<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-28436
OPEN MARKET, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3214536
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
ONE WAYSIDE ROAD
BURLINGTON, MASSACHUSETTS 01803
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(781) 359-3000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past
90 days. Yes [X] No [ ]
As of May 8, 2000, there were 46,269,252 shares of the Registrant's Common
Stock outstanding.
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OPEN MARKET, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999............................. 3
Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999........... 4
Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999........... 5
Notes to Consolidated Financial Statements......................................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk......................................... 24
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................................................. 25
ITEM 2. Changes in Securities and Use of Proceeds.......................................................... 25
ITEM 3. Defaults Upon Senior Securities.................................................................... 25
ITEM 4. Submission of Matters to a Vote of Security Holders................................................ 25
ITEM 5. Other Information.................................................................................. 25
ITEM 6. Exhibits and Reports on Form 8-K................................................................... 25
SIGNATURES................................................................................................. 26
EXHIBIT INDEX.............................................................................................. 27
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OPEN MARKET, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................................ $ 28,669 $ 19,258
Marketable securities............................................................ 10,169 13,033
Accounts receivable, net of allowance for doubtful accounts of $2,831 and
$2,870, respectively............................................................ 27,479 27,609
Prepaid expenses and other current assets........................................ 4,250 4,264
--------------------------
Total current assets................................................... 70,567 64,164
--------------------------
Property and equipment, at cost:
Computers and office equipment................................................... 18,333 17,535
Leasehold improvements........................................................... 5,580 5,527
Land and building................................................................ 4,200 4,200
Furniture and fixtures........................................................... 2,534 2,304
--------------------------
Total property and equipment........................................... 30,647 29,566
Less: Accumulated depreciation and amortization.................................. 17,139 16,043
--------------------------
Net property and equipment............................................. 13,508 13,523
--------------------------
Long-term marketable securities....................................................... - 1,487
Intangible assets, net................................................................ 7,892 8,657
Other assets.......................................................................... 1,372 1,372
-------------------------
$ 93,339 $ 89,203
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations...................................... $ 92 $ 108
Line of credit................................................................... 10,350 10,350
Accounts payable................................................................. 3,844 5,657
Accrued expenses................................................................. 14,112 13,773
Deferred revenues................................................................ 10,074 6,700
---------------------------
Total current liabilities.............................................. 38,472 36,588
---------------------------
Long-term obligations, net of current maturities...................................... 2,657 2,657
Stockholders' Equity:
Preferred stock, $.10 par value--
Authorized--2,000 shares; Issued and outstanding - none..................... -- --
Common stock, $.001 par value--
Authorized--100,000 shares; Issued and outstanding - 46,168
and 44,098 shares at March 31, 2000 and December 31, 1999, respectively.. 46 44
Additional paid-in capital....................................................... 221,772 214,783
Deferred compensation............................................................ (301) (329)
Accumulated deficit.............................................................. (169,307) (164,540)
---------------------------
Total stockholders' equity............................................. 52,210 49,958
---------------------------
$ 93,339 $ 89,203
===========================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
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OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED
MARCH 31,
2000 1999
-------------------------
<S> <C> <C>
Revenues:
Product revenues.............................................. $ 15,355 $ 10,690
Service revenues.............................................. 9,468 5,904
-------------------------
Total revenues........................................... 24,823 16,594
-------------------------
Cost of revenues:
Product revenues.............................................. 2,376 764
Service revenues.............................................. 7,714 4,151
-------------------------
Total cost of revenues................................... 10,090 4,915
-------------------------
Gross profit............................................. 14,733 11,679
-------------------------
Operating expenses:
Selling and marketing......................................... 10,477 8,497
Research and development...................................... 6,036 5,238
General and administrative.................................... 2,372 2,230
Amortization of intangible assets............................. 765 852
-------------------------
Total operating expenses................................. 19,650 16,817
-------------------------
Loss from operations..................................... (4,917) (5,138)
-------------------------
Interest income............................................... 352 314
Interest expense.............................................. (93) (148)
Other expense................................................. (58) (147)
-------------------------
Loss before provision for incomes taxes.................. (4,716) (5,119)
-------------------------
Provision for income taxes......................................... 52 42
-------------------------
Net loss................................................. $ (4,768) $ (5,161)
=========================
Net loss per share-basic and diluted .............................. $ (0.11) $ (0.12)
=========================
Weighted average common shares outstanding--basic and diluted....... 44,401 42,026
=========================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
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OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
--------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss............................................................................... $ (4,768) $(5,161)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization........................................................ 1,096 1,138
Amortization of intangible assets.................................................... 765 832
Stock based compensation expense..................................................... 28 52
Changes in assets and liabilities-
Accounts receivable.................................................................. 129 4,973
Prepaid expenses and other current assets............................................ 15 (269)
Accounts payable..................................................................... (1,814) (480)
Accrued expenses..................................................................... 339 (1,873)
Deferred revenues.................................................................... 3,375 519
--------------------------
Net cash used in operating activities................................................ (835) (269)
--------------------------
Cash Flows from Investing Activities:
Purchases of property and equipment.................................................. (1,081) (362)
Maturities of marketable securities, net............................................. 4,352 904
Decrease in other assets............................................................. - 19
--------------------------
Net cash provided by investing activities............................................ 3,271 561
--------------------------
Cash Flows from Financing Activities:
Payments on line of credit........................................................... - (650)
Payments on note payable............................................................. - (5,000)
Proceeds from issuance of redeemable convertible preferred stock, net of issuance
costs............................................................................... - 4,500
Payments on long-term obligations.................................................... (15) (68)
Proceeds from employee stock purchase plan........................................... 567 650
Proceeds from exercise of stock options.............................................. 6,424 765
--------------------------
Net cash provided by financing activities............................................ 6,976 197
--------------------------
Net increase in cash and cash equivalents................................................. 9,412 489
--------------------------
Cash and cash equivalents, beginning of period............................................ 19,258 21,735
--------------------------
Cash and cash equivalents, end of period.................................................. $ 28,669 $22,224
==========================
Supplemental disclosure of cash flow information:
Interest paid during the period........................................................... $ 49 $ 44
==========================
Taxes paid during the period.............................................................. $ 88 $ 556
==========================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
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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 our products.
The Company executes separate contracts that govern the terms and
conditions of each software license and maintenance arrangement and each
professional services 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, 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 persuasive evidence of an agreement, there are no
significant post-delivery obligations, 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
6
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OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
the Company based on a percentage of the Company's list price. Royalty and
sublicense revenues from the Company's reseller arrangements are recognized when
earned, either on a per-unit basis as reported to the Company by its licensees,
or, with regards to guaranteed minimums, upon shipment of the master copy of all
software to which the guaranteed minimum sublicense fees relate, if there are no
significant post-delivery obligations. Revenues for post-contract customer
support are recognized ratably over the term of the support period, which is
typically one year. Service revenue, which includes education, implementation
and consulting services, is recognized in the period services are provided,
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 three months 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
three months. The average maturity of the Company's marketable securities was
approximately 3 months at March 31, 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 $492 and $1,036 denominated in
foreign currency as of March 31, 2000 and December 31, 1999, respectively.
(E) NET 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. Diluted net loss per share for the
three months ended March 31, 2000 and December 31, 1999 is the same as basic net
loss per share as the inclusion of potential common stock would be antidilutive.
For the three months ended March 31, 2000 and 1999, 8,506,245 and 7,876,420,
respectively, of anti-dilutive securities were not included in the calculation
of basic and diluted net loss per share.
7
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OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(F) COMPREHENSIVE LOSS
SFAS 130, REPORTING COMPREHENSIVE INCOME, requires disclosure of all
components of comprehensive loss on an annual and interim basis. Comprehensive
loss is defined as the change in equity of a business enterprise during a period
from transactions and other events and circumstances from nonowner sources. The
Company's comprehensive loss is the same as the 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) commerce management,
including the licensing of Transact, Live Commerce and Shopsite products, (2)
content management, including the licensing of Content Server formerly the
Internet Publishing System, Content Centre, formerly Xcelerate and
Personalization Centre and (3) other, which includes the publishing product
suite and other discontinued software products. The commerce and content
management segments are combined under the sub-heading e-Business for reporting
purposes.
During the three months ended March 31, 2000 and 1999 respectively, no
customer accounted for more than 10% of the Company's revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, MARCH 31,
REVENUES 2000 1999
-----------------------------
<S> <C> <C>
Commerce product revenues................................... $ 6,561 $ 7,825
Content product revenues.................................... 7,654 480
-----------------------------
e-Business segment subtotal............................ 14,215 8,305
-----------------------------
Other product revenues...................................... 1,140 2,385
-----------------------------
Total product revenues............................ 15,355 10,690
-----------------------------
Commerce service revenues................................... 7,243 4,803
Content services revenues................................... 2,031 182
-----------------------------
e-Business segment subtotal............................ 9,274 4,985
-----------------------------
Other service revenues...................................... 194 919
-----------------------------
Total service revenues............................ 9,468 5,904
-----------------------------
Total revenues.................................... $24,823 $16,594
=============================
</TABLE>
8
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OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues from geographical sources in total and as a percentage of total
revenues for the three months ended March 31, 2000 and 1999 respectively were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED ,
MARCH 31, 2000 MARCH 31, 1999
-----------------------------------------------
<S> <C> <C> <C> <C>
N. America........... $15,518 63% $10,196 61%
Europe............... 4,138 17% 2,679 16%
UK................... 2,131 9% 2,163 13%
Asia................. 1,323 5% 748 5%
Japan................ 698 2% 303 2%
Other................ 1,015 4% 505 3%
-----------------------------------------------
$24,823 100% $16,595 100%
===============================================
</TABLE>
All of the Company's product sales are shipped from its facilities located in
the United States. As of March 31, 2000 and December 31, 1999 all of the
Company's assets relate to the e-Business segment, except for $9,304 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.
(h) New Accounting Standards
The Securities and Exchange Commission issued 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 second 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 Financial Accounting Standards Board (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 in the prior period's consolidated financial statements have
been reclassified to conform to the current period's presentation.
3. SPECIAL CHARGES
As a result of the acquisition of FutureTense 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 of 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 March 31, 2000. The remainder is expected to be paid out by the end of the
year.
9
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OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. ACQUISITIONS
(A) FUTURETENSE INC.
Effective October 15, 1999, the Company completed a merger with
FutureTense, Inc. (FutureTense), a software internet content management and
delivery company. 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 consumation 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.
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>
NINE MONTHS YEARS ENDED
ENDED --------------------------------------
SEPTEMBER 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Open Market
Revenues........................... $52,160 $ 62,145 $ 61,260
Net Loss........................... (6,251) (30,472) (58,006)
Future Tense
Revenues........................... $ 6,032 $ 2,401 $ 187
Net Loss........................... (5,374) (6,498) (4,454)
</TABLE>
10
<PAGE>
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
Open Market is a leading provider of e-business applications and software
services that enable our customers to manage and deliver online content, engage
in personalized online marketing and merchandizing campaigns and conduct
commerce via a secure, reliable, flexible transaction processing and order
management system. We believe that the combination of these three enabling
capabilities creates a cost-efficient, rapidly deployable e-business solution
that provides a more engaging, personalized user experience.
Our e-business application suite is built on an open standards-based
architecture that is scalable and easily adaptable to the evolving business
requirements of our customers. Our products enable the delivery of content and
commercial offers through a broad range of media, including Web browsers and
cell phones, personal digital assistants and other wireless devices.
Since our inception, our business has principally focused on providing
software solutions that enable businesses to engage in business-to-business and
business-to-consumer commerce over the Internet. Over the past three years, we
made a series of acquisitions intended to complement our Internet commerce
functionality that we offer our customers. In 1997, we acquired Waypoint
Software Corporation, a provider of business-to-business catalog solutions, and
Folio Corporation, a supplier of software publishing tools. In 1998, we acquired
ICentral Incorporated, a provider of a browser-based online store-building tool
targeted at small to medium size businesses.
In 1999, we decided to focus on our core Internet commerce business.
Accordingly, 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.
In October 1999, we merged with FutureTense, a provider of Web site content
management products. The goal of this merger was to create a more complete
Internet commerce solution for our customers and to strengthen our competitive
position. We have accounted for the merger as a pooling of interests.
We recognize revenues in accordance with Statement of Position (SOP) 97-2,
SOFTWARE REVENUE RECOGNITION. 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. Our license fees
account for the majority of our revenues. 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 the payment
is fixed or determinable and collection is probable. 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 execute
separate contracts that govern the terms and conditions of each software
license and maintenance arrangement and each professional services
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.
11
<PAGE>
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.
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 20% to 25% 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 discretion 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: commerce,
content and other. Our commerce revenues include license fees and service
revenues from our Transact and ShopSite products. Our content revenues include
license fees and service revenues from our Content Server suite of integrated
products. For reporting purposes, we refer to the total of product and service
revenues for both commerce and content as e-business revenues. 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 quarters ended March 31, 2000 and
1999.
RESULTS OF OPERATIONS
REVENUES
<TABLE>
<CAPTION>
----------------------------------------------------------------
Three months ended
March 31, % change
from
--------------------
2000 1999 Prior year
--------------------
<S> <C> <C> <C>
Commerce revenues 13,804 12,628 9%
Content revenues 9,686 662 1,363%
-------------------------------------
e-Business revenues 23,490 13,290 77%
-------------------------------------
Other revenues 1,333 3,305 (60%)
--------------------
Total revenues 24,823 16,595 50%
----------------------------------------------------------------
</TABLE>
For the three months ended March 31, 2000, total revenues grew by $8,229,
with product and services revenues increasing by $4,665 and $3,564,
respectively, from the comparable prior year period.
12
<PAGE>
PRODUCT REVENUES
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Three months ended
March 31, % change from
--------------------
2000 1999 Prior year
-----------------------------------
<S> <C> <C> <C>
Commerce product revenue 6,561 7,825 (16%)
Content product revenue 7,654 480 1,494%
-----------------------------------
e-Business product revenue 14,215 8,305 71%
-----------------------------------
Other product revenue 1,140 2,385 (52%)
-----------------------------------
Total product revenues 15,355 10,690 44%
-------------------------------------------------------------------
</TABLE>
For the three months ended March 31, 2000, total product revenues increased
$4,665, or 44%, as compared to the same period of the prior year. Our e-business
product revenues increased $5,910, or 71%, primarily due to growth in the number
of new content product licenses and follow-on sales to our installed base of
customers. Commerce product revenue declined 16% primarily as a result of a
lower amount of prepaid merchant licenses that are occasionally sold in
conjunction with our Transact Commerce Service Provider software products. Other
product revenue for the current period represents royalty revenue from the
NextPage master distribution agreement for the Folio software products.
Product revenues accounted for 62% and 64% of total revenues for the three
months ended March 31, 2000 and 1999, respectively. We expect that product
revenues will continue to account for the majority of total revenues for the
foreseeable future.
SERVICE REVENUES
<TABLE>
<CAPTION>
----------------------------------------------------------------
Three months ended
March 31, % change from
--------------------
2000 1999 Prior year
--------------------
<S> <C> <C> <C>
Commerce service revenue 7,243 4,803 51%
Content service revenue 2,031 182 1,015%
-------------------------------
e-Business service revenue 9,274 4,985 86%
-------------------------------
Other service revenue 194 919 -79%
-------------------------------
Total service revenues 9,468 5,904 60%
---------------------------------------------------------------
</TABLE>
For the three months ended March 31, 2000, total e-business service revenues
increased by $4,289, or 86%, as compared to the same period of the prior year,
primarily as a result of increased demand for our consulting and technical
service offerings from both new and existing customers. Commerce service
revenues increased $2,440 due to an increase in completed commerce consulting
projects, as well as growth in commerce maintenance and support revenues from
both new and installed customers. Content service revenues increased
significantly as a direct result of significant new product license business.
Our content product line is relatively new to the marketplace, and we anticipate
growth in content service revenues as the volume of our content product revenues
increase. The decline in other services revenue of 79% was due to the
elimination of service revenue related to the Folio publishing segment. We do
not expect to derive any Folio service revenues during the term of the strategic
arrangement with NextPage.
Service revenues accounted for 38% and 36% of total revenues for the three
months ended March 31, 2000 and 1999, respectively.
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<PAGE>
COST OF PRODUCT REVENUES
<TABLE>
<CAPTION>
MARCH 31,
2000 1999
-------------------
<S> <C> <C>
Cost of product revenues $2,376 $764
% of total product revenue 15% 7%
Product gross margin 85% 93%
----------------------------------------------
</TABLE>
For the three months ended March 31, 2000, the increased cost of product
revenues was attributable primarily to the cost of our content product revenues
and an increase in costs for third party licensing royalties related to our
commerce products. Our content management products carry higher third party
costs than our commerce products. As a result, we believe that our cost of
product revenues as a percentage of product revenues will be in the range of 14%
to 18% for the foreseeable future, as we embed more third party technology into
our product line and continue to resell third party software products with our
commerce and content solutions.
COST OF SERVICE REVENUES
<TABLE>
<CAPTION>
MARCH 31,
2000 1999
------------------
<S> <C> <C>
Cost of service revenues $7,714 $4,151
% of total product revenue 81% 70%
Service gross margin 19% 30%
---------------------------------------------
</TABLE>
For the three months ended March 31, 2000, cost of service revenues increased
primarily as a result of the $2,600 increase in outside consulting expenses and
$500 increase in employee and recruiting expenses. We continued to increase our
use of outside consultants in order to meet the increased demand for consulting
services. This has resulted in a decrease in our service margin compared with
the prior year.
OPERATING EXPENSES
<TABLE>
<CAPTION>
----------------------------------------------------------
Three months ended
March 31, % change
from
-------------------
2000 1999 Prior year
-------------------
<S> <C> <C> <C>
Selling and Marketing 10,477 8,497 23%
Research and Development 6,036 5,238 15%
General and Administrative 2,372 2,230 6%
Amortization of Intangibles 765 852 (10%)
-------------------
Total Operating Expenses 19,650 16,817 17%
----------------------------------------------------------
</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.
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<PAGE>
For the period ended March 31, 2000, selling and marketing expenses increased
$1,980 over the comparable prior year period, primarily due to an increase of
approximately $1,500 in employee related expenses, which included an increase of
$642 for commission expenses related to the increase in revenues. In addition,
recruiting fees increased $321 from the comparable prior year period as a result
of aggressive hiring efforts.
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.
For the three months ended March 31, 2000, research and development expenses
increased $798 from the comparable prior year period. The increase was primarily
attributed to increased use of independent contractors and other outside
consultants prior to our new product releases in March. The new products
releases included: new releases of Transact, Content Centre, Shopsite and four
new products for on-line personalization, marketing campaign management, catalog
creation and syndication.
We believe that we will continue to devote substantial resources to our
product development activities and that our expense levels, in absolute dollars,
will increase slightly in the coming quarters.
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 March 31, 2000, general and administrative
expenses increased $142 from the comparable prior year period. The marginal
increase was attributed primarily to increases related to outside consulting
expenses and other professional fees.
AMORTIZATION OF INTANGIBLES
For the three months ended March 31, 2000, amortization of intangibles,
primarily resulting from the acquisitions of Icentral, Waypoint and Folio,
decreased to $765 from $852 in the comparable prior year. The decrease was
attributable to fully amortized assets 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 March 31, 2000, interest
income increased to $352 from $314 in the comparable prior year period,
primarily as 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. For the three months ended March 31, 2000, interest
expense decreased to $93 from $148 in the comparable prior year period. The
decrease was primarily attributed to the retirement of a note payable related to
the Folio acquisition.
Other income/expense primarily represents foreign currency translation gains
and losses.
PROVISION FOR INCOME TAXES
We recorded a provision for foreign income taxes of $52 and $42 for the three
months ended March 31, 2000 and 1999, respectively. 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 is 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.
LIQUIDITY AND CAPITAL RESOURCES
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<PAGE>
At March 31, 2000, we had $38,838 in cash, cash equivalents and marketable
securities, an increase of $5,060 from December 31, 1999.
Our operating activities used cash and cash equivalents of $835 and $269 for
the three months ended March 31, 2000 and 1999, respectively, to fund our
operations. At March 31, 2000, our net loss decreased approximately 8% to $4,768
from $5,161 in the comparable prior year period. This decrease in our net loss
was offset by changes in accounts receivable and deferred revenues, which
resulted in the increased use of cash in the quarter.
Our investing activities provided cash and cash equivalents of $3,271 and
$561 for the three months ended March 31, 2000 and 1999, respectively. For the
three months ended March 31, 2000, the primary source of cash from investing
activities was $4,352 related to the maturity of marketable securities. This was
partially offset by purchases of property and equipment in the amount of $1,081.
In the comparable prior year period, the primary source of cash from investing
activities was $904 related to the maturity of marketable securities, which was
again partially offset by purchases of property and equipment of $362.
Our financing activities provided cash and cash equivalents of $6,976 and
$197 for the three months ended March 31, 2000 and 1999, respectively. For the
three months ended March 31, 2000, the primary source of cash from financing
activities was $6,991 from the issuance of common stock under our stock option
and stock purchase plans. 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 $1,415 from the issuance of common stock
under our stock option and stock purchase plans. These additions to cash were
partially offset by the repayment of a $5,000 note payable in connection with
the Folio acquisition and $650 on our line of credit.
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.
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% at March 31, 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 March 31, 2000. At March 31, 2000, our borrowings under this
facility were $10,350.
At December 31, 1999, we had net operating loss carryforwards for income tax
purposes of approximately $119,000. 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 carryforwards.
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.
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.
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<PAGE>
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.
YEAR 2000 IMPACT
We have not experienced any significant problems with our computer systems or
software products relating to distinguishing twenty-first century dates from
twentieth century dates, generally referred to as Year 2000 problems. We are
also not aware of any material Year 2000 problems with our clients or vendors.
Accordingly, we have not incurred material expenses or experienced any material
operational disruptions as a result of Year 2000 problems.
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 March 31, 2000, our accumulated deficit was $169
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 has only recently begun to
develop, 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;
- ease of use;
- service; and
17
<PAGE>
- government regulation.
If the Internet commerce market fails to continue to develop or develops more
slowly than expected, our business and prospects will suffer.
THE SALES CYCLE FOR OUR PRODUCTS IS LENGTHY AND MAKES QUARTERLY RESULTS
DIFFICULT TO PREDICT.
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 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 could be negatively affected.
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 LIMITATIONS 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.
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
18
<PAGE>
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.
OUR ABILITY TO DEVELOP, MARKET AND SUPPORT OUR SERVICES DEPENDS ON RETAINING OUR
KEY SENIOR MANAGEMENT TEAM AND ATTRACTING AND RETAINING HIGHLY-QUALIFIED
INDIVIDUALS IN THE INTERNET INDUSTRY.
Our future success depends in significant part upon the continued service of
our key technical and senior management personnel and their continuing ability
to attract and retain highly qualified technical, sales and managerial personnel
in a highly competitive market. Our ability to establish and maintain a position
of technology leadership in the e-business software market depends in large part
upon the skills of our development personnel. 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 experience in the future, difficulty in hiring and
retaining highly skilled employees with appropriate qualifications.
In connection with our recent acquisition of FutureTense, the founders and
employees of that company received a substantial number of our shares of common
stock and can sell these shares at substantial gains. In many cases, these
individuals could become financially independent through these sales, before the
products of either company have fully matured into commercially deliverable
products commanding reasonable market share. Additionally, start-up and other
companies will seek out these individuals due to the financial results they
achieved for their investors. Under the circumstances, we 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.
19
<PAGE>
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; 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 MANAGE OUR PLANNED RAPID EXPANSION EFFECTIVELY, WE MAY INCUR
INCREASED COSTS AND PLACE TOO MANY DEMANDS UPON OUR SENIOR MANAGEMENT TEAM.
We have experienced significant growth over the past two years and we are
pursuing a business plan that, if successfully implemented, will cause us to
continue to expand rapidly over the next several years. This expansion would
occur both domestically and internationally, which would increase our operating
complexity significantly. Our expansion would also require significant time
commitments from our senior management team and severely restrict its ability to
manage our existing business. Our success depends on our ability to manage this
expansion and these demands effectively. We will, among many other things, need
to:
- improve our business development capabilities;
- hire, train and manage an increasing number of highly-skilled employees;
and
20
<PAGE>
- continually enhance our information, management and operational and
financial systems.
Our failure to manage our expansion effectively could increase our costs,
adversely affect our relations with customers and strategic partners and
adversely affect our revenues and operating margins.
WE ARE SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
Our international activities expose us to numerous additional risks. In the
quarter ended March 31, 2000, we derived approximately 37% of our total revenues
from sales outside North America. We currently have seven 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,
21
<PAGE>
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.
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
22
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existing client relationships, gaining new clients or expanding our markets. In
such a case, we would not achieve our expected revenue growth.
IF WE FAIL TO ADEQUATELY INTEGRATE THE OPERATIONS OF FUTURETENSE, WE MAY NOT
REALIZE THE EXPECTED BENEFITS OF THE MERGER.
We completed our acquisition of FutureTense in October 1999. The integration
of FutureTense is a complex process and we are uncertain that the integration
will be completed rapidly or that we will achieve the anticipated benefits of
the merger. Our successful integration of FutureTense will require, among other
things, integration of the sales and marketing groups of each entity and the
integration of our product lines. The diversion of the attention of management
and any difficulties encountered in the process of combining both companies
could cause the disruption of, or a loss of momentum in, the activities of the
combined business. In addition, the process of combining both companies could
negatively affect our employee morale and our ability to retain some of our key
employees or could cause customers to delay or change orders for products as a
result of uncertainty over the integration of our product lines. We will need to
overcome these issues in order to realize the benefits or synergies of the
merger.
IF WE FAIL TO SUCCESSFULLY CROSS-MARKET OUR PRODUCTS AND FUTURETENSE'S PRODUCTS,
WE MAY NOT INCREASE OR MAINTAIN OUR CUSTOMER BASE OR OUR REVENUES.
We intend to offer the respective products and services historically offered
by us and by FutureTense to our collective customers. FutureTense's customers
may have no interest in our products and services and our customers may have no
interest in theirs. The failure of our cross-marketing efforts may diminish the
benefits we realize from the FutureTense merger. In addition, we intend to
develop new products and services that combine our knowledge and resources with
those of FutureTense. We cannot assure you that these products or services will
be developed or, if developed, will be successful or that we can successfully
integrate or realize the anticipated benefits of the merger. As a result, we may
not be able to increase or maintain our customer base.
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.
23
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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 SALES 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
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.
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.
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.
24
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
See the Exhibit Index attached thereto.
(B) REPORTS ON FORM 8-K
On January 12, 2000, we announced that effective February 5, 2000, Ron
Matros would become our Chief Executive Officer, while also retaining the
title of President. Gary Eichhorn, our Chief Executive Officer at the time,
would be retiring from Open Market. The Current Report on Form 8-K
reporting this event was filed with the Securities and Exchange Commission
on January 20, 2000.
On April 10, 2000, we announced that we expect to realize an estimated gain
of $14 to 16 million related to our ownership of SightPath, Inc. Preferred
Stock. This potential gain is a result of Cisco Systems, Inc.'s, pending
acquisition of SightPath, Inc. The actual value that we receive will depend
upon the trading price of Cisco's common stock at the time that the
acquisition is consummated. The Current Report on Form 8-K reporting this
event was filed with the Securities and Exchange Commission on April 25,
2000.
25
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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.
OPEN MARKET, INC.
(Registrant)
Date: May 15, 2000
By: /s/ Betty J. Savage
-----------------------------------------------
BETTY J. SAVAGE
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
Date: May 15, 2000
By: /s/ Annmarie Russell
--------------------------------------------
ANNMARIE RUSSELL
VICE PRESIDENT OF FINANCE
(PRINCIPAL ACCOUNTING OFFICER)
26
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NO. PAGE
27.1 Financial Data Schedule for the quarter ended March 31, 2000. 28
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 28,669
<SECURITIES> 10,169
<RECEIVABLES> 27,479
<ALLOWANCES> 2,831
<INVENTORY> 0
<CURRENT-ASSETS> 70,567
<PP&E> 30,647
<DEPRECIATION> 17,139
<TOTAL-ASSETS> 93,339
<CURRENT-LIABILITIES> 38,472
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 52,164
<TOTAL-LIABILITY-AND-EQUITY> 93,339
<SALES> 15,355
<TOTAL-REVENUES> 24,823
<CGS> 2,376
<TOTAL-COSTS> 10,090
<OTHER-EXPENSES> 19,650
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93
<INCOME-PRETAX> (4,716)
<INCOME-TAX> 52
<INCOME-CONTINUING> (4,768)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,768)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
