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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 0-28436
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OPEN MARKET, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 04-3214536
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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ONE WAYSIDE ROAD
BURLINGTON, MASSACHUSETTS 01803
(Address of principal executive offices) (Zip Code)
(781) 359-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $.001 par value
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 24, 2000, the aggregate market value of the Registrant's voting
securities held by non-affiliates of the Registrant was approximately
$1,441,340,448.
As of March 24, 2000, 46,148,474 shares of the Registrant's Common Stock,
$.001 par value per share, were outstanding.
Portions of the Proxy Statement for the Annual Meeting of Stockholders
expected to be held in May 2000 are incorporated by reference into Part III.
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TABLE OF CONTENTS
PART I
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1. Business.................................................... 3
2. Properties.................................................. 13
3. Legal Proceedings........................................... 13
4. Submission of Matters to a Vote of Security Holders......... 13
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 14
6. Selected Consolidated Financial Data........................ 15
7. Management's Discussion and Analysis of Financial Condition
And
Results of Operations....................................... 16
7A. Quantitative and Qualitative Disclosure About Market Risk... 31
8. Consolidated Financial Statements and Supplementary Data.... 32
9. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure........................................ 64
PART III
10. Directors and Executive Officers of the Registrant.......... 65
11. Executive Compensation...................................... 65
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 65
13. Certain Relationships and Related Transactions.............. 65
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 65
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PART I
ITEM 1. BUSINESS
Open Market is a leading provider of e-business application software and
software services that enable its 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. We currently offer three principal products:
- Internet Publishing System (IPS), our integrated publishing system that
provides content management and the dynamic delivery of personalized
information;
- Transact, our comprehensive order management and transaction processing
system; and
- ShopSite, our Web storefront building software for small and medium size
businesses.
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.
INDUSTRY BACKGROUND
The emergence and widespread acceptance of the Internet as a communication
and commerce medium has changed the way businesses interact with each other and
their customers. The Internet offers businesses the opportunity to establish new
revenue streams and distribution channels, enhance relationships with customers
and partners and improve employee productivity. Companies seeking to utilize
this powerful new medium face several challenges, including managing and
delivering content effectively through the Internet, conducting online marketing
and personalization and enabling secure electronic commerce.
THE NEED TO MANAGE AND DELIVER CONTENT EFFECTIVELY AND
EFFICIENTLY. Increasingly, companies are turning to the Internet as the primary
vehicle for information delivery. Online business requires effective management
and delivery of information to customers, partners and employees. Forrester
Research indicates that, over the past year, many companies have doubled the
amount of information they publish on the Internet and predicts that this trend
will continue over the next year. In order to address this growth, companies are
increasingly demanding software systems that automate the workflow of content
creation, management and delivery.
THE NEED TO CREATE A PERSONALIZED CUSTOMER EXPERIENCE. In an effort to
create more engaging, profitable online businesses, companies are seeking to
deliver dynamic, personalized content. Many companies are initiating marketing
strategies to attract new visitors to their Web sites, motivate purchases and
build loyalty. These initiatives require companies to collect and analyze
customer preferences, behavior and purchase histories so that they may
effectively deliver content and commercial offers in ways that maximize revenue
opportunities.
THE NEED TO CONDUCT COMMERCE ON THE INTERNET. According to International
Data Corporation, the volume of e-commerce transactions is projected to increase
from $218 billion in 2000 to $1.3 trillion in 2003. To satisfy this increased
volume, commerce sites must be highly scalable and reliable and must support:
- secure transaction processing;
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- real-time credit card authentication;
- multiple payment types;
- partial shipments and back orders;
- on-line customer service; and
- real-time order status.
THE NEED TO COMBINE CONTENT, MARKETING AND COMMERCE. Historically, in order
to combine content management, online marketing and personalization and commerce
functionality into a complete e-business solution, companies either built their
own solutions or installed and integrated products from multiple vendors. Both
of these approaches are complicated and involve long implementation periods and
substantial up-front and on-going expenditures.
THE NEED FOR OPEN ARCHITECTURES. Many first generation applications are
based on closed, proprietary architectures and outmoded scripting languages.
These applications are often more difficult to maintain and adapt to changing
business requirements because they are less compatible with other systems and
require personnel with technical skills that are in shorter supply.
THE OPEN MARKET SOLUTION
We offer an integrated packaged suite of e-business software products and
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 and flexible transaction processing and order
management system. Our solution enables organizations to: rapidly deploy our
software; actively deliver personalized information to customers through the
Internet to Web browsers and to wireless and other devices; and minimize the
cost of implementation, integration and on-going ownership of e-business
software applications.
The diagram below illustrates the key e-business functions supported by our
products:
[The diagram depicts the workflow of our commerce management and content
management products as well as the features of our online personalization
functionality.]
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CONTENT MANAGEMENT. Our content management products streamline the Internet
publishing process, enabling customers to effectively publish large, dynamic,
content-rich Web sites. Our products:
- automate content acquisition from a broad range of sources, including
legacy databases, news feeds and other syndicated content sources;
- enable non-technical personnel to easily create and update Web site
content and rules governing the delivery of personalized content and
commercial offers;
- incorporate an industry-tested publishing workflow methodology derived
from our extensive experience with publishers of some of the world's
largest and most heavily used on-line media sites; and
- separate content from the form in which it is displayed, enabling our
customers to use content in a variety of formats and to deliver content
both to personal computers and to devices, such as cell phones, personal
digital assistants and other wireless devices, supported by the Wireless
Application Protocol (WAP).
ONLINE MARKETING AND PERSONALIZATION. Our software products facilitate the
dynamic delivery of personalized content and commercial offers to individuals
and groups of users by:
- supporting a variety of personalization techniques, including
authentication, visitor profiling and rules-based recommendations;
- providing an integrated analysis of transaction data and visitor profile
information for more effective creation and assessment of marketing and
merchandizing campaigns; and
- supporting digital offers and digital coupons that allow merchants to use
a variety of digital media, including the Web, wireless, e-mail, "push"
technology and CD-ROM, to distribute special offers and discounts.
COMMERCE MANAGEMENT. Our commerce management products, built on more than
five years of in-market use, are capable of supporting broad commerce
requirements for both business-to-business and business-to consumer
applications. Our products support:
- multiple types of payment such as purchase orders, credit cards,
procurement cards, micro-transactions and secure electronic transactions
(SETs), debit cards, smart cards and frequent buyer points;
- multiple currencies;
- multiple selling models, including physical goods, digital goods,
subscriptions, auctions and catalogs;
- back orders, partial orders and real-time order status;
- integration with Enterprise Resource Planning (ERP) and other existing
systems; and
- multiple business units and channel partners.
AN INTEGRATED SUITE OF FULL-FEATURED APPLICATIONS. Our suite of application
products provides integrated management of a broad range of critical e-business
functions. We believe that our packaged applications enable our customers to
deploy a broad level of functionality more rapidly than they otherwise could by
building their own solutions in-house "from the ground up" or by installing and
integrating products from multiple vendors.
AN OPEN PLATFORM. Our content management products are built on an open
application server environment, and make use of programming standards such as
XML and Java. Open, standards-based applications can be easily customized and
more readily integrated with existing and third-party applications. Our commerce
management products are based upon our distinctive SecureLink architecture that
addresses the unique requirements of conducting business on the Web. SecureLink
provides the freedom to establish
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an electronic presence using virtually any system platform, any Web server
software and any authoring software or data repository. Similarly, SecureLink
imposes few constraints on buyers, allowing them to make purchases from
virtually any Web-enabled client.
STRATEGY
Our objective is to be the leading provider of a comprehensive, packaged
e-business suite of software applications. The key elements of our strategy to
achieve this objective are as follows:
EXPAND OUR SUITE OF E-BUSINESS PRODUCTS. We plan to enhance and expand our
suite of e-business product and service offerings. We have planned major
releases of our content management and commerce management products, as well as
a number of new product releases, for the first half of 2000. These additions to
our e-business suite are expected to focus on online catalog creation and
management, content syndication, online marketing management and data analysis
and personalization.
INCREASE DIRECT SALES AND INDIRECT DISTRIBUTION CHANNELS. Over the last
five years, we have made significant investments to establish global direct and
indirect distribution channels. As of December 31, 1999, we had a direct
field-based sales force of approximately 100 people worldwide, 62 of whom were
quota carrying sales representatives. We plan to substantially increase the
number of sales representatives by the end of 2000. We believe our team of sales
professionals have the experience required for complex solution selling. We also
plan to expand our indirect sales channels through an enhanced partner program
which offers a comprehensive training curriculum, new co-marketing
opportunities, and developer-level support.
EXPAND RELATIONSHIPS WITH SYSTEMS INTEGRATORS. We have established
relationships with several large domestic and international systems integrators
and consulting firms. We believe these firms have substantial influence over
software purchasing decisions. In addition, these companies aid in the
successful implementation and support of our software products. We believe that
building on our established relationships and creating new relationships with
these partners will enable us to sell additional products to our existing
customer base and gain new customers more rapidly.
INCREASE MARKETING FOCUS. Our marketing strategy focuses on communicating
the possibilities of value creation through the use of our e-business solution
suite. We focus primarily on large enterprises and leading Internet-related
businesses. Within that market, we intend to target business-to-business,
business-to-consumer, financial services, Internet/intranet publishing and media
and Internet portals and marketplaces.
PURSUE STRATEGIC TECHNOLOGY ALLIANCES TO ADD VALUE TO OUR SOLUTIONS. We
seek to integrate third-party technology into our products that will improve the
ability of our customer to use the Internet as a vital business medium. We
maintain relationships with strategic technology vendors designed to extend and
enhance the functionality of our products, particularly in the areas of
personalization and online marketing. We plan to continue to extend our existing
partnerships as well as identify and partner with additional vendors that can
add value to our solutions.
BROADEN INTERNATIONAL PRESENCE. To more effectively sell to and support a
growing global customer base, we have increased our direct sales and service
organizations outside of the United States. We have also established
distribution relationships in several countries, including Brazil, Hong Kong,
India, Israel, Korea, Malaysia, The Netherlands, Singapore and South Africa. We
expect to increase our international sales, marketing and services staff and
expand our international distributor channel through our enhanced partner
program.
EXTEND TECHNOLOGY LEADERSHIP. We intend to continue to devote substantial
resources to the development of innovative new products and technology for our
e-business solutions. Since we began operations in April 1994, we have obtained
several patents asserting claims relating to certain aspects or uses of
electronic commerce software. We have also developed a substantial knowledge
base resulting from our
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experience with a large number of customers conducting Internet commerce,
content management and delivery. We intend to combine our extensive market
experience with the latest Internet technologies to continue to create leading
e-business solutions. We are also committed to supporting open standards in our
products and technologies in an effort to ensure that our customers will be able
to adapt and customize our solutions and more easily integrate them with
existing systems.
PRODUCTS
IPS
IPS is a Web-based, client-server, multi-user system that automates HTML
page production, streamlines the Web publishing process, and provides the
ability to deliver any combination of static and dynamic pages. IPS was first
shipped in July 1998 and Version 2.0 was released in January 1999. IPS includes
our Xcelerate module, which enables editors to produce dynamic engaging websites
by browsing multiple content sources, making selections, and preparing materials
for publishing to multiple formats. IPS customers include Chase Manhattan Bank,
Lucent Technologies, The New York Times, Space.com and The Washington Post.
We have developed an open architecture for meeting the technical demands of
applications designed for online publishing. The IPS product's open architecture
incorporates application server technology, operates on the Windows NT or Sun
Solaris platform and manages data stored in Oracle, Sybase and Informix
databases. IPS currently uses the Netscape Application Server as the foundation
for its infrastructure. We intend to support additional application servers in
the future, such as WebLogic and J2EE, to allow customers to choose from a
variety of underlying packages. IPS product can also be used in conjunction with
other online publishing and design tools and can be customized to meet specific
user or industry needs.
We believe our advanced technology enables clients to build, deliver and
manage enterprise-class e-business solutions with broad functionality in less
time and at a lower cost than existing alternatives.
[The diagram illustrates the three major steps in the electronic publishing
process supported by our products. The first step is assembly of content from a
variety of sources, including news wire feeds, video, database content, and
content authorized by Website owners. The second step is workflow management,
coordinating the efforts of authors, editors, designers and business managers.
The third step is dynamic delivery of personalized information to end users in a
variety of formats, including personal computers, mobile phones, pagers,
personal digital assistants and other hand-held devices.]
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The major functions of IPS include the following:
CONTENT ACQUISITION AND MANAGEMENT. IPS's content management
capabilities support information access from any industry-standard database as
well as other content sources such as syndicated news feeds, wire feeds or video
programming. Content can be contributed remotely and locally, and the system can
assemble design and content elements on demand.
PUBLICATION MANAGEMENT. Our IPS solution offers a range of reliable,
fast and efficient content delivery mechanisms that support an organization's
content strategy as well as the needs of customers and readers. To meet these
varied needs, IPS provides simultaneous, multi-targeted static or dynamic
content delivery and sophisticated cache management.
PERSONALIZATION FEATURES. IPS enables companies to deliver targeted
content, design and commercial offers to site visitors. The IPS platform
enables:
- - user management through a broad range of options to authenticate users;
- - the storage and management of user profiles; and
- - integration with third-party applications for rules-based recommendations.
DESIGN AND DEVELOPMENT. The IPS platform provides users with a robust
and flexible development environment, enabling rapid development, deployment and
easy modification of high-performance Web sites. This platform enables our
customers to integrate our applications or third-party applications with
existing systems or to build their own applications.
TRANSACT
Transact is a comprehensive order management and transaction processing
system which enables customers to engage in large-scale, flexible, secure
Internet commerce. Transact is used by corporate customers that use the product
for their own Web-based business activities and by commerce service providers
that use the product to provide Internet commerce transaction capabilities to
their customers. As of December 31, 1999, more than 80 commerce service
providers had purchased our software. Our customers include the following:
CORPORATE CUSTOMERS
ACER AMERICA
BUSINESS WEEK
INGRAM MICRO
MILACRON
STANDARD & POOR'S
TRIBUNE INTERACTIVE NETWORK SERVICES
USA TODAY
COMMERCE SERVICE PROVIDERS
AT&T
BARCLAYS BANK
CABLE & WIRELESS
FIRST UNION NATIONAL BANK
FRANCE TELECOM
NIPPON TELEGRAPH & TELEPHONE
SWISSCOM
Transact was first deployed in October 1994 and was commercially released in
May 1996. In September, 1999, we released an upgraded version of Transact, which
features enhanced customer service functions and added support for German,
French, and Italian languages and European Value Added Tax (VAT) calculations.
The upgrade also provides additional platform support and ease-of-use features
for information technology managers, as well as other enhancements such as sales
agent support and platform support for Oracle, Sybase, Solaris, and Netscape.
[The illustration depicts two Transact screens presented to end-users during
the sales process. The first screen is an electronic order form which displays
the total price of a purchased item, including tax and shipping charges. The
second screen is a customer service screen which a user may access to check
order status.]
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The major functions of Transact include the following:
ORDER MANAGEMENT. Transact provides for the secure, online capture of
orders and validation of payment and address. Transact performs fraud detection
and checks product inventory before accepting orders and supports partial
shipments and back orders.
FULFILLMENT. Transact supports the offering of physical goods, digital
goods and subscriptions. Transact provides notification when an order is placed
via an interface to enterprise systems, via a fax, an e-mail, or a secure Web
page. As an order is processed, the end user is notified and the online status
of the order is updated. For digital goods, such as software and information,
Transact provides customers with a secure, self-service download facility.
PAYMENT. Transact supports multiple types of payment, including purchase
orders, credit cards, procurement cards, micro-transactions and Secure
Electronic Transactions. The system can also support debit cards, smart card and
frequent buyer points. Transact performs real-time authorization requests and
automatic settlement. It supports automatic subscription renewals and partial
billing and credits with payment reauthorization.
REPORTING. Transact helps companies stay abreast of developments in their
online businesses through an integrated database. The system provides an array
of standard reports as well as support for some of the most popular reporting
and analysis software.
PERSONALIZATION FEATURES. Transact supports the personalization of
commercial offers and customer service. The principal personalization features
provide for:
- analysis and profiling of buyer behavior and preferences;
- demand generation through the delivery of personalized digital offers
across a variety of media, including the Web, e-mail, "push" technology
and CD-ROM; and
- self-service by allowing end users to access personalized and secure
shipping, payment and billing information.
SHOPSITE
ShopSite is an easy-to-use, browser-based, store-building tool targeted to
the needs of small and medium size businesses. ShopSite is sold through our
channel of Internet service providers and Internet portal companies. ShopSite
simplifies the process of setting up an online catalog with an automated store
design assistant, context-sensitive help and a fill-in-the-blank interface. In
addition, ShopSite users can seamlessly tie to Transact through a commerce
service provider. Web developers can create custom templates that allow them to
have control over the look and feel of the store. After the initial design work
is completed, the maintenance of the storefront can be transferred to the
merchant for ongoing changes in prices and content through the easy-to-use
interface.
More than 200 Internet service providers offer the ShopSite product,
including Cable & Wireless, Lycos.com, Winstar's Office.com, Micron and Verio.
ShopSite enables an Internet service provider to differentiate and brand its
services and makes it easier for merchants to build well-designed catalogs.
SERVICES
We believe that providing a comprehensive range of professional services is
a critical component of the successful deployment and operation of our products.
We offer a wide range of services to our customers, including maintenance and
technical support, professional services and education services. We support our
products from service centers in Burlington, Massachusetts; Provo, Utah;
Amsterdam, The Netherlands; Sydney, Australia; and Tokyo, Japan.
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MAINTENANCE AND TECHNICAL SUPPORT SERVICES. Our technical support staff is
comprised of a group of highly trained professionals. The support team assists
customers with technical questions, problems and product deployment-related
issues. Our technical support services are competitively priced and structured
to allow customers to choose the level of support that best fits their unique
business requirements.
Our Basic Service Program features Internet access to a product knowledge
base, unlimited phone and e-mail support during business hours, and a software
subscription service. Our Premier Service Program includes Basic Service
entitlements plus 24 X 7 access to support specialists. Our customer maintenance
programs provide software upgrades, account management services, technical
bulletins, status reports and ongoing communications regarding new features and
products under development.
PROFESSIONAL SERVICES. Our professional services group works closely with
our system integrator partners to provide project leadership and guidance in
installing, customizing and supporting Open Market products. Our professional
services range from internet commerce business planning to solution design and
implementation.
EDUCATION SERVICES. Our education services group provides customers and
systems integrators with in-depth training for all our current products. We hold
classes regularly at training facilities in our regional service centers and we
offer customized training solutions for our customers and partners.
RESEARCH AND PRODUCT DEVELOPMENT
We believe our future success will depend in large part on our ability to
develop technologies that address the evolving needs of our customers.
Accordingly, we intend to expand and enhance our existing product offerings and
introduce new products. Our customers and partners provide significant product
feedback that is channeled into product development and innovation. While we
expect that certain of our new products will be developed internally, we may,
based on timing and cost considerations, expand our product offerings through
acquisitions and partnerships. In addition, we may use external development
resources for certain of our products and product components.
Since our inception, we have made substantial investments in product
development and related activities. As of December 31, 1999, we had 133
employees and independent contractors devoted to product development. Our
research and development expenses were approximately $22.4 million,
$25.9 million and $28.3 million in 1999, 1998 and 1997, respectively.
CUSTOMERS AND MARKETS
Our software products are used by more than 500 large enterprises worldwide
across a broad spectrum of markets, including business-to-business,
business-to-consumer, financial services, Internet/ intranet publishing and
media, and Internet portals and marketplaces. These businesses take advantage of
our solutions either directly by deploying the software within their own
enterprises, or indirectly by procuring services from commerce service providers
running our software. These commerce service providers offer commerce services
to small and medium size companies that wish to outsource the cost and
complexity associated with implementing and maintaining software solutions
within their own organizations. As of December 31, 1999 more than 80 commerce
service providers had purchased software from us. In addition, we have sold more
than 35,000 licenses for our ShopSite Web storefront building software for
smaller merchants.
A representative list of customers include the following:
BUSINESS-TO-BUSINESS
ACER AMERICA
C&K COMPONENTS
INGRAM MICRO
MILACRON
MILLIPORE
TEKTRONIX
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BUSINESS-TO-CONSUMER
CLICKMOVIE.COM
CONSUMERS UNION
PLAYBOY
REALNETWORKS
SONY
USA TODAY
FINANCIAL SERVICES
CHASE MANHATTAN BANK
FIDELITY INVESTMENTS
FIRST USA
GE CAPITAL
HARTFORD LIFE
INTERNET/INTRANET PUBLISHING AND MEDIA
THE FINANCIAL TIMES OF LONDON
MCGRAW HILL
THE NEW YORK TIMES
REUTERS
SPACE.COM
THE WASHINGTON POST
INTERNET PORTALS AND MARKETPLACES
AMERICA ONLINE
DRKOOP.COM
IBELONG.COM
LYCOS.COM
COMMERCE SERVICE PROVIDERS
ADERO
AT&T
BARCLAYS BANK
CABLE & WIRELESS
COMMERCE.NET
CONCORD EFS
ECNET
FRANCE TELECOM
ICOMS
NIPPON TELEGRAPH & TELEPHONE
SWISSCOM
TELECOM NEW ZEALAND
TELSTRA MULTIMEDIA
THUS, PLC
COMPETITION
The market for Internet business applications and services is relatively
new, intensely competitive, quickly evolving and subject to rapid technological
change. We expect competition to continue to increase in the future. Our
products compete with custom solutions developed in-house by prospective
customers, as well as products from competing software vendors such as Art
Technology Group (ATG), BroadVision, IBM, InterShop, InterWorld, Interwoven,
Microsoft, Oracle, Vignette and others. 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 technologies and changes in customer demand, devote greater
resources to the marketing and sale of their products, pursue acquisitions and
other opportunities more readily and adopt more aggressive pricing policies.
Competitive factors in the Internet-based software and services market
include innovative technology, breadth of product features, product quality,
marketing and distribution resources, customer service and support and price.
While we have demonstrated our ability to compete, there can be no assurance
that we will be able to compete successfully against current or future
competitors.
DISTRIBUTION CHANNELS
Our objective is to achieve broad market penetration by employing multiple
distribution channels, including direct sales, distributors and resellers,
original equipment manufacturers, systems integrators and commerce service
providers.
DIRECT SALES AND DISTRIBUTORS. We market and sell our software and services
primarily through our worldwide direct sales force of approximately 100 people
from offices throughout the United States and in Australia, Canada, France,
Germany, Italy, Japan, The Netherlands and the United Kingdom. We are
represented by distributors in countries where we do not have a direct sales
force, including Brazil, Hong Kong, India, Israel, Korea, Malaysia, Singapore
and South Africa.
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SYSTEMS INTEGRATORS. We have also entered into agreements to provide
training, support, marketing and sales assistance to a number of leading system
integrators which sell, install and support our products, including Agency.com,
Arthur Andersen, Cambridge Technology Partners, CSC Consulting, Deloitte
Consulting, IBM Global Services, iXL, PricewaterhouseCoopers, US Interactive and
Whittman-Hart.
COMMERCE SERVICE PROVIDERS. Commerce service providers collectively have
the potential to deliver the benefits of our software to small and medium-sized
businesses across the world. Our commerce service providers include many of the
world's largest telecommunications companies, such as AT&T, Barclays Bank,
Cable & Wireless, France Telecom, First Union National Bank, Nippon Telegraph &
Telephone and Swisscom.
We also maintain relationships with hardware and operating system platform
vendors in order to achieve a high degree of functionality and integration with
their platforms. Platform vendors include Sun Microsystems and Netscape
Communications. In addition, we also maintain relationships with other key
technology partners in order to extend and enhance the functionality of our
products. Technology partners include Autonomy, Cisco Systems, ILOG, iPlanet
E-Commerce Solutions, NetMind Technologies, Net Perceptions, OpenSite
Technologies, Oracle, TAXWARE and United Parcel Service.
INTELLECTUAL PROPERTY AND LICENSES
We rely on trademark, copyright, patent and trade secret laws, employee and
third-party non-disclosure agreements and other methods to protect our
proprietary technology. We require software licensees to enter into license
agreements that impose certain restrictions on their use of our software. In
addition, we have taken steps to avoid disclosure of our trade secrets,
including requiring those persons with access to our proprietary technology and
information to enter into confidentiality agreements with us and restricting
access to our source code. We hold several patents which assert claims for
certain aspects or uses of electronic commerce software including:
- distributed commerce;
- secure, real-time payment using credit and debit cards over the Internet;
- the use of "electronic shopping carts" and session identifiers; and
- the use of telephone numbers as URLs involving redirection by a directory
server.
We continually assess our technology for potential patent filings and have
additional patent applications pending in the United States relating to our
product architecture and technology.
EMPLOYEES
As of December 31, 1999, we had 464 employees and independent contractors.
Of our total employees and independent contractors, 133 were in engineering, 150
in sales and marketing, 59 in customer service, 56 in professional services and
66 in general and administration. None of our employees is represented by a
labor union. We have not experienced any work stopages and consider our
relations with our employees to be good.
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ITEM 2. PROPERTIES
Our principal offices are located in Burlington, Massachusetts and
approximately 120,000 square feet of our Burlington facility lease expires in
February 2010. We also own a building consisting of approximately 32,000 square
feet in Provo, Utah, which is currently subleased. We believe our existing
facilities are adequate to meet our future needs.
In addition, we have sales offices throughout the United States and in
Canada, the United Kingdom, France, Germany, The Netherlands, Italy, Japan and
Australia. We offer support services to our customers from four facilities
located in Burlington, Massachusetts; Amsterdam, The Netherlands; Sydney,
Australia and Tokyo, Japan. We plan to open an additional support facility in
Singapore in 2000.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Special Meeting of Stockholders held on October 13, 1999, the
following proposals were adopted by the vote specified below:
Proposal 1--Approval of the issuance of up to an estimated maximum of
7,700,000 shares of our common stock to stockholders of FutureTense, Inc.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
<S> <C> <C> <C>
19,100,534 349,217 61,397 -0-
</TABLE>
Proposal 2--Approval of our 1999 Stock Incentive Plan.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
<S> <C> <C> <C>
16,019,976 3,404,546 86,626 -0-
</TABLE>
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Nasdaq National Market under the symbol
"OMKT". The following table sets forth, for the periods indicated, the high and
low prices per share for our common stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
-------------- --------------
<S> <C> <C>
1998
First Quarter............................................... $ 21.38 $ 9.44
Second Quarter.............................................. $ 29.13 $ 13.13
Third Quarter............................................... $ 21.63 $ 8.50
Fourth Quarter.............................................. $ 27.00 $ 4.25
1999
First Quarter............................................... $ 17.44 $ 11.19
Second Quarter.............................................. $ 17.50 $ 11.50
Third Quarter............................................... $ 16.25 $ 11.25
Fourth Quarter.............................................. $ 49.86 $ 12.25
</TABLE>
As of March 29, 2000, we had approximately 399 holders of record of our
common stock.
We have never declared or paid any cash dividends on our capital stock. We
presently intend to retain future earnings, if any, to finance the growth of our
business and do not expect to pay any cash dividends.
14
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes
included elsewhere in this report.
The merger with FutureTense in October 1999 was accounted for as a pooling
of interests and accordingly all prior period financial data have been restated
as if the merger took place at the beginning of such periods. Our historical
data is not necessarily indicative of future results.
The selected consolidated balance sheet information presented below as of
December 31, 1999 and 1998 and the operating information for each of the three
years in the period ended December 31, 1999, have been derived from our
consolidated financial statements that have been audited by Arthur Andersen LLP,
independent public accountants, and are included elsewhere in the report. The
selected consolidated balance sheet information as of December 31, 1997, 1996
and 1995 and the operating information for each of the two years in the period
ended December 31, 1996 have been derived from our consolidated financial
statements, audited by Arthur Andersen LLP, not appearing in this report. Arthur
Andersen LLP did not audit the financial statements of FutureTense as of
December 31, 1998, 1997, 1996, and 1995 and for the period from inception
(April 5, 1995) to December 31, 1998. Such financial statements are included in
our consolidated financial statements. These financial statements were audited
by other auditors whose report has been furnished to Arthur Andersen LLP, and
their opinion, in so far as it relates to amounts included for FutureTense, is
based solely upon the report of other auditors. The report of the other auditors
for FutureTense as of December 31, 1998, and for the two years in the period
ended December 31, 1998 is included in this report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING INFORMATION
Revenues:
Revenues.................................................. $ 83,026 $ 64,546 $ 61,447 $ 22,517 $ 1,851
Cost of revenues.......................................... 25,572 18,579 11,853 5,496 1,033
-------- -------- -------- -------- --------
Gross profit.............................................. 57,454 45,967 49,594 17,021 818
-------- -------- -------- -------- --------
Selling and marketing..................................... 38,343 34,772 38,079 25,006 6,717
Research and development.................................. 22,446 25,910 28,307 17,114 4,554
General and administrative................................ 8,667 11,096 10,935 6,755 3,617
Amortization of intangible assets......................... 3,387 3,006 1,351 -- --
In-process research and development....................... -- 5,700 34,679 -- --
Restructuring charge...................................... -- 2,042 -- -- --
Merger related costs...................................... 4,328 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses.................................. 77,171 82,526 113,351 48,875 14,888
-------- -------- -------- -------- --------
Loss from operations...................................... (19,717) (36,559) (63,757) (31,854) (14,070)
-------- -------- -------- -------- --------
Interest income, net...................................... 517 238 2,099 3,054 156
Other expense, net........................................ (166) (324) (218) -- --
-------- -------- -------- -------- --------
Loss before provision for income taxes.................... (19,366) (36,645) (61,876) (28,800) (13,914)
-------- -------- -------- -------- --------
Provision for income taxes................................ 414 325 584 360 --
-------- -------- -------- -------- --------
Net loss.................................................. $(19,780) $(36,970) $(62,460) $(29,160) $(13,914)
-------- -------- -------- -------- --------
Weighted average shares outstanding--basic and diluted.... 42,655 37,815 34,347 30,251 26,810
Net loss per share--basic and diluted..................... $ (0.46) $ (0.98) $ (1.82) $ (0.96) $ (0.52)
======== ======== ======== ======== ========
BALANCE SHEET INFORMATION
Cash, cash equivalents and marketable securities............ $ 32,291 $ 36,719 $ 30,909 $ 75,180 $ 3,722
Working capital (deficit)................................... $ 27,576 $ 28,309 $ 16,455 $ 69,866 $ (5,806)
Total assets................................................ $ 88,805 $ 99,200 $ 83,590 $ 89,246 $ 7,968
Long-term debt, net of current maturities................... $ 2,657 $ 2,937 $ 99 $ 257 $ 659
Stockholders' equity (deficit).............................. $ 49,958 $ 41,436 $ 36,380 $ 69,724 $(15,208)
</TABLE>
15
<PAGE>
ITEM 7. 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 APPEAR IN THOUSANDS.
OVERVIEW
We are 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. We currently offer three principal products:
- Internet Publishing System (IPS), our integrated publishing system that
provides content management and the dynamic delivery of personalized
information;
- Transact, our comprehensive order management and transaction processing
system; and
- ShopSite, our Web storefront building software for small and medium size
businesses.
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 connection with this agreement, we also received license fees from NextPage
in the amount of $3,000 in exchange for granting NextPage a non-exclusive
worldwide right to market and distribute our commerce software products to the
commercial publishing industry.
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 and customer
acceptance is not required. If the license is subject to customer acceptance or
16
<PAGE>
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.
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 customer 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, LiveCommerce and ShopSite products. Our content
revenues include license fees and service revenues from our Internet Publishing
System, or IPS. 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. After 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 years ended December 31, 1999,
1998 and 1997.
17
<PAGE>
RESULTS OF OPERATIONS
REVENUES
<TABLE>
<CAPTION>
COMPARATIVE
PERCENTAGE
YEARS ENDED DECEMBER 31, CHANGES
------------------------------ -------------------
1998 TO 1997 TO
1999 1998 1997 1999 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commerce revenues................................ $62,294 $37,768 $26,844 65% 41%
Content revenues................................. 11,065 625 -- 1670% --
------- ------- ------- ----- ----
e-Business revenues............................ 73,359 38,393 26,844 91% 43%
Other revenues................................... 9,667 26,153 34,603 (63%) (24%)
------- ------- ------- ----- ----
Total revenues............................... $83,026 $64,546 $61,447 29% 5%
======= ======= ======= ===== ====
</TABLE>
In 1999, total revenues grew by $18,480, with product and services revenues
increasing by $10,159 and $8,321, respectively, compared to 1998.
In 1998, total revenues grew by $3,099, with product revenues declining by
$4,668 and service revenues increasing by $7,767 compared to 1997.
PRODUCT REVENUES
<TABLE>
<CAPTION>
COMPARATIVE
PERCENTAGE
CHANGES
YEARS ENDED DECEMBER 31, -------------------
------------------------------ 1998 TO 1997 TO
1999 1998 1997 1999 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commerce product revenues......................... $38,426 $21,734 $17,135 77% 27%
Content product revenues.......................... 8,295 446 -- 1760% --
------- ------- ------- ---- ---
e-Business revenues........................... 46,721 22,180 17,135 111% 29%
Other product revenues............................ 7,021 21,403 31,116 (67%) (31%)
------- ------- ------- ---- ---
Total product revenues...................... $53,742 $43,583 $48,251 23% (10%)
======= ======= ======= ==== ===
</TABLE>
In 1999, total product revenues increased by $10,159 compared to 1998. Our
e-business product revenues increased $24,541 principally due to increases in
the number of product licenses entered into with new customers and follow-on
licenses with our installed base of customers. In addition, in 1999 we recorded
a full year of revenues from our content management product compared to
approximately six months of revenues from that product in 1998, since the
product was introduced in July 1998. This increase was offset by the decline of
$14,382 in other product revenues compared to 1998. This decline resulted from
decreases in license revenues from our Folio software publishing product tool.
In 1998, total product revenues decreased by $4,668 compared to 1997. The
increase in e-business revenues of approximately $5,045 compared to 1997 was due
principally to higher sales of our commerce products. Other product revenues
decreased by $9,713 in 1998 compared to 1997. Discontinuing the licensing of
certain software products accounted for $9,400 of the reduction.
Product revenues accounted for 65%, 68% and 79% of total revenues in 1999,
1998 and 1997, respectively. We expect that product revenues will continue to
account for the majority of total revenues for the foreseeable future.
18
<PAGE>
SERVICE REVENUES
<TABLE>
<CAPTION>
COMPARATIVE
PERCENTAGE
YEARS ENDED DECEMBER 31, CHANGES
------------------------------ -------------------
1998 TO 1997 TO
1999 1998 1997 1999 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commerce service revenues......................... $23,868 $16,034 $ 9,709 49% 65%
Content service revenues.......................... 2,770 179 -- 1447% --
------- ------- ------- ---- --
e-Business revenues........................... 26,638 16,213 9,709 64% 67%
Other service revenues............................ 2,646 4,750 3,487 (44%) 36%
------- ------- ------- ---- --
Total service revenues...................... $29,284 $20,963 $13,196 40% 59%
======= ======= ======= ==== ==
</TABLE>
In 1999, e-business service revenues increased by $10,425 compared to 1998
as a result of increased demand for our consulting and technical service
offerings from both new and existing customers. Commerce service revenues grew
$7,834 due to an increase in consulting projects, as well as an increase in
maintenance and support revenues from our new and installed base of customers.
Content service revenues increased significantly, primarily from the strength of
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. In 1999, other service revenues
declined by $2,104 compared to 1998. This decline was due to reductions in both
consulting and maintenance and support revenues from our Folio products. We do
not expect to derive any Folio service revenues during the term of the agreement
with NextPage.
In 1998, total service revenues increased by $7,767 compared to 1997. The
e-business service revenues increased by $6,504 from 1997, primarily as a result
of a growing customer base and a developing service practice. Other service
revenues increased by $1,263 compared to 1997, primarily attributable to the
increased business volume and improvements in the marketing and delivery of our
service offerings. For 1999, 1998 and 1997, service revenues accounted for 35%,
32% and 21%, respectively, of total revenues.
COST OF PRODUCT REVENUES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cost of product revenues............................ $4,434 $3,214 $2,631
Percentage of total product revenues.............. 8% 7% 5%
Product gross margin.............................. 92% 93% 95%
</TABLE>
In 1999 and 1998, the increased cost of product revenues was attributable
primarily to growth in product revenues and increased 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 8% to 12% for the foreseeable future, as we incorporate
more third party technology into our products and continue to resell third party
software products with our commerce and content solutions.
COST OF SERVICE REVENUES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cost of service revenues.......................... $21,138 $15,365 $9,222
Percentage of total service revenues............ 72% 73% 70%
Service gross margin............................ 28% 27% 30%
</TABLE>
19
<PAGE>
In 1999, cost of service revenues increased by $5,773 from 1998, primarily
due to growth in employee-related expenses of $1,843 and outside consulting
expenses of $3,912. During 1999, we continued to increase the number of our
professional services personnel and our use of outside consultants. We expect
that our service gross margin may decline slightly during the first six months
of 2000 as a result of continued investment in the training of our system
integrators.
In 1998, cost of service revenues increased by $6,143 from 1997, primarily
due to increases in employee-related expenses of $3,923 and outside consulting
expenses of $543. During 1998, we continued to increase the number of our
professional services personnel and our use of outside consultants. In 1998,
service gross margin decreased approximately 3% from 1997, primarily due to an
increase in professional services personnel and lower utilization rates
resulting from extended training processes for new employees.
OPERATING EXPENSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERCENTAGE OF REVENUES
------------------------------------ ------------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Selling and marketing................... $38,343 $34,772 $ 38,079 46% 54% 62%
Research and development................ 22,446 25,910 28,307 27% 40% 46%
General and administrative.............. 8,667 11,096 10,935 10% 17% 18%
Amortization of intangible assets....... 3,387 3,006 1,351 4% 5% 2%
Acquired in-process research and
development........................... -- 5,700 34,679 -- 9% 56%
Restructuring charge.................... -- 2,042 -- -- 3% --
Merger related costs.................... 4,328 -- -- 5% -- --
------- ------- -------- -- --- ---
Total operating expenses................ $77,171 $82,526 $113,351 92% 128% 184%
======= ======= ======== == === ===
</TABLE>
SELLING AND MARKETING
Selling and marketing expenses consist primarily of the cost of sales and
marketing personnel and outside consultants, as well as the costs associated
with marketing programs, industry tradeshows, sales seminars, advertising and
product literature.
In 1999, selling and marketing expenses increased by $3,571, primarily as a
result of an increase in commission expenses related to the increase in
revenues. In 1998, selling and marketing expenses decreased $3,307 compared to
1997. The decrease was attributable primarily to a decrease in employee-related
and travel expenses as a result of reductions in sales and marketing headcount
throughout the 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.
In 1999, research and development expenses decreased $3,464 compared to
1998. The decrease was attributable to reductions of $2,745 in employee-related
expenses and of $719 in outside consulting expenses. This reduction in research
and development headcount primarily resulted from the completion of our modular
version of Transact that was released in the first quarter of 1998.
In 1998, research and development expenses decreased $2,397 compared to 1997
as a result of a reduction in both employee-related expense and the use of
outside technical consultants after completion of a number of technical projects
during the year. In addition, we implemented headcount reductions and
20
<PAGE>
realized other cost efficiencies from the consolidation of the research and
development activities from the Waypoint, Folio and ICentral acquisitions.
Although research and development expenses have decreased in prior years, 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 over the next year.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of the cost of
finance, management and administrative personnel and legal and other
professional fees.
In 1999, general and administrative expenses decreased $2,429 from 1998. The
decrease was attributable primarily to a decrease of $1,200 in bad debt expense
and decreases related to travel expenses, professional fees and equipment
rental.
General and administrative expenses in 1998 slightly increased over 1997.
AMORTIZATION OF INTANGIBLES
In 1999, amortization of intangibles increased by $381 from 1998, as a
result of recording a full year of amortization costs related to the 1998
ICentral acquisition. Amortization costs increased by $1,655 in 1998, as a
result of recording a full year of amortization costs related to the 1997 Folio
and Mission Critical Technologies acquisitions.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
Acquired in-process research and development expenses consisted of $5,700
relating to the ICentral acquisition in 1998, and $429, $9,250 and $25,000
relating to the acquisitions of Mission Critical Technologies, Waypoint and
Folio, respectively, in 1997. These costs were expensed in the periods of the
acquisitions and are included in the accompanying consolidated statements of
operations for the respective periods. The amount allocated to acquired
in-process research and development related to projects that had not yet reached
technological feasibility and that, until completion of development, had no
alternative future use.
RESTRUCTURING CHARGE
In the fourth quarter of 1998, we recorded a $2,042 restructuring charge to
align our operating costs with our anticipated future revenue stream. The major
components of the restructuring charge were employee severance, benefits and
related costs, write-off of assets and termination of certain contractual
obligations.
MERGER RELATED COSTS
We incurred one-time costs related to our merger with FutureTense of $4,328.
These costs consisted of professional fees and other charges of $3,353 and costs
to exit contractual obligations and asset impairments of $975.
NON-OPERATING INCOME (EXPENSE)
Interest income represents interest earned on cash, cash equivalents and
marketable securities. The decreases in interest income in 1999 and 1998, as
compared to the prior years, were attributable primarily to lower average
investments in cash, cash equivalents and marketable securities as a result of
increased funding of operations and capital expenditures. Interest expense
relates to the interest charged on our line-of-credit and long-term obligations.
Interest expense increased in 1998 primarily due to the issuance of a $10,000
promissory note in connection with the Folio acquisition in 1997. Interest
expense decreased in
21
<PAGE>
1999 due mainly to the repayment of the promissory note. Other income/expense
primarily represents foreign currency translation gains and losses. In 1998, we
also recorded a loss of approximately $197 on an equity investment.
PROVISION FOR INCOME TAXES
We recorded a provision for foreign income taxes of $414, $325 and $584 in
1999, 1998 and 1997, 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
At December 31, 1999, we had $32,291 in cash, cash equivalents and
marketable securities, a decrease of $4,428 from December 31, 1998.
Our operating activities used cash and cash equivalents of $7,978, $32,996
and $32,676 during 1999, 1998 and 1997, respectively, to fund our operations. In
1999, our net loss decreased approximately 46% to $19,780 from $36,970 in 1998.
Accounts receivable decreased in absolute dollars despite a growth in revenues,
primarily as a result of the receipt of cash from revenue recorded in prior
periods with extended terms as well as shorter average payment terms in new
contracts.
In 1999, our investing activities provided cash and cash equivalents of $51.
The primary source of cash from investing activities in 1999 was $1,973 related
to the maturity of marketable securities, offset by the purchase of property and
equipment in the amount of $2,068. In 1998 and 1997, we used cash and cash
equivalents of $11,397 and $7,729, respectively. In 1998, the principal uses of
cash were $5,933 for purchases related to certain property and equipment and
$5,521 for the purchase of marketable securities. In 1997, the principal uses of
cash from investing activities were $11,400 related to the Folio acquisition and
the purchase of property and equipment in the amount of $7,280, offset by the
maturities of marketable securities worth $11,296.
Our financing activities provided cash and cash equivalents of $5,510,
$46,124 and $7,236, during 1999, 1998 and 1997, respectively. In 1999, cash and
cash equivalents provided by financing activities consisted of $4,500 related to
the sale of redeemable preferred stock and $7,369 from the issuance of common
stock under our stock option and stock purchase plans. These were offset by the
repayment of a $5,000 note payable in connection with the Folio acquisition. In
1998, we received proceeds of $5,000 from Intel and $20,000 from CMG Information
Services, Inc., and Capital Ventures International from the issuance of common
stock. In addition, we received proceeds of $8,496 from the issuance of
redeemable convertible preferred stock and $4,595 from the issuance of common
stock under our stock option and stock purchase plans. Also in 1998, we repaid
$5,000 of the note payable issued in connection with the Folio acquisition with
a cash payment of $1,818 and an issuance of our common stock having a value of
$3,182. In 1997, the principal source of cash provided by financing activities
was net borrowings of $5,168 against 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 which 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
22
<PAGE>
at the prime lending rate, which was 8.5% at December 31, 1999. 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 at December 31, 1999. During 1999, we decreased our borrowings
under this facility to $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.
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 do not anticipate incurring material expenses or experiencing
any material operational disruptions as a result of Year 2000 problems.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
INTRODUCTION
This Annual Report 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 Annual 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 December 31, 1999, our accumulated deficit
was $164.5 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
- 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
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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
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.
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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
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;
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- 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
- 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
year ended December 31, 1999, we derived approximately 29% 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
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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.
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,
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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.
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
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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
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
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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 PRODUCTS
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
FOREIGN EXCHANGE HEDGING. The accounts of Open Market's foreign
subsidiaries are translated in accordance with SFAS No. 52, FOREIGN CURRENCY
TRANSLATION. In translating the accounts of the foreign subsidiaries into U.S.
dollars, assets and liabilities are translated at the rate of exchange in effect
at year-end, while stockholders' equity is translated at historical rates.
Revenue and expense accounts are translated using the weighted average exchange
rate in effect during the year. Foreign currency translation and transaction
gains or losses for 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. This
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 accompanying Notes to Consolidated Financial Statements.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Consolidated Financial Statements set forth on page 33.
QUARTERLY FINANCIAL RESULTS
The following table sets forth certain unaudited quarterly financial data
for 1998 and 1999. In the opinion of management, the unaudited quarterly
information has been prepared on the same basis as the audited consolidated
financial statements and includes all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of the information
for the periods presented. The quarterly operating results are not necessarily
indicative of results of operations for any future period.
Our merger with FutureTense in October 1999 was accounted for as a pooling
of interests, and accordingly, all prior period financial data have been
restated as if the merger took place at the beginning of such periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Commerce product.................... $ 2,966 $ 8,465 $ 4,729 $ 5,574 $ 7,825 $10,541 $ 9,710 $10,350
Content product..................... 9 47 128 262 480 599 1,808 5,408
Other product....................... 8,803 3,726 4,188 4,686 2,385 2,418 1,071 1,147
------- -------- ------- ------- ------- ------- ------- -------
Product revenues.................. 11,778 12,238 9,045 10,522 10,690 13,558 12,589 16,905
------- -------- ------- ------- ------- ------- ------- -------
Commerce service.................... 2,875 3,359 4,725 5,074 4,803 5,091 6,483 7,491
Content service..................... 1 45 50 83 182 973 1,000 615
Other service....................... 1,331 1,179 1,144 1,097 919 940 529 258
------- -------- ------- ------- ------- ------- ------- -------
Service revenues.................. 4,207 4,583 5,919 6,254 5,904 7,004 8,012 8,364
------- -------- ------- ------- ------- ------- ------- -------
Total revenues.................. 15,985 16,821 14,964 16,776 16,594 20,562 20,601 25,269
------- -------- ------- ------- ------- ------- ------- -------
Cost of Revenues:
Product revenues.................... 728 761 787 938 764 1,014 850 1,806
Service revenues.................... 3,086 3,691 4,062 4,526 4,151 5,197 4,986 6,804
------- -------- ------- ------- ------- ------- ------- -------
Total cost of revenues............ 3,814 4,452 4,849 5,464 4,915 6,211 5,836 8,610
------- -------- ------- ------- ------- ------- ------- -------
Gross profit...................... 12,171 12,369 10,115 11,312 11,679 14,351 14,765 16,659
------- -------- ------- ------- ------- ------- ------- -------
Operating Expenses:
Selling and marketing............... 8,473 8,662 8,757 8,880 8,497 9,360 8,539 11,947
Research and development............ 7,303 7,281 6,035 5,291 5,238 5,872 5,514 5,822
General and administrative.......... 2,910 2,757 2,897 2,532 2,230 1,969 2,662 1,806
Amortization of intangibles......... 565 777 833 831 852 852 897 786
In-process research and
development....................... -- 5,700 -- -- -- -- -- --
Restructuring charge................ -- -- -- 2,042 -- -- -- --
Merger related costs................ -- -- -- -- -- -- -- 4,328
------- -------- ------- ------- ------- ------- ------- -------
Total operating expenses.......... 19,251 25,177 18,522 19,576 16,817 18,053 17,612 24,689
Loss from operations.............. (7,080) (12,808) (8,407) (8,264) (5,138) (3,702) (2,847) (8,030)
Other (expense) income................ 32 (63) 73 (128) 19 119 142 71
------- -------- ------- ------- ------- ------- ------- -------
Loss before income taxes.......... (7,048) (12,871) (8,334) (8,392) (5,119) (3,583) (2,705) (7,959)
Provision for income taxes............ 28 33 121 143 42 103 71 198
------- -------- ------- ------- ------- ------- ------- -------
Net loss.......................... $(7,076) $(12,904) $(8,455) $(8,535) $(5,161) $(3,686) $(2,776) $(8,157)
======= ======== ======= ======= ======= ======= ======= =======
</TABLE>
32
<PAGE>
OPEN MARKET, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... 34
Report of Independent Accountants........................... 35
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 36
Consolidated Statements of Operations for the years ended
December 31, 1999 1998 and 1997........................... 37
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997.......................... 38
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... 39
Notes to Consolidated Financial Statements.................. 41
</TABLE>
33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Open Market, Inc.:
We have audited the accompanying consolidated balance sheets of Open
Market, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations, redeemable
convertible preferred stock and stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1998 and 1997 financial statements of
FutureTense, Inc., a company acquired during 1999 in a transaction accounted for
as a pooling of interests, as discussed in Note 4(a). Such financial statements
are included in the consolidated financial statements of Open Market, Inc. and
reflect total assets of 4% in 1998 and total revenues of 4% and 0% in 1998 and
1997, respectively. These statements were audited by other auditors whose report
has been furnished to us and our opinion, insofar as it relates to amounts
included for FutureTense, Inc., is based solely upon the report of the other
auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Open Market, Inc. and subsidiaries as of December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 28, 2000
34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Open Market, Inc:
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' deficit and cash flows present fairly,
in all material respects, the financial position of FutureTense, Inc. at
December 31, 1998, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1998 in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 10, 1999
35
<PAGE>
OPEN MARKET, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 19,258 $ 21,735
Marketable securities..................................... 13,033 14,984
Accounts receivable, net of allowance for doubtful
accounts of $2,870 and $2,543 in 1999 and 1998,
respectively............................................ 27,211 28,541
Prepaid expenses and other current assets................. 4,264 2,451
--------- ---------
Total current assets.................................. 63,766 67,711
--------- ---------
Property and equipment, at cost:
Computers and office equipment............................ 17,535 15,540
Leasehold improvements.................................... 5,527 5,470
Land and building......................................... 4,200 4,200
Furniture and fixtures.................................... 2,304 2,215
--------- ---------
Total property and equipment.......................... 29,566 27,425
Less--accumulated depreciation and amortization........... 16,043 11,436
--------- ---------
Net property and equipment............................ 13,523 15,989
--------- ---------
Long-term marketable securities............................. 1,487 1,510
Intangible assets........................................... 8,657 12,618
Other assets................................................ 1,372 1,372
--------- ---------
Total assets.......................................... $ 88,805 $ 99,200
========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations............... $ 108 $ 411
Line of credit............................................ 10,350 11,000
Note payable.............................................. -- 5,000
Accounts payable.......................................... 5,657 3,352
Accrued expenses.......................................... 13,773 14,167
Deferred revenues......................................... 6,302 5,472
--------- ---------
Total current liabilities............................. 36,190 39,402
--------- ---------
Long-term obligations, net of current maturities............ 2,657 2,937
Commitments (Note 9)
Redeemable Convertible Preferred Stock...................... -- 15,425
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--44,098 and 36,995 shares in 1999 and
1998, respectively.................................... 44 37
Additional paid-in capital................................ 214,783 186,191
Deferred compensation..................................... (329) (32)
Accumulated deficit....................................... (164,540) (144,760)
--------- ---------
Total stockholders' equity............................ 49,958 41,436
--------- ---------
Total liabilities and stockholders' equity............ $ 88,805 $ 99,200
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product revenues.......................................... $ 53,742 $ 43,583 $ 48,251
Service revenues.......................................... 29,284 20,963 13,196
-------- -------- --------
Total revenues........................................ 83,026 64,546 61,447
-------- -------- --------
Cost of Revenues:
Product revenues.......................................... 4,434 3,214 2,631
Service revenues.......................................... 21,138 15,365 9,222
-------- -------- --------
Total cost of revenues................................ 25,572 18,579 11,853
-------- -------- --------
Gross profit.......................................... 57,454 45,967 49,594
-------- -------- --------
Operating Expenses:
Selling and marketing..................................... 38,343 34,772 38,079
Research and development.................................. 22,446 25,910 28,307
General and administrative................................ 8,667 11,096 10,935
Amortization of intangible assets......................... 3,387 3,006 1,351
In-process research and development....................... -- 5,700 34,679
Restructuring charge...................................... -- 2,042 --
Merger related costs...................................... 4,328 -- --
-------- -------- --------
Total operating expenses.............................. 77,171 82,526 113,351
-------- -------- --------
Loss from operations.................................. (19,717) (36,559) (63,757)
-------- -------- --------
Interest income........................................... 1,220 1,429 2,911
Interest expense.......................................... (703) (1,191) (812)
Other expense, net........................................ (166) (324) (218)
-------- -------- --------
Loss before provision for income taxes................ (19,366) (36,645) (61,876)
-------- -------- --------
Provision for income taxes................................ 414 325 584
-------- -------- --------
Net loss.............................................. $(19,780) $(36,970) $(62,460)
======== ======== ========
Net loss per share--basic and diluted..................... $ (0.46) $ (0.98) $ (1.82)
======== ======== ========
Weighted average common shares outstanding--basic and
diluted................................................. 42,655 37,815 34,347
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE>
OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
STOCKHOLDERS' EQUITY
----------------------------------
REDEEMABLE
CONVERTIBLE COMMON STOCK
PREFERRED STOCK ---------------------
----------------------------- $.001 ADDITIONAL
NUMBER CARRYING NUMBER PAR PAID-IN
OF SHARES VALUE OF SHARES VALUE CAPITAL
------------------ -------- ---------- -------- ----------
28 114,977
Balance, December 31, 1996 as previously reported........... -- $ -- 28,565,000 $ $
<S> <C> <C> <C> <C> <C>
FutureTense Pooling of Interests.......................... 1,006,000 5,749 1,981,000 2 130
------------------ ------- ---------- --- --------
Balance, December 31, 1996 restated......................... 1,006,000 5,749 30,546,000 30 115,107
Exercise of common stock options.......................... -- -- 710,000 1 355
Employee stock purchase plan.............................. -- -- 59,000 -- 658
Issuance of common stock in Waypoint acquisition.......... -- -- 739,000 1 9,548
Issuance of common stock in Folio acquisition, net of
purchase price adjustment............................... -- -- 898,000 1 11,509
Issuance of FutureTense Series B redeemable convertible
preferred stock......................................... 129,000 937 -- -- --
Repurchase and cancellation of common stock -- -- (269,000) -- --
Deferred compensation related to stock options............ -- -- -- -- 380
Amortization of deferred compensation related to stock
options................................................. -- -- -- -- (14)
Net loss.................................................. -- -- -- -- --
------------------ ------- ---------- --- --------
Balance, December 31, 1997.................................. 1,135,000 6,686 32,683,000 33 137,543
Exercise of common stock options.......................... -- -- 977,000 1 3,447
Employee stock purchase plan.............................. -- -- 132,000 -- 1,147
Issuance of common stock for payment of note payable...... -- -- 221,000 -- 3,182
Conversion of other equity to common stock................ -- -- 628,000 1 6,919
Issuance of common stock in ICentral acquisition.......... -- -- 480,000 -- 10,000
Issuance of common stock in private placements, net of
issuance costs of $738.................................. -- -- 1,882,000 2 24,260
Issuance of FutureTense Series C redeemable convertible
preferred stock......................................... 686,000 5,000 -- -- --
Conversion of note payable................................ 26,000 189 -- -- --
Issuance of FutureTense Series D redeemable convertible
preferred stock......................................... 2,398,000 3,550 -- -- --
Cancellation of restricted common stock................... -- -- (8,000) -- --
Reversal of deferred compensation related to termination
of stock options........................................ -- -- -- -- (330)
Compensation expense related to stock options............. -- -- -- -- 23
Amortization of deferred compensation..................... -- -- -- -- --
Net loss.................................................. -- -- -- -- --
------------------ ------- ---------- --- --------
Balance, December 31, 1998.................................. 4,245,000 15,425 36,995,000 37 186,191
Exercise of common stock options.......................... -- -- 1,323,000 2 6,242
Employee stock purchase plan.............................. -- -- 93,000 -- 1,125
Issuance of common stock in ICentral acquisition.......... -- -- 49,000 -- 609
Issuance of FutureTense Series D redeemable convertible
preferred stock......................................... 3,039,000 4,500 -- -- --
Conversion of FutureTense preferred stock into Open Market
common stock............................................ (7,284,000) (19,925) 5,638,000 5 19,920
Amortization of deferred compensation..................... -- -- -- -- --
Deferred compensation related to issuance of common stock
options................................................. -- -- -- -- 696
Net loss.................................................. -- -- -- -- --
------------------ ------- ---------- --- --------
Balance, December 31, 1999.................................. -- -- 44,098,000 $44 $214,783
================== ======= ========== === ========
<S> <C> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY
--------------------------------------------------------------------
OTHER EQUITY
----------------------
COMMON TOTAL
SHARE CARRYING DEFERRED ACCUMULATED STOCKHOLDERS'
EQUIVALENTS VALUE COMPENSATION DEFICIT EQUITY
----------- -------- ------------- ------------ ------------
Balance, December 31, 1996 as previously reported........... -- $ -- $ -- $ (42,638) $ 72,367
FutureTense Pooling of Interests.......................... -- -- (83) (2,692) (2,643)
-------- ------- ----- --------- --------
Balance, December 31, 1996 restated......................... (83) (45,330) 69,724
Exercise of common stock options.......................... -- -- -- -- 356
Employee stock purchase plan.............................. -- -- -- -- 658
Issuance of common stock in Waypoint acquisition.......... -- -- -- -- 9,549
Issuance of common stock in Folio acquisition, net of
purchase price adjustment............................... 628,000 6,920 -- -- 18,430
Issuance of FutureTense Series B redeemable convertible
preferred stock......................................... -- -- -- -- --
Repurchase and cancellation of common stock -- -- -- -- --
Deferred compensation related to stock options............ -- -- (380) -- --
Amortization of deferred compensation related to stock
options................................................. -- -- 138 -- 124
Net loss.................................................. -- -- -- (62,460) (62,460)
-------- ------- ----- --------- --------
Balance, December 31, 1997.................................. 628,000 6,920 (325) (107,790) 36,381
Exercise of common stock options.......................... -- -- -- -- 3,448
Employee stock purchase plan.............................. -- -- -- -- 1,147
Issuance of common stock for payment of note payable...... -- -- -- -- 3,182
Conversion of other equity to common stock................ (628,000) (6,920) -- -- --
Issuance of common stock in ICentral acquisition.......... -- -- -- -- 10,000
Issuance of common stock in private placements, net of
issuance costs of $738.................................. -- -- -- -- 24,262
Issuance of FutureTense Series C redeemable convertible
preferred stock......................................... -- -- -- -- --
Conversion of note payable................................ -- -- -- -- --
Issuance of FutureTense Series D redeemable convertible
preferred stock......................................... -- -- -- -- --
Cancellation of restricted common stock................... -- -- -- -- --
Reversal of deferred compensation related to termination
of stock options........................................ -- -- 275 -- (55)
Compensation expense related to stock options............. -- -- (23) -- --
Amortization of deferred compensation..................... -- -- 41 -- 41
Net loss.................................................. -- -- -- (36,970) (36,970)
-------- ------- ----- --------- --------
Balance, December 31, 1998.................................. -- -- (32) (144,760) 41,436
Exercise of common stock options.......................... -- -- -- -- 6,244
Employee stock purchase plan.............................. -- -- -- -- 1,125
Issuance of common stock in ICentral acquisition.......... -- -- -- -- 609
Issuance of FutureTense Series D redeemable convertible
preferred stock......................................... -- -- -- -- --
Conversion of FutureTense preferred stock into Open Market
common stock............................................ -- -- -- -- 19,925
Amortization of deferred compensation..................... -- -- 399 -- 399
Deferred compensation related to issuance of common stock
options................................................. -- -- (696) -- --
Net loss.................................................. -- -- -- (19,780) (19,780)
-------- ------- ----- --------- --------
Balance, December 31, 1999.................................. -- $ -- $(329) $(164,540) $ 49,958
======== ======= ===== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE>
OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss.................................................. $(19,780) $(36,970) $(62,460)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization........................... 4,572 5,561 3,956
Amortization of intangible assets....................... 3,815 3,006 1,351
Write-off of in-process research and development........ -- 5,700 34,679
Stock based compensation expense........................ 1,008 (14) 124
Loss on disposition of fixed assets..................... -- 39 --
Write-down of assets related to restructuring........... -- 294 --
Changes in assets and liabilities--
Accounts receivable..................................... 1,331 (8,804) (14,646)
Prepaid expenses and other current assets............... (1,828) (339) 467
Accounts payable........................................ 2,310 (283) 1,809
Accrued expenses........................................ (358) (1,613) 2,382
Deferred revenues....................................... 952 427 (338)
-------- -------- --------
Net cash used in operating activities................... (7,978) (32,996) (32,676)
Cash Flows from Investing Activities:
Purchases of property and equipment....................... (2,068) (5,933) (3,980)
Increase in construction-in-progress...................... -- -- (3,300)
Repayment of loan by Founder.............................. -- 993 507
Maturities (purchases) of marketable securities........... 1,973 (5,521) 11,296
Cash paid in acquisitions................................. -- (1,420) (10,977)
(Increase) decrease in other assets....................... 146 484 (1,275)
-------- -------- --------
Net cash provided by (used in) investing activities......... 51 (11,397) (7,729)
Cash Flows from Financing Activities:
Net borrowings (payments) under the line of credit........ (650) 4,631 5,168
(Payments on) proceeds from long-term obligations......... (709) 2,830 104
Proceeds from the issuance of redeemable convertible
preferred stock, net of issuance costs.................. 4,500 8,496 --
Proceeds (payments) on note payable....................... (5,000) (1,818) 950
Proceeds from the factoring of accounts receivable........ -- 3,128 --
Proceeds from employee stock purchase plan................ 1,125 1,147 658
Proceeds from exercise of stock options................... 6,244 3,448 356
Proceeds from issuance of common stock in private
placements.............................................. -- 24,262 --
-------- -------- --------
Net cash provided by financing activities................... 5,510 46,124 7,236
Foreign Exchange Effect on Cash and Cash Equivalents........ (60) 67 194
Net (Decrease) Increase in Cash and Cash Equivalents........ (2,417) 1,731 (33,169)
Cash and Cash Equivalents, beginning of year................ 21,735 19,937 52,912
-------- -------- --------
Cash and Cash Equivalents, end of year...................... $ 19,258 $ 21,735 $ 19,937
======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid during year................................... $ 1,046 $ 1,372 $ 78
======== ======== ========
Taxes paid during year...................................... $ 228 $ 48 $ 270
======== ======== ========
</TABLE>
39
<PAGE>
OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Supplemental Schedule of Noncash Financing Activities:
Conversion of non-interest bearing note into shares of
Series C redeemable convertible preferred stock......... $ -- $ 189 $ --
======== ======== ========
Payment of note payable through issuance of
common stock (See Note 4)............................... $ -- $ 3,182 $ --
======== ======== ========
In connection with the acquisition of ICentral, the
following non-cash transaction occurred:
Fair value of assets acquired, including cash............. $ -- $(12,086) $ --
Liabilities assumed....................................... -- 666 --
Issuance of common stock.................................. -- 10,000 --
-------- -------- --------
Cash paid for acquisition and acquisition costs..... $ -- $ (1,420) $ --
======== ======== ========
In connection with the acquisition of Waypoint, the
following non-cash transaction occurred:
Fair value of assets acquired, excluding cash............. $ -- $ -- $ (9,332)
Liabilities assumed....................................... -- -- 156
Issuance of common stock.................................. -- -- 9,548
-------- -------- --------
Cash acquired in acquisition, net of issuance
costs............................................. $ -- $ -- $ 372
======== ======== ========
In connection with the acquisition of Folio, the following
non-cash transaction occurred:
Fair value of assets acquired............................. $ -- $ -- $(45,512)
Liabilities assumed....................................... -- -- 5,682
Issuance of common stock for repayment of note payable.... -- -- 18,430
Issuance of note payable.................................. -- -- 10,000
-------- -------- --------
Cash paid for acquisition and acquisition costs..... $ -- $ -- $(11,400)
======== ======== ========
In connection with the acquisition of Mission Critical
Technologies, the following non-cash transaction occurred:
Fair value of assets acquired, excluding cash............. $ -- $ -- $ (2,505)
Liabilities assumed....................................... -- -- 1,180
Issuance of redeemable convertible preferred stock........ -- -- 937
Issuance of note payable.................................. -- -- 439
-------- -------- --------
Cash acquired in acquisition........................ $ -- $ -- $ 51
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated finanicial
statements.
40
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) OPERATIONS
Open Market, Inc. ("Open Market" or "the Company") offers an integrated
suite of e-business software products and services that enable our customers to
manage and deliver online content, and engage in personalized online marketing.
The integrated e-business application suite is built on an open standards-based
architecture that is scalable and easily adaptable to the evolving business
through a broad range of media, including Web browsers and cell phones, personal
digital assistants and other wireless devices. The Company currently offers
three principal products: Internet Publishing System, the integrated publishing
system that provides content management and dynamic delivery of personalized
information: Transact, our comprehensive order management and transaction
processing system: and Shopsite, our web storefront building software for small
to medium businesses.
The Company is subject to risks common to growing technology-based
companies, including a history of significant losses, operating results are
largely dependent upon continued development and growth of Internet commerce,
lengthy sales cycles, dependence on systems integrators, competition,
fluctuations in quarterly operating results, managing rapid expansion,
international operations, product defects, integration of FutureTense
acquisition, dependence on intellectual property, potential intellectual
property rights infringements and threat of product defects.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of the following significant accounting policies described in this note and
elsewhere in the accompanying notes to consolidated financial statements.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company, and its wholly owned subsidiaries, which includes
FutureTense, Inc., for all periods presented. 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. Additionally,
the American Institute of Certified Public Accountants recently issued SOP 98-9,
which provides for certain amendments to SOP 97-2, which is effective for
transactions entered into beginning January 1, 2000. This pronouncement is not
expected to materially impact the Company's revenue recognition practices. The
Company generates revenues from two sources: license fees for the use of our
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 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 an arrangement. Under the residual method, the fair
value of the undelivered elements is
41
<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)
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 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 revenues, which includes
education, implementation and consulting services, are recognized in the period
services are provided, if customer acceptance is not required, there is evidence
of an agreement, the revenues are fixed or determinable and collection is
probable.
Cost of product revenues consists of costs to distribute the product,
including the cost of the media on which it is delivered and royalty payments to
third-party vendors. Cost of service revenues consists primarily of consulting
and support personnel salaries and related costs.
Deferred revenues represent cash received from customers for products and
services in advance of revenue recognition.
(C) CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company accounts for investments under Statement of Financial Accounting
Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES. Under SFAS No. 115, investments for which the Company has the
positive intent and ability to hold to maturity, consisting of cash equivalents
and marketable securities, are reported at amortized cost, which approximates
fair market value. Cash equivalents are highly liquid investments with original
maturities of less than three months. Marketable securities are investment-grade
securities with original maturities of greater than three months. The average
maturity of the Company's marketable securities was approximately five months at
December 31,
42
<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)
1999. Long-term marketable securities are investment-grade securities with
original maturities of greater than one year. To date, the Company has not
recorded any realized gains or losses.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Cash and cash equivalents
Cash.................................................. $ 9,464 $14,396
Commercial paper and corporate bonds.................. 3,496 4,045
Money market accounts................................. 4,905 2,632
U.S. government, state, municipal and agency
securities.......................................... 1,393 662
------- -------
Total cash and cash equivalents..................... $19,258 $21,735
======= =======
Marketable securities
Corporate and other debt securities................... $11,433 $ 8,596
State and municipal bonds............................. 1,600 6,388
------- -------
Total marketable securities......................... $13,033 $14,984
======= =======
Long-term marketable securities
Corporate and other debt securities................... $ 1,487 $ 1,510
------- -------
Total long-term marketable securities............... $ 1,487 $ 1,510
======= =======
</TABLE>
(D) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization using the
straight-line method to allocate the cost of property and equipment over their
estimated useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
- -------------------- -----------
<S> <C>
Computers and office equipment.............................. 3-5 years
Leasehold improvements...................................... Lease term
Building.................................................... 25 years
Furniture and fixtures...................................... 7 years
</TABLE>
(E) RESEARCH AND DEVELOPMENT EXPENSES
The Company has evaluated the establishment of technological feasibility of
its products in accordance with SFAS No. 86, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. The Company sells
products in a market that is subject to rapid technological change, new product
development and changing customer needs; accordingly, the Company has concluded
that technological feasibility is not established until the development stage of
the product is nearly complete. The Company defines technological feasibility as
the completion of a working model. The time period during which costs could be
capitalized, from the point of reaching technological feasibility until the time
of general product release, is very short, and consequently, the amounts that
could be capitalized are not material to the Company's financial position or
results of operations. Therefore, the Company has charged all such costs to
research and development in the period incurred.
43
<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)
(F) TRANSLATION OF FOREIGN CURRENCIES
The accounts of the Company's foreign subsidiaries are translated in
accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. In translating the
accounts of the foreign subsidiaries into U.S. dollars, assets and liabilities
are translated at the rate of exchange in effect at year-end, while
stockholders' equity is translated at historical rates. Revenue and expense
accounts are translated using the weighted average rate in effect during the
year. Foreign currency translation and transaction gains or losses for the
foreign subsidiary are included in the accompanying consolidated statements of
operations since the functional currency of these subsidiaries is the U.S.
dollar. The Company had accounts receivable of approximately $1,036 and $944
denominated in foreign currencies as of December 31, 1999 and 1998,
respectively. The Company marks these receivables to market and records a gain
or loss, which is a component of other income/expense in the consolidated
statements of operations. The Company has not incurred a significant loss to
date.
(G) 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.
The Company has applied the provisions of SFAS No. 128 and Staff Accounting
Bulletin (SAB) No. 98 for all periods presented. Net loss per share is based
upon the weighted average outstanding shares of common stock, adjusted to give
effect to the number of equivalent shares of Open Market common stock issued in
connection with the FutureTense acquisition for all periods presented. Diluted
net loss per share for the years ended 1999, 1998 and 1997 is the same as basic
net loss per share as the inclusion of the potential common stock equivalents
would be antidilutive. The number of outstanding antidilutive potential common
stock, consist of warrants, shares held in escrow from the FutureTense
acquisition and stock options totaling 8,259, 6,622 and 6,741 for the years
ended December 31, 1999, 1998 and 1997, respectively.
(H) CONCENTRATIONS OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet risk and credit
risk concentrations. The Company has no significant off-balance-sheet risk or
credit risk concentrations. The Company maintains its cash and cash equivalents
with several financial institutions and invests in investment-grade securities.
The Company did not have any customers with revenues greater than 10% of total
revenues in the years ended December 31, 1999, 1998 and 1997 or accounts
receivable balances greater than 10% of total accounts receivable as of
December 31, 1999 and 1998.
(I) POSTRETIREMENT BENEFITS
The Company has no obligations for postretirement benefits.
(J) FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments, which
include cash equivalents, marketable securities, accounts receivable, accounts
payable, line of credit, long-term debt and obligations and redeemable
convertible preferred stock approximate their carrying value.
44
<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)
(K) USE OF ESTIMATES
The preparation of the accompanying consolidated financial statements
required the use of certain estimates by management in determining the Company's
assets, liabilities, revenues and expenses. Actual results could differ from
those estimates.
(L) RECLASSIFICATIONS
The Company has reclassified certain prior year information to conform with
current year's presentation.
(M) COMPREHENSIVE LOSS
SFAS No. 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.
(N) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
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 on
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 operating segments (1) commerce management,
including the licensing of Transact, LiveCommerce and ShopSite products,
(2) content management, including the licensing of Internet Publishing System
and (3) other, which includes the publishing product suite and
45
<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)
other discontinued software products. The commerce and content management
segments are combined under the sub-heading e-business for reporting purposes.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues
Commerce product revenues........................ $38,426 $21,734 $17,135
Content product revenues......................... 8,295 446 --
------- ------- -------
e-Business segment subtotal................ 46,721 22,180 17,135
------- ------- -------
Other product revenues........................... 7,021 21,403 31,116
------- ------- -------
Total product revenues................. 53,742 43,583 48,251
------- ------- -------
Commerce service revenues........................ 23,868 16,034 9,709
Content service revenues......................... 2,770 179 --
------- ------- -------
e-Business segment subtotal................ 26,638 16,213 9,709
------- ------- -------
Other service revenues........................... 2,646 4,750 3,487
------- ------- -------
Total service revenues................. 29,284 20,963 13,196
------- ------- -------
Total revenues......................... $83,026 $64,546 $61,447
======= ======= =======
</TABLE>
Revenues from geographical sources in total and as a percentage of total
revenues in 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
North America................................ $58,341 70% $44,407 68% $43,248 71%
United Kingdom............................... 7,198 9 6,374 10 6,784 11
Europe....................................... 11,636 14 8,057 12 3,892 6
Asia Pacific................................. 2,813 3 3,072 5 4,256 7
Japan........................................ 1,582 2 1,618 3 1,701 3
Other........................................ 1,456 2 1,018 2 1,566 2
------- --- ------- --- ------- ---
Total.................................. $83,026 100% $64,546 100% $61,447 100%
======= === ======= === ======= ===
</TABLE>
All of the Company's product sales for the years ended December 31, 1999,
1998 and 1997 were shipped from its facilities located in the United States. As
of December 31, 1999 and 1998 all of the Company's assets relate to the
e-business segment, except for $10,173 and $25,439, 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.
(O) LONG-LIVED ASSETS
The Company evaluates the carrying value of long-lived assets based on the
guidance in SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF. The
46
<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)
Company's evaluation considers strategy, competitive information, market trends
and operating performance. Based on its evaluation at December 31, 1999, the
Company does not believe any impairment of long-lived assets exists.
(P) 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.
(3) SPECIAL CHARGES
(A) RESTRUCTURING CHARGES
In the fourth quarter of 1998, the Company implemented a restructuring plan
to better align its operating costs with its anticipated future revenue stream.
The major component of the restructuring charge related to the elimination of
approximately 67 employees across the following functions: research and
development (27), marketing (17), general and administrative (22) and services
(1). In addition, 10 employees moved from research and development to services.
Other components related to settling certain contractual arrangements for
porting and product integration that resulted from a change in product strategy.
Other charges included the write-off of unutilized software, originally intended
for use by the sales force but not implemented due to the reduction in marketing
personnel. The total cash impact of the restructuring amounted to approximately
$1,748. All liabilities were paid as of December 31, 1999. Following are the
significant components of the restructuring charge:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- --------
<S> <C>
Employee severance, benefits and related costs.............. $1,260
Write-off of assets......................................... 294
Termination costs of certain contractual arrangements....... 488
------
Total....................................................... $2,042
======
</TABLE>
(B) NON-RECURRING CHARGES
As a result of the acquisition of FutureTense during the fourth quarter of
1999 (See Note 4(a)), the Company incurred one-time costs related to the merger
of $4,328. These costs were comprised of
47
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(3) SPECIAL CHARGES (CONTINUED)
professional fees and other charges of $3,353 and costs to exit contractual
obligations and asset impairments of $975. The total cash impact related to the
transaction was $3,394 of which $2,720 was paid as of December 31, 1999. The
remainder is expected to be paid in 2000.
(4) ACQUISITIONS
(A) FUTURETENSE, INC.
Effective October 15, 1999, Open Market, Inc. 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 Open
Market common stock. In addition, the Company assumed FutureTense employee stock
options and warrants that converted into options to acquire 1,124,628 shares of
Open Market stock. As of the date of the consumation of the merger, the common
stock issued by Open Market 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 of FutureTense.
During the nine month period ended September 30, 1999, the Company recorded
revenues of $432 related to the sale of FutureTense products and services as
part of a reseller agreement. This amount has been eliminated in consolidation.
No other material adjustments were required as a result of conforming the
accounting policies of FutureTense to the existing Open Market policies.
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
------------------ ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
Open Market
Revenues.................................. $52,160 $62,145 $61,260
Net Loss.................................. (6,251) (30,472) (58,006)
FutureTense
Revenues.................................. $ 6,032 $ 2,401 $ 187
Net Loss.................................. (5,374) (6,498) (4,454)
</TABLE>
(B) ICENTRAL INCORPORATED
On April 30, 1998, the Company acquired all of the outstanding shares of
capital stock of ICentral, Incorporated (ICentral) based in Provo, Utah.
ICentral specializes in Internet store-building products geared to small and
medium sized businesses. As payment of the purchase price, the Company
(i) issued an aggregate of 480,140 shares of the common stock of the Company and
(ii) made a cash payment of $720 to the former stockholders of ICentral. The
value of the shares of the Company's common stock issued in connection with the
acquisition was approximately $10,000 based on a weighted average market price,
as
48
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) ACQUISITIONS (CONTINUED)
defined. In addition, in connection with this acquisition, the Company entered
into employment agreements in 1998 with certain key employees of ICentral under
which the Company agreed to pay bonuses in an aggregate amount of $1,000,
depending on certain future events, as defined. The employees earned $609 under
the employment agreements, which was paid through the issuance of 48,752 shares
of common stock under the Company's 1994 Stock Purchase Plan. The remainder was
forfeited due to termination of employment. For financial statement purposes,
this acquisition was accounted for as a purchase, and accordingly, the results
of operations of ICentral subsequent to April 30, 1998 are included in the
Company's consolidated statements of operations.
The aggregate purchase price of $12,086 consisted of the following:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- --------
<S> <C>
Common stock................................................ $10,000
Cash........................................................ 720
Assumed liabilities......................................... 666
Acquisition costs........................................... 700
-------
Total purchase price:................................. $12,086
=======
</TABLE>
The purchase price was allocated based upon the fair value of the tangible
and intangible assets acquired. These allocations represent the fair values
determined by an appraisal. The appraisal incorporated proven valuation
procedures and techniques in determining the fair value of each intangible
asset. The purchase price has been allocated as follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- --------
<S> <C>
Current assets.............................................. $ 86
Other acquired intangible assets............................ 6,300
In-process research & development........................... 5,700
-------
Total assets acquired:................................ $12,086
=======
</TABLE>
The in-process research and development has been expensed as a charge
against operations as of the closing of the transaction, and is included in the
accompanying 1998 consolidated statement of operations. The amount allocated to
in-process research and development relates to projects that had not yet reached
technological feasibility and that, until completion of development, have no
alternative future use. These projects were to require substantial development
and testing prior to reaching technological feasibility. However, there could be
no assurance that these projects would reach technological feasibility or
develop into products that would be sold profitably by the Company. The
technology acquired in the acquisition of ICentral has required, and will
continue to require, substantial additional development by the Company. The
capitalized intangible assets are being amortized over five to seven years. The
Company recorded approximately $1,260 and $840 of amortization expense relating
to these intangible assets during 1999 and 1998, respectively.
49
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) ACQUISITIONS (CONTINUED)
(C) WAYPOINT SOFTWARE CORPORATION
On February 12, 1997, the Company acquired all of the outstanding shares of
capital stock of Waypoint Software Corporation (Waypoint), a software
development company specializing in the business-to-business industrial catalog
segment of the Internet. As payment of the purchase price, the Company issued an
aggregate of approximately 739,000 shares of its common stock to the
stockholders of Waypoint and issued options to acquire approximately 6,000
shares of the Company's common stock at $0.456 per share to Waypoint option
holders. The value of the shares of, and the options to acquire, the Company's
common stock issued in connection with the acquisition was approximately $11,000
based on a weighted average market price, as defined, of the Company's freely
tradable shares. The shares issued were subject to certain selling restrictions
and, as a result, were not freely tradable. Therefore, for purposes of
calculating aggregate consideration paid, the value of the shares issued was
recorded at a discounted value. In addition, in connection with this
acquisition, the Company has entered into employment agreements with certain of
the principals of Waypoint under which the Company has agreed to pay bonuses in
an aggregate amount of $1,200 over two years depending on certain future events,
as defined. The total bonus amounts were paid as of February 1999. For financial
statement purposes, this acquisition was accounted for as a purchase, and
accordingly, the results of operations of Waypoint subsequent to February 12,
1997, are included in the Company's consolidated statements of operations.
The aggregate purchase price of $9,922 consisted of the following:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- --------
<S> <C>
Common stock................................................ $9,548
Assumed liabilities......................................... 156
Acquisition costs........................................... 218
------
Total purchase price:................................. $9,922
======
</TABLE>
The purchase price was allocated based upon the fair value of the tangible
and intangible assets acquired. These allocations represent the fair values
determined by an independent appraisal. The appraisal incorporated proven
valuation procedures and techniques in determining the fair value of each
intangible asset. The purchase price has been allocated as follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- --------
<S> <C>
Cash........................................................ $ 590
Property, plant and equipment............................... 76
Other assets................................................ 6
In-process research and development......................... 9,250
------
Total assets acquired:................................ $9,922
======
</TABLE>
The in-process research and development has been expensed as a charge
against operations as of the closing of the transaction, and is included in the
accompanying 1997 consolidated statement of operations. The amount allocated to
in-process research and development relates to projects that had not yet reached
technological feasibility and that, until completion of development, have no
alternative future use. These
50
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) ACQUISITIONS (CONTINUED)
projects were to require substantial development and testing prior to the
reaching of technological feasibility. However, there could be no assurance that
these projects would reach technological feasibility or develop into products
that might be sold profitably by the Company. The technology acquired in the
acquisition of Waypoint has required substantial additional development by the
Company which resulted in the first release of the LiveCommerce catalog in
October 1998.
(D) FOLIO CORPORATION
Pursuant to a Stock Purchase Agreement dated as of February 20, 1997 (the
"Stock Purchase Agreement"), the Company acquired all of the outstanding shares
of capital stock of Folio Corporation (Folio), a leading supplier of software
for managing business-critical information from Reed Elsevier. As payment of the
purchase price, the Company (i) issued 897,866 shares of common stock of the
Company, (ii) made a cash payment of $10,000, (iii) agreed to issue 897,866
shares of common stock of the Company in January 1998 and (iv) issued a
promissory note of the Company in the original principal amount of $10,000
payable in either cash or a combination of cash and common stock of the Company.
(See Note 6(b)) The value of the shares of common stock of the Company issued or
reserved for issuance was approximately $25,000, based on a weighted average
market price, as defined, of the Company's freely tradable shares. The shares of
common stock issued in March 1997 and in January 1998 were not freely tradable
due to selling restrictions. Therefore, for purposes of calculating the
aggregate consideration paid, the value of such shares was recorded at a
discounted value at the time of issuance. The Stock Purchase Agreement provided
for a purchase price adjustment based on the change in the net assets of Folio
from the estimated value at December 31, 1996, through the date of closing. As a
result of this adjustment, the former stockholder of Folio forfeited 270,116
shares of common stock of the Company to be issued in the transaction.
Additional paid-in capital in the accompanying consolidated statements of
stockholders' equity included the value of the shares to be issued in
January 1998, net of the forfeited shares. The Company repaid $5,000 of the note
payable issued to Reed Elsevier in 1997 in connection with the Folio acquisition
with a $1,818 cash payment and $3,182 of common stock. The Company repaid the
remaining $5,000 note payable in cash in March 1999. For financial statement
purposes, this acquisition was accounted for as a purchase, and accordingly, the
results of operations of Folio subsequent to March 7, 1997, are included in the
Company's consolidated statements of operations. For tax purposes, this
transaction will be treated as a deemed asset purchase in accordance with the
Internal Revenue Code Section 338(h)(10).
The aggregate purchase price of $45,512 consisted of the following:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- --------
<S> <C>
Common stock................................................ $18,430
Cash paid................................................... 10,000
Note payable................................................ 10,000
Assumed liabilities......................................... 5,682
Acquisition costs........................................... 1,400
-------
Total purchase price.................................. $45,512
=======
</TABLE>
The purchase price was allocated based upon the fair value of the tangible
assets acquired. These allocations present the fair values determined by an
independent appraisal. The appraisal incorporated
51
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) ACQUISITIONS (CONTINUED)
proven valuation procedures and techniques in determining the fair value of each
intangible asset. The purchase price was allocated as follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- --------
<S> <C>
Current assets.............................................. $ 4,729
Property, plant and equipment............................... 6,605
Other assets................................................ 41
In-process research and development......................... 25,000
Other acquired intangible assets............................ 9,137
-------
Total purchase price.................................. $45,512
=======
</TABLE>
The in-process research and development has been expensed as a charge
against operations as of the closing of the transaction, and is included in the
accompanying 1997 consolidated statement of operations. The amount allocated to
in-process research and development relates to projects that had not yet reached
technological feasibility and that, until completion of development, have no
alternative future use. These projects were to require substantial development
and testing prior to reaching technological feasibility. However, there could be
no assurance that these projects would reach technological feasibility or
develop into products that would be sold profitably by the Company. The
technology acquired in the acquisition of Folio required substantial additional
development by the Company. The capitalized intangible assets are being
amortized over five to seven years. The Company recorded approximately $1,710,
$1,620 and $1,351 of amortization expense relating to these intangible assets
during 1999, 1998 and 1997, respectively. In 1999, the Company entered into an
exclusive worldwide marketing and distribution agreement with NextPage for the
Folio publishing products (see note 11).
(E) MISSION CRITICAL TECHNOLOGIES
On October 20, 1997, FutureTense acquired all the outstanding shares of
Mission Critical Technologies ("MCT"). MCT was engaged in the design,
development and distribution of software primarily to the publishing industry.
As payment of the purchase price, FutureTense (i) issued an aggregate of 128,748
shares of FutureTense's Series B redeemable convertible preferred stock valued
at $937 (ii) non-interest bearing note in the amount of $439. For financial
statement purposes, this acquisition was accounted for as a purchase, and
accordingly, the results of operations of MCT subsequent to October 20, 1997,
are included in the Open Market's consolidated statements of operations. The
aggregate purchase price of $2,556 consisted of the following:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- --------
<S> <C>
Series C redeemable convertible preferred stock............. $ 937
Note payable................................................ 439
Assumed liabilities......................................... 1,180
------
Total purchase price.................................. $2,556
======
</TABLE>
52
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) ACQUISITIONS (CONTINUED)
The purchase price was allocated based upon the fair value of the tangible
and intangible assets acquired. These allocations represent the fair values
determined by an appraisal. The appraisal incorporated proven valuation
procedures and techniques in determining the fair value of each intangible
asset. The purchase price has been allocated as follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- --------
<S> <C>
Cash........................................................ $ 51
Current assets.............................................. 261
Property plant and equipment................................ 235
Purchased software.......................................... 233
In-process research & development........................... 428
Other acquired intangible assets............................ 1,348
------
Total assets acquired................................. $2,556
======
</TABLE>
The in-process research and development has been expensed as a charge
against operations as of the closing of the transaction, and is included in the
accompanying 1997 consolidated statement of operations. The amount allocated to
in-process research and development relates to projects that had not yet reached
technological feasibility and that, until completion of development, have no
alternative future use. The technology acquired in the acquisition of MCT
required substantial additional development by the Company. These projects were
to require substantial development and testing prior to reaching technological
feasibility. However, there could be no assurance that these projects would
reach technological feasibility or develop into products that would be sold
profitably by the Company. The intangible assets are being amortized over the
estimated useful life of three years. The Company recorded approximately $991,
$527 and $62 of amortization expense relating to these intangible assets during
1999, 1998 and 1997, respectively.
(5) INTANGIBLE ASSETS
Intangible assets consist principally of goodwill and the value of acquired
technology. These intangibles were obtained from our acquisition of Folio,
ICentral and Mission Critical Technologies. The Company amortizes these
intangibles over their estimated useful lives as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED -------------------
ACQUISITION USEFUL LIFE 1999 1998
- ----------- ------------ -------- --------
<S> <C> <C> <C>
Folio........................................ 5 to 7 years $ 9,137 $ 9,137
ICentral..................................... 5 to 7 years 6,300 6,300
Mission Critical Technologies................ 3 years 1,581 1,581
------- --------
Total intangible assets 17,018 17,018
Less: Accumulated amortization (8,361) (4,400)
------- --------
Net intangible assets $ 8,657 $ 12,618
======= ========
</TABLE>
53
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) LONG-TERM OBLIGATIONS
(A) LINE-OF-CREDIT ARRANGEMENT
The Company has an unsecured credit facility arrangement with a bank, which
provides up to $15,000 in financing 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 (8.5% at December 31, 1999). The Company is
required to comply with certain restrictive covenants under this agreement and
the line is collateralized by the Company's accounts receivable. The Company was
in compliance with all such covenants at December 31, 1999. The outstanding
balance was $10,350 under this facility as of December 31, 1999. This line of
credit expires September 20, 2000 and is subject to annual renewal.
(B) NOTES PAYABLE
In April 1996, May 1997 and September 1998, the Company entered into
agreements with a bank to borrow up to $250, $250 and $400, respectively, for
equipment purchases. The agreements expired in April 1997, May 1997 and
June 1999, respectively, at which time all amounts outstanding were converted
into three-year term loans. Outstanding amounts bore interest at the prime rate
plus 1.5%, 1.5% and 1.25%, respectively. The total principal amounts outstanding
were $0 and $460 at December 31, 1999 and 1998, respectively. In connection with
these notes payable, the Company issued a warrant to purchase 1,317 shares of
common stock at $3.80 per share.
In connection with the acquisition of Folio, (See Note 4(d)) the Company
issued an 8%, $10,000 promissory note payable to Reed Elsevier. The note was
payable in either cash or shares of common stock of the Company. During 1998,
the Company made a $5,000 payment on the note comprised of cash of $1,818 and
220,701 shares of common stock valued at $3,182. The balance of the note payable
was paid in cash in March 1999.
(C) MORTGAGE
In July 1998, the Company entered into a $2,800 mortgage of its 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.
(D) OBLIGATIONS UNDER LICENSE AGREEMENT
During 1994, the Company entered into a license agreement with a university
to utilize certain patented computer software. The Company expensed the present
value of the future commitments under contract, $217, as a component of research
and development expense during 1994. The balance of the obligation was $47 and
$90 at December 31, 1999 and 1998, respectively. The final installment is
scheduled to be repaid in 2000.
54
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) LONG-TERM OBLIGATIONS (CONTINUED)
The combined future maturities of the mortgage and the license agreement as
of December 31, 1999 are outlined in the following table:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ --------
<S> <C>
2000........................................................ $ 108
2001........................................................ 68
2002........................................................ 74
2003........................................................ 2,515
------
2,765
Less Current Portion........................................ 108
------
Total long-term obligations................................. $2,657
======
</TABLE>
(7) INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, ACCOUNTING FOR
INCOME TAXES, the objective of which is to recognize the amount of current and
deferred income taxes payable or refundable at the date of the financial
statements as a result of all events that have been recognized in the
accompanying consolidated financial statements, as measured by enacted tax laws.
The provision for income taxes for the years ended December 31, 1999, 1998
and 1997 consists of foreign income and withholding taxes.
At December 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $119,000, which expire through
2006 - 2019. The Company also has certain tax credits available to offset future
federal and state income taxes, if any. Net operating loss carryforwards and
credits are subject to review and possible adjustments by the Internal Revenue
Service and may be limited in the event of certain cumulative changes in excess
of 50% in the ownership interests of significant stockholders over a three-year
period. The Company believes it has experienced a change in ownership in excess
of 50%. The Company does not believe that this change in ownership will
significantly impact the Company's ability to utilize its net operating loss
carryforwards.
The components of the Company's deferred tax asset are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Net operating loss carryforwards........................ $ 47,463 $ 43,800
Amortization of intangible assets....................... 9,563 9,859
Tax credit carryforwards................................ 2,894 1,639
Temporary differences................................... 1,200 2,057
-------- --------
Total deferred tax assets............................... 61,120 57,355
Less--valuation allowance............................... (61,120) (57,355)
-------- --------
Net deferred tax assets................................. $ -- $ --
======== ========
</TABLE>
55
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(7) INCOME TAXES (CONTINUED)
It is the Company's objective to become a profitable enterprise and to
realize the benefits of its deferred tax assets. However, in evaluating the
realizability of these deferred tax assets, management has considered the
Company's operating history, the volatility of the market in which it competes,
the operating losses incurred to date, and believes that given the significance
of this evidence, a full valuation reserve against its deferred tax assets is
required as of December 31, 1999 and 1998.
(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(A) PREFERRED STOCK
In April 1996, the Company's Board of Directors authorized the issuance of
up to 2,000,000 shares of $.10 par value preferred stock. At December 31, 1999,
no shares are issued and outstanding.
In connection with the merger with FutureTense, which was accounted for as a
pooling of interest, all outstanding shares of FutureTense preferred stock were
exchanged for the Company's common stock. The shares of Series A, B, C and D
Preferred Stock issued were as follows:
<TABLE>
<CAPTION>
SHARES
OF OPEN
MARKET
DESCRIPTION OF NUMBER OF PRICE PER GROSS COMMON
PREFERRED STOCK DATE SHARES SHARE PROCEEDS STOCK
--------------- ------------------------------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Series A February 1996 380,651 $3.15 $1,199,050 730,850
Series B July 1996 and October 1997 754,178 7.28 5,486,645 1,448,022
Series C February 1998 and June 1998 711,842 7.29 5,189,328 1,366,737
Series D December 1998 and February 1999 5,436,837 1.48 8,049,782 2,087,745
</TABLE>
The Series A, B, C and D Preferred Stock had the following rights,
preferences and privileges. The Series A, B, C and D Preferred shareholders had
liquidation preference over common stock in the event of a liquidation,
dissolution or winding up of the Company. The Series A, B, C and D Preferred
shareholders were entitled to receive dividends at the defined dividend rate,
when and if declared by the Board of Directors. The Company was required to
redeem the Series A, B, C and D Preferred Stock for the redemption price plus
any declared but unpaid dividends beginning February 10, 2002. At the option of
the holder, the Company was required to convert the preferred stock into common
stock based upon the conversion ratio, as defined. The preferred shareholders
were entitled to vote with the common stockholders on an as converted basis. The
Series A, B, C and D Preferred shareholders also had the right of first refusal
to purchase any new securities offered by the Company, as defined. These rights,
preferences and privileges terminated upon the consummation of the merger
between the Company and FutureTense.
(B) COMMON STOCK RESERVED
Common stock reserved for issuance at December 31, 1999 consisted of the
following:
<TABLE>
<S> <C>
Stock Incentive Plan.................................... 14,986,000
Warrants................................................ 336,045
----------
15,322,045
==========
</TABLE>
56
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
(C) PRIVATE PLACEMENTS
In June 1998, Intel Corporation made an investment in the Company,
purchasing 335,852 unregistered shares of the Company's common stock for an
aggregate purchase price of $5,000. The Company's content management product
line (IPS) currently supports the Intel environment and the Company will
continue to migrate appropriate commerce features from Transact to this
environment running on top of IPS. The Intel support will include the Itanium
(IA-64) processor.
In July 1998, CMG Information Services, Inc., an investor and developer of
Internet companies ("CMG") and Capital Ventures International, a fund managed by
Heights Capital Management ("CVI"), made a $20,000 equity investment in the
Company. Pursuant to the terms of the agreements, the Company issued an
aggregate of 1,545,893 shares of common stock of the Company to CMG and CVI at a
price of $12.94 per share. In addition, the Company issued to CMG and CVI
warrants to purchase 334,728 shares of common stock at a price of $16.43 per
share which expire on July 30, 2003. The Company filed a registration statement
on Form S-3, covering all such shares of common stock, which was declared
effective by the Securities and Exchange Commission on August 13, 1998.
(D) STOCKHOLDERS' RIGHTS
In January 1998, the Company's Board of Directors adopted a Shareholder
Protection Rights Plan declaring a dividend of one right for each share of the
Company's common stock outstanding at the close of business on February 12,
1998. The rights entitle the Company's shareholders to purchase one
one-thousandth of a share of a series of junior participating preferred stock of
the Company at an exercise price of $65.00 per share. The rights become
exercisable in the event that another party acquires or announces its intention
to acquire beneficial ownership of 18% or more of the Company's common stock.
Such percentage may, at the Board's discretion, be lowered, although in no event
may it be lower than 10%. In the event of such an acquisition or similar event,
each right, except those owned by the acquirer, will enable the holder of the
right to purchase that number of common shares of the Company which equals the
exercise price of the right divided by one-half of the market price of the
common stock. In addition, if the Company is involved in a merger or other
transaction with another party in which it is not the surviving corporation, or
it sells or transfers 50% or more of its assets or earning power to another
party, each right will entitle its holder to purchase that number of shares of
common stock of the other party which equals the exercise price of the right
divided by one-half of the market price of such common stock. The rights expire
ten years from the date of the grant.
(E) COMMON STOCK
At December 31, 1999, the Company had outstanding 1,703,998 shares of common
stock which are subject to restriction agreements (the "Restriction Agreements")
under the 1996 Incentive Plan. Pursuant to the Restriction Agreements, the
Company has the right to repurchase any unvested shares of common stock in the
event of termination of employment with cause, as defined, or due to
stockholder's voluntary resignation with the Company at 25% of the then-current
fair market value of the common stock. Shares subject to the Restriction
Agreements vest quarterly over a five year period commencing December 1995,
subject to certain acceleration provisions. In connection with the consummation
of the merger of
57
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
FutureTense the restrictions on these shares were accelerated and then converted
into shares of the Company's common stock.
During 1996, FutureTense issued 1,057,786 shares of restricted common stock
to certain employees and consultants. The estimated value of these shares
totaled $110 and was recorded as deferred compensation and is being amortized as
compensation expense over the vesting period of the restricted common stock.
In 1997, as a result of the resignation of one of the founding stockholders
of FutureTense who was a party to a Restriction Agreement, FutureTense
repurchased 268,800 shares of unvested common stock for $20. A compensation
charge of $19 was recorded for the difference between the original cost and the
repurchase price.
In July 1998, 7,918 shares of unvested restricted stock, granted to a
consultant in 1996, were cancelled. The deferred compensation associated with
the grant was not significant at the date of cancellation.
(F) STOCK OPTION PLANS
During 1994, the Company's Board of Directors adopted the 1994 Stock
Incentive Plan (the 1994 Incentive Plan). Under the Incentive Plan, as amended,
the Company has reserved and may issue up to 19,201,000 shares of common stock
or options to purchase common stock. As of December 31, 1999, there were
2,158,000 shares available for issuance under the 1994 Incentive Plan.
In September 1996, FutureTense's Board of Directors adopted the 1996
FutureTense Plan (the 1996 Incentive Plan) under which 1,125,000 shares of
common stock are reserved for issuance to employees, officers, directors and
consultants upon the exercise of options granted under the Plan. As of
December 31, 1999, there were 20,000 shares available for issuance under the
1996 Incentive Plan.
In August 1999, the Company's Board of Directors adopted the the 1999 Stock
Incentive Plan (the 1999 Incentive Plan). Under the Incentive Plan, the Company
has reserved and may issue up to 4,000,000 shares of common stock or options to
purchase common stock. As of December 31, 1999, there were 4,000,000 shares
available for issuance under the 1999 Incentive Plan.
Under the terms of the above mentioned Incentive Plans, the Board of
Directors may grant incentive stock options or non-qualified stock options to
purchase shares of the Company's common stock. The purchase price and vesting
schedule applicable to each option grant are determined by the Board of
Directors. Generally, options vest over a four-year period and expire 10 years
from the date of grant.
In 1996, the Company's Board of Directors approved the 1996 Director Option
Plan (the Director Plan) whereby the Company has reserved and may issue up to
200,000 shares of common stock. Under the terms of the Director Plan, each newly
elected director will be granted an option to purchase 20,000 shares of common
stock. In addition, commencing with the 1998 annual meeting of the stockholders
and for every annual meeting of stockholders thereafter, each director who is
not a founder or employee of the Company will be granted an option to purchase
6,000 shares of common stock. Generally, these options vest over a four-year
period and expire 10 years from the date of grant. The vesting of these options
will accelerate upon a change of control, as defined. At December 31, 1999,
there were 84,400 options available for grant under this plan.
58
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
The Company recorded deferred compensation when stock options were granted
to employees at an exercise price per share that is less than the fair market
value on the date of the grant. Deferred compensation was recorded in an amount
equal to the excess of the fair market value per share over the exercise price
multiplied by the number of shares purchasable under the option. The Company
recorded $399, $41 and $138 of deferred compensation expense in 1999, 1998 and
1997, respectively, which represented the difference betweeen the fair market
value of the common stock on the date of grant, for accounting purposes, and the
exercise price.
In November 1998, the Compensation Committee of the Board of Directors
authorized a Stock Option Exchange Program (the Program). Under the terms of the
program all current employees, excluding certain officers subject to
Regulation 16 had the option to request that the Company cancel their existing
options and replace them with a new option. Options for a total of 2,258,153
shares were surrendered under the program by employees and exchanged for new
options at the new option exercise price and vesting schedule. The new exercise
price was equal to the fair market value of the Company's common stock on
November 13, 1998, or $7.875. The repriced shares were subject to certain
selling restrictions though 1999. These repriced options are reflected as grants
and cancellations in the 1998 stock option activity below.
The following is a summary of the stock option activity for all plans:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
PRICE PRICE PRICE
NUMBER OF PER NUMBER OF PER NUMBER OF PER
SHARES SHARE SHARES SHARE SHARES SHARE
---------- -------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........ 6,622,000 $ 5.47 6,741,000 $ 5.94 5,137,000 $3.29
Granted............................... 5,022,000 13.31 5,129,000 11.22 3,083,000 9.88
Exercised............................. (1,323,000) 4.66 (977,000) 3.53 (710,000) 0.50
Canceled.............................. (2,062,000) 9.77 (4,271,000) 10.98 (769,000) 8.97
---------- ------ ---------- ------ --------- -----
Outstanding at end of year.............. 8,259,000 $ 9.29 6,622,000 $ 5.47 6,741,000 $5.94
Options available for grant at end of
year.................................. 6,262,000 5,198,000 1,602,000
Options exercisable..................... 2,963,000 2,239,000 2,194,000
Weighted-average fair value of options
granted during the year............... $ 13.31 $ 11.22 $ 9.88
========== ========== =========
</TABLE>
59
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISEABLE
------------------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
NUMBER CONTRACTUAL PRICE NUMBER PRICE
OUTSTANDING LIFE PER SHARE EXERCISABLE PER SHARE
----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.17-- 0.17............................ 15,000 5.15 $ 0.17 15,000 $ 0.17
$ 0.25-- 0.25............................ 1,061,000 5.85 0.25 1,061,000 0.25
$ 0.52-- 0.52............................ 1,008,000 8.14 0.52 763,000 0.52
$ 1.50-- 7.50............................ 174,000 7.98 6.11 64,000 5.35
$ 7.81-- 7.88............................ 1,371,000 7.83 7.88 605,000 7.87
$ 9.38--11.25............................ 466,000 7.14 10.56 312,000 10.46
$11.50--11.50............................ 939,000 9.18 11.50 -- --
$11.71--12.88............................ 1,020,000 9.24 12.25 65,000 12.03
$12.94--13.01............................ 116,000 9.59 12.96 28,000 13.00
$13.13--44.00............................ 2,089,000 9.71 16.45 50,000 13.46
--------- --------- ------
8,259,000 $ 9.29 2,963,000 $ 3.66
</TABLE>
(G) THE 1996 EMPLOYEE STOCK PURCHASE PLAN
In April 1996, the Company's Board of Directors approved the 1996 Employee
Stock Purchase Plan (the Purchase Plan) whereby, the Company has reserved and
may issue up to an aggregate of 750,000 shares of its common stock for issuance
in accordance with the Purchase Plan. Under the terms of the Purchase Plan,
employees who meet certain eligibility requirements may purchase shares of the
Company's common stock at 85% of the closing price of the common stock on the
first or last day of each six-month offering period, whichever is lower. In
1999, 1998 and 1997 the Company issued 93,000, 132,000 and 59,000 shares,
respectively for gross proceeds of approximately $1,125, $1,147 and $658,
respectively. At December 31, 1999, there were 466,000 shares available for
issuance under the purchase plan.
(H) PRO FORMA DISCLOSURE OF STOCK-BASED COMPENSATION
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
measurement of the fair value of stock options or warrants granted to employees
to be included in the statement of operations or, alternatively, disclosed in
the notes to consolidated financial statements. The Company has determined that
it will continue to account for stock-based compensation for employees under
Accounting Principles Board Opinion No. 25 and elect the disclosure-only
alternative under SFAS No. 123. The Company records the fair market value of
stock options and warrants granted to nonemployees in the consolidated statement
of operations. The Company has computed the pro forma disclosures required under
SFAS
60
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
No. 123 for stock options granted in 1999, 1998 and 1997 using the Black-Scholes
option pricing model. The weighted average assumptions used for 1999, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate........................... 5.96% 4.91% 6.88%
Expected dividend yield........................... -- -- --
Expected life..................................... 6 years 6 years 7 years
Expected volatility............................... 103% 108% 70%
</TABLE>
The total value of the options granted to employees and stock issued under
the employee stock purchase plan during 1999, 1998 and 1997 was computed as
approximately $49,664, $32,320 and $16,962, respectively. Of these amounts
approximately $17,114, $7,870 and $8,924 would be charged to operations for the
years ended December 31, 1999, 1998 and 1997, respectively. The remaining
amount, approximately $36,594, would be amortized over the remaining vesting
periods. The pro forma effect of these option grants for the years ended
December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss, as reported.......................... $(19,780) $(36,970) $(62,460)
======== ======== ========
Net loss, pro forma............................ $(36,894) $(44,840) $(71,384)
======== ======== ========
Net loss per share--basic and diluted
As reported.................................... $ (0.46) $ (0.98) $ (1.87)
======== ======== ========
Pro forma...................................... $ (0.86) $ (1.19) $ (2.14)
======== ======== ========
</TABLE>
The resulting pro forma compensation expense may not be representative of
the amount to be expected in future years as the pro forma expense may vary
based upon the number of options granted. The Black-Scholes option pricing model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, option pricing
models require the input of highly subjective assumptions, including expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
61
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(9) COMMITMENTS
(A) FACILITIES
The Company leases its facilities and certain equipment under operating
leases that expire through February 2010. The future minimum lease commitments
at December 31, 1999, net of sublease income, were as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, COMMITMENTS
- ------------------------ -----------
<S> <C>
2000........................................................ $ 3,438
2001........................................................ 3,590
2002........................................................ 3,443
2003........................................................ 3,225
2004........................................................ 3,123
Thereafter.................................................. 16,786
-------
$33,605
=======
</TABLE>
Rent expense included in the accompanying consolidated statements of
operations was approximately $2,585, $3,171 and $2,775 for the years ended
December 31, 1999, 1998 and 1997, respectively. The Company subleased a portion
of its Burlington office space and its Cambridge facility during 1999.
(B) SALE OF ACCOUNTS RECEIVABLE
In 1998, the Company had a non-recourse factoring agreement under which it
could factor up to $8,000 of qualified accounts receivable, as defined. The
Company sold approximately $3,000 of accounts receivable during the second
quarter of 1998. There was $1,750 of accounts receivable outstanding under the
factoring agreement at December 31, 1998, which was collected in the first
quarter of 1999. The Company recorded these transactions as a sale of financial
assets in accordance with SFAS No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING
OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES, as it surrendered control
over these receivables upon transfer.
(10) RELATED PARTY TRANSACTIONS
The Company has entered into agreements with certain stockholders that
provide for product and service revenues. The Company believes that the terms of
these transactions are on terms no less favorable to the Company than could be
obtained from unaffiliated third parties. The Company recognized product and
service revenues from related parties of approximately $259, $208 and $6,129,
during the years ended December 31, 1999, 1998 and 1997, respectively. The
Company had related party accounts receivable of approximately $71 and $5, and
related party deferred revenue of approximately $41 and $196 included in the
accompanying consolidated balance sheets as of December 31, 1999 and 1998,
respectively, from certain stockholders.
(11) EXCLUSIVE DISTRIBUTION AGREEMENT
On June 9, 1999, the Company announced the formation of a strategic
partnership with NextPage LLC. Under the terms of the agreement, as amended on
September 30, 1999, in exchange for a three year exclusive worldwide marketing
and distribution right for the Folio publishing products,
62
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(11) EXCLUSIVE DISTRIBUTION AGREEMENT (CONTINUED)
NextPage will pay the Company a minimum of $14,000 in guaranteed royalties,
during this period commencing July 1, 1999. The Company is recognizing these
royalties ratably over the three year period. At the end of the three-year
period NextPage has an option to obtain all rights, title and interests to the
Folio products for a purchase price equal to such products' estimated
fair-market value. In addition, the Company received $3,000 in software license
fees from NextPage in exchange for NextPage's non-exclusive, worldwide rights to
market and distribute the Company's commerce software products to the commercial
publishing industry. In connection with this distribution agreement, the Company
recorded $5,441 in commerce and other product revenues during 1999.
(12) EMPLOYEE BENEFIT PLAN
In October 1995, the Company adopted a 401(k) savings and investment plan
(the 401(k) Plan) for eligible employees. Each participant may elect to
contribute up to 15% of his or her compensation for the plan year, subject to
certain limitations, as defined. Company matching contributions are made to the
401(k) Plan at the discretion of the Board of Directors. To date there have been
no discretionary contributions made by the Company to the 401(k) Plan.
(13) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Payroll and related expenses.............................. $ 6,002 $ 5,822
Professional and consulting fees.......................... 552 1,702
All other................................................. 7,219 6,643
------- -------
$13,773 $14,167
======= =======
</TABLE>
(14) DEFERRED REVENUES
Deferred revenues consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Future product deliverables................................. $ 149 $ 291
Prepaid service revenues.................................... 6,153 5,181
------ ------
$6,302 $5,472
====== ======
</TABLE>
63
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
64
<PAGE>
PART III
The information required by Items 10 through 13 are incorporated by
reference to our Definitive Proxy Statement for our 2000 Annual Meeting of
Stockholders scheduled for May 16, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Accountants
Consolidated Balance Sheet as of December 31, 1999 and 1998
Consolidated Statement of Operations for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statement of Redeemable Convertible Preferred Stock and
Stockholders' Equity for the years ended December 31, 1999, 1998 and
1997
Consolidated Statement of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
Exhibits. The Exhibits listed in the Exhibit Index immediately
preceding such Exhibits are filed as part of this Annual Report on
Form 10-K.
(b) During the fouth quarter of 1999, the Company filed the following report
on Form 8-K:
Reports on Form 8-K filed during the fourth quarter of 1999
Current report on Form 8-K filed with Securities and Exchange
Commission on November 1, 1999
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
OPEN MARKET, INC.
By: /s/ RON MATROS
-----------------------------------------
Ron Matros
PRESIDENT, CHIEF EXECUTIVE OFFICER
</TABLE>
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated below on the dates indicated.
<TABLE>
<S> <C>
/s/ RONALD J. MATROS March 30, 2000
-------------------------------------------
Ronald J. Matros
President, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ BETTY SAVAGE March 30, 2000
-------------------------------------------
Betty Savage
Vice President and Chief
Financial Officer (Principal Financial Officer)
/s/ ANNMARIE RUSSELL March 30, 2000
-------------------------------------------
Annmarie Russell
Vice President, Finance
(Chief Accounting Officer)
/s/ GULREZ ARSHAD March 30, 2000
-------------------------------------------
Gulrez Arshad
Director
/s/ THOMAS H. BRUGGERE March 30, 2000
-------------------------------------------
Thomas H. Bruggere
Director
</TABLE>
66
<PAGE>
<TABLE>
<S> <C>
/s/ SHIKHAR GHOSH March 30, 2000
-------------------------------------------
Shikhar Ghosh
Director
/s/ HARLAND LAVIGNE March 30, 2000
-------------------------------------------
Harland LaVigne
Director
/s/ PAUL SAGAN March 30, 2000
-------------------------------------------
Paul Sagan
Director
/s/ WILLIAM S. KAISER March 30, 2000
-------------------------------------------
William S. Kaiser
Director
/s/ EUGENE F. QUINN March 30, 2000
-------------------------------------------
Eugene F. Quinn
Director
</TABLE>
67
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Open Market, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Open Market, Inc. and subsidiaries included in this
10-K and have issued our report thereon dated January 28, 2000. Our audits were
made for the purpose of forming an opinion on the basic consolidated financial
statements taken as a whole. This schedule is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, fairly states, in all material respects, the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 28, 2000
68
<PAGE>
SCHEDULE II
OPEN MARKET, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT ADDITIONS CHARGED TO BALANCE AT
BEGINNING DUE TO COSTS AND AMOUNTS END OF
OF PERIOD ACQUISITIONS EXPENSES WRITTEN OFF PERIOD
---------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
ACCOUNTS RECEIVABLE ALLOWANCES
Year Ended December 31, 1999.............. $2,937 -- 1,911 718 $4,130
====== ====== ====== ==== ======
Year Ended December 31, 1998.............. $1,581 -- 1,867 512 $2,936
====== ====== ====== ==== ======
Year Ended December 31, 1997.............. $ 301 530 1,483 733 $1,581
====== ====== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
OF PERIOD ADDITIONS DEDUCTIONS OTHER PERIOD
---------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
RESTRUCTURING CHARGES
Year Ended December 31, 1999............. $1,088 -- 1,088 -- $ --
====== ====== ====== ==== ======
Year Ended December 31, 1998............. $ -- 2,042 954 -- $1,088
====== ====== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
OF PERIOD ADDITIONS DEDUCTIONS OTHER PERIOD
---------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
NON-RECURRING CHARGES
Year Ended December 31, 1999............. $ -- 389 -- -- $ 389
====== ====== ====== ==== ======
</TABLE>
69
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated July 14, 1999 by and
among the Registrant, OM/SA Acquisition Corporation and
FutureTense, Inc. (1)
2.2 Form of Escrow Agreement entered into by and among the
Registrant, Jarrett Collins, as representative of the
stockholders of FutureTense, Inc. and State Street Bank and
Trust Company (1)
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.(1)
3.2 Amended and Restated By-laws of the Registrant.(2)
4.1 Specimen Certificate for shares of Common Stock, $.001 par
value, of the Registrant.(2)
4.2 Form of Rights Certificate.(3)
4.3 Rights Agreement, dated as of January 26, 1998, between the
Registrant and BankBoston, N.A.(4)
4.4 Amendment No. 1, dated as of February 17, 1999, to the
Rights Agreement, dated as of January 26, 1998, between the
Registrant and BankBoston N.A., as Rights Agent.(5)
10.1 1994 Stock Incentive Plan, as amended.(2)#
10.2 1996 Employee Stock Purchase Plan.(2)#
10.3 1996 Director Option Plan.(2)#
10.4 1999 Stock Incentive Plan.(1)#
10.5 FutureTense, Inc. 1996 Stock Incentive Plan.#*
10.6 Employment Agreement between the Registrant and Gary B.
Eichhorn, dated November 7, 1995.(2)#
10.7 Amendment No. 1, dated as of April 15, 1998, to Employment
Agreement between the Registrant and Gary B. Eichhorn, dated
November 7, 1995.(6)#
10.8 Invention and Non-Disclosure Agreement dated November 10,
1995, between the Registrant and Gary B. Eichhorn.(2)
10.9 Lease between Wayside Realty Trust and Registrant dated
March 11, 1997.(7)
10.10 Loan and Security Agreement between Silicon Valley Bank and
Registrant dated September 26, 1997.(8)
10.11 Export-Import Bank Loan and Security Agreement between
Silicon Valley Bank and Registrant dated September 26,
1997.(8)
10.12 Securities Purchase Agreement, dated as of July 30, 1998, by
and between the Registrant and CMG Information Services,
Inc.(9)
10.13 Securities Purchase Agreement dated as of July 30, 1998, by
and between the Registrant and Capital Ventures
International.(9)
10.14 Stock Purchase Warrant, dated July 30, 1998, by and between
the Registrant and CMG Information Services, Inc.(9)
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.15 Stock Purchase Warrant, dated July 30, 1998, by and between
the Registrant and Capital Ventures International.(9)
10.16 Registration Rights Agreement, dated as of July 30, 1998, by
and between the Registrant and CMG Information Services,
Inc.(9)
10.17 Registration Rights Agreement, dated as of July 30, 1998, by
and between the Registrant and Capital Ventures
International.(9)
10.18 Form of Executive Retention Agreement entered into by the
Registrant on one hand, and each of the following executive
officers of the Registrant, Ron Matros, Betty Savage, Paul
Esdale, Carol Mitchell, B.C. Krishna, Gregory Pope and
Michael S. Messier, on the other hand.(7)
10.19+ Master Software License and Distribution Agreement, dated
June 30, 1999 between NextPage L.C. and the Registrant.(10)
10.20+ Amended Master Software License and Distribution Agreement,
dated September 30, 1999 between NextPage L.C. and the
Company.(11)
10.21* Form of Employment Agreement entered into by the Registrant
on one hand, and the following executive officer of the
Registrant: Ronald J. Matros.
10.22* Form of Employment Agreement entered into by the Registrant
on one hand, and the following executive officer of the
Registrant: B.C. Krishna.
21.1 * Subsidiaries of the Registrant.
23.1 * Consent of Arthur Andersen LLP.
23.2 * Consent of PricewaterhouseCoopers LLP.
27.1 * Financial Data Schedule.
</TABLE>
- ------------------------
* Filed herewith.
# Denotes management contract or compensatory plan or arrangement.
^ Confidential treatment requested as to certain portions which have been
omitted and filed separately with the Securities and Exchange Commission.
+ Confidential materials ommitted and filed separately with the Securities and
Exchange Commission.
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-4, as amended (File No. 333-84801).
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-1, as amended. (File No. 333-03340).
(3) Incorporated by reference to the Registrant's Form 8-A filed January 30,
1998.
(4) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated January 30, 1998.
(5) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated February 17, 1999.
(6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998.
(7) Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997.
71
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
</TABLE>
(8) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997.
(9) Incorporated by reference to the Registrant's Current Report on Form 8-K,
dated July 30, 1998.
(10) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999.
(11) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999.
72
<PAGE>
Exhibit 10.5
AMENDED MAY 18, 1998
AMENDED SEPTEMBER 11, 1998
FUTURETENSE, INC.
1996 STOCK INCENTIVE PLAN
1. PURPOSE
The purpose of this 1996 Stock Incentive Plan (the "Plan") is to
encourage key employees, directors, and consultants of FutureTense, Inc. (the
"Company") and its Subsidiaries (as hereinafter defined) to continue their
association with the Company by providing favorable opportunities for them to
participate in the ownership of the Company and in its future growth through the
granting of stock, stock options, and other rights to compensation in amounts
determined by the value of the Company's stock. The term "Subsidiary" as used in
the Plan means a corporation of which the Company owns, directly or indirectly
through an unbroken chain of ownership, fifty percent (50%) or more of the total
combined voting power of all classes of stock.
2. ADMINISTRATION OF THE PLAN
The Plan shall be administered by a committee (the "Committee")
consisting of two or more members of the Company's Board of Directors (the
"Board"), or by the Board itself. The Committee shall from time to time
determine to whom options or other rights shall be granted under the Plan,
whether options granted shall be incentive stock options ("ISOs") or
nonqualified stock options ("NSOs"), the terms of the options or other rights,
and the number of shares which may be granted under options. The Committee shall
report to the Board the names of individuals to whom stock or options or other
rights are to be granted, the number of shares covered and the terms and
conditions of each grant. The determinations described in this paragraph may be
made by the Committee or by the Board, as the Board shall direct in its
discretion, and references in the Plan to the Committee shall be understood to
refer to the Board in any such case.
The Committee shall select one of its members as Chairman and shall
hold meetings at such times and places as it may determine. A majority of the
Committee shall constitute a quorum, and acts of the Committee at which a quorum
is present, or acts reduced to or approved in writing by all the members of the
Committee, shall be the valid acts of the Committee. The Committee shall have
the authority to adopt, amend and rescind such rules and regulations as, in its
opinion, may be advisable in the administration of the Plan. All questions of
interpretation and application of such rules and regulations, of the Plan and of
options granted thereunder (the "Options"), and of Common Stock transferred
subject to restrictions under the Plan ("Restricted Stock") and stock
appreciation rights granted under the Plan ("SARs") (collectively, "Other
Rights") shall be subject to the determination of the Committee, which shall be
final and binding. The Plan shall be administered in such a manner as to permit
those Options granted hereunder
<PAGE>
and specially designated under Section 5 hereof as an ISO to qualify as
incentive stock options as described in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").
3. STOCK SUBJECT TO THE PLAN
The total number of shares of stock which may be subject to Options and
Other Rights under the Plan shall be 3,217,720 shares of the Company's Common
Stock, $0.0002 par value per share, from either authorized but unissued shares
or treasury shares. The number of shares stated in this Section 3 shall be
subject to adjustment in accordance with the provisions of Section 10. Shares of
Restricted Stock that fail to vest, and shares of Common Stock subject to an
Option that is neither fully exercised prior to its expiration or other
termination nor terminated by reason of the exercise of an SAR related to the
Option, shall again become available for grant under the terms of the Plan.
4. ELIGIBILITY
The individuals who shall be eligible for grant of Options and Other
Rights under the Plan shall be key employees and other individuals who render
services of special importance to the management, operation, or development of
the Company or a Subsidiary, and who have contributed or may be expected to
contribute materially to the success of the Company or a Subsidiary. ISOs shall
not be granted to any individual who is not an employee of the Company or a
Subsidiary. The term "Optionee," as used in the Plan, refers to any individual
to whom an Option or Other Right has been granted.
5. TERMS AND CONDITIONS OF OPTIONS
Every option shall be evidenced by a written Stock Option Agreement in
such form as the Committee shall approve from time to time, specifying the
number of shares of Common Stock that may be purchased pursuant to the Option,
the time or times at which the Option shall become exercisable in whole or in
part, whether the Option is intended to be an ISO or an NSO, and such other
terms and conditions as the Committee shall approve, and containing or
incorporating by reference the following terms and conditions:
(a) DURATION. The duration of each Option shall be as
specified by the Committee in its discretion; provided, however, that
no ISO shall expire later than ten (10) years from its date of grant,
and no ISO granted to an employee who owns (directly or under the
attribution rules of Section 424(d) of the Code) stock possessing more
than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or any Subsidiary shall expire later
than five (5) years from its date of grant.
(b) EXERCISE PRICE. The exercise price of each option shall be
any lawful consideration, as specified by the Committee in its
discretion; provided, however, that the price with respect to an ISO
shall be at least one hundred percent (100%) of the
<PAGE>
fair market value of the shares on the date on which the Committee
awards the Option, which shall be considered the date of grant of the
Option for purposes of fixing the price; and provided further that the
price with respect to an ISO granted to an employee who at the time of
grant owns (directly or under the attribution rules of Section 424(d)
of the Code) stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or of any
Subsidiary shall be at least one hundred ten percent (110%) of the fair
market value of the shares on the date of grant of the ISO. For
purposes of the Plan, except as may be otherwise explicitly provided in
the Plan or in any Stock Option Agreement, Restricted Stock Agreement,
SAR Agreement or similar document, the "fair market value" of a share
of Common Stock at any particular date shall be determined according to
the following rules: (i) if the Common Stock is not at the time listed
or admitted to trading on a stock exchange or the Nasdaq National
Market, the fair market value shall be the closing price of the Common
Stock on the date in question in the over-the-counter market, as such
price is reported in a publication of general circulation selected by
the Board and regularly reporting the price of the Common Stock in such
market; provided, however, that if the price of the Common Stock is not
so reported, the fair market value shall be determined in good faith by
the Board; or (ii) if the Common Stock is at the time listed or
admitted to trading on any stock exchange or the Nasdaq National
Market, then the fair market value shall be the mean between the lowest
and highest reported sale prices (or the lowest reported bid price and
the highest reported asked price) of the Common Stock on the date in
question on the principal exchange on which the Common Stock is then
listed or admitted to trading. If no reported sale of Common Stock
takes place on the date in question on the principal exchange or the
Nasdaq National Market, as the case may be, then the reported closing
sale price (or the reported closing asked price) of the Common Stock on
such date on the principal exchange or the Nasdaq National Market, as
the case may be, shall be determinative of fair market value.
(c) METHOD OF EXERCISE. To the extent that it has become
exercisable under the terms of the Stock Option Agreement, an Option
may be exercised from time to time by written notice to the Chief
Financial officer of the Company stating the number of shares with
respect to which the Option is being exercised and accompanied by
payment of the exercise price in cash or check payable to the Company
or, if the Stock Option Agreement so provides, other payment or deemed
payment described in this subsection 5 (c). Such notice shall be
delivered in person or by facsimile transmission to the Chief Financial
Officer of the Company or shall be sent by registered mail, return
receipt requested, to the Chief Financial Officer of the Company, in
which case delivery shall be deemed made on the date such notice is
deposited in the mail.
Alternatively, payment of the exercise price may be made:
(1) In whole or in part, in shares of Common Stock
already owned by the Optionee provided that such shares are
fully vested and free of all liens, claims, and encumbrances
of any kind; provided, further, that the Optionee may
<PAGE>
not make payment in shares of Common Stock that he acquired
upon the earlier exercise of any ISO, unless he has held the
shares until at least two (2) years after the date the ISO was
granted and at least one (1) year after the date the ISO was
exercised. If payment is made in whole or in part in shares of
Common Stock, then the Optionee shall deliver to the Company
certificates registered in his name representing a number of
shares of Common Stock legally and beneficially owned by him,
fully vested and free of all liens, claims, and encumbrances
of every kind and having a fair market value on the date of
delivery that is not greater than the exercise price, such
certificates to be duly endorsed, or accompanied by stock
powers duly endorsed, by the record holder of the shares
represented by such certificates. If the exercise price
exceeds the fair market value of the shares for which
certificates are delivered, the Optionee shall also deliver
cash or a check payable to the order of the Company in an
amount equal to the amount of that excess or, if the Stock
Option Agreement so provides, his promissory note as described
in the next following paragraph of this subsection 5(c); or
(2) In whole or in part by delivery of the
Optionee's recourse promissory note, in a form specified by
the Company, secured by the Common Stock acquired upon
exercise of the Option and such other security as the
Committee may require.
Alternatively, options may be exercised by means of a
"cashless exercise" procedure approved in all respects in advance by
the Committee, in which a broker: (i) transmits the option price to the
Company in cash or acceptable cash equivalents, either (1) against the
Optionee's notice of exercise and the Company's confirmation that it
will deliver to the broker stock certificates issued in the name of the
broker for at least that number of shares having a fair market value
equal to the option price, or (2) as the proceeds of a margin loan to
the Optionee; or (ii) agrees to pay the option price to the Company in
cash or acceptable cash equivalents upon the broker's receipt from the
Company of stock certificates issued in the name of the broker for at
least that number of shares having a fair market value equal to the
option price. The Optionee's written notice of exercise of an option
pursuant to a "cashless exercise" procedure must include the name and
address of the broker involved, a clear description of the procedure,
and such other information or undertaking by the broker as the
Committee shall reasonably require.
At the time specified in an Optionee's notice of exercise, the
Company shall, without issue or transfer tax to the Optionee, deliver
to him at the main office of the Company, or such other place as shall
be mutually acceptable, a certificate for the shares as to which his
option is exercised. If the Optionee fails to pay for or to accept
delivery of all or any part of the number of shares specified in his
notice upon tender of delivery thereof, his right to exercise the
Option with respect to those shares shall be terminated, unless the
Company otherwise agrees.
<PAGE>
(d) RELOAD OPTIONS. The Committee may, in its discretion,
provide in the terms of any Stock Option Agreement that if the Optionee
delivers shares of Common Stock already owned in full or partial
payment of the option price, or in full partial payment of the tax
withholding obligations incurred on account of the exercise of the
option, the Optionee shall, either automatically and immediately upon
such exercise, or in the discretion of the Committee upon such
exercise, be granted a new option (a "Reload Option") to purchase that
number of shares of Common Stock delivered by the Optionee to the
Company, on such terms and conditions as the Committee may determine
under the terms of the Plan. The exercise price for shares subject to a
Reload Option shall be not less than one hundred percent (100%) of the
fair market value of the shares on the date of grant of the Reload
Option, and the duration of a Reload Option shall be equal to the
unexpired term of the exercised Option on the date of exercise.
(e) NOTICE OF ISO STOCK DISPOSITION. The Optionee must notify
the Company promptly in the event that he sells, transfers, exchanges
or otherwise disposes of any shares of Common Stock issued upon
exercise of an ISO, before the later of (i) the second anniversary of
the date of grant of the ISO, and (ii) the first anniversary of the
date the shares were issued upon his exercise of the ISO.
(f) EFFECT OF CESSATION OF EMPLOYMENT. The Committee shall
determine in its discretion and specify in each Stock Option Agreement
the effect, if any, of the termination of the Optionee's employment
upon the exercisability of the Option.
(g) NO RIGHTS AS STOCKHOLDER. An Optionee shall have no rights
as a stockholder with respect to any shares covered by an option until
the date of issuance of a certificate to him for the shares. No
adjustment shall be made for dividends or other rights for which the
record date is earlier than the date the certificate is issued, other
than as required or permitted pursuant to Section 10.
(h) SUBSTITUTED OPTION. With the consent of the Optionee, the
Committee shall have the authority at any time and from time to time to
terminate any outstanding Option and grant in substitution for it a new
Option covering the same number or a different number of shares,
provided that the option price under the new option shall be no less
than the fair market value of the Common Stock on the date of grant of
the new Option.
6. STOCK APPRECIATION RIGHTS
The Committee may grant SARs in respect of such number of shares of
Common Stock subject to the Plan as it shall determine, in its discretion, and
may grant SARs either separately or in connection with Options, as described in
the following sentence. An SAR granted in connection with an Option may be
exercised only to the extent of the surrender of the related option, and to the
extent of the exercise of the related option the SAR shall terminate. Shares of
Common Stock covered by an Option that terminates upon the exercise of a related
SAR shall
<PAGE>
cease to be available under the Plan. The terms and conditions of an SAR related
to an Option shall be contained in the Stock Option Agreement, and the terms of
an SAR not related to any Option shall be contained in an SAR Agreement.
Upon exercise of an SAR, the Optionee shall be entitled to receive from
the Company an amount equal to the excess of the fair market value, on the
exercise date, of the number of shares of Common Stock as to which the SAR is
exercised, over the exercise price for those shares under a related Option or,
if there is no related Option, over the base value stated in the SAR Agreement.
The amount payable by the Company upon exercise of an SAR shall be paid in the
form of cash or other property (including Common Stock of the Company), as
provided in the Stock Option Agreement or SAR Agreement governing the SAR.
7. RESTRICTED STOCK
The Committee may grant or award shares of Restricted Stock in respect
of such number of shares of Common Stock, and subject to such terms or
conditions, as it shall determine and specify in a Restricted Stock Agreement.
A holder of Restricted Stock shall have all of the rights of a
stockholder of the Company, including the right to vote the shares and the right
to receive any cash dividends, unless the Committee shall otherwise determine.
Certificates representing Restricted Stock shall be imprinted with a legend to
the effect that the shares represented may not be sold, exchanged, transferred,
pledged, hypothecated or otherwise disposed of except in accordance with the
terms of the Restricted Stock Agreement and, if the Committee so determines, the
Optionee may be required to deposit the certificates with an escrow agent
designated by the Committee, together with a stock power or other instrument of
transfer appropriately endorsed in blank.
8. METHOD OF GRANTING OPTIONS AND OTHER RIGHTS
The grant of Options and Other Rights shall be made by action of the
Board at a meeting at which a quorum of its members is present, or by unanimous
written consent of all its members; provided, however, that if an individual to
whom a grant has been made fails to execute and deliver to the Committee a Stock
Option Agreement, SAR Agreement or Restricted Stock Agreement within thirty (30)
days after it is submitted to him, the Option or Other Rights' granted under the
agreement shall be voidable by the Company at its election, without further
notice to the Optionee.
9. REQUIREMENTS OF LAW
The Company shall not be required to transfer any Restricted Stock or
to sell or issue any shares upon the exercise of any Option or SAR if the
issuance of such shares will result in a violation by the Optionee or the
Company of any provisions of any law, statute or regulation of any governmental
authority. Specifically, in connection with the Securities Act of 1933, as
amended (the "Securities Act"), upon the transfer of Restricted Stock or the
exercise of any
<PAGE>
Option or SAR the Company shall not be required to issue shares unless the
Committee has received evidence satisfactory to it to the effect that the holder
of the Option or Other Right will not transfer such shares except pursuant to a
registration statement in effect under the Securities Act or unless an opinion
of counsel satisfactory to the Company has been received by the Company to the
effect that such registration is not required. Any determination in this
connection by the Committee shall be conclusive. The Company shall not be
obligated to take any other affirmative action in order to cause the transfer of
Restricted Stock or the exercise of an Option or SAR to comply with any law or
regulations of any governmental authority, including, without limitation, the
Securities Act or applicable state securities laws.
10. CHANGES IN CAPITAL STRUCTURE
In the event that the outstanding shares of Common Stock are hereafter
changed for a different number or kind of shares or other securities of the
Company, by reason of a reorganization, recapitalization, exchange of shares,
stock split, combination of shares or dividend payable in shares or other
securities, a corresponding adjustment shall be made by the Committee in the
number and kind of shares or other securities covered by outstanding Options and
Other Rights, and for which Options or Other Rights may be granted under the
Plan. Any such adjustment in outstanding Options or Other Rights shall be made
without change in the total price applicable to the unexercised portion of the
Option, but the price per share specified in each Stock Option Agreement or
agreement as to Other Rights shall be correspondingly adjusted; provided,
however, that no adjustment shall be made with respect to an ISO that would
constitute a modification as defined in Section 424 of the Code. Any such
adjustment made by the Committee shall be conclusive and binding upon all
affected persons, including the Company and all Optionees.
If while unexercised Options or SARs remain outstanding under the Plan
the Company merges or consolidates with a wholly owned subsidiary for the
purpose of reincorporating itself under the laws of another jurisdiction, the
optionees will be entitled to acquire shares of Common Stock of the
reincorporated Company upon the same terms and conditions as were in effect
immediately prior to such reincorporation (unless such reincorporation involves
a change in the number of shares or the capitalization of the Company, in which
case proportional adjustments shall be made as provided above) and the Plan,
unless otherwise rescinded by the Board, will remain the Plan of the
reincorporated Company.
Except as otherwise provided in the preceding paragraph, if while
unexercised Options or SARs remain outstanding under the Plan the Company merges
or consolidates with one or more corporations (whether or not the Company is the
surviving corporation), or is liquidated or sells or otherwise disposes of
substantially all of its assets to another entity, or upon a Change of Control
(as defined herein), then, except as otherwise specifically provided to the
contrary in an Optionee's Stock Option Agreement, SAR Agreement or Restricted
Stock Agreement, the Committee, in its discretion, shall amend the terms of all
outstanding Options and SARs so that either:
<PAGE>
(i) after the effective date of such merger, consolidation,
sale or Change of Control, as the case may be, (each such
event, a "Reorganization Transaction") each Optionee shall be
entitled, upon exercise of an Option or SAR, to receive in
lieu of shares of Common Stock the number and class of shares
of such stock or other securities to which he would have been
entitled pursuant to the terms of the Reorganization
Transaction if he had been the holder of record of the number
of shares of Common Stock as to which the option or SAR is
being exercised, or shall be entitled to receive from the
successor entity a new stock option or stock appreciation
right of comparable value; or
(ii) all outstanding Options and SARs shall be cancelled as of
the effective date of any such liquidation or Reorganization
Transaction provided that each Optionee shall have the right
to exercise his Option or SAR according to its terms during
the period of twenty (20) days ending on the day preceding the
effective date of such liquidation or Reorganization
Transaction; and in addition to the foregoing, the Committee
may in its discretion amend the terms of an Option or SAR by
canceling some or all of the restrictions on its exercise, to
permit its exercise pursuant to this paragraph (ii) to a
greater extent than that permitted on its existing terms; or
(iii) all outstanding options and SARs shall be cancelled as
of the effective date of any such liquidation or
Reorganization Transaction in exchange for consideration in
cash or in kind, which consideration in both cases shall be
equal in value to the value of those shares of stock or other
securities the Optionee would have received had the option
been exercised (to the extent then exercisable) and no
disposition of the shares acquired upon such exercise had been
made prior to such liquidation or Reorganization Transaction,
less the option price therefor. Upon receipt of such
consideration by the Optionee, his or her option shall
immediately terminate and be of no further force and effect.
The value of the stock or other securities the Optionee would
have received if the Option had been exercised shall be
determined in good faith by the Committee, and in the case of
shares of the Common Stock of the Company, in accordance with
the provisions of Section 5(b).
A "Change of Control" of the Company shall be deemed to have occurred
if any person (as such term is used in Section 13 (d) and 14 (d) (2) of the
Exchange Act of 1934, as amended (the "Exchange Act") ) other than a trust
related to an employee benefit plan maintained by the Company becomes the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of
fifty percent (50%) or more of the Company's outstanding Common Stock, and
within the period of twenty-four (24) consecutive months immediately thereafter,
individuals other than (a) individuals who at the beginning of such period
constitute the entire Board of Directors or (b) individuals whose election, or
nomination for election by the Company's stockholders, was approved by a vote of
at least two-thirds of the directors then still in office who were directors at
the beginning of the period, become a majority of the Board.
<PAGE>
Except as expressly provided to the contrary in this Section 10, the
issuance by the Company of shares of stock of any class for cash or property or
for services, either upon direct sale or upon the exercise of rights or
warrants, or upon conversion of shares or obligations of the Company convertible
into such shares or other securities, shall not affect the number, class or
price of shares of Common Stock then subject to outstanding Options or SARs.
<PAGE>
11. FORFEITURE FOR DISHONESTY
Notwithstanding anything to the contrary in the Plan or in any Stock
Option Agreement, if the Committee determines, after full consideration of the
facts presented on behalf of both the Company and an Optionee, that the Optionee
has been engaged in fraud, embezzlement, theft, commission of a felony or proven
dishonesty in the course of his employment by the Company or a Subsidiary, which
damaged the Company or Subsidiary, or has disclosed trade secrets or other
proprietary information of the Company or a Subsidiary or has violated the terms
of his agreements with the Company, (a) the Optionee shall forfeit all
unexercised options and all exercised Options under which the Company has not
yet delivered the certificates, and (b) the Company shall have the right to
repurchase all or any part of the shares of Common Stock acquired by the
Optionee upon the earlier exercise of any Option, at a price equal to the amount
paid to the Company upon such exercise, increased by an amount equal to the
interest that would have accrued in the period between the date of exercise of
the Option and the date of such repurchase upon a debt in the amount of the
exercise price, at the prime rate(s) announced from time to time during such
period in the Federal Reserve Statistical Release Selected Interest Rates. The
decision of the Committee as to the cause of an Optionee's discharge and the
damage done to the Company or a Subsidiary shall be final, binding, and
conclusive. No decision of the Board, however, shall affect in any manner the
finality of the discharge of an Optionee by the Company or a Subsidiary.
12. MISCELLANEOUS
(a) NONASSIGNABILITY OF OTHER RIGHTS. No Other Rights shall be
assignable or transferable by the Optionee except by will or the laws of descent
and distribution. During the life of the Optionee, Other Rights shall be
exercisable only by the Optionee.
(b) NO GUARANTEE OF EMPLOYMENT. Neither the Plan nor any Stock Option
Agreement, SAR Agreement or Restricted Stock Agreement shall give an employee
the right to continue in the employment of the Company or a Subsidiary, or give
the Company or a Subsidiary the right to require an employee to continue in
employment.
(c) TAX WITHHOLDING. To the extent required by law, the Company shall
withhold or cause to be withheld income and other taxes with respect to any
income recognized by an Optionee by reason of the exercise or vesting of an
Option or Other Right, or a cash bonus paid in connection with such exercise or
vesting, and as a condition to the receipt of any Option or Other Right or
related cash bonus the Optionee shall agree that if the amount payable to him by
the Company and any Subsidiary in the ordinary course is insufficient to pay
such taxes, then he shall upon the request of the Company pay to the Company an
amount sufficient to satisfy its tax withholding obligations.
Without limiting the foregoing, the Committee may in its discretion
permit any Optionee's withholding obligation to be paid in whole or in part in
the form of shares of
<PAGE>
Common Stock, by withholding from the shares to be issued or by accepting
delivery from the Optionee of shares already owned by him. The fair market value
of the shares for such purposes shall be determined as set forth in Section 5
(b). An Optionee may not make any such payment in the form of shares of Common
Stock acquired upon the exercise of an ISO until the shares have been held by
him for at least two (2) years after the date the ISO was granted and at least
one (1) year after the date the ISO was exercised. If payment of withholding
taxes is made in whole or in part in shares of Common Stock, the Optionee shall
deliver to the Company certificates registered in his name representing shares
of Common Stock legally and beneficially owned by him, fully vested and free of
all liens, claims, and encumbrances of every kind, duly endorsed or accompanied
by stock powers duly endorsed by the record holder of the shares represented by
such certificates. If the Optionee is subject to Section 16(a) of the Exchange
Act, his ability to pay his withholding obligation in the form of shares of
Common Stock shall be subject to such additional restrictions as may be
necessary to avoid any transaction that might give rise to liability under
Section 16(b) of the Exchange Act.
(d) USE OF PROCEEDS. The proceeds from the sale of shares pursuant to
Options or Other Rights shall constitute general funds of the Company.
(e) GENDER. All masculine pronouns used in this Plan shall include both
sexes.
13. EFFECTIVE DATE, DURATION, AMENDMENT AND TERMINATION OF PLAN
The Plan shall be effective as of September 1, 1996, subject to
ratification by (a) the holders of a majority of the outstanding shares of
capital stock present, or represented, and entitled to vote thereon (voting as a
single class) at a duly held meeting of the stockholders of the Company, or (b)
by the written consent of the holders of a majority (or such greater degree as
may be prescribed under the Company's charter, by-laws, and applicable state
law) of the capital stock of the issuer entitled to vote thereon (voting as a
single class) within twelve (12) months after such date. Options that are
conditioned upon such ratification of the Plan by the stockholders may be
granted prior to such ratification. The Committee may grant Options and Other
Rights under the Plan from time to time until the close of business on August
30, 2006. The Board may at any time amend the Plan provided, however, that
without approval of the Company's stockholders there shall be no: (i) increase
in the total number of shares covered by the Plan, except by operation of the
provisions of Section 10; (ii) change in the class of individuals eligible to
receive Options or Other Rights; (iii) reduction in the exercise price of any
outstanding ISO; (iv) extension of the latest date upon which any outstanding
ISO may be exercised; (v) material increase of the obligations of the Company or
rights of any Optionee under the Plan or any Option or Other Rights granted
pursuant to the Plan; or (vi) other change in the Plan that requires stockholder
approval under applicable law. No amendment shall adversely affect outstanding
Options or Other Rights without the consent of the Optionee. The Plan may be
terminated at any time by action of the Board, but any such termination will not
terminate options and Other Rights then outstanding, without the consent of the
Optionee.
<PAGE>
Exhibit 10.21
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this day of July,
1999, is entered into by Open Market, Inc., a Delaware corporation with its
principal place of business at 1 Wayside Road, Burlington, MA 01803 (the
"Company"), and Ron Matros, residing in Marlborough, MA (the "Employee").
Concurrently with the execution and delivery of this Agreement, Open
Market, Inc., Acquisition Corp., a Delaware corporation ("MergerSub"), and
FutureTense, Inc., a Delaware corporation ("FutureTense, Inc."), have executed
and delivered an Agreement and Plan of Merger dated as of July , 1999 (the
"Merger Agreement"), providing for the merger of MergerSub into FutureTense,
Inc., whereby FutureTense, Inc. shall be a wholly-owned subsidiary of the
Company immediately following the Effective Time (as defined in the Merger
Agreement) (the "Merger").
In connection with the transactions contemplated by the Merger
Agreement, the Company desires to employ the Employee, and the Employee desires
to be employed by the Company. In consideration of the mutual covenants and
promises contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the parties hereto,
the parties agree as follows:
1. TERM OF EMPLOYMENT. The Company hereby agrees to employ the Employee,
and the Employee hereby accepts employment with the Company, upon the terms set
forth in this Agreement, for the period commencing on the Effective Date (as
defined in the Merger Agreement) (the "Commencement Date") and ending upon
termination of employment in accordance with Section 4,: If the Merger is not
consumated, this Agreement becomes null and void.
2. TITLE; CAPACITY. The Employee shall serve as a Section 16(b) officer
of the Company (and will be required, as a condition of employment, to sign the
Executive Retention Agreement attached hereto as Attachment A), a member of the
Company's Board of Directors, and President and Chief Operating Officer or in
such other similar position as the Company may determine from time to time. The
Employee shall be based at the Company's headquarters in Burlington or Acton,
Massachusetts, or such place within twenty (20) miles of Burlington or Acton,
Massachusetts as the CEO shall determine. The Employee shall be subject to the
supervision of, and shall have such authority as is delegated to him by Gary
Eichhorn, Chief Executive Officer, or his successor.
The Employee hereby accepts such employment and agrees to undertake the
duties and responsibilities inherent in such position and such other reasonably
consistent duties and responsibilities as the Chief Executive Officer shall from
time to time reasonably assign to him. The Employee agrees to devote his entire
business time, attention and energies to the business and interests of the
Company during the Employment Period; provided, however, that nothing herein
shall be construed as preventing the Employee from making personal investments,
and provided, further, that nothing herein shall be construed as preventing the
Employee from serving on civic or
<PAGE>
charitable boards, so long as the Employee has obtained permission to do so in
each instance and in advance from the Chief Executive Officer. The Employee
agrees to abide by the rules, regulations, instructions, personnel practices and
policies of the Company and any changes therein which may be adopted from time
to time by the Company.
3. COMPENSATION AND BENEFITS.
3.1 SALARY. The Company shall pay the Employee, in semi-monthly
installments, an annual base salary of $205,000 for the one-year period
commencing on the Commencement Date. Such salary shall be subject to adjustment
thereafter as determined by the CEO or his successor.
3.2 FRINGE BENEFITS. The Employee shall be entitled to participate in
all bonus and benefit programs that the Company establishes and makes available
to its employees, if any, to the extent that Employee's position, tenure,
salary, age, health and other qualifications make him eligible to participate,
including, but not limited to, the Company's 1999 Executive Short Term Incentive
Plan attached hereto as Attachment B. The Employee shall be entitled to 3 weeks
paid vacation per year, to be taken at such times as may be approved by the CEO.
3.3 REIMBURSEMENT OF EXPENSES. The Company shall reimburse the
Employee for all reasonable travel, entertainment and other expenses incurred or
paid by the Employee in connection with, or related to, the performance of his
duties, responsibilities or services under this Agreement, upon presentation by
the Employee of documentation, expense statements, vouchers and/or such other
supporting information as the Company may reasonably request, PROVIDED, HOWEVER,
that the amount available for such travel, entertainment and other expenses may
be fixed in advance by the CEO.
3.4 OPTIONS. The Company agrees to grant to Employee under its 1994
Incentive Stock Option Plan an option to purchase up to 250,000 shares of its
Common Stock, $.001 par value per share, at a price per share equal to the fair
market value of the shares of Common Stock of the Company at the time of grant,
which option shall vest ratably over a four-year period and shall be subject to
the terms and conditions of the Company's standard form of Option Agreement. To
the extent permissable under applicable law and under the 1994 Incentive Stock
Option Plan, such options shall be incentive stock options. The grant of options
pursuant to this Section 3.4 shall be approved by the Board on or before the
Effective Date and the options shall issue promptly after the Effective Date.
3.5 BONUS. Employee shall be entitled to participate in the Company's
1999 Executive Short Term Incentive Plan pursuant to which Employee shall be
paid (a) a minimum bonus of $75,000 for the year ending December 31, 1999 to be
paid in the first pay period following December 31, 1999 and (b) a minimum bonus
of $125,000 for the year ending December 31, 2000 to be paid no later than April
1, 2000 (the "Year 2000 Bonus"). However, if pursuant to the terms of the
Company's 1999 Executive Short Term Incentive Plan, Employee is not entitled to
receive the Year 2000 Bonus (or any portion thereof), Employee shall repay the
Company any amount in excess of $75,000 (up to a maximum of $50,000), such
payment to be made no later than January 31, 2001. "
<PAGE>
4. EMPLOYMENT TERMINATION. The employment of the Employee by the Company
pursuant to this Agreement shall terminate upon the occurrence of any of the
following:
4.1 At the election of the Company, for cause, immediately upon
written notice by the Company to the Employee. For the purposes of this Section
4.1, cause for termination shall be deemed to exist upon (a) a good faith
finding by the CEO of the material failure of the Employee to perform his
assigned duties for the Company, which failure is not cured within thirty (30)
days after a written demand for performance is delivered to the Employee by the
CEO which specifically identifies the manner in which the CEO believes that the
Employee has not performed his duties; (b) the Employee's dishonesty, gross
negligence or willful misconduct, or (c) the conviction of the Employee of, or
the entry of a pleading of guilty or nolo contendere by the Employee to, any
crime involving moral turpitude or any felony;
4.2 Thirty days after the death or disability of the Employee. As
used in this Agreement, the term "disability" shall mean the inability of the
Employee, due to a physical or mental disability, for a period of 90 days,
whether or not consecutive, during any 360-day period to perform the services
contemplated under this Agreement. A determination of disability shall be made
by a physician satisfactory to both the Employee and the Company, PROVIDED THAT
if the Employee and the Company do not agree on a physician, the Employee and
the Company shall each select a physician and these two together shall select a
third physician, whose determination as to disability shall be binding on all
parties;
4.3 At the election of the Company at any time after the first
anniversary of the Commencement Date, provided the Company gives the Employee at
least 30 days advanced written notice;
4.4 At the election of the Employee at any time after the first
anniversary of the Commencement Date, provided the Employee gives the Company at
least 30 days advanced written notice;
4.5 At the election of the Employee at any time for Good Reason. For
purposes of this Agreement, "Good Reason" shall mean the termination of
employment by the Employee as a result of (a) a material breach of the
Employment Agreement by the Company; or (b) a material reduction in the
Employee's responsibilities.
5. EFFECT OF TERMINATION.
5.1 TERMINATION FOR CAUSE OR AT ELECTION OF THE EMPLOYEE AFTER THE
FIRST ANNIVERSARY. In the event the Employee's employment is terminated for
cause pursuant to Section 4.1, or at the election of the Employee pursuant to
Section 4.4, the Company shall pay to the Employee the compensation and benefits
otherwise payable to him under Section 3 through the last day of his actual
employment by the Company.
5.2 TERMINATION AT ELECTION OF THE COMPANY AFTER THE FIRST
ANNIVERSARY. In the event the Employee's employment is terminated at the
election of the Company pursuant to Section 4.3, the Company shall pay to the
Employee an amount equal to six months of his base salary as severance pay. No
payment hereunder will be required unless and until the parties enter into a
release agreement pursuant to which the Employee releases the
<PAGE>
Company from any and all claims related to his employment with or termination
from the Company, and any payment hereunder will be made in accordance with the
Company's regular payroll practices.
5.3 TERMINATION FOR GOOD REASON OR AT ELECTION OF COMPANY PRIOR TO
FIRST ANNIVERSARY. In the event the Employee's employment is terminated prior to
the first anniversary of the Commencement Date either at the election of the
Employee for good reason pursuant to Section 4.5 or at the election of the
Company other than for cause, the Company shall continue to pay the Employee his
base salary as severance pay until the first anniversary of the Commencement
Date or an amount equal to six months of his base salary as severance pay,
whichever is greater.
5.4 TERMINATION FOR DEATH OR DISABILITY. If the Employee's employment
is terminated by death or because of disability pursuant to Section 4.2, the
Company shall pay to the estate of the Employee or to the Employee, as the case
may be, the compensation which would otherwise be payable to the Employee up to
the end of the month in which the termination of his employment because of death
or disability occurs.
5.5 SURVIVAL. The provisions of Sections 6 and 7 shall survive the
termination of this Agreement.
6. NON-COMPETE.
6.1 During the Employment Period and for a period of two years after
the termination or expiration thereof, the Employee will not directly or
indirectly: (i) as an individual proprietor, partner, stockholder, officer,
employee, director, joint venturer, investor, lender, or in any other capacity
whatsoever (other than as the holder of not more than one percent (1%) of the
total outstanding stock of a publicly held company), engage in the business of
developing, producing, marketing or selling software products or services in the
Internet commerce industry or content management or epublishing business that
are or would be directly competitive with products or services offered or under
development by the Company while the Employee was employed by the Company; or
(ii) recruit, solicit or induce, or attempt to induce, any employee or employees
of the Company to terminate their employment with, or otherwise cease their
relationship with, the Company; or (iii) solicit for the purpose of providing
any product or service competitive with the products or services offered by the
Company, divert or take away, or attempt to divert or to take away, the business
or patronage of any of the clients, customers or accounts, or prospective
clients, customers or accounts, of the Company which were contacted, solicited
or served by the Employee while employed by the Company.
6.2 If any restriction set forth in this Section 6 is found by any
court of competent jurisdiction to be unenforceable because it extends for too
long a period of time or over too great a range of activities or in too broad a
geographic area, it shall be interpreted to extend only over the maximum period
of time, range of activities or geographic area as to which it may be
enforceable.
6.3 The restrictions contained in this Section 6 are necessary for
the protection of the business and goodwill of the Company and are considered by
the Employee to be reasonable for such purpose. The Employee agrees that any
breach of this Section 6 will cause the Company substantial and irrevocable
damage and
<PAGE>
therefore, in the event of any such breach, in addition to such other remedies
which may be available, the Company shall have the right to seek specific
performance and injunctive relief.
7. PROPRIETARY INFORMATION AND DEVELOPMENTS.
7.1 PROPRIETARY INFORMATION.
(a) Employee agrees that all information and know-how, whether
or not in writing, of a private, secret or confidential nature concerning the
Company's technology business or financial affairs (collectively, "Proprietary
Information") is and shall be the exclusive property of the Company. By way of
illustration, but not limitation, Proprietary Information may include
inventions, products, processes, methods, techniques, formulas, compositions,
compounds, projects, developments, plans, research data, clinical data,
financial data, personnel data, computer programs, and customer and supplier
lists. Employee will not disclose any Proprietary Information to others outside
the Company or use the same for any unauthorized purposes without written
approval by an officer of the Company, either during or after his employment,
unless and until such Proprietary Information has become public knowledge
without fault by the Employee.
(b) Employee agrees that all files, letters, memoranda, reports,
records, data, sketches, drawings, laboratory notebooks, program listings, or
other written, photographic, or other tangible material containing Proprietary
Information, whether created by the Employee or others, which shall come into
his custody or possession, shall be and are the exclusive property of the
Company to be used by the Employee only in the performance of his duties for the
Company.
(c) Employee agrees that his obligation not to disclose or use
information, know-how and records of the types set forth in paragraphs (a) and
(b) above, also extends to such types of information, know-how, records and
tangible property of customers of the Company or suppliers to the Company or
other third parties who may have disclosed or entrusted the same to the Company
or to the Employee in the course of the Company's business.
7.2 DEVELOPMENTS.
(a) Employee will make full and prompt disclosure to the Company
of all inventions, improvements, discoveries, methods, developments, software,
and works of authorship, whether patentable or not, which are created, made,
conceived or reduced to practice by the Employee or under his direction or
jointly with others during his employment by the Company, whether or not during
normal working hours or on the premises of the Company (all of which are
collectively referred to in this Agreement as "Developments").
(b) Employee agrees to assign and does hereby assign to the
Company (or any person or entity designated by the Company) all his right, title
and interest in and to all Developments and all related patents, patent
applications, copyrights and copyright applications. However, this Section 7(b)
shall not apply to Developments which do not relate to the present or planned
business or research and development of the Company and which are made and
conceived by the Employee not during normal working hours, not on the Company's
premises and not using the Company's tools, devices, equipment or Proprietary
Information.
<PAGE>
(c) Employee agrees to cooperate fully with the Company, both
during and after his employment with the Company, with respect to the
procurement, maintenance and enforcement of copyrights and patents (both in the
United States and foreign countries) relating to Developments. Employee shall
sign all papers, including, without limitation, copyright applications, patent
applications, declarations, oaths, formal assignments, assignment of priority
rights, and powers of attorney, which the Company may deem necessary or
desirable in order to protect its rights and interests in any Development.
7.3 OTHER AGREEMENTS. Employee hereby represents that he is not bound
by the terms of any agreement with any previous employer or other party to
refrain from using or disclosing any trade secret or confidential or proprietary
information in the course of his employment with the Company or to refrain from
competing, directly or indirectly, with the business of such previous employer
or any other party. Employee further represents that his performance of all the
terms of this Agreement and as an employee of the Company does not and will not
breach any agreement to keep in confidence proprietary information, knowledge or
data acquired by him in confidence or in trust prior to his employment with the
Company.
8. NOTICES. All notices required or permitted under this Agreement shall
be in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail,
postage prepaid, addressed to the other party at the address shown above, or at
such other address or addresses as either party shall designate to the other in
accordance with this Section 8.
9. PRONOUNS. Whenever the context may require, any pronouns used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular forms of nouns and pronouns shall include the plural, and vice
versa.
10. ENTIRE AGREEMENT. This Agreement, together with its attachments,
constitutes the entire agreement between the parties and supersedes all prior
agreements and understandings, whether written or oral, relating to the subject
matter of this Agreement. In the event of a Change in Control, as defined in the
Executive Retention Agreement attached hereto as Attachment A, the provisions of
Attachment A shall supersede any provisions of this Agreement concerning the
same subject matter.
11. AMENDMENT. This Agreement may be amended or modified only by a written
instrument executed by both the Company and the Employee.
12. GOVERNING LAW. This Agreement shall be construed, interpreted and
enforced in accordance with the laws of the Commonwealth of Massachusetts.
13. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to the benefit of both parties and their respective successors and assigns,
including any corporation with which or into which the Company may be merged or
which may succeed to its assets or business, provided, however, that the
obligations of the Employee are personal and shall not be assigned by him.
14. MISCELLANEOUS.
<PAGE>
14.1 No delay or omission by the Company in exercising any right under
this Agreement shall operate as a waiver of that or any other right. A waiver or
consent given by the Company on any one occasion shall be effective only in that
instance and shall not be construed as a bar or waiver of any right on any other
occasion.
14.2 The captions of the sections of this Agreement are for
convenience of reference only and in no way define, limit or affect the scope or
substance of any section of this Agreement.
14.3 In case any provision of this Agreement shall be invalid, illegal
or otherwise unenforceable, the validity, legality and enforceability of the
remaining provisions shall in no way be affected or impaired thereby.
15. REQUIRED APPROVALS. The Company and the Employee hereby acknowledge
and agree that this agreement shall not take effect until the above terms and
conditions have been approved by the Company's Board of Directors.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year set forth above.
Open Market, Inc.
By: /s/ Gary Eichhorn
-----------------
Title: Chief Executive Officer
EMPLOYEE
/s/ Ronald J. Matros
--------------------
<PAGE>
Exhibit 10.22
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this day of July,
1999, is entered into by Open Market, Inc., a Delaware corporation with its
principal place of business at 1 Wayside Road, Burlington, MA 01803 (the
"Company"), and BC Krishna, residing in Chelmsford, MA (the "Employee").
Concurrently with the execution and delivery of this Agreement, Open
Market, Inc., Acquisition Corp., a Delaware corporation ("MergerSub"), and
FutureTense, Inc., a Delaware corporation ("FutureTense, Inc."), have executed
and delivered an Agreement and Plan of Merger dated as of July , 1999 (the
"Merger Agreement"), providing for the merger of MergerSub into FutureTense,
Inc., whereby FutureTense, Inc. shall be a wholly-owned subsidiary of the
Company immediately following the Effective Time (as defined in the Merger
Agreement) (the "Merger").
In connection with the transactions contemplated by the Merger
Agreement, the Company desires to employ the Employee, and the Employee desires
to be employed by the Company. In consideration of the mutual covenants and
promises contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the parties hereto,
the parties agree as follows:
1. TERM OF EMPLOYMENT. The Company hereby agrees to employ the Employee,
and the Employee hereby accepts employment with the Company, upon the terms set
forth in this Agreement, for the period commencing on the Effective Date (as
defined in the Merger Agreement) (the "Commencement Date") and ending upon
termination of employment in accordance with Section 4,: If the Merger is not
consumated, this Agreement becomes null and void.
2. TITLE; CAPACITY. The Employee shall serve as a Corporate Officer of
the Company (and will be required, as a condition of employment, to sign the
Executive Retention Agreement attached hereto as Attachment A) and Chief
Technology Officer or in such other similar position as the Company may
determine from time to time. The Employee shall be based at the Company's
headquarters in Burlington or Acton, Massachusetts, or such place within twenty
(20) miles of Burlington or Acton, Massachusetts as the Company shall determine.
The Employee shall be subject to the supervision of, and shall have such
authority as is delegated to him by Ron Matros, President and Chief Operating
Officer, or his designee.
The Employee hereby accepts such employment and agrees to undertake the
duties and responsibilities inherent in such position and such other duties and
responsibilities as the Company or its designee shall from time to time
reasonably assign to him. The Employee agrees to devote his entire business
time, attention and energies to the business and interests of the Company during
the Employment Period; provided, however, that nothing herein shall be construed
as preventing the Employee from making personal investments, and provided,
further, that nothing herein shall be construed as preventing the Employee from
serving on civic or charitable boards, so long as the Employee has obtained
permission to do so in each instance and in advance from the President and Chief
Operating Officer. The Employee agrees to abide by the rules, regulations,
instructions, personnel practices and policies of the Company and any changes
therein which may be adopted from time to time by the Company.
<PAGE>
3. COMPENSATION AND BENEFITS.
3.1 SALARY. The Company shall pay the Employee, in semi-monthly
installments, an annual base salary of $150,000 for the one-year period
commencing on the Commencement Date. Such salary shall be subject to adjustment
thereafter as determined by the President and COO or his designee.
3.2 FRINGE BENEFITS. The Employee shall be entitled to participate in
all bonus and benefit programs that the Company establishes and makes available
to its employees, if any, to the extent that Employee's position, tenure,
salary, age, health and other qualifications make him eligible to participate,
including, but not limited to, the Company's 1999 Executive Short Term Incentive
Plan attached hereto as Attachment B. The Employee shall be entitled to 3 weeks
paid vacation per year, to be taken at such times as may be approved by the
President and COO or his designee.
3.3 REIMBURSEMENT OF EXPENSES. The Company shall reimburse the
Employee for all reasonable travel, entertainment and other expenses incurred or
paid by the Employee in connection with, or related to, the performance of his
duties, responsibilities or services under this Agreement, upon presentation by
the Employee of documentation, expense statements, vouchers and/or such other
supporting information as the Company may request, PROVIDED, HOWEVER, that the
amount available for such travel, entertainment and other expenses may be fixed
in advance by the President and COO or his designee.
3.4 OPTIONS. The Company agrees to grant to Employee under its 1994
Incentive Stock Option Plan an option to purchase up to 175,000 shares of its
Common Stock, $.001 par value per share, at a price per share equal to the fair
market value of the shares of Common Stock of the Company at the time of grant,
which option shall vest ratably over a four-year period and shall be subject to
the terms and conditions of the Company's standard form of Option Agreement. To
the extent permissable under applicable law and under the 1994 Incentive Stock
Option Plan, such options shall be incentive stock options. The grant of options
pursuant to this Section 3.4 shall be approved by the Board on or before the
Effective Date and the options shall issue promptly after the Effective Date.
4. EMPLOYMENT TERMINATION. The employment of the Employee by the Company
pursuant to this Agreement shall terminate upon the occurrence of any of the
following:
4.1 At the election of the Company, for cause, immediately upon
written notice by the Company to the Employee. For the purposes of this Section
4.1, cause for termination shall be deemed to exist upon (a) a good faith
finding by the Company of the material failure of the Employee to perform his
assigned duties for the Company, which failure is not cured within thirty (30)
days after a written demand for performance is delivered to the Employee by the
Company which specifically identifies the manner in which the Company believes
that the Employee has not performed his duties; (b) the Employee's dishonesty,
gross negligence or willful misconduct, or (c) the conviction of the Employee
of, or the entry of a pleading of guilty or nolo contendere by the Employee to,
any crime involving moral turpitude or any felony;
4.2 Thirty days after the death or disability of the Employee. As
used in this Agreement, the term "disability" shall mean the inability of the
Employee, due to a physical or mental disability, for a period of 90
<PAGE>
days, whether or not consecutive, during any 360-day period to perform the
services contemplated under this Agreement. A determination of disability shall
be made by a physician satisfactory to both the Employee and the Company,
PROVIDED THAT if the Employee and the Company do not agree on a physician, the
Employee and the Company shall each select a physician and these two together
shall select a third physician, whose determination as to disability shall be
binding on all parties;
4.3 At the election of the Company at any time after the first
anniversary of the Commencement Date, provided the Company gives the Employee at
least 30 days advanced written notice.
4.4 At the election of the Employee at any time after the first
anniversary of the Commencement Date, provided the Employee gives the Company
at least 30 days advanced written notice.
4.5 At the election of the Employee at any time for Good Reason. For
purposes of this Agreement, "Good Reason" shall mean the termination of
employment by the Employee as a result of (a) a material breach of the
Employment Agreement by the Company; or (b) a material reduction in the
Employee's responsibilities.
5. EFFECT OF TERMINATION.
5.4 TERMINATION FOR CAUSE OR AT ELECTION OF THE EMPLOYEE AFTER THE
FIRST ANNIVERSARY. In the event the Employee's employment is terminated for
cause pursuant to Section 4.1, or at the election of the Employee pursuant to
Section 4.4, the Company shall pay to the Employee the compensation and benefits
otherwise payable to him under Section 3 through the last day of his actual
employment by the Company.
5.5 TERMINATION AT ELECTION OF THE COMPANY AFTER THE FIRST
ANNIVERSARY. In the event the Employee's employment is terminated at the
election of the Company pursuant to Section 4.3, the Company shall pay to the
Employee an amount equal to six months of his base salary as severance pay. No
payment hereunder will be required unless and until the parties enter into a
release agreement pursuant to which the Employee releases the Company from any
and all claims related to his employment with or termination from the Company,
and any payment hereunder will be made in accordance with the Company's regular
payroll practices.
5.6 TERMINATION FOR GOOD REASON OR AT ELECTION OF COMPANY PRIOR TO
FIRST ANNIVERSARY. In the event the Employee's employment is terminated prior to
the first anniversary of the Commencement Date either at the election of the
Employee for good reason pursuant to Section 4.5 or at the election of the
Company other than for cause, the Company shall continue to pay the Employee his
base salary as severance pay until the first anniversary of the Commencement
Date or an amount equal to six months of his base salary as severance pay,
whichever is greater.
5.4 TERMINATION FOR DEATH OR DISABILITY. If the Employee's employment
is terminated by death or because of disability pursuant to Section 4.2, the
Company shall pay to the estate of the Employee or to the Employee, as the case
may be, the compensation which would otherwise be payable to the Employee up to
the end of the month in which the termination of his employment because of death
or disability occurs.
<PAGE>
5.5 SURVIVAL. The provisions of Sections 6 and 7 shall survive the
termination of this Agreement.
6. NON-COMPETE.
6.1 During the Employment Period and for a period of two years after
the termination or expiration thereof, the Employee will not directly or
indirectly: (i) as an individual proprietor, partner, stockholder, officer,
employee, director, joint venturer, investor, lender, or in any other capacity
whatsoever (other than as the holder of not more than one percent (1%) of the
total outstanding stock of a publicly held company), engage in the business of
developing, producing, marketing or selling software products or services in the
Internet commerce industry or content management or epublishing business that
are or would be directly competitive with products or services offered or under
development by the Company while the Employee was employed by the Company; or
(ii) recruit, solicit or induce, or attempt to induce, any employee or employees
of the Company to terminate their employment with, or otherwise cease their
relationship with, the Company; or (iii) solicit for the purpose of providing
any product or service competitive with the products or services offered by the
Company, divert or take away, or attempt to divert or to take away, the business
or patronage of any of the clients, customers or accounts, or prospective
clients, customers or accounts, of the Company which were contacted, solicited
or served by the Employee while employed by the Company.
6.2 If any restriction set forth in this Section 6 is found by any
court of competent jurisdiction to be unenforceable because it extends for too
long a period of time or over too great a range of activities or in too broad a
geographic area, it shall be interpreted to extend only over the maximum period
of time, range of activities or geographic area as to which it may be
enforceable.
6.3 The restrictions contained in this Section 6 are necessary for
the protection of the business and goodwill of the Company and are considered by
the Employee to be reasonable for such purpose. The Employee agrees that any
breach of this Section 6 will cause the Company substantial and irrevocable
damage and therefore, in the event of any such breach, in addition to such other
remedies which may be available, the Company shall have the right to seek
specific performance and injunctive relief.
7. PROPRIETARY INFORMATION AND DEVELOPMENTS.
7.1 PROPRIETARY INFORMATION.
(a) Employee agrees that all information and know-how, whether
or not in writing, of a private, secret or confidential nature concerning the
Company's technology business or financial affairs (collectively, "Proprietary
Information") is and shall be the exclusive property of the Company. By way of
illustration, but not limitation, Proprietary Information may include
inventions, products, processes, methods, techniques, formulas, compositions,
compounds, projects, developments, plans, research data, clinical data,
financial data, personnel data, computer programs, and customer and supplier
lists. Employee will not disclose any Proprietary Information to others outside
the Company or use the same for any unauthorized purposes without written
approval by an officer of the Company, either during or after his employment,
unless and until such Proprietary Information has become public knowledge
without fault by the Employee.
<PAGE>
(b) Employee agrees that all files, letters, memoranda, reports,
records, data, sketches, drawings, laboratory notebooks, program listings, or
other written, photographic, or other tangible material containing Proprietary
Information, whether created by the Employee or others, which shall come into
his custody or possession, shall be and are the exclusive property of the
Company to be used by the Employee only in the performance of his duties for the
Company.
(c) Employee agrees that his obligation not to disclose or use
information, know-how and records of the types set forth in paragraphs (a) and
(b) above, also extends to such types of information, know-how, records and
tangible property of customers of the Company or suppliers to the Company or
other third parties who may have disclosed or entrusted the same to the Company
or to the Employee in the course of the Company's business.
7.2 DEVELOPMENTS.
(a) Employee will make full and prompt disclosure to the Company
of all inventions, improvements, discoveries, methods, developments, software,
and works of authorship, whether patentable or not, which are created, made,
conceived or reduced to practice by the Employee or under his direction or
jointly with others during his employment by the Company, whether or not during
normal working hours or on the premises of the Company (all of which are
collectively referred to in this Agreement as "Developments").
(b) Employee agrees to assign and does hereby assign to the
Company (or any person or entity designated by the Company) all his right, title
and interest in and to all Developments and all related patents, patent
applications, copyrights and copyright applications. However, this Section 7(b)
shall not apply to Developments which do not relate to the present or planned
business or research and development of the Company and which are made and
conceived by the Employee not during normal working hours, not on the Company's
premises and not using the Company's tools, devices, equipment or Proprietary
Information.
(c) Employee agrees to cooperate fully with the Company, both
during and after his employment with the Company, with respect to the
procurement, maintenance and enforcement of copyrights and patents (both in the
United States and foreign countries) relating to Developments. Employee shall
sign all papers, including, without limitation, copyright applications, patent
applications, declarations, oaths, formal assignments, assignment of priority
rights, and powers of attorney, which the Company may deem necessary or
desirable in order to protect its rights and interests in any Development.
7.3 OTHER AGREEMENTS. Employee hereby represents that he is not bound
by the terms of any agreement with any previous employer or other party to
refrain from using or disclosing any trade secret or confidential or proprietary
information in the course of his employment with the Company or to refrain from
competing, directly or indirectly, with the business of such previous employer
or any other party. Employee further represents that his performance of all the
terms of this Agreement and as an employee of the Company does not and will not
breach any agreement to keep in confidence proprietary information, knowledge or
data acquired by him in confidence or in trust prior to his employment with the
Company.
<PAGE>
8. NOTICES. All notices required or permitted under this Agreement shall
be in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail,
postage prepaid, addressed to the other party at the address shown above, or at
such other address or addresses as either party shall designate to the other in
accordance with this Section 8.
9. PRONOUNS. Whenever the context may require, any pronouns used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular forms of nouns and pronouns shall include the plural, and vice
versa.
10. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties and supersedes all prior agreements and understandings,
whether written or oral, relating to the subject matter of this Agreement. In
the event of a Change in Control, as defined in the Executive Retention
Agreement attached hereto as Attachment A, the provisions of Attachment A shall
supersede any provisions of this Agreement concerning the same subject matter.
11. AMENDMENT. This Agreement may be amended or modified only by a written
instrument executed by both the Company and the Employee.
12. GOVERNING LAW. This Agreement shall be construed, interpreted and
enforced in accordance with the laws of the Commonwealth of Massachusetts.
13. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to the benefit of both parties and their respective successors and assigns,
including any corporation with which or into which the Company may be merged or
which may succeed to its assets or business, provided, however, that the
obligations of the Employee are personal and shall not be assigned by him.
14. MISCELLANEOUS.
14.1 No delay or omission by the Company in exercising any right under
this Agreement shall operate as a waiver of that or any other right. A waiver or
consent given by the Company on any one occasion shall be effective only in that
instance and shall not be construed as a bar or waiver of any right on any other
occasion.
14.2 The captions of the sections of this Agreement are for
convenience of reference only and in no way define, limit or affect the scope or
substance of any section of this Agreement.
14.3 In case any provision of this Agreement shall be invalid, illegal
or otherwise unenforceable, the validity, legality and enforceability of the
remaining provisions shall in no way be affected or impaired thereby.
15. REQUIRED APPROVALS. The Company and the Employee hereby acknowledge
and agree that this agreement shall not take effect until the above terms and
conditions have been approved by the Company's Board of Directors.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year set forth above.
Open Market, Inc.
By: /s/ Michael S. Messier
----------------------
Title: Vice President, Human Resources
EMPLOYEE
/s/ BC Krishna
--------------
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OR COUNTRY
OF INCORPORATION
----------------
<S> <C> <C>
1) Open Market Securities, Inc. Massachusetts
One Wayside Road
Burlington, Massachusetts
2) Open Market UK Limited United Kingdom
Arundell House
1 Farm Yard, 1st Floor
Windor SL4 1QL, UK
3) Open Market France SARL France
8 Rue de Berri
Paris, France
4) Open Market Germany GmbH Germany
Merkurhaus Frankfurt
Hessenring 121
61348 Bad Homburg
Germany
5) Open Market Pty Limited Australia
P.O. Box R1608
Royal Exchange NSW
Sydney, Australia
6) Open Market Internet Software B.V. The Netherlands
Wegalaan 32
2132 JC Hoofddorp
The Netherlands
7) Folio Corporation Utah
1 Wayside Road
Burlington, Massachusetts
8) Waypoint Software Corporation Massachusetts
1 Wayside Road
Burlington, Massachusetts
9) Open Market Japan KK Japan
No. 2 Okamotoya Bldg.
4F 1-22-16 Toranomon, Minato-ku
Tokyo, Japan
<PAGE>
10) Open Market Italy s.r.l. Italy
Corso Novara 2
27029 Vigevano-PV
Italy
(11) ICentral Incorporated Utah
5072 North 300 West
Provo, Utah
12 FutureTense, Inc. Massachusetts
1 Wayside Road
Burlington, Massachusetts
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K into the Company's previously filed
registration statements File Nos. 333-06821, 333-32448, 333-60041, 333-84137,
333-89545 and 333-89543 on Form S-8, and File Nos. 333-28323, 333-32447,
333-45973, 333-61013 and 333-64937 on Form S-3.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 29, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 333-28323, 333-32447, 333-45973, 333-61013 and
333-64937) and Form S-8 (Nos. 333-06821, 333-32448, 333-60041, 333-84137,
333-89545 and 333-89543) of Open Market, Inc. of our report dated March 10,
1999 relating to the financial statements of FutureTense, Inc., which appears
in this Annual Report on Form 10-K. The financial statements of FutureTense,
Inc. are not included in this Annual Report on Form 10-K and we have not
audited any financial statements of FutureTense, Inc. subsequent to December
31, 1998 or performed any audit procedures subsequent to the date of our
report.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 19,258 21,735
<SECURITIES> 13,033 14,984
<RECEIVABLES> 27,211 28,541
<ALLOWANCES> 2,870 2,543
<INVENTORY> 0 0
<CURRENT-ASSETS> 63,766 67,711
<PP&E> 29,566 27,425
<DEPRECIATION> 16,043 11,436
<TOTAL-ASSETS> 88,805 99,200
<CURRENT-LIABILITIES> 36,190 39,402
<BONDS> 0 0
0 15,425
0 0
<COMMON> 44 37
<OTHER-SE> 49,914 41,399
<TOTAL-LIABILITY-AND-EQUITY> 88,805 99,200
<SALES> 53,742 43,583
<TOTAL-REVENUES> 83,026 64,546
<CGS> 4,434 3,214
<TOTAL-COSTS> 25,572 18,579
<OTHER-EXPENSES> 77,171 82,526
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (703) (1,191)
<INCOME-PRETAX> (19,366) (36,645)
<INCOME-TAX> 414 325
<INCOME-CONTINUING> (19,780) (36,970)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (19,780) (36,970)
<EPS-BASIC> (0.46) (0.98)
<EPS-DILUTED> (0.46) (0.98)
</TABLE>
