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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
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<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-28436
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OPEN MARKET, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-3214536
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
</TABLE>
ONE WAYSIDE ROAD
BURLINGTON, MASSACHUSETTS 01803
(Address of principal executive offices) (Zip Code)
(781) 359-3000
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of July 31, 2000, there were 46,588,915 shares of the Registrant's Common
Stock outstanding.
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<PAGE>
OPEN MARKET, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999...................................... 3
Consolidated Statements of Operations for the three and
six months ended June 30, 2000 and 1999................ 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999........................... 5
Notes to Consolidated Financial Statements.............. 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 13
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk............................................... 29
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings................................... 30
ITEM 2. Changes in Securities and Use of Proceeds........... 30
ITEM 3. Defaults Upon Senior Securities..................... 30
ITEM 4. Submission of Matters to a Vote of Security
Holders................................................... 30
ITEM 5. Other Information................................... 31
ITEM 6. Exhibits and Reports on Form 8-K.................... 31
SIGNATURES.................................................. 32
EXHIBIT INDEX............................................... 33
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OPEN MARKET, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 18,007 $ 19,258
Marketable securities..................................... 21,381 13,033
Accounts receivable (net of allowance for doubtful
accounts of $3,691 and $2,870, respectively)............ 31,224 27,609
Prepaid expenses and other current assets................. 5,176 4,264
-------- --------
Total current assets.................................. 75,788 64,164
-------- --------
Property, plant and equipment, at cost:
Computers and office equipment............................ 18,881 17,535
Leasehold improvements.................................... 5,584 5,527
Land & building........................................... 4,200 4,200
Furniture & fixtures...................................... 2,528 2,304
-------- --------
Total property and equipment.......................... 31,193 29,566
Less: Accumulated depreciation and amortization............. 18,062 16,043
-------- --------
Net property and equipment............................ 13,131 13,523
Long-term marketable securities............................. -- 1,487
Intangible assets, net...................................... 7,126 8,657
Other assets................................................ 1,081 1,372
-------- --------
$ 97,126 $ 89,203
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations............... $ 66 $ 108
Line of credit............................................ 9,340 10,350
Accounts payable.......................................... 4,279 5,657
Accrued expenses.......................................... 13,904 13,773
Deferred revenues......................................... 8,898 6,700
-------- --------
Total current liabilities............................. 36,487 36,588
-------- --------
Long-term obligations, net of current maturities............ 2,623 2,657
Stockholders' equity:
Preferred stock, $.10 par value--Authorized--2,000 shares;
Issued and outstanding--none............................ -- --
Common stock, $.001 par value--Authorized--300,000 shares;
Issued and outstanding--46,312 shares and 44,098 shares
at June 30, 2000 and December 31, 1999, respectively.... 46 44
Additional paid-in capital................................ 222,213 214,783
Deferred compensation..................................... (272) (329)
Net unrealized gain on marketable securities.............. 625 --
Accumulated deficit....................................... (164,596) (164,540)
-------- --------
Total stockholders' equity............................ 58,016 49,958
-------- --------
$ 97,126 $ 89,203
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Product revenues.................................... $15,719 $13,558 $31,073 $24,248
Service revenues.................................... 10,798 7,004 20,267 12,908
------- ------- ------- -------
Total revenues.................................. 26,517 20,562 51,340 37,156
------- ------- ------- -------
COST OF REVENUES:
Product revenues.................................... 2,311 1,014 4,686 1,778
Service revenues.................................... 8,972 5,197 16,687 9,348
------- ------- ------- -------
Total cost of revenues.......................... 11,283 6,211 21,373 11,126
------- ------- ------- -------
Gross profit.................................... 15,234 14,351 29,967 26,030
------- ------- ------- -------
OPERATING EXPENSES:
Selling and marketing............................... 12,632 9,360 23,109 17,857
Research and development............................ 6,422 5,872 12,458 11,110
General and administrative.......................... 3,723 2,820 6,859 5,903
------- ------- ------- -------
Total operating expenses........................ 22,777 18,052 42,426 34,870
------- ------- ------- -------
Loss from operations............................ (7,543) (3,701) (12,459) (8,840)
Gain on investment.................................. 12,321 -- 12,321 --
Interest income..................................... 373 309 726 623
Interest expense.................................... (83) (184) (175) (332)
Other expense....................................... (61) (5) (119) (153)
------- ------- ------- -------
Income (loss) before provision for income taxes......... 5,007 (3,581) 294 (8,702)
Provision for income taxes.............................. 298 103 350 145
------- ------- ------- -------
Net income (loss)....................................... $ 4,709 $(3,684) $ (56) $(8,847)
======= ======= ======= =======
Net income (loss) per share-basic (Note 2(e))........... $ 0.10 $ (0.09) $ (0.00) $ (0.21)
======= ======= ======= =======
Weighted average number of common and common equivalent
shares outstanding-basic (Note 2(e)).................. 45,528 42,570 44,965 42,249
======= ======= ======= =======
Net income (loss) per share-diluted (Note 2(e))......... $ 0.10 $ (0.09) $ (0.00) $ (0.21)
======= ======= ======= =======
Weighted average number of common and common equivalent
shares outstanding-diluted (Note 2(e))................ 48,244 42,570 44,965 42,249
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (56) $(8,847)
Adjustments to reconcile net loss to net cash used in
operating activities:
Gain on investment...................................... (12,613) --
Depreciation and amortization........................... 2,018 2,453
Amortization of intangible assets....................... 1,531 1,664
Deferred Compensation................................... 57 657
Changes in assets and liabilities:
Accounts receivable..................................... (3,616) 1,457
Prepaid expenses and other current assets............... (910) (2,342)
Accounts payable........................................ (1,378) (331)
Accrued expenses........................................ 131 (1,201)
Deferred revenues....................................... 2,198 1,036
------- -------
Net cash used in operating activities................. (12,638) (5,454)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (1,627) (1,075)
Sales (purchases) of marketable securities, net........... 6,376 1,421
Increase in other assets.................................. 291 38
------- -------
Net cash provided by investing activities............. 5,040 384
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit, net........................... (1,010) (650)
Payments on note payable.................................. -- (5,000)
Proceeds from the issuance of redeemable convertible
preferred stock, net of issuance costs.................. -- 4,500
Payments on long-term obligations......................... (75) (39)
Proceeds from employee stock purchase plan................ 567 650
Proceeds from exercise of stock options................... 6,865 1,644
------- -------
Net cash provided by financing activities............. 6,347 1,105
------- -------
Net decrease in cash and cash equivalents................... (1,251) (3,965)
------- -------
Cash and cash equivalents, beginning of period.............. 19,258 21,735
------- -------
Cash and cash equivalents, end of period.................... $18,007 $17,770
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period........................... $ 171 $ 184
======= =======
Taxes paid during the period.............................. $ 74 $ 17
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION
The consolidated financial statements of Open Market, Inc. (the "Company")
presented herein have been prepared pursuant to the rules of the Securities and
Exchange Commission for quarterly reports on Form 10-Q and do not include all of
the information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1999,
included in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 30, 2000.
The consolidated financial statements and notes herein are unaudited but, in
the opinion of management, include all adjustments (consisting of normal,
recurring adjustments) necessary to present fairly the consolidated financial
position, results of operations and cash flows of the Company and its
subsidiaries.
The results of operations for the interim periods shown herein are not
necessarily indicative of the results to be expected for any future interim
period or for the entire year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain accounting policies described in this and other notes to these
consolidated financial statements.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements reflect the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
(B) REVENUE RECOGNITION
The Company recognizes revenue in accordance with Statement of Position
(SOP) 97-2, SOFTWARE REVENUE RECOGNITION, as amended by SOP 98-4 and SOP 98-9.
The Company generates revenue from two sources: license fees for the use of its
products and service revenues for implementation, support, consulting and
training related to our products.
The Company executes separate contracts that govern the terms and conditions
of each software license and maintenance arrangement and each professional
service arrangement. These contracts may be an element in a multiple element
arrangement. Revenues under multiple element arrangements, which may include
several different software products or services sold together, are allocated to
each element based on the residual method in accordance with the Statement of
Position 98-9, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN
ARRANGEMENTS.
The Company uses the residual method when fair value does not exist for one
of the delivered elements in a multiple element arrangement. Under the residual
method, the fair value of the undelivered elements is deferred and subsequently
recognized. The Company has established sufficient vendor specific objective
evidence for the value of professional services, training and maintenance and
support services based on the price charged when these elements are sold
separately. Accordingly, 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.
6
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues from software license agreements are recognized upon delivery of
the software if there is evidence of an agreement, there are no significant
post-delivery obligations, and the payment is fixed or determinable and
collection is probable. If an acceptance period is required, revenues are
recognized upon customer acceptance.
The Company enters into reseller arrangements for certain products that
typically provide for sublicense fees payable to the Company based on a
percentage of the Company's list price. Royalty and sublicense revenues from the
Company's reseller arrangements are recognized when earned, either on a per-unit
basis as reported to the Company by its licensees, or, with regards to
guaranteed minimums, upon shipment of the master copy of all software to which
the guaranteed minimum sublicense fees relate, if there are no significant
post-delivery obligations. Revenues for post-contract customer support are
recognized ratably over the term of the support period, which is typically one
year. Service revenue, which includes revenue from education, implementation and
consulting services, is recognized in the period services are provided, if there
is evidence of an agreement, the revenues are fixed and determinable and
collectibility is probable.
Cost of product revenues consists of costs to distribute the product,
including the cost of the media on which it is delivered and royalty payments to
third-party vendors. Cost of service revenues consists primarily of consulting
and support personnel salaries and related costs.
(C) CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company accounts for investments under Statement of Financial Accounting
Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES. Under SFAS No. 115, investments for which the Company has the
positive intent and ability to hold to maturity, consisting of cash equivalents
and marketable securities, are reported at amortized cost, which approximates
fair market value. Cash equivalents are highly liquid investments with
maturities of less than 90 days at the time of acquisition. Marketable
securities consist of investment grade commercial paper, corporate notes, and
obligations of certain municipalities with original maturities of greater than
90 days. The average maturity of the Company's marketable securities was
approximately 2 months at June 30, 2000 and 5 months at December 31, 1999. The
Company's marketable securities also include 208,259 shares of Cisco
Systems, Inc. common stock which were converted from 291,667 shares of
SightPath, Inc. preferred stock (formerly known as Clearview
Technologies, Inc.) on May 16, 2000 which resulted in an increase in marketable
securities of $13,238. (See note 5)
(D) TRANSLATION OF FOREIGN CURRENCIES
The accounts of the Company's foreign subsidiaries are translated in
accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. In translating the
accounts of the foreign subsidiaries into U.S. dollars, assets and liabilities
are translated at the rate of exchange in effect at period-end, while
stockholders' equity is translated at historical rates. Revenue and expense
accounts are translated using the weighted average rate in effect during the
period. Foreign currency translation and transaction gains or losses for the
foreign subsidiaries are included in the accompanying consolidated statements of
operations since the functional currency of these subsidiaries is the U.S.
dollar. The Company had accounts receivable of $619 and $1,036 denominated in
foreign currency as of June 30, 2000 and December 31, 1999, respectively.
7
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) NET INCOME (LOSS) PER SHARE
The Company applies SFAS No. 128 EARNINGS PER SHARE. SFAS No. 128
establishes standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential common stock.
Basic net loss per share is calculated by dividing net loss by the weighted
average number of common shares outstanding. For the three months ended
June 30, 2000 and 1999, basic outstanding shares were 45,528 and 42,570,
respectively, and dilutive outstanding shares were 48,244 and 42,570,
respectively. Diluted net loss per share for the three months ended June 30,
2000 includes the effect of dilutive stock options representing 2,716 shares of
Company common stock. Diluted net loss per share for the six months ended
June 30, 2000 and the three and six months ended June 30, 1999 is the same as
basic net loss per share, as the inclusion of potential common stock would be
anti-dilutive.
(F) COMPREHENSIVE INCOME (LOSS)
SFAS 130, REPORTING COMPREHENSIVE INCOME, requires disclosure of all
components of comprehensive income (loss) on an annual and interim basis.
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. The changes in equity included in the Company's
comprehensive income (loss) comprise the reported net income (loss) for all
periods presented and unrealized gains on investments. The unrealized gain on
investment is a result of the conversion of 291,667 shares of SightPath, Inc.
preferred stock (formerly known as Clearview Technologies) to 208,259 shares of
Cisco Systems, Inc. common stock on May 16, 2000. (See note 5)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss)........................... $4,709 $(3,684) $(56) $(8,847)
Other comprehensive income (loss):
Unrealized gain on investments............ 625 -- 625 --
------ ------- ---- -------
Total comprehensive income (loss)........... $5,334 $(3,684) $569 $(8,847)
====== ======= ==== =======
</TABLE>
(G) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND SIGNIFICANT CUSTOMERS
The Company applies SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION which establishes standards for reporting
information regarding operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS No. 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions
how to allocate resources and assess performance. The Company's chief
decision-maker, as defined under SFAS No. 131, is a combination of the Chief
Executive Officer and the Chief Financial Officer.
The Company has three reportable segments (1) commerce management, including
the licensing of Transact, Live Commerce and Shopsite products, (2) content
management, including the licensing of
8
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OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Content Server (formerly the Internet Publishing System), Content Centre
(formerly Xcelerate), Personalization Centre and Catalog Centre, and (3) other,
which includes the publishing product suite and other discontinued software
products. The commerce and content management segments are combined under the
sub-heading e-Business for reporting purposes.
During the three months ended June 30, 2000, no customer accounted for more
than 10% of the Company's revenues. In the three months ended June 30, 1999, one
customer accounted for approximately 15% of the Company's revenues. During the
six months ended June 30, 2000 and 1999, no customer accounted for more than 10%
of the Company's revenues. No customer accounted for more than 10% of the
Company's accounts receivable balance at June 30, 2000 and December 31, 1999.
The following table presents the Company's revenues for its reportable
segments for the three and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Commerce product revenues................... $ 5,837 $10,541 $12,398 $18,366
Content product revenues.................... 8,714 769 16,368 1,384
------- ------- ------- -------
e-Business segment subtotal............. 14,551 11,310 28,766 19,750
------- ------- ------- -------
Other product revenues...................... 1,168 2,248 2,307 4,498
------- ------- ------- -------
Total product revenues................ $15,719 $13,558 $31,073 $24,248
------- ------- ------- -------
Commerce service revenues................... $ 7,257 $ 5,091 $15,437 $ 9,894
Content service revenues.................... 3,394 1,244 4,485 1,627
------- ------- ------- -------
e-Business segment subtotal............. 10,651 6,335 19,922 11,521
------- ------- ------- -------
Other service revenues...................... 147 669 345 1,387
------- ------- ------- -------
Total service revenues................ 10,798 7,004 20,267 12,908
------- ------- ------- -------
Total revenues........................ $26,517 $20,562 $51,340 $37,156
======= ======= ======= =======
</TABLE>
9
<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)
The following table presents geographical revenues from sources in total and
as a percent of total revenues for the three and six months ended June 30, 2000
and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North America........................ $15,605 59% $16,715 81% $31,140 61% $27,015 73%
Europe............................... 2,981 11% 1,493 7% 6,352 12% 4,115 11%
UK................................... 1,947 7% 466 2% 4,081 8% 2,659 7%
Italy................................ 1,998 8% 1,057 5% 3,121 6% 1,233 3%
Asia................................. 1,509 6% 144 1% 2,379 5% 677 2%
Japan................................ 858 3% 197 1% 1,556 3% 501 1%
Other................................ 1,619 6% 490 3% 2,711 5% 956 3%
------- ---- ------- ---- ------- ---- ------- ----
$26,517 100% $20,562 100% $51,340 100% $37,156 100%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
All of the Company's product sales are shipped from its facilities located in
the United States. As of June 30, 2000 and December 31, 1999 all of the
Company's assets relate to the e-Business segment, except for $7,939 and
$10,173, respectively, which are attributable to the other product revenue
segment. Substantially all of the Company's long-lived assets are located in the
United States.
(H) NEW ACCOUNTING STANDARDS
The Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 101, REVENUE RECOGNITION, in December 1999. The Company is required to
adopt this new accounting guidance through a cumulative charge to operations, in
accordance with Accounting Principles Board Opinion (APB) No. 20, ACCOUNTING
CHANGES, no later than the fourth quarter of fiscal 2000. The Company believes
that the adoption of the guidance provided in SAB No. 101 will not have a
material impact on future operating results.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION-AN INTERPRETATION OF APB OPINION NO. 25 (Interpretation 44).
Interpretation 44 clarifies the application of APB No. 25 in certain situations,
as defined. Interpretation 44 is effective July 1, 2000 but is retroactive for
certain events that occurred after December 15, 1998. The Company does not
expect that the adoption of Interpretation 44 will materially affect its
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS
No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. SFAS No. 133 is not expected to have
a material impact on the Company's consolidated financial statements.
10
<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)
(I) RECLASSIFICATIONS
Certain amounts have been reclassified in the prior period consolidated
financial statements to conform to the current period's presentation.
3. SPECIAL CHARGES
As a result of the acquisition of FutureTense, Inc. (FutureTense), a
software internet content management and delivery company during the fourth
quarter of 1999 (See Note 4), the Company incurred one-time costs related to the
merger of $4,328. These costs comprised professional fees and other charges of
$3,353 and costs to exit contractual obligation and asset impairments of $975.
The total cash impact related to the transaction was $3,394 of which $3,057 was
paid as of June 30, 2000. The remainder is expected to be paid by the end of the
year.
4. ACQUISITIONS
Effective October 15, 1999, the Company completed a merger with FutureTense.
The Company issued 7,346,210 shares of its common stock to the holders of
outstanding FutureTense stock, and of this total, 734,621 shares were placed in
escrow. Each FutureTense share was exchanged for .384 shares of the Company's
common stock. In addition, the Company assumed FutureTense employee stock
options and warrants that converted into options to acquire 1,124,628 shares of
Company common stock. As of the date of the consummation of the merger the
common stock issued by the Company and the converted options had an aggregate
market value of $111,180. The merger has been accounted for as a pooling of
interests and, accordingly, all prior period financial statements presented
herein have been restated as if the merger took place at the beginning of such
periods. In addition, in connection with this acquisition, the Company entered
into employment agreements in 1999 with key employees from FutureTense.
In accordance with Accounting Principles Board Opinion (APB) No. 16, the
following information presents Statement of Operations data for the periods
preceding the merger:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
------------------ ----------------
<S> <C> <C>
Open Market
Revenues................................. $18,550 $34,146
Net Loss................................. (1,925) (5,165)
FutureTense
Revenues................................. $ 2,012 $ 3,010
Net Loss................................. (1,759) (3,682)
</TABLE>
5. INVESTMENT IN SIGHTPATH, INC.
In June 1998, Open Market, Inc. and SightPath, Inc. (formerly known as
Clearview Technologies, Inc.) entered into an agreement whereby Open Market
assigned to SightPath rights to a pending patent application by David Gifford, a
founder of Open Market, Inc. and SightPath, Inc., in exchange for 291,667 shares
of series A Convertible Preferred Stock of SightPath, Inc.
11
<PAGE>
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. INVESTMENT IN SIGHTPATH, INC. (CONTINUED)
On March 29, 2000, Cisco Systems, Inc. announced a definitive agreement to
acquire all outstanding shares and options of SightPath, Inc. in exchange for
Cisco common stock. The merger was effective as of May 16, 2000 and the
conversion ratio was .7933703 which resulted in 231,399 common shares of Cisco
Systems, Inc. Approximately 10% of the shares will be held in escrow for a
period of one year. At May 16, 2000, the Company realized a net gain on
investment of $12,071, or $0.25 per share, based on a closing price of $60.563
per common share. On June 30, 2000, the Company then recognized an unrealized
gain on investment of $625 to record the fair value of $63.563 per common share
of Cisco Systems, Inc. On August 4, 2000, the Company sold 208,259 shares of
Cisco Systems, Inc. common stock for an average price of $65.35 per share
resulting in proceeds of $13,609.
6. CONTINGENCIES
CLASS ACTION SUIT
Between June 14, 2000 and August 10, 2000, the Company is aware of six
putative class actions that were filed against the Company and certain of its
officers and directors in the United States District Court for the District of
Massachusetts. These actions, each filed on behalf of an alleged class of
Company shareholders who purchased their common stock between November 8, 1999
and April 18, 2000, allege violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The
plaintiffs are seeking monetary damages and other appropriate relief. The
defendants believe they have meritorious defenses to the foregoing matters, but
cannot predict their outcome. Plaintiffs have notified defendants of their
intention to file a single, consolidated complaint to which the defendants shall
have 45 days to respond.
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS TOGETHER WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND
THE RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT. THE FOLLOWING FINANCIAL
DATA IS PRESENTED IN THOUSANDS.
OVERVIEW
We 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. 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
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 service arrangement. We have established sufficient vendor specific
objective evidence for the value of professional services, training, and
maintenance and support services based on the price charged when these elements
are sold separately. Accordingly, software license revenue is recognized under
the residual method in arrangements in which software is licensed with
professional services, training, and
13
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maintenance and support services. Under the residual method, the fair value of
the undelivered elements is deferred and subsequently recognized.
We also enter into reseller arrangements for certain of our products that
typically provide for sublicense fees payable to us based on a percentage of our
list price. We recognize these sublicense revenues from resellers when earned,
either on a per-unit basis or, for guaranteed minimums, upon shipment of the
master copy of all our software to which the guaranteed sublicense fee minimums
relate, if there are no significant post-delivery obligations.
The Company will be adopting SAB No. 101, REVENUE RECOGNITION. The Company
believes that the adoption of the guidance provided in SAB No. 101 will not have
a material impact on future operating results.
Our service revenues derive from a wide variety of contracted services for
technical support, consulting and training related to our products. We charge
fees for maintenance and support based on a percentage, generally 20% to 30% of
the corresponding license fee, and recognize these fees ratably over the life of
the contract. Our maintenance agreements provide for product upgrades and
enhancements and technical support in the form of telephone or on-site
assistance. These agreements are renewable at the discretion of the customer.
Accordingly, our maintenance and technical support revenues are typically a
function of new product licenses and the annual renewal of maintenance
agreements. We also generate revenues from professional services, which include
implementation and technical consulting, and from education services, including
on-site and online training services. We recognize revenues from professional
and education services as such services are performed.
We report our revenues according to three operating segments: commerce,
content and other. Our commerce revenues include license fees and service
revenues from our Transact and ShopSite products. Our content revenues include
license fees and service revenues from our Content Server suite of integrated
products. For reporting purposes, we refer to the total of product and service
revenues for both commerce and content as e-Business revenues. The other
revenues relate, historically, to license fees and service revenues generated
from the software publishing tools acquired from Folio and other products,
certain of which have been discontinued. Subsequent to June 1999, other revenues
relate primarily to the royalties received from NextPage in accordance with our
strategic arrangement.
Our cost of product revenues consists of costs to distribute our products,
including the cost of the media on which our products are delivered and royalty
payments to third-party vendors for technology that is incorporated into our
products. Our cost of service revenues consists primarily of the salaries and
related costs of our technical personnel.
Software development costs that qualified to be capitalized were immaterial
in all periods. Accordingly, we have charged all such expenses to research and
development in the period incurred.
Our customer base is diversified, with no single customer representing
greater than 10% of our total revenues for the quarter ended June 30, 2000. For
the quarter ended June 30, 1999, one customer accounted for approximately 15% of
the Company's revenues. During the six months ended June 30, 2000 and 1999, no
customer accounted for more than 10% of the Company's revenues.
14
<PAGE>
RESULTS OF OPERATIONS
REVENUES
<TABLE>
<CAPTION>
THREE-MONTHS ENDED % CHANGE SIX-MONTHS ENDED % CHANGE
JUNE 30, FROM JUNE 30, FROM
------------------- PRIOR ------------------- PRIOR
2000 1999 YEAR 2000 1999 YEAR
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Commerce revenues..................... $13,094 $15,632 (16%) $27,835 $28,260 (2%)
Content revenues...................... 12,108 2,013 501% 20,853 3,011 593%
------- ------- ------- -------
e-Business revenues................... 25,202 17,645 43% 48,688 31,271 56%
------- ------- ------- -------
Other revenues........................ 1,315 2,917 (55%) 2,652 5,885 (55%)
------- ------- ------- -------
Total revenues........................ $26,517 $20,562 29% $51,340 $37,156 38%
======= ======= ======= =======
</TABLE>
For the three and six months ended June 30, 2000, total revenues grew $5,955
and $14,184, respectively, from the comparable prior year periods.
PRODUCT REVENUES
<TABLE>
<CAPTION>
THREE-MONTHS ENDED % CHANGE SIX-MONTHS ENDED % CHANGE
JUNE 30, FROM JUNE 30, FROM
------------------- PRIOR ------------------- PRIOR
2000 1999 YEAR 2000 1999 YEAR
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Commerce product revenue.............. $ 5,837 $10,541 (45%) $12,398 $18,366 (32%)
Content product revenue............... 8,714 769 1033% 16,368 1,384 1083%
------- ------- ------- -------
e-Business product revenue............ 14,551 11,310 29% 28,766 19,750 46%
------- ------- ------- -------
Other product revenue................. 1,168 2,248 (48%) 2,307 4,498 (49%)
------- ------- ------- -------
Total product revenue................. $15,719 $13,558 16% $31,073 $24,248 28%
======= ======= ======= =======
</TABLE>
For the three and six months ended June 30, 2000, total product revenues
increased $2,161 and $6,825, respectively, as compared to the same periods of
the prior year. E-Business product revenues for the three and six months ended
June 30, 2000, increased $3,241 and $9,016, respectively, primarily due to
growth in content product licenses and follow-on sales to our installed base of
customers. For the three and six months ended June 30, 2000, commerce product
revenue declined 45% and 32%, respectively. The decline was primarily a result
of the $3,000 commerce product distribution agreement with NextPage that was
consummated during the three months ended June 30, 1999 which granted NextPage a
non-exclusive worldwide right to market and distribute our commerce software
products to the commercial publishing industry. In addition, lower average
system prices for Transact licenses contributed to the decline. During the three
months ended June 30, 2000, we realized an increase in the number of Transact
unit sales, but also a reduction in the average system price of new Transact
licenses from the comparable prior year period. The average revenue generated by
Transact licenses decreased because a smaller proportion of our new Transact
customers were Commerce Service Providers, or CSPs, and a higher proportion were
enterprise customers. CSPs generally pay higher license fees than enterprise
customers for Transact because they are using the product to support many other
businesses.
Other product revenue for the current periods represented royalty revenue
from the NextPage master distribution agreement for the Folio software products.
Product revenues accounted for approximately 59% and 61% of total revenues
for the three and six months ended June 30, 2000, respectively, and 66% and 65%
for the three and six months ended June 30,
15
<PAGE>
1999, respectively. We expect that product revenues will continue to account for
the majority of total revenues for the foreseeable future.
SERVICE REVENUES
<TABLE>
<CAPTION>
THREE-MONTHS ENDED % CHANGE SIX-MONTHS ENDED % CHANGE
JUNE 30, FROM JUNE 30, FROM
------------------- PRIOR ------------------- PRIOR
2000 1999 YEAR 2000 1999 YEAR
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Commerce service revenue............... $ 7,257 $5,091 43% $15,437 $ 9,894 56%
Content service revenue................ 3,394 1,244 173% 4,485 1,627 176%
------- ------ ------- -------
e-Business service revenue............. 10,651 6,335 68% 19,922 11,521 73%
------- ------ ------- -------
Other service revenue.................. 147 669 (78%) 345 1,387 (75%)
------- ------ ------- -------
Total service revenue.................. $10,798 $7,004 54% $20,267 $12,908 57%
======= ====== ======= =======
</TABLE>
For the three and six months ended June 30, 2000, total service revenues
increased $3,794 and $7,359, respectively as compared to the same periods of the
prior year. E-Business service revenue increased $4,316 and $8,401 for the three
and six months ended June 30, 2000, respectively, from the comparable prior year
periods. For the three and six months ended June 30, 2000, commerce service
revenue increased $2,166 and $5,543, respectively. The growth was attributed
primarily to an increase in commerce consulting projects, as well as growth in
commerce maintenance and support revenues from both new and installed customers.
Content service revenues increased as a direct result of significant new content
product license business. Other service revenues for the three and six months
ended June 30, 2000, declined 78% and 75%, respectively. The decline was due to
the elimination of service revenue related to the Folio publishing segment. We
do not expect to derive significant Folio service revenues during the term of
the strategic arrangement with NextPage.
Service revenues accounted for 41% and 39% of total revenues for the three
and six months ended June 30, 2000, respectively, and 34% and 35% for the three
and six months ended June 30, 1999, respectively.
COST OF PRODUCT REVENUES
<TABLE>
<CAPTION>
THREE-MONTHS
ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cost of product revenues.................. $2,311 $1,014 $4,686 $1,778
Percentage of total product revenues...... 15% 7% 15% 7%
Product gross margin...................... 85% 93% 85% 93%
</TABLE>
For the three and six months ended June 30, 2000, cost of product revenues
increased primarily as a result of growth in content product revenues and an
increase in costs for third party licensing royalties related to our commerce
products. Our content management products carry higher third party costs than
our commerce products. As a result, we believe that our cost of product revenues
as a percentage of product revenues will be in the range of 14% to 18% for the
foreseeable future as we embed more third party technology into our product line
and continue to resell third party software products with our commerce and
content solutions.
16
<PAGE>
COST OF SERVICE REVENUES
<TABLE>
<CAPTION>
THREE-MONTHS
ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cost of service revenues................. $8,972 $5,197 $16,687 $9,348
Percentage of total service revenues..... 83% 74% 82% 72%
Service gross margin..................... 17% 26% 18% 28%
</TABLE>
For the three and six months ended June 30, 2000, cost of service revenues
increased primarily as a result of growth in our professional services business
and increased costs related to outside consulting expenses and personnel
recruitment. For the three months ended June 30, 2000, outside consulting
expenses increased $2,763 and travel, recruiting, and training costs increased
$568 from the comparable prior year period. The decrease in service gross margin
was attributed primarily to our increased use of outside consultants to meet
increased demand for our consulting services.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE-MONTHS ENDED % CHANGE SIX-MONTHS ENDED % CHANGE
JUNE 30, FROM JUNE 30, FROM
------------------- PRIOR ------------------- PRIOR
2000 1999 YEAR 2000 1999 YEAR
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Selling and marketing................. $12,632 $ 9,360 35% $23,109 $17,857 29%
Research and development.............. 6,422 5,872 9% 12,458 11,110 12%
General and administrative............ 2,957 1,969 50% 5,328 4,199 27%
Amortization of intangibles........... 766 851 (10%) 1,531 1,704 (10%)
------- ------- ------- -------
Total operating expenses.............. $22,777 $18,052 26% $42,426 $34,870 22%
======= ======= ======= =======
</TABLE>
SELLING AND MARKETING
Selling and marketing expenses consist primarily of the cost of sales and
marketing personnel and outside marketing consultants, as well as the costs
associated with marketing programs, industry tradeshows, sales seminars,
advertising, and product literature.
For the three and six months ended June 30, 2000, selling and marketing
expenses increased to $12,632 and $23,109, respectively, from $9,360 and $17,857
in the comparable prior year periods, respectively. The increases were
attributed primarily to increases in employee-related expenses, recruiting fees,
and marketing and promotional efforts. For the three months ended June 30, 2000,
we realized increases of $1,499 in employee related expenses over the same
period last year, which included an increase of $632 for commission expenses
related to the increase in revenues. Also, for the three months ended June 30,
2000, recruiting fees increased $270 from the comparable prior year period as a
result of aggressive hiring efforts related to the reorganization of our North
American field sales organization.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of the cost of research
and development personnel and independent contractors, certain licensed
technology and equipment and facilities costs related to such activities.
For the three and six months ended June 30, 2000, research and development
expenses increased to $6,422 and $12,458 from $5,872 and $11,110 in the
comparable prior year periods, respectively. For the three months ended
June 30, 2000, the increased use of independent contractors and other outside
17
<PAGE>
consultants prior to our new product enhancements and releases in June resulted
in increased costs of approximately $223 from the comparable prior year period.
In addition, for the three months ended June 30, 2000, recruiting expenses
increased approximately $106 from the comparable prior year period to meet
hiring needs in the research and development organization.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of the cost of
finance, management and administrative personnel and legal and other
professional fees.
For the three and six months ended June 30, 2000, general and administrative
expenses increased to $2,957 and $5,328, respectively, from $1,969 and $4,199 in
the comparable prior year periods, respectively. The increases were attributed
primarily to an increase in bad debt expense and the related allowance for
doubtful accounts, which have increased in proportion to the increase in the
accounts receivable balance.
AMORTIZATION OF INTANGIBLES
For the three and six months ended June 30, 2000, amortization of
intangibles, primarily resulting from the acquisitions or mergers of ICentral,
FutureTense and Folio, decreased to $766 and $1,531, respectively, from $851 and
$1,704, in the comparable prior year periods, respectively. The decrease was
attributed to fully amortized intangible assets at the end of fiscal 1999.
NON-OPERATING INCOME (EXPENSE)
Interest income represents interest earned on cash, cash equivalents and
marketable securities. For the three and six months ended June 30, 2000,
interest income increased to $373 and $726, respectively, from $309 and $623 in
the comparable prior year periods, respectively. The increase was primarily as a
result of higher average returns on investments in cash, cash equivalents and
marketable securities.
Interest expense relates to the interest charged on our line-of-credit and
long-term obligations. For the three and six months ended June 30, 2000,
interest expense decreased to $83 and $175, respectively, from $184 and $332 in
the comparable prior year periods, respectively. The decrease was attributed
primarily to the retirement of a note payable related to the Folio acquisition.
Other income/expense primarily represents foreign currency translation gains
and losses.
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, requires disclosure of all
components of comprehensive income on an annual and interim basis. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. In our case, the changes in equity included in comprehensive income are
comprised of the reported net income for all periods presented and unrealized
gains on investments. During the three months ended June 30, 2000, we recorded a
gain on investment of $12,321 and an unrealized gain of $625 on the conversion
of 291,667 shares of SightPath preferred stock (formerly known as Clearview
Technologies) to 208,259 shares of Cisco Systems common stock on May 16, 2000.
PROVISION FOR INCOME TAXES
We recorded a provision for income taxes of $298 and $350 for the three and
six months ended June 30, 2000, respectively, from $103 and $145 in the
comparable prior year periods, respectively. For the three months ended
June 30, 2000, approximately $250 related to income taxes on the gain on our
investment in SightPath, Inc. preferred stock. For the three and six months
ended June 30, 2000, approximately $48 and $100, respectively, related to
foreign income taxes, as did those amounts provisioned in the comparable prior
year periods.
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<PAGE>
Generally, this provision relates to the amount of estimated taxes due in
foreign jurisdictions for our foreign operations and certain withholding taxes.
We incurred losses for U.S. tax purposes for all periods to date and,
accordingly, there has been no provision for U.S. income taxes. We believe that
the provision for income taxes will fluctuate in the future and will be
dependent upon the geographical locations of future sales and the associated
withholding taxes in those countries. The provision for income taxes will also
fluctuate when we become eligible for corporate income taxation in the United
States.
NET INCOME/LOSS
For the three months ended June 30, 2000, net income was $4,709, or $0.10
per share, including a net gain of $12,071, or $0.25 per share, from the
Company's investment in SightPath, Inc., which was acquired by Cisco
Systems, Inc. in May 2000. Excluding the net gain from investment, net loss was
$7,362 million, or $0.16 loss per share. This compared to a net loss of $3,684,
or $0.09 loss per share, for the three months ended June 30, 1999. For the six
months ended June 30, 2000 and 1999, net loss was $12,127, or $0.27 loss per
share, excluding the net gain from investment, and $8,847, or $0.21 loss per
share, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we had $39,388 in cash, cash equivalents and marketable
securities, an increase of $7,097 from December 31, 1999.
Our operating activities used cash and cash equivalents of $12,638 and
$5,454 for the six months ended June 30, 2000 and 1999, respectively, to fund
our operations. At June 30, 2000, our net loss decreased approximately 99% to
$56 from $8,847 in the comparable prior year period. The decrease in our net
loss was attributed primarily to the net gain of $12,071 on our investment in
SightPath, Inc. preferred stock. Excluding this net gain from investment, net
loss for the six months ended June 30, 2000 was $12,127. An increase in accounts
receivable also contributed to the higher use of cash in operating activities.
Accounts receivable increased as a result of slower than anticipated collection
of customer receivables.
Our investing activities provided cash and cash equivalents of $5,040 and
$384 for the six months ended June 30, 2000 and 1999, respectively. For the six
months ended June 30, 2000, the primary source of cash from investing activities
was $6,376 related to the sale of marketable securities. This was partially
offset by purchases of property and equipment in the amount of $1,627. In the
comparable prior year period, the primary source of cash from investing
activities was $1,421 related to the sale of marketable securities, which was
partially offset by purchases of property and equipment of $1,075.
Our financing activities provided cash and cash equivalents of $6,347 and
$1,105 for the six months ended June 30, 2000 and 1999, respectively. For the
six months ended June 30, 2000, the primary source of cash from financing
activities was $7,432 from the issuance of common stock under our stock option
and stock purchase plans. This was partially offset by payments made on our line
of credit of $1,010. In the comparable prior year period, cash and cash
equivalents provided by financing activities consisted of $4,500 related to the
sale of redeemable preferred stock and $2,294 from the issuance of common stock
under our stock option and stock purchase plans. These provisions were partially
offset by the repayment of a $5,000 note payable in connection with the Folio
acquisition.
In July 1998, we obtained a $2,800 mortgage loan, on a Provo, Utah,
building, which bears interest at the fixed rate of 8.5%. The mortgage principal
payments are based upon a 20-year term with a balloon payment of $2,468 due on
June 19, 2003.
We have an unsecured credit facility arrangement with a bank that provides
up to $15,000 in financing in the form of a demand line of credit. Borrowings
under this line are limited to 80% of eligible domestic accounts receivable and
90% of eligible foreign accounts receivable, as defined, and bear interest at
the prime lending rate, which was 9.5% at June 30, 2000. We are required to
comply with certain restrictive
19
<PAGE>
covenants under this agreement and the line is collateralized by our accounts
receivable. We were in compliance with all such covenants as of June 30, 2000.
At June 30, 2000, our borrowings under this facility were $9,340 with
availability of $5,660 under this line.
At December 31, 1999, we had net operating loss carry-forwards 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 carry-forwards.
We believe that our existing capital resources are adequate to meet our cash
requirements for at least the next 12 months. There can be no assurance,
however, that changes in our plans or other events affecting our operations will
not result in accelerated or unexpected expenditures.
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.
20
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
INTRODUCTION
This quarterly report on Form 10-Q contains certain forward-looking
statements. For this purpose, any statements we have used that are not
statements of historical fact may be considered forward-looking statements. We
have used "believes", "anticipates", "plans", "expects", and similar
expressions. There are a number of important factors that could cause our actual
results to differ materially from those indicated by forward-looking statements
made in this quarterly report and those presented elsewhere by management from
time to time. Some of the important risks and uncertainties that may cause our
operating results to differ materially or adversely are discussed below.
WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND THESE LOSSES MAY CONTINUE IN THE
FUTURE, WHICH COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.
We have experienced operating losses in each quarterly and annual period
since our inception and these operating losses may continue in the future. We
incurred net losses of $62.5 million for the year ended December 31, 1997,
$37.0 million for the year ended December 31, 1998, and $19.8 million for the
year ended December 31, 1999. As of June 30, 2000, our accumulated deficit was
$165 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 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.
21
<PAGE>
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.
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
22
<PAGE>
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;
-- 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;
23
<PAGE>
-- customer order deferrals in anticipation of enhancements or new products
offered by us or our competitors;
-- non-renewal of service agreements;
-- software defects and other product quality problems;
-- the mix of products and services we sell;
-- customer retention;
-- the ability to collect payments from our customers on a timely basis;
-- any changes in our pricing policies and/or those of our competitors;
-- changes in the level of operating expenses;
-- sales productivity; and
-- general economic conditions.
In addition, our operating expenses are largely based on anticipated revenue
trends and a significant portion of our expenses, such as leased real estate
facilities, depreciation and personnel, is fixed in the short term. Accordingly,
our results of operations are particularly sensitive to fluctuations in
revenues. If our revenues fall below our expectations, we would probably not be
able to reduce our fixed or other expenses in sufficient time to respond to the
shortfall. If our operating results fall below the expectations of securities
analysts or investors in some future quarter or quarters, the market price of
our common stock is likely to decline.
IF WE ARE UNABLE TO 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
quarter ended June 30, 2000, we derived approximately 41% of our total revenues
from sales outside North America. We currently have eight offices in Europe and
Asia. A key component of our business strategy is to expand our international
activities. As we continue to expand internationally, we are increasingly
subject to risks of doing business internationally, including the following:
-- unexpected changes in regulatory requirements;
-- export controls relating to encryption technology and other export
restrictions;
24
<PAGE>
-- 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, 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.
25
<PAGE>
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
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
26
<PAGE>
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 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
27
<PAGE>
of its infrastructure. These outages and delays could impact the Internet sites
of Web publishers using our products and services.
THE IMPOSITION OF SALES AND OTHER TAXES ON PRODUCTS SOLD BY OUR CUSTOMERS OVER
THE INTERNET COULD HAVE A NEGATIVE EFFECT ON ONLINE COMMERCE AND, AS A RESULT,
ON DEMAND FOR OUR PRODUCT.
The imposition of new sales or other taxes could limit the growth of
electronic commerce generally and, as a result, the demand for our products.
There is recent federal legislation that limits the imposition of state and
local taxes on Internet-related sales. In 1998, the United States Congress
passed the Internet Tax Freedom Act, which places a three-year moratorium on
state and local taxes on Internet access, unless the tax was already imposed
prior to October 1, 1998, and discriminatory taxes on electronic commerce. There
is a possibility that Congress may not renew this legislation in 2001. If
Congress chooses not to renew this legislation, state and local governments
would be free to impose taxes on goods purchased over the Internet. In addition,
one or more foreign countries may seek to impose sales or other tax collection
obligations on out-of-jurisdiction companies that engage in electronic commerce.
A successful assertion by one or more foreign countries that companies engaged
in electronic commerce should collect sales or other taxes on sales of their
products over the Internet, even though not physically present in the foreign
country, could indirectly reduce demand for our products.
WE ARE A PARTY TO SECURITIES CLASS ACTION LITIGATION WHICH MAY BE COSTLY TO
DEFEND AND THE OUTCOME OF WHICH IS UNCERTAIN AND MAY HARM OUR BUSINESS.
We and several of our former and present officers and directors are named as
defendants in several class action complaints which have been filed on behalf of
certain of our stockholders who purchased securities between November 8, 1999
and April 18, 2000. These complaints allege violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under
this Act. The plaintiffs are seeking monetary damages and other appropriate
relief and have notified us and the other defendants of their intention to
file a single, consolidated complaint.
We can provide no assurance as to the outcome of this securities litigation.
Any conclusion of this litigation in a manner adverse to us would have a
material adverse effect on our business, financial condition, and results of
operations. In addition, the cost to us of defending any litigation or other
proceeding, even if resolved in our favor, could be substantial. Such litigation
could also substantially divert the attention of our management and our
resources in general. Uncertainties resulting from the initiation and
continuation of this litigation or other proceedings could harm our ability to
compete in the marketplace. Because the price of our common stock has been, and
may continue to be, highly volatile, we have no assurance that additional
securities class action complaints will not be filed against us in the future.
28
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE HEDGING. The accounts of our foreign subsidiaries are
translated in accordance with SFAS No. 52, Foreign Currency Translation. In
translating the accounts of the foreign subsidiaries into U.S. dollars, assets
and liabilities are translated at the rate of exchange in effect at quarter end,
while stockholders' equity is translated at historical rates. Revenue and
expense accounts are translated using the weighted average exchange rate in
effect during the quarter. Foreign currency translation and transaction gains or
losses for our subsidiaries are included in the accompanying consolidated
statements of operations since the functional currency for our subsidiaries is
the U.S. dollar. The Company had accounts receivable of $619 and $1,036
denominated in foreign currency as of June 30, 2000 and December 31, 1999,
respectively.
INVESTMENT PORTFOLIO. We do not use derivative financial instruments for
investment purposes and only invest in financial instruments that meet the high
credit quality standards, as specified in our investment policy guidelines. The
policy also limits the amount of credit exposure of any one issue, issuer, and
type of investment. See "Note 2--Summary of Significant Accounting Policies" in
the Notes to Consolidated Financial Statements. In addition, we maintain an
investment in Cisco Systems, Inc. (see Note 5). This security is classified as
available for sale and consequently, is recorded on the balance sheet at fair
value with unrealized gains or losses reported as a separate component of
accumulated other comprehensive income, net of tax. Since Cisco Systems, Inc. is
a publicly traded equity investment, the value is subject to market price
volatility.
29
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Between June 14, 2000 and August 10, 2000, the Company is aware of six
putative class actions that were filed against the Company and certain of its
officers and directors in the United States District Court for the District of
Massachusetts. These actions, each filed on behalf of an alleged class of
Company shareholders who purchased their common stock between November 8, 1999
and April 18, 2000, allege violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The
plaintiffs are seeking monetary damages and other appropriate relief. The
defendants believe they have meritorious defenses to the foregoing matters, but
cannot predict their outcome. Plaintiffs have notified defendants of their
intention to file a single, consolidated complaint to which the defendants shall
have 45 days to respond.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual Meeting of Stockholders held on May 16, 2000, the
following proposals were adopted by the vote specified below:
<TABLE>
<CAPTION>
BROKER
PROPOSAL FOR AGAINST ABSTAIN NON-VOTES
-------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
(1) To elect three Class I Directors:
Thomas H. Bruggere.......................... 35,635,082 852,157
William S. Kaiser........................... 35,887,192 600,047
Paul Sagan.................................. 35,891,802 595,437
(2) To approve an amendment to the Corporation's
Amended and Restated Certificate of
Incorporation to increase the number of
authorized shares of common stock from
100,000,000 to 300,000,000.................. 29,106,672 7,095,992 284,575
(3) To approve amendments to the Corporation's
1996 Director Option Plan to (a) increase
the number of shares of Common Stock
issuable upon exercise of options granted
annually to directors from 6,000 to 10,000
and (b) provide that all options granted on
or after May 16, 2000 shall vest as to 25%
of the shares subject to such options on the
first anniversary of the date of grant and
in 12 equal quarterly installments
thereafter.................................. 31,500,225 4,673,287 313,727
(4) To ratify the selection by the Board of
Directors of Arthur Andersen LLP as the
Corporation's independent public accountants
for the fiscal year ending December 31,
2000........................................ 35,940,477 267,172 279,590
</TABLE>
30
<PAGE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On April 10, 2000, we announced that we expect to realize an estimated gain
of $14 to 16 million related to our ownership of SightPath, Inc. Preferred
Stock. This potential gain is a result of Cisco Systems, Inc.'s, pending
acquisition of SightPath, Inc. The actual value that we receive will depend upon
the trading price of Cisco's common stock at the time that the acquisition is
consummated. The Current Report on Form 8-K reporting this event was filed with
the Securities and Exchange Commission on April 25, 2000. See Footnote 5 to the
accompanying financial statements.
On July 25, 2000, Open Market, Inc. announced that effective July 25, 2000,
Ron Matros, resigned as the Company's President and Chief Executive Officer, and
that Harland LaVigne, a current member of the Company's Board of Directors, will
serve as interim President and Chief Executive Officer of the Company. The
Current Report on Form 8-K reporting this event was filed with the Securities
and Exchange Commission on August 7, 2000.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
<TABLE>
<S> <C> <C>
OPEN MARKET, INC.
(Registrant)
By: /s/ BETTY J. SAVAGE
-----------------------------------------
Betty J. Savage
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Date: August 14, 2000 (PRINCIPAL FINANCIAL OFFICER)
By: /s/ ANNMARIE RUSSELL
-----------------------------------------
Annmarie Russell
VICE PRESIDENT OF FINANCE
Date: August 14, 2000 (PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
32
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.
10.1 1996 Director Option Plan.
27.1 Financial Data Schedule for the quarter ended June 30, 2000.
</TABLE>
33
