compromise or breach were to occur, it could
damage our reputation and cause us to lose existing and prospective customers.
IF WE DO NOT COMPETE EFFECTIVELY, PARTICULARLY AGAINST ESTABLISHED PARTICIPANTS
WITH GREATER FINANCIAL AND OTHER RESOURCES THAN OURS, WE WILL LOSE MARKET SHARE.
The market for e-business applications is relatively new, rapidly evolving
and intensely competitive. If we fail to compete successfully with current or
future competitors, we may lose market share. Our customers' requirements and
the technology available to satisfy those requirements continually change. We
expect competition in this market to persist and increase in the future. Our
primary competition includes in-house development efforts by prospective
customers and other vendors of application software or application development
platforms and tools directed at interactive commerce and financial services,
such as Art Technology Group, BroadVision, InterShop, InterWorld, Interwoven and
Vignette.
In addition, larger companies with much broader product offerings, such as
IBM, Microsoft and Oracle, may bundle their products to discourage users from
purchasing our products. Some of our current and potential competitors have
longer operating histories, greater name recognition, larger installed customer
bases and significantly greater financial, technical and marketing resources
than we do. As a result, these competitors may be able to develop and expand
their product offerings more quickly, adapt more swiftly to new or emerging
technology and changes in customer demands, develop greater resources to the
marketing and sales of their product, pursue acquisition and other opportunities
more readily and adapt more aggressive pricing policies. In addition,
competitors have established and, in the future, may establish cooperative
relationships among themselves or with third parties to market or enhance their
products. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. Competitive
pressures may make it difficult for us to acquire and retain customers and are
likely to result in price reductions reduced gross margins and loss of market
share.
WE MAY EXPERIENCE DIFFICULTY IN ATTRACTING AND RETAINING MEMBERS OF OUR KEY
SENIOR MANAGEMENT TEAM AND OTHER HIGHLY QUALIFIED INDIVIDUALS IN THE INTERNET
INDUSTRY.
Our ability to establish and maintain a position of technology leadership in
the highly competitive e-business software market depends in large part upon our
ability to attract and retain highly qualified managerial, sales and technical
personnel. We have recently experienced the departure of several senior
executives and may have difficulty in attracting new executives due to
competition for talent from start-ups and other companies. Our future success
also depends on our continuing to attract, retain and motivate highly skilled
employees. Competition for employees in our industry is intense. We may be
unable to retain our key employees or attract, assimilate or retain other highly
qualified employees in the future. We have from time to time in the past
experienced, and we expect to continue to
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experience in the future, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications. If our stock price continues to
decline, we may face a difficult and significant task of motivating key
personnel to stay committed to us.
FLUCTUATIONS IN OUR QUARTERLY REVENUE AND OPERATING RESULTS MAY RESULT IN
REDUCED PROFITABILITY AND CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.
We have experienced significant fluctuations in our results of operations on
a quarterly and annual basis. We expect to continue experiencing significant
fluctuations in our future quarterly and annual results of operations due to a
variety of factors, many of which are outside our control, including:
- the introduction of new products by us and our competitors;
- the variability and length of sales cycles associated with our product
offerings;
- the market acceptance of, and demand for, our products;
- the pace of development of electronic commerce conducted on the Internet;
- customer order deferrals in anticipation of enhancements or new products
offered by us or our competitors;
- non-renewal of service agreements;
- software defects and other product quality problems;
- the mix of products and services we sell;
- customer retention;
- the ability to collect payments from our customers on a timely basis;
- any changes in our pricing policies and/or those of our competitors;
- changes in the level of operating expenses;
- sales productivity; and
- general economic conditions.
In addition, our operating expenses are largely based on anticipated revenue
trends and a significant portion of our expenses, such as leased real estate
facilities, depreciation and personnel, is fixed in the short term. Accordingly,
our results of operations are particularly sensitive to fluctuations in
revenues. If our revenues fall below our expectations, we would probably not be
able to reduce our fixed or other expenses in sufficient time to respond to the
shortfall. If our operating results fall below the expectations of securities
analysts or investors in some future quarter or quarters, the market price of
our common stock is likely to decline.
IF WE ARE UNABLE TO RESTRUCTURE OUR OPERATIONS EFFECTIVELY, WE MAY NOT REALIZE
EXPECTED COST SAVINGS AND INCREASED REVENUES
We are currently pursuing a business plan that, if successfully implemented,
will cause us to restructure our operations to reduce expenses by streamlining
our workforce and realigning resources across business segments to appropriately
support each segment's customer base. In addition, we may transition our
professional services organization to focus on higher-margin design assurance
services for partners. This restructuring will require significant time
commitments from our senior management team and restrict its ability to pursue
other projects. We may experience a decline in product and services revenues and
a loss of customers as a result of changing the mix of products and services to
which we devote our development and marketing efforts without realizing any
benefits.
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<PAGE>
WE ARE SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
Our international activities expose us to numerous additional risks. In the
quarter ended September 30, 2000, we derived approximately 43% of our total
revenues from sales outside North America. We currently have eight offices in
Europe and Asia. A key component of our business strategy is to expand our
international activities. As we continue to expand internationally, we are
increasingly subject to risks of doing business internationally, including the
following:
- unexpected changes in regulatory requirements;
- export controls relating to encryption technology and other export
restrictions;
- tariffs and other trade barriers;
- difficulties in staffing and managing foreign operations;
- political and economic instability;
- fluctuations in currency exchange rates;
- reduced protection for intellectual property rights;
- cultural barriers;
- difficulty of enforcing agreements and collecting accounts receivables;
- seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world; and
- potentially adverse tax consequences.
Our international sales growth will be limited if we are unable to establish
additional foreign operations, expand international sales channel management and
support, hire additional personnel, customize products for local markets and
develop relationships with international distributors and systems integrators.
Even if we are able to successfully expand our international operations, we
cannot be certain that we will succeed in maintaining or expanding international
market demand for our products.
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS AND WE MAY BE SUBJECT TO
INFRINGEMENT CLAIMS THAT COULD SUBJECT US TO SIGNIFICANT LIABILITY AND DIVERT
THE TIME AND ATTENTION OF OUR SENIOR MANAGEMENT.
We regard our products, services and technology as proprietary. We attempt
to protect them through a combination of patents, copyrights, trademarks and
trade secret laws. We also generally enter into confidentiality agreements with
our employees, consultants and customers, and generally control access to and
distribution of our documentation and other proprietary information. These
methods may not be sufficient to protect our proprietary rights. We have no
patented technology that would preclude or inhibit competitors from entering our
market. Although we hold several U.S. patents asserting claims relating to
certain aspects or uses of electronic commerce software, we cannot be sure of
the degree of intellectual property protection those patents will provide.
Despite these precautions, it may be possible for a third party to copy or
otherwise misappropriate and use our products, services or technology without
authorization, particularly in foreign countries where the laws may not protect
our proprietary rights to the same extent as do the laws of the United States.
We also cannot assure you that third parties will not develop similar technology
independently. We may need to resort to litigation in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. This litigation could
result in substantial costs and diversion of resources and could harm our
business.
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In addition to licensing technologies from third parties, we are developing
and acquiring additional proprietary intellectual property. Third parties may
try to claim our products or services infringe their intellectual property. We
expect that participants in our markets will be increasingly subject to
infringement claims. Any claim, whether meritorious or not, could be time
consuming, result in costly litigation and/or require us to enter into royalty
or licensing agreements. These royalty or licensing agreements might not be
available on terms acceptable to us or at all, in which case we would have to
cease selling, incorporating or using those products and services that
incorporate the challenged intellectual property and expend substantial amounts
of resources to redesign our products or services. If we are forced to enter
into royalty or licensing agreements or to redesign our products or services,
our business and prospects would suffer.
WE ARE DEPENDENT ON THIRD PARTY TECHNOLOGY, AND IF WE ARE UNABLE TO LICENSE THIS
TECHNOLOGY OR IF DEFECTS IN THIS TECHNOLOGY EXIST, OUR PRODUCT SHIPMENTS COULD
BE DELAYED.
We rely in large part on technology that we license from third parties,
including relational database management systems from Oracle and application
server software from Netscape. The licenses from these third parties may not
continue to be available to us on commercially reasonable terms, or at all. If
we were to lose any of these technology licenses, we would have to cease selling
our products that incorporate the licensed technology and expend substantial
amounts of resources to redesign our products using equivalent technology, if
available. If we are forced to cease selling and to redesign our products, our
business and prospects would suffer.
OUR PRODUCTS MAY CONTAIN DEFECTS, WHICH MAY PROVE COSTLY AND TIME CONSUMING FOR
US TO CORRECT.
Sophisticated software products, such as those we develop and market, may
contain errors or failures that become apparent when we introduce the products
or when we provide an increased volume of services. We cannot assure you that
testing by us and our potential customers will detect all errors in our products
prior to licensing or sale. Correcting such errors may result in loss of
revenues, delay in market acceptance, diversion of development resources, damage
to our reputation or increased service and warranty costs, any of which would
adversely affect our business and our ability to market our products profitably.
IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL
CHANGES AND EVOLVING INDUSTRY STANDARDS, OUR PRODUCTS MAY BECOME OBSOLETE, AND
WE WOULD PROBABLY LOSE EXISTING CUSTOMERS AND BE UNABLE TO ATTRACT NEW ONES.
Internet markets are characterized by rapidly changing technologies,
evolving industry standards, frequent new product and service introductions and
changing customer demands. The introduction of new products or technologies
could render our product offerings obsolete, reduce the cost of competing
products or increase the number of products similar to those that we provide or
plan to provide. Our future success will depend on our ability to adapt to
rapidly changing technologies and to enhance existing solutions and develop and
introduce a variety of new solutions and services to address our customers'
changing demands. We may be required to make significant and ongoing investments
in future periods in order to remain competitive. Further, we may experience
difficulties that could delay or prevent the successful design, development,
introduction or marketing of our solutions and services or lengthen our sales
cycles. In addition, our new solutions or enhancements must meet the
requirements of our current and prospective customers and must achieve
significant market acceptance. Any material delays in introducing new solutions
and enhancements may cause customers to forego purchases of our solutions and
purchase those of our competitors. Our failure to successfully design, develop,
test and introduce new services, or the failure of our recently introduced
services to achieve market acceptance, could prevent us from maintaining
existing client relationships, gaining new clients or expanding our markets. In
such a case, we would not achieve our expected revenue growth.
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THE REGULATION OF THE INTERNET IS UNSETTLED, AND FUTURE REGULATIONS COULD
ADVERSELY AFFECT OUR OPERATING COSTS AND OUR ABILITY TO MARKET PRODUCTS
FACILITATING INTERNET COMMERCE.
The laws and regulations that apply to commerce and communication over the
Internet are becoming more prevalent. Such legislation could dampen the growth
in Internet usage generally and decrease the acceptance of the Internet as a
commercial medium. The United States Congress has recently considered enacting
Internet laws regarding children's privacy, copyrights, taxation and the
transmission of sexually explicit material. The European Union also recently
enacted its own privacy regulations. The laws governing the Internet, however,
remain largely unsettled, even in areas where there has been some legislative
action. It may take years to determine whether and how existing laws such as
those governing intellectual property, telecommunications, privacy, libel and
taxation apply to the Internet. In addition, the growth and development of the
market for electronic commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business over the Internet.
EXISTING AND FUTURE EXPORT CONTROLS MAY DELAY THE INTRODUCTION OF NEW PRODUCTS
OR LIMIT OUR ABILITY TO DISTRIBUTE PRODUCTS OUTSIDE OF THE UNITED STATES.
Due to the encryption technology contained in our products, our products are
subject to export controls within the United States. These export controls,
either in their current form or as may be subsequently enacted, may delay the
introduction of new products or limit our ability to distribute products outside
the United States. In addition, federal or state legislation or regulation may
further limit levels of encryption or authentication technology. Also, various
countries regulate the import of certain encryption technology and have adopted
laws relating to personal privacy issues that could limit our ability to
distribute products in those countries.
OUR BUSINESS MAY SUFFER IF THE INTERNET INFRASTRUCTURE IS UNABLE TO EFFECTIVELY
SUPPORT THE GROWTH IN DEMAND PLACED ON IT.
Our success will depend, in large part, upon the maintenance of the Internet
infrastructure, such as reliable network backbones with the necessary speed,
data capacity and security, and the timely development of enabling products such
as high speed modems, for providing reliable Internet access and services and
improved content. We cannot assure you that the Internet infrastructure will
continue to effectively support the demands placed on it as the Internet
continues to experience increased numbers of users, frequency of use and
increased bandwidth requirements. Even if the necessary infrastructure or
technologies are developed, we may have to spend considerable amounts to adapt
our solutions accordingly. Furthermore, the Internet has experienced a variety
of outages and other delays due to damage to portions of its infrastructure.
These outages and delays could impact the Internet sites of Web publishers using
our products and services.
THE IMPOSITION OF SALE AND OTHER TAXES ON PRODUCTS SOLD BY OUR CUSTOMERS OVER
THE INTERNET COULD HAVE A NEGATIVE EFFECT ON ONLINE COMMERCE AND, AS A RESULT,
ON DEMAND FOR OUR PRODUCT.
The imposition of new sales or other taxes could limit the growth of
electronic commerce generally and, as a result, the demand for our products.
There is recent federal legislation that limits the imposition of state and
local taxes on Internet-related sales. In 1998, the United States Congress
passed the Internet Tax Freedom Act, which places a three-year moratorium on
state and local taxes on Internet access, unless the tax was already imposed
prior to October 1, 1998, and discriminatory taxes on electronic commerce. There
is a possibility that Congress may not renew this legislation in 2001. If
Congress chooses not to renew this legislation, state and local governments
would be free to impose taxes on goods purchased over the Internet. In addition,
one or more foreign countries may seek to impose sales or other tax collection
obligations on out-of-jurisdiction companies that engage in electronic commerce.
A successful assertion by one or more foreign countries that companies engaged
27
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in electronic commerce should collect sales or other taxes on sales of their
products over the Internet, even though not physically present in the foreign
country, could indirectly reduce demand for our products.
WE ARE PARTY TO SECURITIES CLASS ACTION LITIGATION WHICH MAY BE COSTLY TO DEFEND
AND THE OUTCOME OF WHICH IS UNCERTAIN AND MAY HARM OUR BUSINESS.
We and several of our former and present officers and directors are named as
defendants in several class action complaints which have been filed on behalf of
certain of our stockholders who purchased securities between November 8, 1999
and April 18, 2000. These complaints allege violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under
this Act. The plaintiffs are seeking monetary damages and other appropriate
relief and have notified us and the other defendants of their intention to
file a single, consolidated complaint.
We can provide no assurance as to the outcome of this securities litigation.
Any conclusion of this litigation in a manner adverse to us would have a
material adverse effect on our business, financial condition, and results of
operations. In addition, the cost to us of defending any litigation or other
proceeding, even if resolved in our favor, could be substantial. Such litigation
could also substantially divert the attention of our management and our
resources in general. Uncertainties resulting from the initiation and
continuation of this litigation or other proceedings could harm our ability to
compete in the marketplace. Because the price of our common stock has been, and
may continue to be, highly volatile, we have no assurance that additional
securities class action complaints will not be filed against us in the future.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE HEDGING. The accounts of our 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 quarter 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 quarter. Foreign currency translation and transaction gains or
losses for our subsidiaries are included in the accompanying consolidated
statements of operations since the functional currency for our subsidiaries is
the U.S. dollar. The Company had accounts receivable of $1,260 and $1,036
denominated in foreign currency as of September 30, 2000 and December 31, 1999,
respectively.
INVESTMENT PORTFOLIO. We do not use derivative financial instruments for
investment purposes and only invest in financial instruments that meet the high
credit quality standards, as specified in our 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.
29
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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) See Exhibit Index following signature page to this 10-Q.
(b) On July 25, 2000, Open Market, Inc. announced that effective July 25,
2000, Ron Matros, resigned as the Company's President and Chief Executive
Officer, and that Harland LaVigne, a current member of the Company's Board of
Directors, will serve as interim President and Chief Executive Officer of the
Company. The Current Report on Form 8-K reporting this event was filed with the
Securities and Exchange Commission on August 7, 2000.
On October 18, 2000, Open Market, Inc. announced that effective in early
November 2000, Betty J. Savage will resign as the Company's Vice President and
Chief Financial Officer. The Current Report on Form 8-K reporting this event was
filed with the Securities and Exchange Commission on October 26, 2000.
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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.
<TABLE>
<S> <C> <C>
OPEN MARKET, INC.
(Registrant)
Date: November 14, 2000 By: /s/ HARLAND LAVIGNE
-----------------------------------------
Harland LaVigne
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: November 14, 2000 By: /s/ ANNMARIE RUSSELL
-----------------------------------------
Annmarie Russell
VICE PRESIDENT OF FINANCE
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
31
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.1 Real Estate Purchase and Sale Agreement dated August 23,
2000.
10.2 Amendment to the Real Estate Purchase and Sale Agreement
dated August 23, 2000.
27.1 Financial Data Schedule for the quarter ended September 30,
2000.
</TABLE>
32
