Initial Public Offering (IPO): Pre-Effective Amendment to Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1/A Pre-Effective Amendment to Registration Statement 85 470K
(General Form)
2: EX-1.1 Us Underwriting Agreement 22 107K
3: EX-1.2 International Underwriting Agreement 10 44K
4: EX-5 Hale & Dorr Opinion 2 9K
5: EX-23.2 Consent of Independent Accountants 1 5K
6: EX-24 Power of Attorney 1 6K
S-1/A — Pre-Effective Amendment to Registration Statement (General Form)
Document Table of Contents
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1996
REGISTRATION NO. 333-03340
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
OPEN MARKET, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 7372 04-3214536
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR NUMBER)
ORGANIZATION) ----------------
245 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02142
(617) 621-9500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
GARY B. EICHHORN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
OPEN MARKET, INC.
245 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02142
(617) 621-9500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
PAUL P. BROUNTAS, ESQ. DAVID C. CHAPIN, ESQ.
HALE AND DORR ROPES & GRAY
60 STATE STREET ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02109 BOSTON, MASSACHUSETTS 02110
(617) 526-6000 (617) 951-7000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_] 333-
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] 333-
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
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OPEN MARKET, INC.
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY
ITEMS IN PART I OF FORM S-1
[Download Table]
REGISTRATION STATEMENT ITEM AND CAPTION LOCATION IN PROSPECTUS
--------------------------------------- ----------------------
1.Forepart of Registration Statement and
Outside Front Cover Page of
Prospectus............................. Outside Front Cover Page
2.Inside Front and Outside Back Cover Pages
of Prospectus.......................... Inside Front Cover Page; Outside
Back Cover Page
3.Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges..... Prospectus Summary; Risk Factors
4.Use of Proceeds.......................... Prospectus Summary; Use of Proceeds
5.Determination of Offering Price.......... Underwriting
6.Dilution................................. Dilution
7.Selling Security Holders................. Not Applicable
8.Plan of Distribution..................... Outside Front Cover Page;
Underwriting
9.Description of Securities to be
Registered............................. Description of Capital Stock
10.Interests of Named Experts and Counsel... Legal Matters; Experts
11.Information With Respect to the
Registrant:
(a)Description of Business................ Prospectus Summary; Business;
Management's Discussion and
Analysis of Financial Condition and
Results of Operations
(b)Description of Property................ Business-Facilities
(c)Legal Proceedings...................... Not Applicable
(d)Market Price of and Dividends on the
Registrant's Common Equity and
Related Stockholder Matters.......... Front Cover Page; Dividend Policy;
Management-Executive Compensation;
Description of Capital Stock;
Shares Eligible for Future Sale
(e)Financial Statements................... Capitalization; Consolidated
Financial Statements
(f)Selected Financial Data................ Selected Consolidated Financial Data
(g)Supplementary Financial Information.... Not Applicable
(h)Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... Management's Discussion and Analysis
of Financial Condition and Results
of Operations
(i)Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure................. Not Applicable
(j)Directors, Executive Officers,
Promoters and Control Persons........ Management--Executive Officers,
Directors and Key Employees;
Certain Transactions
(k)Executive Compensation................. Management-Executive Compensation
(l)Security Ownership of Certain
Beneficial Owners and Management..... Principal Stockholders
(m)Certain Relationships and Related
Transactions......................... Certain Transactions
12.Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Not Applicable
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 14, 1996
4,000,000 SHARES
[LOGO]
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
-----------
All of the 4,000,000 shares of Common Stock offered hereby are being sold by
Open Market, Inc. Of the 4,000,000 shares of Common Stock offered, 3,200,000
shares are being offered hereby in the United States and 800,000 shares are
being offered in a concurrent International Offering outside the United States.
The initial public offering price and the aggregate underwriting discount per
share will be identical for both Offerings. See "Underwriting".
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price per share will be between $13.00 and $15.00. For factors to be considered
in determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR CERTAIN CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN THE COMMON STOCK.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "OMKT".
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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[Download Table]
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------- ------------ -----------
Per Share............................... $ $ $
Total(3)................................ $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting estimated expenses of $800,000 payable by the Company.
(3) The Company has granted the U.S. Underwriters an option for 30 days to
purchase up to an additional 480,000 shares at the initial public offering
price per share, less the underwriting discount, solely to cover over-
allotments. Additionally, the Company has granted the International
Underwriters an option for 30 days to purchase up to an additional 120,000
shares at the initial public offering price per share, less the
underwriting discount, solely to cover over-allotments. If such options are
exercised in full, the total initial public offering price, underwriting
discount and proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting".
-----------
The shares offered hereby are offered severally by the U.S. Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1996, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
COWEN & COMPANY
MONTGOMERY SECURITIES
-----------
The date of this Prospectus is , 1996.
secure Internet commerce . . .
[DEPICTION OF AN OM-TRANSACT CENTRALIZED INTERNET COMMERCE SERVICES NETWORK FOR
FINANCIAL SERVICES PROVIDERS, CORPORATIONS, TELCOS AND ACCESS PROVIDERS
(REPRESENTED BY A BUILDING IN THE CENTER OF THE GRAPHIC IMAGE) AND SHOWING, WITH
ARROWS, THE FLOW OF INFORMATION.]
Internet
[LOGO]
Providing Software for Managing Business Transactions on to Internet Open Market
enables businesses to conduct. . .
--------------
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
Intranet
[Depiction of OM-Axcess centralized information access services network for a
corporation (represented by a building in the center of the graphic image) and
showing, with arrows, the flow of information.]
and information access control.
[LOGO OF OPEN MARKET APPEARS HERE]
* Open Market expects that OM-Axcess and OM-Transact will be generally
available in May of 1996.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. Except as otherwise noted herein, all
information contained in this Prospectus (i) reflects the conversion of all
outstanding shares of the Company's Series A, B and C Convertible Preferred
Stock (the "Preferred Stock") into an aggregate of 13,437,025 shares of Common
Stock at the closing of the Offerings, and (ii) assumes no exercise of the
Underwriters' over-allotment options.
THE COMPANY
Open Market, Inc. ("Open Market" or the "Company") develops, markets,
licenses and supports high performance software products that allow its
customers to engage in business-to-consumer and business-to-business electronic
commerce on the Internet and to deploy Internet-based business applications
within an enterprise ("Intranet"). Open Market's innovative technology enables
the separation of the management of business transactions from the management
of content, thereby allowing companies to securely and centrally manage
business transactions using content located on multiple distributed Web
servers. The Company's products permit functions such as order taking,
authorization, payment processing, security and customer service to be
performed centrally by a "back office" transaction management system, allowing
merchants and other content providers to focus on management of the "front
office" content at their distributed Web sites.
Open Market's strategy is to focus on providing Internet software for
business. The Company's objective is to make its software an industry standard
for managing business transactions on the Internet. The Company's products
feature open application interfaces allowing for integration with existing
corporate systems and a scalable distributed infrastructure that can grow with
a company's needs. The products provide the core building blocks for managing
transactions on the Internet, support open standards and multiple security and
payment protocols and work with popular browsers and servers.
The Company's products include:
OM-TRANSACT(TM) - a transaction management system with the capacity to
handle a high volume of transactions via standard Web protocols. Coupled
with OM-SecureLink(TM), the Company's enabling technology for linking
content to management servers, OM-Transact enables companies to use the Web
to take customers' orders, authorize their credit, instruct the warehouse
to ship the goods, request the bank to transfer funds and track
transactions from start to finish.
OM-AXCESS(TM) - an Intranet authentication and authorization system that,
coupled with OM-SecureLink, allows companies to control access to content
located on private Intranets. Using OM-Axcess, companies issue "access
tickets" to employees, contractors, partners and visitors seeking to access
secure Web-based information and to engage in collaboration and other forms
of electronic commerce within an enterprise.
OM-EXPRESS(TM) - a desktop software product that allows users to download
selected Internet content to their local personal computers during off-peak
hours for later viewing and use.
The Company's other products include Open Market Secure WebServer(TM), Open
Market WebReporter(TM) and Merchant Solution(TM).
To accelerate the market acceptance of its technology architecture and
products, the Company has entered into numerous technology, marketing and
distribution relationships. Among the companies that have entered into these
agreements with Open Market are Novell, Inc., FTP Software, Inc., Hewlett-
Packard Company, Digital Equipment Corporation, Tandem Computers Incorporated,
Interleaf, Inc., Bluestone, Inc., Stratus Computer, Inc. and Sequent Computer
Systems Incorporated.
The Company was incorporated as a Delaware corporation in December 1993. The
Company's principal executive office is located at 245 First Street, Cambridge,
Massachusetts 02142, and its telephone number is (617) 621-9500. The Company's
home page is located at http://www.openmarket.com.
Open Market(TM), OM-Transact, OM-Axcess, OM-SecureLink, OM-Express, Open
Market Secure WebServer, Open Market WebReporter, Merchant Solution and
StoreBuilder(TM), are trademarks of Open Market, Inc. All other trademarks or
trade names referred to in this Prospectus are the property of their respective
owners.
3
RISK FACTORS
For a discussion of considerations relevant to an investment in the Common
Stock, see "Risk Factors".
THE OFFERINGS
The offering of 3,200,000 shares of common stock, par value $.001 per share
(the "Common Stock"), initially being offered in the United States (the "U.S.
Offering") and the offering of 800,000 shares of Common Stock initially being
offered in a concurrent international offering outside the United States (the
"International Offering") are collectively referred to as the "Offerings". The
closing of each of the Offerings is conditioned upon the closing of the other
Offering.
[Download Table]
Common Stock offered by the Company................. 4,000,000 shares
U.S. Offering...................................... 3,200,000 shares
International Offering............................. 800,000 shares
Common Stock to be outstanding after the Offerings.. 26,939,910 shares(1)
Nasdaq National Market symbol....................... OMKT
Use of proceeds..................................... General corporate
purposes, including the
funding of working
capital and growth.
See "Use of Proceeds".
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
[Download Table]
THREE MONTHS
ENDED
PERIOD FROM INCEPTION MARCH 31,
(APRIL 25, 1994) TO YEAR ENDED ----------------
DECEMBER 31, 1994 DECEMBER 31, 1995 1995 1996
--------------------- ----------------- ------- -------
STATEMENT OF OPERATIONS
DATA:
Total revenues.......... $ -- $ 1,806 $ 88 $ 2,675
Loss from operations.... (1,280) (14,028) (1,004) (7,048)
Net loss................ (1,250) (13,872) (1,012) (6,867)
Pro forma net loss per
common and common
equivalent share(2).... $ (.53) $ (.26)
Pro forma weighted
average number of
common and common
equivalent shares
outstanding(2)......... 26,250 26,345
[Download Table]
MARCH 31, 1996
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PRO FORMA
PRO FORMA(3) AS ADJUSTED(3)(4)
------------ -----------------
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securi-
ties.......................................... $21,648 $72,928
Working capital................................ 11,632 62,912
Total assets................................... 27,599 78,579
Long-term obligations, net of current
maturities.................................... 986 986
Stockholders' equity........................... 15,221 66,501
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(1) Based upon the number of shares outstanding as of March 31, 1996. Excludes
5,539,617 shares of Common Stock issuable upon the exercise of outstanding
options as of March 31, 1996 with a weighted average exercise price of
$1.57 per share, and an additional 1,481,998 and 250,000 shares reserved
for issuance under the Company's 1994 Stock Incentive Plan and 1996
Employee Stock Purchase Plan, respectively, plus shares reserved for
issuance under the 1996 Director Option Plan. See "Management--Executive
Compensation" and Note 5 of Notes to Consolidated Financial Statements.
(2) Computed on the basis described in Note 2(g) of Notes to Consolidated
Financial Statements.
(3) Gives effect to the conversion of all shares of the Company's Preferred
Stock into an aggregate of 13,437,025 shares of Common Stock upon the
closing of the Offerings. See Note 6 of Notes to Consolidated Financial
Statements.
(4) Adjusted to give effect to the sale by the Company of 4,000,000 shares of
Common Stock offered hereby (at an assumed public offering price of $14.00
per share and after deducting the estimated underwriting discount and
offering expenses) and the application of the net proceeds therefrom. See
"Use of Proceeds" and "Capitalization".
4
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Common Stock offered by this Prospectus.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT
The Company has only a limited operating history. Although it began
operations in April 1994, it had no revenues in 1994 and only nominal product
revenues in 1995. Approximately 80% of its 1995 revenues was attributable to
development, consulting and other services. The Company's initial products
were developed primarily to serve as building blocks for its Internet
transaction management and Intranet access products, which were first
announced in March 1996 and are expected to be generally available in May
1996. The Company has incurred net losses since inception and expects to
continue to operate at a loss for the foreseeable future. As of March 31,
1996, the Company had an accumulated deficit of $22,995,000. It is the
Company's objective to become a profitable enterprise and to realize the
benefits of its deferred tax assets. However, in evaluating the realizability
of these deferred tax assets, management has considered the Company's short
operating history, the volatility of the market in which it competes, the
operating losses incurred to date and the operating losses anticipated for the
foreseeable future, and believes that given the significance of this evidence
a full valuation reserve against its deferred tax assets is required as of
December 31, 1994 and 1995 and March 31, 1996. In addition, the Company's
future prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in the new and rapidly evolving Internet
market. To address these risks, the Company must, among other things, respond
to competitive developments, complete development of its product lines,
continue to attract, retain and motivate qualified persons, commercialize
products and services incorporating its technologies and successfully execute
its sales and distribution strategy. There can be no assurance that the
Company will be successful in addressing such risks, or that the Company will
achieve or sustain profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
DEVELOPING MARKET; UNPROVEN ACCEPTANCE OF THE COMPANY'S PRODUCTS
The market for the Company's Internet products and services has only
recently begun to develop, is rapidly evolving and is characterized by an
increasing number of market entrants that have introduced or developed
products and services for commerce on the Internet. As is typical in the case
of a new and rapidly evolving industry, demand and market acceptance for
recently introduced products and services are subject to a high level of
uncertainty. Critical issues concerning the commercial use of the Internet
(including security, reliability, cost, ease of use and quality of service)
remain unresolved and may impact the growth of Internet use. Similarly, the
use of Internet protocols for enterprise business applications is a recent
phenomenon and may not become widespread. While the Company believes that its
software products offer significant advantages for business-to-consumer and
business-to-business electronic commerce on the Internet and business
applications within an enterprise, there can be no assurance that commerce
over the Internet will become widespread or that the Company's products will
become widely adopted for commerce over the Internet.
The adoption of the Internet for commerce and business applications,
particularly by those individuals and organizations which have historically
relied upon alternative means of commerce and business applications, generally
requires the acceptance of a new way of conducting business and exchanging
information. In particular, enterprises that have already invested substantial
resources in other means of conducting commerce and performing business
applications may be particularly reluctant to adopt a new strategy that may
make certain of their existing personnel and infrastructure obsolete. In
addition, acceptance of the Company's products is dependent in large part on
the success of its customers in the application of such products.
Because the market for the Company's products and services is new and
evolving, it is difficult to predict with any assurance the future growth
rate, if any, and size of this market. There can be no
5
assurance that the market for the Company's products and services will develop
or that the Company's products or services will be adopted or will meet
customers' functionality or performance requirements. If the market fails to
develop, develops more slowly than expected or becomes saturated with
competitors, or if the Company's products do not achieve market acceptance,
the Company's business, operating results or financial condition will be
materially adversely affected.
DEPENDENCE UPON NEW PRODUCTS AND TECHNOLOGY
In March 1996, the Company announced two new products, OM-Transact for the
management of business transactions on the Internet and OM-Axcess for
facilitating the private and secure exchange of information on the Intranet.
The Company believes that a significant portion of its 1996 revenues will be
derived from the sale of these two software products and related service
revenues. These products are complex and expensive compared to Internet
products introduced to date, and will generally involve significant investment
decisions by prospective customers. Accordingly, the Company expects that it
will encounter risks typical of companies that rely on large accounts,
including the reluctance of purchasers to commit to major investments in new
products and protracted sales cycles, both of which add to the difficulty of
predicting future revenues.
The marketability and acceptance of OM-Transact and OM-Axcess also will be
highly dependent on the performance and functionality of these products and on
the success of initial implementations of these products by the Company's
customers. Problems or delays experienced by the Company's initial customers
in the installation and use of OM-Transact or OM-Axcess, even if such problems
or delays are not attributable to the Company or its products, or a failure of
the Company's service provider customers to successfully market electronic
commerce applications, could slow the rate of adoption of the Company's
products by other potential customers. Moreover, products as complex as those
offered by the Company may contain undetected errors when first introduced or
when new versions are released. There can be no assurance that, despite
testing by the Company, errors will not occur in current or new products after
commencement of commercial shipments, resulting in adverse publicity, in loss
of or delay in market acceptance, or in claims by the customer against the
Company, which could have a material adverse effect on the Company's business,
operating results or financial condition.
The Company intends to promote OM-SecureLink, the Company's enabling
technology for linking content to management servers, as an industry standard
by encouraging software and systems companies to integrate or bundle it with
their products. The failure to successfully promote the wide adoption of OM-
SecureLink, in particular by companies offering content creation tools, or the
wide adoption of alternative standards, could substantially slow the rate of
adoption of the Company's products. The Company's adaptation of its products
to implement any such alternative standards may require substantial time and
expense. Moreover, any such alternative standards may be subject to
proprietary rights of third parties. Any slowing in the rate of adoption of
the Company's products or substantial time and expense associated with, or
legal barriers preventing, the implementation of alternative standards could
have a material adverse effect on the Company's business, operating results or
financial condition.
MANAGEMENT OF GROWTH
The rapid execution necessary for the Company to fully exploit the market
for its products and services requires an effective planning and management
process. The Company's rapid growth has placed, and is expected to continue to
place, a significant strain on the Company's managerial, operational and
financial resources. As of March 31, 1996, the Company had grown to 257
employees and independent contractors from 15 employees on December 31, 1994,
and the Company expects this rapid growth to continue. In December 1995, Gary
B. Eichhorn joined the Company as its President and Chief Executive Officer.
In addition, most of the Company's development and engineering staff have been
employed at the Company for less than one year. To manage its growth, the
Company must continue to implement and improve its operational and financial
systems and to expand, train and manage its employee base. For example, the
Company is currently in the process
6
of building its internal maintenance and support organization. Further, the
Company will need to manage multiple relationships with various customers and
other third parties. Although the Company believes that it has made adequate
allowances for the costs and risks associated with this expansion, there can
be no assurance that the Company's systems, procedures or controls will be
adequate to support the Company's operations or that Company management will
be able to achieve the rapid execution necessary to fully exploit the market
for the Company's products and services. The Company's future operating
results will also depend on its ability to expand its sales and marketing
organizations, establish a distribution channel to penetrate different and
broader markets and expand its support organization commensurate with the
increasing base of its installed products. If the Company is unable to manage
its growth effectively, the Company's business, operating results or financial
condition will be materially adversely affected. See "Business-Distribution
and Customers" and "-Employees".
COMPETITION
The market for Internet-based software and services is new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition to increase in the future. The Company's
electronic commerce products compete with solutions from custom designers and
products from Netscape Communications Corporation, Microsoft Corporation,
Oracle Corporation, BroadVision, Inc. and CONNECT, Inc. For Intranet
applications the Company competes with Netscape, Microsoft, and Oracle. Many
of the Company's current and potential competitors have longer operating
histories, greater name recognition, larger installed customer bases and
significantly greater financial, technical and marketing resources than those
of the Company. Such competition could materially adversely affect the
Company's business, operating results or financial condition.
Competitive factors in the Internet-based software and services market
include core technology, breadth of product functionality and features,
product performance and quality, marketing and distribution resources,
customer service and support and price. The market and competition are still
new and rapidly evolving, and there can be no assurance that the Company will
be able to compete successfully against current or future competitors, or that
this competition will not materially adversely affect the Company's business,
operating results or financial condition.
SECURITY RISKS AND SYSTEM DISRUPTIONS
Despite the implementation of various security mechanisms in the Company's
products, its products may be vulnerable to break-ins and similar disruptive
problems caused by Internet users. The level of security provided by the
Company's products is dependent on the level of security selected by the
Company's customers and the proper configuration and use of the products'
security mechanisms. Such computer break-ins and other disruptions would
jeopardize the security of information stored in and transmitted through the
computer systems of users of the Company's products, which may result in
significant liability to the Company and may also deter potential customers.
Persistent security problems continue to plague public and private data
networks. Recent break-ins reported in the press and otherwise have included
incidents involving hackers bypassing firewalls by posing as authorized
computers and involving the theft of confidential information. Alleviating
problems caused by third parties may require significant expenditures of
capital and resources by the Company. Such expenditures could have a material
adverse effect on the Company's business, operating results or financial
condition. Moreover, the security and privacy concerns of existing and
potential customers, as well as concerns related to computer viruses, may
inhibit the growth of the Internet marketplace generally, and the Company's
customer base and revenues in particular. The Company attempts to limit its
liability to customers, including liability arising from a failure of the
security feature contained in the Company's products, through contractual
provisions. However, there can be no assurance that such limitations will be
enforceable. The Company currently does not have product liability insurance
to protect against these risks and there can be no assurance that such
insurance will be available to the Company on commercially reasonable terms.
7
DEPENDENCE UPON THE INTERNET
The use of the Company's products and services will depend in large part
upon the continued development of the infrastructure for providing Internet
access and services. Because global commerce and online exchange of
information on the Internet is new and evolving, it is difficult to predict
with any assurance whether the Internet will prove to be a viable commercial
marketplace. The Internet has experienced, and is expected to continue to
experience, substantial growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. In
addition, the Internet could lose its viability due to delays in the
development or adoption of new standards and protocols (for example, the next-
generation Internet Protocol) to handle increased levels of Internet activity,
or due to increased governmental regulation. There can be no assurance that
the infrastructure or complementary services necessary to make the Internet a
viable commercial marketplace will be developed, or, if developed, that the
Internet will become a viable commercial marketplace for products and services
such as those offered by the Company. If the necessary infrastructure or
complementary services or facilities are not developed, or if the Internet
does not become a viable commercial marketplace, the Company's business,
operating results or financial condition will be materially adversely
affected.
DEPENDENCE UPON PRODUCT DEVELOPMENT; RISKS OF TECHNOLOGICAL CHANGE AND
EVOLVING INDUSTRY STANDARDS
The Company's success will depend upon its ability to develop new products
and provide new services that meet changing customer requirements. The market
for the Company's products is characterized by rapidly changing technology,
evolving industry standards and customer requirements, emerging competition
and frequent new product and service introductions. There can be no assurance
that the Company can successfully identify new product opportunities and
develop and bring new products and services to market in a timely manner.
Failure of the Company, for technological or other reasons, to develop and
introduce new products and product enhancements and new services that are
compatible with industry standards and that satisfy customer requirements
would have a material adverse effect on the Company's business, operating
results or financial condition.
In addition, the Company or its competitors may announce enhancements to
existing products or services, or new products or services embodying new
technologies, industry standards or customer requirements that have the
potential to supplant or provide lower cost alternatives to the Company's
existing products and services. The introduction of such enhancements or new
products and services could render the Company's existing products and
services obsolete and unmarketable. There can be no assurance that the
announcement or introduction of new products or services by the Company or its
competitors or any change in industry standards will not cause customers to
defer or cancel purchases of existing products or services, which could have a
material adverse effect on the Company's business, operating results or
financial condition.
Furthermore, introduction by the Company of products or services with
reliability, quality or compatibility problems could result in reduced orders,
delays in collecting accounts receivable and additional service costs. The
failure to introduce a new product, service or product enhancement on a timely
basis could delay or hinder market acceptance. Any such event could have a
material adverse effect on the Company's business, operating results or
financial condition. See "Business-Products".
EVOLVING DISTRIBUTION STRATEGY
The Company's distribution strategy includes expansion of its direct sales
and support organization focusing on large accounts and service providers. To
date, the Company has sold its products only through direct sales, the
Internet and original equipment manufacturers ("OEMs"). The Company expects to
increasingly use OEMs and independent software vendors and has recently
8
begun using systems integrators and value added resellers ("VARs")
(collectively, "Resellers"). The Company expects that any material increase in
sales through Resellers as a percentage of total revenues, especially in the
percentage of sales through OEMs and VARs, will adversely affect the Company's
average selling prices and gross margins due to the lower unit prices that are
typically charged when selling through indirect channels. Moreover, there can
be no assurance that the Company will be able to attract Resellers that will
be able to market the Company's products effectively and will be qualified to
provide timely and cost-effective customer support and service or that the
Company will be able to manage conflicts among its Resellers. In addition, the
Company's agreements with Resellers typically do not restrict Resellers from
distributing competing products, and in many cases may be terminated by either
party without cause. Also, in some cases the Company may grant exclusive
distribution rights that are limited by territory and in duration. The
inability to recruit, manage or retain qualified Resellers, or their inability
to penetrate their respective market segments, could materially adversely
affect the Company's business, operating results or financial condition. See
"Business-Distribution and Customers".
The Company plans to expand its direct sales and support organization. There
can be no assurance that such internal expansion will be successfully
completed, that the cost of such expansion will not exceed the revenues
generated, or that the Company's sales and marketing organization will be able
to successfully compete against the significantly more extensive and well-
funded sales and marketing operations of many of the Company's current or
potential competitors. The Company's inability to effectively manage its
internal expansion could have a material adverse effect on the Company's
business, operating results or financial condition.
In addition to expanding its direct sales channels, the Company plans to
continue to distribute some of its products electronically through the
Internet. Distributing the Company's products through the Internet makes the
Company's software more susceptible than other software to unauthorized
copying and use. The Company has historically allowed and currently intends to
continue to allow potential customers to electronically download its products
for a free evaluation period. There can be no assurance that, upon expiration
of the evaluation period, the Company will be able to collect payment from
users that retain a copy of the Company's products. If, as a result of
changing legal interpretations of liability for unauthorized use of the
Company's software or otherwise, users were to become less sensitive to
avoiding copyright infringement, the Company's business, operating results or
financial condition would be materially adversely affected.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
As a result of the Company's limited operating history, the Company does not
have historical financial data for a significant period on which to base
planned operating expenses. The Company's expense levels are fixed in advance
and based in part on its expectations as to future revenues. The Company has
operated to date without a backlog and no assurance can be given that it will
build backlog in the future. As a result, quarterly sales and operating
results will generally depend on the volume and timing of and ability to
fulfill orders received within the quarter and the timing of the customer's
acceptance of the Company's products, which are difficult to forecast. The
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenues shortfall. Accordingly, any significant shortfall of
demand for the Company's products and services in relation to the Company's
expectations would have an immediate material adverse impact on the Company's
business, operating results or financial condition. In addition, the Company
plans to continue to increase its operating expenses to fund greater levels of
research and development, increase its sales and marketing operations, develop
new distribution channels and broaden its customer support capabilities. To
the extent that such expenses precede or are not subsequently followed by
increased revenues, the Company's business, operating results or financial
condition will be materially adversely affected.
9
The Company expects in the future to experience significant fluctuations in
quarterly operating results that may be caused by many factors, including the
protracted sales cycles associated with the reluctance of purchasers to commit
to major investments in new products, demand for the Company's products,
introduction or enhancement of products by the Company and its competitors,
market acceptance of new products, mix of distribution channels through which
products are sold, pricing and mix of products and services sold, changes in
pricing policies by its competitors and general economic conditions. As a
result, the Company believes that period-to-period comparisons of its results
of operations may not necessarily be meaningful and should not be relied upon
as any indication of future performance. Due to all of the foregoing factors,
it is likely that in some future quarter the Company's operating results will
be below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock would likely be materially
adversely affected.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there
are currently few laws or regulations directly applicable to access to, or
commerce on, the Internet. However, due to the increasing popularity and use
of the Internet, it is possible that a number of laws and regulations may be
adopted with respect to the Internet, covering issues such as user privacy,
pricing and characteristics and quality of products and services. The
Telecommunications Reform Act of 1996 was recently enacted and imposes
criminal penalties on anyone who distributes obscene, lascivious or indecent
communications on the Internet. The adoption of any such laws or regulations
may decrease the growth of the Internet, which could in turn increase the
adverse effect on the Company's business, operating results or financial
condition. Moreover, the applicability to the Internet of existing laws
governing issues such as property ownership, libel and personal privacy is
uncertain. Further, due to the encryption technology contained in the
Company's products, such products are subject to U.S. export controls. There
can be no assurance that such export controls, either in their current form or
as may be subsequently enacted, will not delay the introduction of new
products or limit the Company's ability to distribute products outside of the
United States or electronically. While the Company intends to take precautions
against unlawful exportation, the global nature of the Internet makes it
virtually impossible to effectively control the distribution of the Company's
products. In addition, federal or state legislation or regulation may further
limit levels of encryption or authentication technology. Further, various
countries regulate the import of certain encryption technology and have
adopted laws relating to personal privacy issues which could limit the
Company's ability to distribute products in those countries. Any such export
or import restrictions, new legislation or regulation or government
enforcement of existing regulations could have a material adverse impact on
the Company's business, operating results or financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company's performance depends substantially on the performance of its
executive officers and key employees, most of whom have worked together for
only a short period of time. Given the Company's early stage of development,
the Company is dependent on its ability to retain and motivate high quality
personnel, especially its management and highly skilled development team. The
loss of the services of any of its executive officers or other key employees
could have a material adverse effect on the Company's business, operating
results or financial condition.
The Company's future success also depends on its continuing ability to
identify, hire, train and retain other highly qualified technical and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to attract, assimilate or retain
other highly qualified technical and managerial personnel in the future.
Although the practice of the Company is not to enter into employment
agreements with its employees, it has entered into an employment agreement
with Gary B. Eichhorn, its President and Chief Executive Officer. The
10
Company's practice not to enter into employment agreements may adversely
impact its ability to attract and retain technical and managerial personnel.
The inability to attract and retain the necessary technical and managerial
personnel could have a material adverse effect upon the Company's business,
operating results or financial condition. See "Business-Employees" and
"Management".
PROPRIETARY RIGHTS
The Company relies on trademark, copyright, patent and trade secret laws,
employee and third-party non-disclosure agreements and other methods to
protect its proprietary rights. The Company currently has five patent
applications pending in the United States relating to the Company's product
architecture and technology. While the Company believes that the pending
patent applications relate to patentable inventions, there can be no assurance
that any pending or future patent applications will be granted or that any
patent relied upon by the Company in the future will not be challenged,
invalidated or circumvented or that the rights granted thereunder or under
licensing agreements will provide competitive advantages to the Company. The
Company believes that, due to the rapid pace of technological innovation for
Internet products, the Company's ability to establish and maintain a position
of technology leadership in the industry depends more on the skills of its
development personnel than upon the legal protections afforded its existing
technology.
The Company's success is dependent in part upon its proprietary software
technology. There can be no assurance that its agreements with employees,
consultants and others who participate in the development of its software will
not be breached, that the Company will have adequate remedies for any breach,
or that the Company's trade secrets will not otherwise become known to or
independently developed by competitors. Furthermore, there can be no assurance
that the Company's efforts to protect its rights through patent, trademark and
copyright laws will not fail to prevent the development and design by others
of products or technology similar to or competitive with those developed by
the Company.
The Company is not aware that it is infringing any patent or violating any
other proprietary rights of any third party relating to the Company or the
Company's products. However, the computer software market is characterized by
frequent and substantial intellectual property litigation. Intellectual
property litigation is complex and expensive, and the outcome of such
litigation is difficult to predict.
The Company's success will depend in part on its continued ability to obtain
and use licensed technology that is important to the functionality of its
products. An inability to continue to procure or use such technology would
likely have a material adverse effect on the Company's business, operating
results or financial condition. See "Business-Proprietary Technology".
CONCENTRATION OF STOCK OWNERSHIP
Upon completion of the Offerings, the present directors, executive officers
and their respective affiliates will beneficially own approximately 54% of the
outstanding Common Stock, assuming no exercise of the underwriters' over-
allotment option and approximately 52% of the outstanding Common Stock
assuming full exercise of the underwriters' over-allotment option. As a
result, these stockholders will be able to exercise control over all matters
requiring approval from the holders of a majority of the outstanding shares,
including the election of directors and approval of significant corporate
transactions. Such concentration of ownership may also have the effect of
delaying or preventing a change in control of the Company. See "Description of
Capital Stock-Delaware Law and Certain Charter and By-Law Provisions" and
"Principal Stockholders".
NO PRIOR PUBLIC MARKET, POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offerings, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for
the Common Stock will develop or be sustained after the Offerings. The initial
offering price will be determined by negotiation between the
11
Company and the representatives of the Underwriters based upon several
factors. See "Underwriting" for a discussion of the factors to be considered
in determining the initial public offering price. The market price of the
Company's Common Stock is likely to be highly volatile and could be subject to
wide fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company or
its competitors, or changes in financial estimates by securities analysts, or
other events or factors. In addition, the stock market has experienced
significant price and volume fluctuations that have particularly affected the
market price of equity securities of many high technology companies and that
often have been unrelated to the operating performance of such companies. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against such a company. Such litigation could result in substantial costs and
a diversion of management's attention and resources, which would have a
material adverse effect on the Company's business, operating results or
financial condition. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. See "Underwriting".
IMMEDIATE AND SUBSTANTIAL DILUTION
Investors participating in the Offerings will incur immediate and
substantial dilution. To the extent outstanding options to purchase the
Company's Common Stock are exercised, there will be further dilution. See
"Dilution".
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following the Offerings could adversely affect the market price for the Common
Stock. See "Shares Eligible for Future Sale" and "Description of Capital
Stock".
CERTAIN ANTI-TAKEOVER EFFECT PROVISIONS AFFECTING STOCKHOLDERS
The Company's Amended and Restated Certificate of Incorporation (the
"Restated Certificate of Incorporation") and Amended and Restated By-laws (the
"Restated By-laws") provide that any action required or permitted to be taken
by stockholders of the Company must be effected at a duly called annual or
special meeting of stockholders and may not be effected by any consent in
writing, and require reasonable advance notice by a stockholder of a proposal
or director nomination which such stockholder desires to present at any annual
or special meeting of stockholders. Special meetings of stockholders may be
called only by the Chairman of the Board, the Chief Executive Officer or, if
none, the President of the Company or by the Board of Directors. The Restated
Certificate of Incorporation and Restated By-laws provide for a classified
Board of Directors, and members of the Board of Directors may be removed only
for cause upon the affirmative vote of holders of at least two-thirds of the
shares of capital stock of the Company entitled to vote. In addition, the
Board of Directors will have the authority, without further action by the
stockholders, to fix the rights and preferences of, and issue shares of,
authorized Preferred Stock. In addition, the Company is subject to the anti-
takeover provisions of Section 203 of the Delaware General Corporation Law,
which will prohibit the Company from engaging in a "business combination" with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 also could have the effect of delaying or preventing a change of
control of the Company. These provisions, and the provisions of the Restated
Certificate of Incorporation and Restated By-laws, may have the effect of
deterring hostile takeovers or delaying or preventing changes in control or
management of the Company, including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices.
In addition, these provisions may limit the ability of stockholders to approve
transactions that they may deem to be in their best interests. See
"Description of Capital Stock-Preferred Stock" and "-Delaware Law and Certain
Charter and By-law Provisions".
12
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common Stock
offered by the Company hereby are estimated to be $51,280,000 ($59,092,000 if
the Underwriters' over-allotment option is exercised in full) assuming an
initial public offering price of $14.00 per share, after deducting the
estimated underwriting discount and offering expenses payable by the Company.
The principal purposes of the Offerings are to increase the Company's equity
capital, to create a public market for the Common Stock, to increase the
visibility of the Company in the marketplace and to facilitate future access
by the Company to public equity markets.
The Company expects to use the net proceeds from the Offerings for general
corporate purposes, including the funding of working capital and growth.
The Company may seek acquisitions of businesses, products and technologies
that are complementary to those of the Company, and a portion of the net
proceeds may be used for such acquisitions. While the Company engages from
time to time in discussions with respect to potential acquisitions, the
Company has no plans, commitments or agreements with respect to any such
acquisitions as of the date of this Prospectus, and there can be no assurances
that any such acquisitions will be made. Pending such uses, the Company
intends to invest the net proceeds from the Offerings in short-term,
investment grade, interest-bearing instruments.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support
the development of its business and does not anticipate paying cash dividends
for the foreseeable future. Payment of future dividends, if any, will be at
the discretion of the Company's Board of Directors after taking into account
various factors, including the Company's financial condition, operating
results and current and anticipated cash needs.
13
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1996
was $14,921,000, or $0.65 per share, after giving effect to the automatic
conversion of all outstanding shares of Preferred Stock into an aggregate of
13,437,025 shares of Common Stock upon the closing of the Offerings. Pro forma
net tangible book value per share represents the amount of total tangible
assets of the Company reduced by the Company's total liabilities, divided by
the pro forma number of shares of Common Stock outstanding, including shares
of Common Stock resulting from the conversion of the Preferred Stock. After
giving effect to the sale by the Company of 4,000,000 shares of Common Stock
offered by the Company at an assumed initial public offering price of $14.00
per share (after deducting the estimated underwriting discount and offering
expenses), the adjusted pro forma net tangible book value of the Company as of
March 31, 1996 would have been $66,501,000, or $2.47 per share. This
represents an immediate increase in pro forma net tangible book value of $1.82
per share to existing stockholders and an immediate dilution of $11.53 per
share to new investors purchasing Common Stock in the Offerings.
The following table illustrates this per share dilution:
[Download Table]
Assumed initial public offering price per share............... $14.00
Pro forma net tangible book value per share as of March 31,
1996....................................................... $0.65
Increase per share attributable to the Offerings............ 1.82
-----
Adjusted pro forma net tangible book value per share as of
March 31, 1996 after the Offerings........................... 2.47
------
Dilution per share to new investors........................... $11.53
======
The following table sets forth on a pro forma basis as of March 31, 1996,
after giving effect to the automatic conversion of all outstanding shares of
Preferred Stock into an aggregate of 13,437,025 shares of Common Stock upon
the closing of the Offerings, the number of shares of Common Stock purchased
from the Company, the total consideration paid to the Company and the average
price paid per share by the existing stockholders and by the investors
purchasing shares of Common Stock offered hereby (at an assumed initial public
offering price of $14.00 per share):
[Download Table]
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
Existing stockholders...... 22,939,910 85.2% $38,209,230 40.6% $ 1.67
New investors.............. 4,000,000 14.8 56,000,000 59.4 14.00
---------- ----- ----------- -----
Total...................... 26,939,910 100.0% $94,209,230 100.0%
========== ===== =========== =====
The foregoing tables assume no exercise of any outstanding stock options or
the Underwriters' over-allotment options. As of March 31, 1996, there were
outstanding options to purchase 5,539,617 shares of Common Stock at a weighted
average exercise price of $1.57 per share. See "Underwriting" for information
concerning the Underwriters' over-allotment option. To the extent that the
outstanding options, or any options granted in the future, are exercised,
there will be further dilution to new investors. See "Management-Executive
Compensation".
14
CAPITALIZATION
The following table sets forth (i) the unaudited pro forma capitalization of
the Company at March 31, 1996 which reflects the automatic conversion of all
outstanding shares of Preferred Stock into an aggregate of 13,437,025 shares
of Common Stock upon the closing of the Offerings and (ii) the unaudited pro
forma as adjusted capitalization of the Company which gives effect to the sale
of 4,000,000 shares of Common Stock offered by the Company at an assumed
public offering price of $14.00 per share and the application of the estimated
net proceeds therefrom. This table should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus.
[Download Table]
MARCH 31, 1996
----------------------
PRO FORMA
PRO FORMA AS ADJUSTED
--------- -----------
(IN THOUSANDS)
Current maturities of long-term obligations.......... $ 575 $ 575
======== ========
Long-term obligations, net of current maturities..... $ 986 $ 986
Stockholders' equity:
Preferred stock, $.10 par value; no shares
authorized, issued or outstanding (pro forma);
2,000,000 shares authorized, no shares issued or
outstanding (pro forma as adjusted)............... -- --
Common stock, $.001 par value; 100,000,000 shares
authorized; 22,939,910 shares issued and
outstanding (pro forma); 26,939,910 shares issued
and outstanding (pro forma as adjusted)(1)........ 23 27
Additional paid-in capital......................... 38,193 89,469
Accumulated deficit................................ (22,995) (22,995)
-------- --------
Total stockholders' equity....................... 15,221 66,501
-------- --------
Total capitalization............................. $ 16,207 $ 67,487
======== ========
--------
(1) Excludes (i) 5,539,617 shares of Common Stock issuable upon the exercise
of outstanding options as of March 31, 1996 with a weighted average
exercise price of $1.57 per share and (ii) an additional 1,481,998 and
250,000 shares reserved for issuance under the Company's 1994 Stock
Incentive Plan and 1996 Employee Stock Purchase Plan, respectively, plus
shares reserved for issuance under the 1996 Director Option Plan. See
"Management- Executive Compensation" and Note 5 of Notes to Consolidated
Financial Statements.
15
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company. The Statement of Operations Data for the period from inception (April
25, 1994) to December 31, 1994 and for the year ended December 31, 1995 and
the Balance Sheet Data as of December 31, 1994 and 1995 have been derived from
the Company's Consolidated Financial Statements, which have been audited by
Arthur Andersen LLP, independent public accountants, and together with their
report thereon are included elsewhere in this Prospectus. The selected
consolidated financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus.
The selected consolidated financial data for the three months ended March
31, 1995 and 1996 are derived from the unaudited Consolidated Financial
Statements of the Company included elsewhere in this Prospectus. In the
opinion of management, the unaudited Consolidated Financial Statements have
been prepared on the same basis as the audited Consolidated Financial
Statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations for such periods. Results for the three months ended
March 31, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996.
[Download Table]
PERIOD FROM
INCEPTION THREE MONTHS
(APRIL 25, ENDED
1994) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ----------------
1994 1995 1995 1996
------------ ------------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Product revenues................. $ -- $ 365 $ -- $ 2,248
Service revenues................. -- 1,441 88 427
------- -------- ------- -------
Total revenues................. -- 1,806 88 2,675
------- -------- ------- -------
Cost of Revenues:
Product revenues................. -- 44 -- 137
Service revenues................. -- 969 58 297
------- -------- ------- -------
Total cost of revenues......... -- 1,013 58 434
------- -------- ------- -------
Gross profit................... -- 793 30 2,241
------- -------- ------- -------
Operating Expenses:
Research and development......... 840 6,717 522 3,701
Selling and marketing............ 164 4,517 317 4,119
General and administrative....... 276 3,587 195 1,469
------- -------- ------- -------
Total operating expenses....... 1,280 14,821 1,034 9,289
------- -------- ------- -------
Loss from operations........... (1,280) (14,028) (1,004) (7,048)
------- -------- ------- -------
Interest income.................... 30 242 1 200
Interest expense................... -- (86) (9) (19)
------- -------- ------- -------
Net loss....................... $(1,250) $(13,872) $(1,012) $(6,867)
======= ======== ======= =======
Pro forma net loss per common and
common equivalent share(1)........ $ (.53) $ (.26)
======== =======
Pro forma weighted average number
of common and common equivalent
shares outstanding(1)............. 26,250 26,345
======== =======
[Download Table]
DECEMBER 31,
----------------- PRO FORMA
1994 1995 MARCH 31, 1996(2)
------- -------- -----------------
(IN THOUSANDS) (IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities.......................... $ 636 $ 3,712 $21,648
Working capital...................... 461 (5,783) 11,632
Total assets......................... 959 7,947 27,599
Long-term obligations, net of current
maturities.......................... 195 659 986
Stockholders' equity (deficit)....... (1,283) (15,187) 15,221
-------
(1) Computed on the basis described in Note 2(g) of Notes to Consolidated
Financial Statements.
(2) Gives effect to the conversion of all shares of the Company's Preferred
Stock into an aggregate of 13,437,025 shares of Common Stock upon the
closing of the Offerings. See Note 6 of Notes to Consolidated Financial
Statements.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company commenced operations on April 25, 1994. From inception through
March 31, 1996, the Company raised gross proceeds of approximately $38,200,000
from the private sales of equity securities. The proceeds from these
financings have been used to fund the Company's start-up activities,
recruitment of personnel, acquisition of operating assets, and research and
development and marketing activities. The number of employees and independent
contractors of the Company has grown from 15 at December 31, 1994 to 240 at
December 31, 1995 and 257 at March 31, 1996.
During 1994, the Company focused on the development of its products and,
accordingly, a significant percentage of its expenditures in 1994 related to
research and development activities. During 1995, the Company accelerated its
research and development activities by increasing the number of research and
development personnel. In addition, the Company began to hire additional
sales, marketing and administrative personnel.
In the first quarter of 1995, the Company began to generate service revenues
through development and consulting contracts. In the third quarter of 1995,
the Company began recording product revenue for its Web server products. In
the fourth quarter of 1995, the Company introduced Merchant Solution, a "front
office" commerce solution for merchants.
In March 1996, the Company announced two products, OM-Transact and OM-
Axcess, which it believes will generate a significant portion of its 1996
product revenues. The Company also believes that the type of development and
consulting services that it has performed to date will decline as a percentage
of total revenues, as the Company focuses on product sales and related
services in 1996 and in future years.
Revenues from software license agreements are recognized upon shipment of
the software if there are no significant post-delivery obligations, and
payment is due within one year. 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.
Sublicense fees are recognized on aper-unit basis as reported to the Company
by its licensees. Revenues for post contract customer support are recognized
ratably over the term of the support period, which is typically one year.
Revenues from development and consulting services are recognized upon customer
acceptance or the period in which services are provided if customer acceptance
is not required and the revenues are fixed and determinable.
The Company has a limited operating history. The Company's ability to
successfully market its existing products and to develop and market new
products must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets which are subject
to rapid technological change. To address these risks, the Company must, among
other things, respond to competitive developments, continue to attract, retain
and motivate qualified persons, and continue to upgrade its technologies and
commercialize products and services incorporating such technologies. There can
be no assurance that the Company will be successful in addressing such risks.
17
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995
REVENUES
Total revenues were approximately $2,675,000 for the three months ended
March 31, 1996, a significant increase from approximately $88,000 for the
three months ended March 31, 1995. One customer accounted for approximately
75% of total revenues for the three months ended March 31, 1996 and two other
customers accounted for 71% and 29%, respectively, of total revenues for the
three months ended March 31, 1995.
Product revenues were approximately $2,248,000 or 84% of total revenues for
the three months ended March 31, 1996. Product revenues consist primarily of
an initial $2 million license fee received from a reseller in August 1995 for
the right to sublicense the Company's Web server products and, to a lesser
extent, the sale of the Company's Web server and Merchant Solution products to
end users. Although product revenues from its Web server products represent a
majority of the product revenues for the three months ended March 31, 1996,
revenues from these products are not expected to represent a significant
percentage of the Company's product revenues in 1997 and beyond. While the
Company did not recognize any revenue on its OM-Transact and OM-Axcess
products during the three months ended March 31, 1996, the Company believes
that revenues from these products will represent a significant percentage of
total product revenues in 1996. In addition, the Company believes that product
revenues as a percentage of total revenues will fluctuate on a quarterly basis
and will generally be less as a percentage of total revenues than for the
three months ended March 31, 1996.
Service revenues were approximately $427,000 or 16% of total revenues for
the three months ended March 31, 1996, a significant increase from
approximately $88,000 for the three months ended March 31, 1995. Service
revenues relate to (i) development, consulting and other services performed
for certain customers to assist them in their development of services and
products for the Internet and (ii) customer support services, which include
post contract customer support, installation, training and other services
related to product sales. The Company expects that total service revenues as a
percentage of total revenues will fluctuate on a quarterly basis, due in part
to the timing of significant development contracts, and will generally be more
as a percentage of total revenue than for the three months ended March 31,
1996.
COST OF REVENUES
Cost of product revenues for the three months ended March 31, 1996 consisted
primarily of the costs to distribute the products, including the cost of media
on which they are delivered. If, in the future, the Company incorporates in
its products additional technology licensed from third parties, the Company
believes that cost of product revenues may increase as a percentage of the
related product revenues due to increased costs related to such licensed
technology. Cost of service revenues consists primarily of personnel and
related costs incurred in providing development, consulting and other services
to customers. Cost of service revenues increased to approximately $297,000 for
the three months ended March 31, 1996 from approximately $58,000 for the three
months ended March 31, 1995.
Gross profits may fluctuate based on the mix of distribution channels used
by the Company, the mix of products sold, the mix of product revenues versus
service revenues and the mix of international versus domestic revenues. The
Company expects to realize higher gross profits on direct product sales than
on product sales through indirect channels and higher gross profits on product
revenues than on services revenues. In addition, gross profits vary by product
and are generally higher on
18
international product sales as compared to domestic product sales. Due to its
limited operating history, the Company cannot accurately predict the mix of
future product and service revenues.
OPERATING EXPENSES
Research and development expenses consist primarily of the cost of research
and development personnel and independent contractors, certain purchased
technology, as well as equipment and facilities costs related to such
activities. These expenses increased to approximately $3,701,000 for the three
months ended March 31, 1996 from approximately $522,000 for the three months
ended March 31, 1995. The substantial increase in these expenses for the three
months ended March 31, 1996 was primarily attributable to the hiring of
additional software engineers and consultants to develop and enhance the
Company's products as well as increased equipment and facilities-related
costs. Qualifying capitalizable software development costs were immaterial in
both periods, and accordingly, the Company has charged all such expenses to
research and development in the period incurred. The Company believes that
significant investments in research and development are required to remain
competitive in the software industry. As a result, the Company intends to
increase the amounts of its research and development expenditures in the
future. Certain research and development expenditures are incurred
substantially in advance of the related revenue and in some cases do not
generate revenue.
Selling and marketing expenses consist primarily of the cost of sales and
marketing personnel and consultants, as well as the costs associated with
marketing programs and literature. These expenses increased to approximately
$4,119,000 for the three months ended March 31, 1996 from approximately
$317,000 in the three months ended March 31, 1995. The substantial increase in
these expenses for the three months ended March 31, 1996 was primarily
attributable to the expansion of the Company's sales and marketing
organization through an increase in the number of sales and marketing
personnel and, to a lesser extent, preparation and distribution of new product
sales literature and an increase in promotional and advertising expenses. The
Company intends to increase selling and marketing expenditures in future
periods.
General and administrative expenses consist primarily of the cost of
finance, management and administrative personnel, as well as legal and other
professional fees. These expenses increased to approximately $1,469,000 for
the three months ended March 31, 1996 from approximately $195,000 for the
three months ended March 31, 1995. The substantial increase for the three
months ended March 31, 1996 was primarily attributable to the hiring of
additional management and administrative personnel and to a lesser extent an
increase in legal and other professional fees and the expansion of the
Company's operations. The Company intends to increase general and
administrative expenditures in future periods.
Interest income represents interest earned on cash, cash equivalents and
marketable securities. Interest income increased to approximately $200,000 for
the three months ended March 31, 1996 from approximately $1,000 for the three
months ended March 31, 1995. The increase is primarily attributable to higher
average investments in cash, cash equivalents and marketable securities during
the three months ended March 31, 1996. Interest expense increased to
approximately $19,000 for the three months ended March 31, 1996 from
approximately $9,000 for the three months ended March 31, 1995. Interest
expense represents interest payable on the Company's equipment line of credit
and term notes payable and an obligation under a license agreement. The
increase in interest expense is primarily attributable to a higher outstanding
balance under the Company's equipment line of credit and term notes payable.
The Company had losses for tax purposes for the three months ended March 31,
1995 and 1996. Accordingly, there was no provision for income taxes in these
periods.
To date, inflation has not had a significant impact on the Company's
operations.
19
YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM INCEPTION TO DECEMBER 31,
1994.
REVENUES
Total revenues were approximately $1,806,000 for the year ended December 31,
1995, of which approximately $1,441,000 or 80%, was attributable to
development, consulting and other services performed for certain of the
Company's customers to assist them in their development of services and
products for the Internet. Two customers accounted for approximately 33% and
16%, respectively, of total revenues for the year ended December 31, 1995, the
latter of which owned approximately 7.5% of the Company's outstanding stock as
of March 31, 1996. See "Certain Transactions". Product revenues in the year
ended December 31, 1995 accounted for approximately 20% of total revenues and
principally relate to the sale of the Company's Web server products which were
developed primarily to serve as platforms for the Company's subsequent product
offerings of its new transaction management and access systems, OM-Transact
and OM-Axcess.
COST OF REVENUES
Cost of product revenues in the year ended December 31,1995 consisted
primarily of the costs to distribute the product, including the cost of media
on which it is delivered. If, in the future, the Company incorporates in its
products more technology licensed from third parties, the Company believes
that cost of product revenues may increase as a percentage of the related
product revenues due to increased costs related to such licensed technology.
Cost of service revenues consists primarily of personnel and related costs
incurred in providing development, consulting and other services to customers.
OPERATING EXPENSES
Research and development expenses consist primarily of the cost of research
and development personnel and independent contractors, certain purchased
technology, as well as equipment and facilities costs related to such
activities. The substantial increase in these expenses in 1995 was primarily
attributable to the hiring of additional software engineers and consultants to
develop and enhance the Company's products as well as increased equipment- and
facilities-related costs. Qualifying capitalizable software development costs
were immaterial in both periods, and accordingly, the Company has charged all
such expenses to research and development in the period incurred.
Selling and marketing expenses consist primarily of the cost of sales and
marketing personnel and consultants, as well as the costs associated with
marketing programs and literature. The substantial increase in these expenses
in 1995 was primarily attributable to the increase in the number of sales and
marketing personnel, preparation and distribution of new product sales
literature and increase in promotional and advertising expenses.
General and administrative expenses consist primarily of the cost of
finance, management and administrative personnel, as well as legal and other
professional fees. The increase in 1995 primarily resulted from the hiring of
additional management and administrative personnel and to a lesser extent an
increase in legal and other professional fees as well as the expansion of the
Company's operations.
Interest income represents interest earned on cash and cash equivalents. The
increase in interest income is primarily attributable to higher average
investments in cash and cash equivalents during the year ended December 31,
1995. Interest expense in the year ended December 31, 1995 represents interest
payable on the Company's equipment line of credit and term note payable and an
obligation under a license agreement.
The Company had losses for tax purposes for the period from inception to
December 31, 1994 and for the year ended December 31, 1995. Accordingly, there
was no provision for income taxes in these periods.
20
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had approximately $21,648,000 in cash, cash
equivalents and marketable securities. The Company has funded its operations
through the private sales of equity securities, borrowings under its equipment
line of credit and term notes payable and deferred revenue (which consists of
customer prepayments). Since inception, the Company has raised gross proceeds
of approximately $38,200,000 from the private sale of equity securities,
including $26,950,000 in the three months ended March 31, 1996.
The Company had a capital equipment line of credit under which it could
borrow up to $1,500,000. On October 31, 1995 and March 29, 1996, $850,000 and
$635,000 borrowed under this line of credit was converted into 36-month and
33-month term notes payable, respectively. Borrowings under the term notes
payable bear interest at prime (8.5% at December 31, 1995) plus 1.5% and are
secured by substantially all assets of the Company. In addition, the Company
is required to comply with certain restrictive covenants which include among
other items, minimum levels of tangible net worth and a $2,500,000 minimum
cash balance. The Company was in compliance with these covenants at March 31,
1996.
The Company's operating activities utilized cash and cash equivalents of
approximately $843,000, $4,060,000, $1,116,000 and $6,224,000 for the period
from inception to December 31, 1994, for the year ended December 31, 1995 and
for the three months ended March 31, 1995 and 1996, respectively. Deferred
revenues, which provided approximately $5,906,000 of cash for operating
activities from inception through March 31, 1996, represent cash received from
customers for product and service revenues in advance of revenue recognition
by the Company. Deferred revenues will fluctuate based upon the timing of cash
receipts relative to the recognition of product and service revenues. There
can be no assurance that certain deferred revenues will be recognized as
revenues in future periods and that the Company will not be required to refund
certain cash payments received from its customers.
The Company's investing activities used cash and cash equivalents of
approximately $338,000, $2,967,000, $400,000 and $5,438,000 for the period
from inception to December 31, 1994, the year ended December 31, 1995 and the
three months ended March 31, 1995 and 1996, respectively. The principal uses
have been to fund investment in marketable securities, the purchase of
property and equipment and a $1,500,000 loan to a founder of the Company. See
Note 8 of Notes to Consolidated Financial Statements.
The Company's financing activities provided cash and cash equivalents of
approximately $1,817,000, $10,103,000, $1,318,000 and $26,632,000 for the
period from inception to December 31, 1994, the year ended December 31, 1995
and the three months ended March 31, 1995 and 1996, respectively, primarily
from the private sales of equity securities and borrowings under its equipment
line of credit and term notes payable.
Capital expenditures were approximately $3,933,000 from inception through
March 31, 1996. The Company has no material commitments other than obligations
under the term notes payable and operating leases. The Company estimates that
capital expenditures in 1996 will be approximately $4,000,000 to $5,000,000.
At December 31, 1995, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $13,588,000. 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 in excess of 50%. The Company believes that it has
experienced a change in ownership in excess of 50% and that it may experience
an additional change in ownership in excess of 50% upon completion of the
Offerings.
21
The Company does not believe that these changes in ownership will
significantly impact the Company's ability to utilize its net operating loss
carryforwards. It is the Company's objective to become a profitable enterprise
and to realize the benefits of its deferred tax assets. However, in evaluating
the realizability of these deferred tax assets, management has considered the
Company's short operating history, the volatility of the market in which it
competes, the operating losses incurred to date and the operating losses
anticipated for the foreseeable future, and believes that given the
significance of this evidence a full valuation reserve against its deferred
tax assets is required as of December 31, 1994 and 1995 and March 31, 1996.
The Company believes that its existing capital resources are adequate to
meet its cash requirements for at least the next 12 months. There can be no
assurance, however, that changes in the Company's plans or other events
affecting the Company's operations will not result in accelerated or
unexpected expenditures.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial data
for each of the five most recent quarters in the period ended March 31, 1996.
In the opinion of management, the unaudited quarterly information has been
prepared on the same basis as the audited Consolidated Financial Statements
and includes all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the information for the periods
presented. The quarterly information should be read in conjunction with the
audited Consolidated Financial Statements and Notes thereto included elsewhere
in this Prospectus. The quarterly operating results are not necessarily
indicative of results of operations for any future period.
[Download Table]
THREE MONTHS ENDED
------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1995 1996
-------- -------- --------- -------- --------
(IN THOUSANDS)
Revenues:
Product revenues............... $ -- $ -- $ 33 $ 332 $ 2,248
Service revenues............... 88 173 506 674 427
------- ------- ------- ------- -------
Total revenues............... 88 173 539 1,006 2,675
------- ------- ------- ------- -------
Cost of Revenues:
Product revenues............... -- -- 4 40 137
Service revenues............... 58 121 328 462 297
------- ------- ------- ------- -------
Total cost of revenues....... 58 121 332 502 434
------- ------- ------- ------- -------
Gross profit................. 30 52 207 504 2,241
------- ------- ------- ------- -------
Operating Expenses:
Research and development....... 522 1,430 1,555 3,210 3,701
Selling and marketing.......... 317 739 1,007 2,454 4,119
General and administrative..... 195 473 611 2,308 1,469
------- ------- ------- ------- -------
Total operating expenses..... 1,034 2,642 3,173 7,972 9,289
------- ------- ------- ------- -------
Loss from operations......... (1,004) (2,590) (2,966) (7,468) (7,048)
------- ------- ------- ------- -------
Interest income.................. 1 77 90 74 200
Interest expense................. (9) (27) (29) (21) (19)
------- ------- ------- ------- -------
Net loss..................... $(1,012) $(2,540) $(2,905) $(7,415) $(6,867)
======= ======= ======= ======= =======
QUARTERLY INFORMATION
Product revenues commenced in the third quarter of 1995 upon the
introduction of the Company's Web server products, and increased in the fourth
quarter of 1995 due to an increase in unit shipments of these products, along
with the introduction of Merchant Solution. The increase in product revenues
22
in the first quarter of 1996 primarily relates to an initial $2 million
license fee received from a reseller in August 1995 for the right to
sublicense the Company's Web server products and, to a lesser extent, the sale
of the Company's Web server and Merchant Solution products to end users.
Service revenues increased in each of the four quarters of 1995, primarily
from development agreements with the Company's customers and, to a lesser
extent, customer support and maintenance contracts and hosting programs for
certain customer applications. The decrease in service revenues in the first
quarter of 1996 primarily relates to the timing of the completion of certain
development contracts. The Company believes that product revenues as a
percentage of total revenues will fluctuate on a quarterly basis and will
generally be less as a percentage of total revenues than for the three months
ended March 31, 1996. In addition, the Company expects that total service
revenues as a percentage of total revenues will fluctuate on a quarterly
basis, due in part to the timing of significant development contracts, and
will generally be more as a percentage of total revenues than for the three
months ended March 31, 1996.
The Company has increased operating expenses in each of the quarters as a
result of the expansion of the Company's research and development activities,
marketing activities, and the management team. The Company expects to continue
to make significant investments in its infrastructure and internal operations
over at least the next several years in anticipation of future growth.
The Company's quarterly operating results have fluctuated and will continue
to fluctuate from period to period. See "Risk Factors-Potential Fluctuations
in Quarterly Results".
23
BUSINESS
Open Market, Inc. ("Open Market" or the "Company") develops, markets,
licenses and supports high performance software products that allow its
customers to engage in business-to-consumer and business-to-business
electronic commerce on the Internet and to deploy Internet-based business
applications within an enterprise ("Intranet"). Open Market's innovative
technology enables the separation of the management of business transactions
from the management of content, thereby allowing companies to securely and
centrally manage business transactions using content located on multiple
distributed Web servers. The Company's products permit functions such as order
taking, authorization, payment processing, security and customer service to be
performed centrally by a "back office" transaction management system, allowing
merchants and other content providers to focus on management of the "front
office" content at their distributed Web sites.
INDUSTRY BACKGROUND
The Internet was used historically by academic institutions and government
agencies to exchange information and send and receive electronic mail. A
number of factors, including the proliferation of communication-enabled
personal computers, the availability of intuitive, graphical software
("browsers") and an increasingly robust network infrastructure, has allowed
widespread access to the Internet and has increased the use of the World Wide
Web ("Web"). The Web allows a broad range of users to easily access
information on the Internet and interact with individuals or organizations
offering textual, graphical and other information. International Data
Corporation has estimated that the number of individuals worldwide with access
to the Internet will reach approximately 200 million by the end of 1999, of
which 125 million are expected to be accessing the Web. In addition, Zona
Research Inc. estimates that the combined Internet and Intranet software
market will increase from $342 million in 1995 to $3.3 billion in 1998.
With an increasing number of Web users both in the United States and
internationally, the Web has emerged as a new mass communications medium. The
reduced cost required to publish content on the Web, relative to traditional
publishing methods, has led to an explosion of Web-based content, including
online magazines, news feeds and games, as well as an abundance of product,
educational, entertainment and political information. The emergence of the Web
also has created major opportunities for companies to promote, market and
distribute their products and services in a targeted, interactive and
multimedia environment.
The Company believes that the next major phase of Internet growth will be
driven by the emergence of commerce and other interactive business
applications of the Web. With the right software, the same general purpose,
worldwide network that has been used to display content and to manage
communications and e-mail can also be harnessed to manage electronic commerce
transactions conducted on the Internet as well as Intranet applications within
an enterprise.
In business-to-consumer electronic commerce, businesses can directly reach a
worldwide customer base with little incremental distribution cost through the
creation and management of Internet "stores". In addition, businesses are
beginning to take advantage of the fact that other businesses with which they
need to interact, including customers, suppliers and distributors, are
increasingly using the Internet. Traditionally, many large companies have
built private networks to communicate with their largest customers, suppliers
and distributors. Today, the Internet's worldwide accessibility can make
Internet-based data communications cost effective and available to
organizations of all sizes.
The Internet protocols that are being used between companies and individuals
and between businesses can also serve as the basis for internal systems that
facilitate communications and information flow within an enterprise. These
systems that are contained within the "walls" of an organization have become
popularly known as Intranet systems. Over the past 12 to 18 months many
companies have developed and installed a large number of internal Web sites,
which in many cases
24
are in geographically diverse locations. To date, the primary application for
these systems has been the publication of information for viewing by
employees. Examples of published information are internal jobs listings,
personnel handbooks, company directories, department charters and product
descriptions.
Although the advantages of the Internet are compelling, the growth of
electronic commerce applications has been limited to date, primarily because
Internet software capable of effectively and securely managing business
transactions has not been available. As electronic commerce and other
applications of the Web and Web technologies evolve, the Company believes that
businesses increasingly will require software solutions that have the
following features: central management of shared services; multi-faceted
security; controlled and selective access; high performance and scalability;
and openness and flexibility.
Electronic commerce applications to date have combined the management of
content and the management of "back office" functions, such as credit card
processing, customer profiling and legacy applications interfacing, on a
single server. This approach has limited the ability of current applications
to provide robust, highly secure, scalable and flexible systems, thereby
inhibiting the growth of electronic commerce on the Internet. For example, for
a company that desires to process multiple orders for products whose
information is located on multiple servers, current transaction management
solutions generally require the company to replicate the complete transaction
management system on each server.
The Company believes that current solutions to the problem of controlled
access suffer from the same constraints. To offer business applications on the
Internet, a company must be able to provide selective and controlled access to
the information available on its internal and external Web servers. For
example, a company may want each of its business partners to have access to
pricing and product information on only specific products. Current solutions
to this problem of controlled access are effective if the company maintains
all of its product and pricing information on a single server, but impose
constraints when information is distributed on multiple servers, as is
increasingly the case. In the multiple server scenario, each information
server must have its own authentication and access management module.
Moreover, whenever the company alters the information, it may need to adjust
the authentication and access module on each server.
THE OPEN MARKET SOLUTION
Open Market has developed a comprehensive, integrated set of products and
services specifically designed to enable the management of both Internet
business transactions and Intranet applications. Open Market's solution
combines the advantages of distributed Web servers deployed throughout a
company and across the Internet with the ability to centrally manage business
transactions and Intranet applications from secure, centrally managed sites.
The Company's technology enables customers to link the content on
distributed Web servers to the servers that manage either transactions or
access to content. Once the content on the Web servers is linked, common
services can be delivered by transaction and access management systems such as
the Company's OM-Transact and OM-Axcess products. OM-Transact is a "back
office" transaction management system whose functions include order
processing, authorization, payment processing, security and customer service.
OM-Axcess is server software designed to support a company's internal Web
applications by centrally managing the authentication and authorization of end
users seeking access to the system.
OM-SecureLink is the Company's enabling technology for linking content to
servers. It has been designed to work with standard Web protocols so that it
operates with most leading Web servers, including those from the Company,
Novell, Netscape and Microsoft, and Web browsers, including those from
Netscape, Microsoft and Spyglass, Inc.
To take advantage of centrally provided services through OM-SecureLink, the
content on a Web server needs to be OM-SecureLink enabled, that is, linked to
transaction management and access
25
management servers. Open Market has developed software tools and components as
part of OM-SecureLink which allow customers to so enable their content. In
addition, companies that develop authoring tools and software tools for
content management can integrate OM-SecureLink into their products.
OPEN MARKET TECHNOLOGY ARCHITECTURE
[IMAGE DEPICTS THE MANNER IN WHICH DISTRIBUTED WEB CONTENT IS LINKED TO
OM-TRANSACT (COMMERCIAL TRANSACTION MANAGEMENT) AND OM-AXCESS (CENTRALIZED
ACCESS MANAGEMENT) MAKING USE OF OM-SECURELINK SERVICES]
Open Market has relationships with leading content tool providers to support
OM-SecureLink, including Bluestone and SAQQARA Systems, Inc. In addition, Open
Market has developed Merchant Solution, its own "front office" development
tool, which incorporates OM-SecureLink. The Company believes that making OM-
SecureLink technology broadly available for use with Web servers and content
creation tools provides an opportunity to make OM-SecureLink and the Open
Market architecture an industry standard for managing business transactions on
the Internet.
STRATEGY
The Company's objective is to be a leading supplier of comprehensive,
integrated, high performance software products to enable businesses to manage
Internet business transactions and Intranet applications. To achieve this
objective, the Company is pursuing the following strategies:
Focus on Providing Internet Software for Business. Open Market is focused on
providing software to enable Internet-based commerce and Intranet
applications. The Company believes that the business software segment has high
growth potential and includes products that are technologically complex and
high value-added. Furthermore, business customers value and are willing to pay
for functionality, reliability and performance.
26
Promote OM-SecureLink as an Industry Standard. The Company believes OM-
SecureLink is a key element in building reliable business applications on the
Internet. The Company's strategy is to encourage software and systems
companies to support it as part of their product line. To accelerate the
adoption of OM-SecureLink, the Company has entered into and is continuing to
pursue joint marketing and development agreements with leading software and
systems companies to integrate and bundle OM-SecureLink with their products.
Support Open Systems. The Company recognizes that its customers have
invested in many different servers, browsers and hardware platforms and rely
on existing security and payment protocols. The Company is committed to open
systems and intends to proactively support the development and evolution of
open standards. This strategy will allow the Company to shorten its product
time to market and accelerate and broaden market acceptance of its products.
Provide Enhanced Security. Providing for transaction and content security is
a key aspect of the Company's product strategy. The Company offers a multi-
level security architecture, which currently addresses encryption, containment
and workstation compromise, and which will address insider fraud, thereby
allowing its customers to select the appropriate levels of security for their
applications. The Company believes that this comprehensive approach to
security, which extends beyond protecting the privacy of point-to-point
communications, is a key differentiator for its Internet business software.
The Company intends to continue its focus on developing or enhancing its
technology to provide a robust, highly secure operating environment.
Continue to Develop Technology and Marketing Relationships. The Company has
entered into and intends to continue to develop strategic technology and
marketing relationships in order to accelerate the acceptance of its
architecture and products as the key building blocks for managing business
transactions on the Internet. Through its relationships, the Company believes
that software and hardware providers, suppliers of value-added networks,
Internet service providers, financial institutions and credit card processors
will offer products and services that support and complement Open Market's
products.
Implement Comprehensive Distribution Strategy. The Company has a worldwide
distribution strategy which relies on both direct and indirect channels. It
plans to expand its direct sales, support and service organization to focus on
large accounts and service providers. To broaden its presence in additional
markets, the Company intends to expand its indirect distribution channels by
establishing relationships with systems integrators, distributors, OEMs and
independent software vendors.
PRODUCTS
Open Market has developed the following comprehensive, integrated family of
software products that are the core building blocks of its Internet solution:
[Download Table]
PRODUCT AVAILABILITY CURRENT LIST PRICE
------- ------------------- ------------------
OM-Transact May 1996(1) Starts at $250,000(2)
OM-Axcess May 1996(1) Starts at $ 35,000(2)
OM-Express July 1996(1) $ 30(2)
Merchant Solution Currently available $ 19,995
Secure WebServer Currently available $ 1,495
WebReporter Currently available $ 495
--------
(1) These products are expected to be generally available for customer
delivery during the months indicated.
(2) Anticipated list price at the time of general availability.
27
OM-TRANSACT
OM-Transact is a "back office" transaction management system which provides
order processing, authorization, payment processing, security and customer
service functionality. It is based on an innovative distributed architecture
that separates content from shared services (i.e., "front office" activities
from "back office" operations). OM-Transact, as a centrally managed system,
can be securely linked to multiple content servers using the Company's OM-
SecureLink technology.
OM-TRANSACT ARCHITECTURE
[ Images depicts the specific features of OM-Transact, including security,
authorization payment processing, on-line customer service, record keeping and
order management and how OM-Transact can be linked through OM-SecureLink to
distrubuted Web content]
OM-Transact is modular and based on an open architecture. The product's
modularity allows a customer to adapt its transaction management system to
include optional functionality, such as sales tax, international tax, and
shipping charge calculations, by simply appending new modules to the system.
Each new module becomes a shared service available to the customer's existing
content servers. Based on its open architecture, OM-Transact supports leading
HTTP browsers (i.e., those from Netscape, Microsoft and Spyglass), including
those that support security protocols SSL, S-HTTP or PCT. OM-Transact supports
multiple security and authentication schemes for privacy and content security.
With respect to payment schemes, OM-Transact currently supports credit card
technology and provides on-line credit card processing by linking to financial
networks of major credit card companies. The Company expects to enhance OM-
Transact to support other payment methods, such as digital cash schemes and
financial electronic data interchange ("EDI"), as they become widely used in
the marketplace. OM-Transact is also capable of maintaining accurate, real-
time order reports and audit trails providing customers with the ability to
gather key consumer, business and market information on-line.
28
The Company offers OM-Transact as a comprehensive "back office" solution to
service providers and corporations that want to develop a reliable, high
performance, scalable electronic commerce solution on the Internet. The
expected list price for OM-Transact is $250,000, plus an additional $3,000 per
merchant, subject to volume discounts, for service providers supporting
multiple merchants. The Company has installed an early release version of OM-
Transact at several companies, including Time Inc. New Media and Tribune
Company.
OM-AXCESS
By centrally managing the authentication and authorization of end users, OM-
Axcess facilitates the management of Web-based information and the management
of access to proprietary corporate data distributed across an Intranet. OM-
Axcess provides digital "access tickets" to each user for access to the
content on each Web server that the user is authorized to see. Together with
OM-SecureLink, OM-Axcess supports most leading Web servers, including those
from the Company, Novell, Netscape and Microsoft, provides comprehensive
tracking of user requests and supplies detailed management reports. In
addition, OM-Axcess enables software developers and systems integrators to
integrate Web-based applications with existing systems through an application
programming interface (API).
Using OM-Axcess with other Open Market products, a company can expand the
applications that it can deploy on an Intranet from simple publishing
applications, where everyone has access to all of the information on the Web
servers, to interactive business applications where access to information is
controlled and selective. For example, the personnel department, in addition
to publishing benefits data, can furnish employees with access to their
individual pension plan data while preventing other employees from accessing
that data.
OM-AXCESS ARCHITECTURE
[IMAGE DEPICTS THE USER AUTHENTICATION AND ACCESS AUTHORIZATION FEATURES OF OM-
AXCESS AND HOW OM-AXCESS CAN BE LINKED THROUGH OM-SECURELINK WITH DISTRIBUTED
CORPORATE DATA AND APPLICATIONS]
29
OM-Axcess can be used for applications such as document management,
development of personalized content and centralized management of distributed
multi-vendor content. Companies currently using the "beta" version of OM-
Axcess include Digital Equipment Corporation, The Vanguard Group, Inc.,
Hewlett-Packard, Bloomberg Financial Markets and Interleaf.
OM-EXPRESS
OM-Express is a desktop software product designed to work with leading Web
browsers and Web servers. The product is designed to allow users to download
selected Internet content to their local personal computers during off-peak
hours for later viewing and use. This product enables a user to schedule the
downloading (and subsequent updating) of a lengthy document or publication at
a time when Internet rates and traffic are lower and to view it on the user's
personal computer when convenient. In April 1996, the Company made a "beta"
version of OM-Express available at no cost via the Internet for evaluation
purposes and announced an arrangement with CompuServe Incorporated and Time
Inc. New Media for the license and distribution of OM-Express to their
Internet service subscribers.
MERCHANT SOLUTION
Merchant Solution provides the "front office" Web site software tools for
establishing a business on the Web. It consists of the Company's StoreBuilder,
an easy-to-use Windows-based application that allows merchants to develop on-
line stores, and OM-SecureLink software for linking the store to a "back
office" OM-Transact system. The product also includes a high performance Open
Market Secure WebServer and WebReporter. The current list price for Merchant
Solution including one year of "back office" support is $19,995. Organizations
using Merchant Solution include Patriot's Trail Girl Scout Council, Newbury
Comics, Inc. and White Pine Software, Inc.
SECURE WEBSERVERS AND WEBREPORTER
Open Market has developed a reliable, high performance and secure Web
server. The Open Market Secure WebServer is scalable and multi-threaded and is
designed to handle a large number of connections simultaneously. The server
supports S-HTTP, SSL and PCT security protocols. The server also offers access
control, logging and reporting capabilities and provides a foundation for
integrated, distributed solutions.
The Open Market WebReporter enables businesses to generate customized end-
user access and browsing pattern reports. It is included with the Open Market
Secure WebServer and is compatible with other leading Web servers.
RESEARCH AND DEVELOPMENT
To keep pace with technological developments in the marketplace and address
the increasingly sophisticated needs of its customers, the Company intends to
expand its existing product offerings and introduce new application products
for the Internet-based electronic commerce and enterprise markets. The
Company's customers and Resellers provide significant product feedback that is
channeled into product development and innovation. While the Company expects
that certain of its new products will be developed internally, the Company
may, based on timing and cost considerations, expand its product offerings
through acquisitions. In addition, the Company has relied and will continue to
rely on external relationships and development resources for development of
certain of its products and components thereof. Some of the Company's current
technology partners include Bluestone, FTP Software, Interleaf, Caro-Kann
Corporation, TAXWARE International, Premenos Corp. and RSA Data Security, Inc.
30
As of March 31, 1996, the Company had 112 employees and independent
contractors devoted to research and development and expects to add to that
number during 1996. The Company's research and development expenses amounted
to approximately $840,000, $6,716,000, $522,000, and $3,700,000 in the period
from inception to December 31, 1994, for the year ended December 31, 1995 and
for the three months ended March 31, 1995 and 1996, respectively.
CUSTOMER SERVICES AND SUPPORT
The Company believes that its comprehensive customer service, support and
education programs are critical to the successful development and marketing of
its Internet-based business solutions. These programs strengthen relationships
with leading customers in target markets.
The Company offers the following two types of services:
Support and Maintenance
Basic Service - Includes software updates and discounts on
Educational Services and software up-
grades, unlimited toll-free telephone and
e-mail support from 8 a.m. to 8 p.m. EST
on business days and a Technical Services
newsletter subscription.
Premier Service - Includes all Basic Service entitlements
plus an additional discount on Educational
Services and unlimited toll-free telephone
and e-mail support 24 hours per day, 7
days per week.
Depending on the type of support and maintenance service selected, annual fees
range from 20% to 30% of product list price. For a service provider using OM-
Transact to provide "back office" support to its merchant customers, the
Company offers support services for $1,000 per year per supported merchant.
Education and Training
Educational Services - 3 to 4 day sessions at prices ranging from
$1,000 to $2,000 per session.
Start Up Services - One-time set up charge based on product;
additional monthly fees based on customer
options.
Consulting Services - Consultants and senior consultants at
prices ranging from $125 to $175 per hour;
custom solution packages are also avail-
able.
DISTRIBUTION AND CUSTOMERS
The Company's objective is to achieve broad market penetration by employing
multiple distribution channels, including direct sales, OEMs, systems
integrators, independent software vendors and VARs.
The Company's direct sales force focuses on two primary markets. For
electronic commerce, the direct sales force works with large network service
providers, including large telecommunications companies, Internet service
providers, and financial service providers, that will develop transaction
management services for their customers. Sales to these customers are complex
and require technical support and project management which are coordinated by
a direct sales account manager and an assigned project manager. In addition,
the direct sales force focuses on large retailers, manufacturers (Fortune
1000) and distributors. At March 31, 1996, the Company's sales force included
35 employees in North America, Europe and Australia.
31
The Company's customers include:
Banc One Parade Net, Inc.
Bloomberg Financial Markets Time Inc. New Media
Conde Net, Inc. Toronto Dominion
First Union National Bank Tribune Company
Hewlett-Packard Unipalm PIPEX
networkMCI, Inc. ZD Net
The Company has entered into agreements to market its products with several
Resellers, including Novell, Digital Equipment, Hewlett-Packard, Interleaf and
Stratus Computer. In the Novell agreement, Novell has agreed to license the
Company's OM-SecureLink technology with the intent of integrating the
technology into Novell's commerce Web server. The Company has entered into an
agreement with CSC Consulting, Inc., a systems integrator, to work with its
customers to design, install and customize large electronic commerce and
Intranet solutions. The Company expects to pursue relationships with additional
systems integrators. The Company offers training programs designed to educate
systems integrators concerning the Open Market architecture, and the Company
has, and will continue to develop, tools that allow these integrators to work
effectively with Open Market software.
COMPETITION
The market for Internet-based software and services is new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition to increase in the future. The Company's electronic
commerce products compete with solutions from custom designers and products
from Netscape, Microsoft, Oracle, BroadVision and CONNECT. For Intranet
applications the Company competes with Netscape, Microsoft, and Oracle. Many of
the Company's current and potential competitors have longer operating
histories, greater name recognition, larger installed customer bases and
significantly greater financial, technical and marketing resources than those
of Company. Such competition could materially adversely affect the Company's
business, operating results or financial condition.
Competitive factors in the Internet-based software and services market
include core technology, breadth of product features, product quality,
marketing and distribution resources, customer service and support and price.
The market and competition are still new and rapidly evolving, and there can be
no assurance that the Company will be able to compete successfully against
current or future competitors, or that this competition will not materially
adversely affect the Company's business, operating results or financial
condition.
PROPRIETARY TECHNOLOGY
The Company relies on trademark, copyright, patent and trade secret laws,
employee and third-party non-disclosure agreements and other methods to protect
its proprietary rights. The Company currently has five patent applications
pending in the United States relating to the Company's product architecture and
technology. While the Company believes that the pending patent applications
relate to patentable inventions, there can be no assurance that any pending or
future patent applications will be granted or that any patent relied upon by
the Company in the future will not be challenged, invalidated or circumvented
or that the rights granted thereunder or under licensing agreements will
provide competitive advantages to the Company. The Company believes that, due
to the rapid pace of technological innovation for Internet products, the
Company's ability to establish and maintain a position of technology leadership
in the industry is dependent more on the skills of its development personnel
than upon the legal protections afforded its existing technology.
32
The Company's success is dependent in part upon its proprietary software
technology. There can be no assurance that its agreements with employees,
consultants and others who participate in the development of its software will
not be breached, that the Company will have adequate remedies for any breach,
or that the Company's trade secrets will not otherwise become known to or
independently developed by competitors. Furthermore, there can be no assurance
that the Company's efforts to protect its proprietary technology will not fail
to prevent the development and design by others of products or technology
similar to or competitive with those developed by the Company.
The Company is not aware that it is infringing any patent or violating any
other proprietary rights of any third party relating to the Company or the
Company's products. However, the computer software market is characterized by
frequent and substantial intellectual property litigation. Intellectual
property litigation is complex and expensive, and the outcome of such
litigation is difficult to predict.
The Company's success will depend in part on its continued ability to obtain
and use licensed technology that is important to the functionality of its
products. An inability to continue to procure or use such technology would
likely have a material adverse effect on the Company's business, operating
results or financial condition.
EMPLOYEES
As of March 31, 1996 the Company had 257 employees and independent
contractors. Of the total employees and independent contractors, 112 were in
engineering, 76 in sales and marketing, 46 in support and operations, and 23
in finance and administration. The Company's future success depends in
significant part upon the continued service of its key technical and senior
management personnel and its continuing ability to attract and retain highly
qualified technical and managerial personnel. Competition for highly qualified
personnel is intense and there can be no assurance that the Company will be
able to retain its key managerial and technical employees or that it will be
able to attract and retain additional highly qualified technical and
managerial personnel in the future. None of the Company's employees is
represented by a labor union. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.
FACILITIES
Open Market's principal offices are located in Cambridge, Massachusetts and
consist of approximately 81,000 square feet of office space. The lease of the
Cambridge facility expiresFebruary 1, 2001. The Company also leases
approximately 4,700 square feet of office space in an adjacent building; this
space was sublet in April 1995 to a commercial tenant for the balance of the
lease term. The Company believes its existing facilities will be adequate
through 1997.
In addition, the Company leases approximately 4,900 square feet of office
space in Menlo Park, California which it uses as a regional sales office and a
West Coast research and development facility.
The Company has sales offices in New Jersey, Chicago, Atlanta and Menlo
Park, California in the United States, Toronto, Canada and the United Kingdom;
it plans to open additional sales offices in the United States, Europe and
Asia during 1996. The Company also has sales representatives in Washington,
D.C., France and Australia.
33
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company are as
follows:
[Enlarge/Download Table]
NAME AGE POSITION
---- --- --------
Gary B. Eichhorn.............. 41 President and Chief Executive Officer and Director
Shikhar Ghosh................. 38 Chairman of the Board
David K. Gifford, Ph.D. ...... 41 Vice Chairman and Chief Scientific Officer
Joanne C. Conrad.............. 43 Vice President of Human Resources
Thomas A. Nephew.............. 44 Vice President of Service and Operations
Daniel E. Ross................ 42 Vice President of Sales
Regina O. Sommer.............. 38 Chief Financial Officer and Secretary
Lawrence C. Stewart, Ph.D. ... 40 Chief Technology Officer
Robert C. Weinberger.......... 43 Vice President of Corporate Marketing
Peter Y. Woon, Ph.D. ......... 61 Vice President of Engineering
Gulrez Arshad(2).............. 49 Director
Bruce D. Judson(1)............ 37 Director
William S. Kaiser(2).......... 40 Director
Eugene F. Quinn(1)............ 42 Director
Ray Stata(1).................. 61 Director
Robert J. Tarr, Jr.(2)........ 52 Director
--------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Mr. Eichhorn joined the Company as its President and Chief Executive Officer
in December 1995. He has served as a director of the Company since December
1995. From September 1991 to November 1995, Mr. Eichhorn worked at Hewlett-
Packard Company, a computer company, and most recently served as General
Manager of the Medical Systems Group. From 1975 to 1991, Mr Eichhorn held
various sales and management positions at Digital Equipment Corporation, a
computer company.
Mr. Ghosh, a founder of the Company, has served as a director of the Company
since June 1994. From June 1994 to December 1995, Mr. Ghosh served as the
Company's President and Chief Executive Officer. In December 1995, Mr. Ghosh
became the Chairman of the Board of Directors. From 1992 to 1994, Mr. Ghosh
served as Vice President of EDS Communications Industry Group, a systems
integration company, and from 1988 to 1992, Mr. Ghosh served as President and
Chief Executive Officer of EDS Personal Communications Corporation, a provider
of information services to the personal communications industry.
Dr. Gifford, a founder of the Company, has served as a director of the
Company since December 1993 and also served as President of the Company from
December 1993 to June 1994. Dr. Gifford became the Vice Chairman of the Board
of Directors in December 1995. Since July 1982, Dr. Gifford has served as
Professor at the Massachusetts Institute of Technology.
Ms. Conrad joined the Company in December 1995 as its Vice President of
Human Resources. From March 1994 to December 1995, Ms. Conrad served as a
principal of Conrad & Associates, a human resources consulting company. From
February 1988 to February 1994, Ms. Conrad served as Director of Human
Resources and Vice President of Employee Relations of Olsten Kimberly Quality
Care, a healthcare services provider.
Mr. Nephew joined the Company in August 1995 as its Vice President of
Service and Operations. From March 1994 to August 1995, Mr. Nephew served as
Director of Technical Services of Progress Software Corporation, a database
software company, and from July 1993 to March 1994, Mr. Nephew served as
Director of Information Services of Phoenix Technologies, Ltd., a software
company. From 1989 to 1993, Mr. Nephew served as the Director of MIS and more
recently as the Director of Customer Service of Proteon, Inc., a networking
company.
34
Mr. Ross joined the Company in December 1995 as its Vice President of Sales.
From June 1994 to December 1995, Mr. Ross served as Vice President and General
Manager of Americas of PictureTel Corporation, a manufacturer of video
teleconferencing equipment. From 1978 to June 1994, Mr. Ross served in various
sales positions at Digital Equipment Corporation, most recently as Director of
United States PC Sales.
Ms. Sommer joined the Company in January 1995 as its Chief Financial
Officer. From July 1993 to May 1994, Ms. Sommer served as Vice President-
Finance of Olsten Corporation, a temporary and home healthcare services
provider, and from July 1989 to July 1993, she served as Vice President of
Taxes at Lifetime Corporation, a home healthcare services provider.
Dr. Stewart joined the Company in April 1994 as its Chief Technology
Officer. From March 1984 to April 1994, Dr. Stewart held various engineering
positions at Digital Equipment Corporation, most recently as a Senior
Consultant Engineer.
Mr. Weinberger joined the Company in January 1995 as Vice President of
Corporate Marketing. From May 1989 to January 1995, Mr. Weinberger served as a
marketing manager of Hewlett-Packard Company.
Dr. Woon joined the Company in December 1995 as Vice President of
Engineering. From July 1994 to December 1995, Dr. Woon was engaged as a
founder of a telecommunications consulting company. From January 1991 to July
1994, Dr. Woon served as the Senior Vice President of Engineering at Centigram
Communications Corp., a communications technology company.
Mr. Arshad has served as a director of the Company since June 1994. Since
November 1989, Mr. Arshad has served as Chairman of Nuland & Arshad, an
investment management firm.
Mr. Judson has served as a director of the Company since August 1995. Since
September 1993, Mr. Judson has served as General Manager of new media
activities of Time Inc. From March 1989 to September 1993, Mr. Judson served
in a variety of marketing positions at Time Inc., including Director of
Marketing for the magazine division of Time Inc.
Mr. Kaiser has served as a director of the Company since June 1994. Mr.
Kaiser has been employed by Greylock Management Corporation, a venture capital
firm, since May 1986 and has been a general partner of Greylock Limited
Partnerships since January 1988. Mr. Kaiser is a director of Avid Technology,
Inc., Spyglass, Inc., Checkfree Corporation and Raptor Systems, Inc.
Mr. Quinn has served as a director of the Company since April 1995. Since
September 1994, Mr. Quinn has served as the General Manager of Tribune
Interactive Network Services of Tribune Company, a publishing company. From
September 1991 to September 1994, Mr. Quinn served as the General Manager,
Chicago Online of Chicago Tribune Company, a newspaper publisher. Mr. Quinn is
a director of Checkfree Corporation.
Mr. Stata has served as a director of the Company since May 1996. Since
1973, Mr. Stata has served as the Chairman of the Board of Directors and Chief
Executive Officer of Analog Devices, Inc., a computer company. From 1971 to
1991, Mr. Stata also served as the President of Analog Devices, Inc. Mr. Stata
is a director of INSO Corp.
Mr. Tarr has served as director of the Company since March 1996. Since 1991,
Mr. Tarr has served as the President, Chief Executive Officer and Chief
Operating Officer of Harcourt General, Inc., a publisher and specialty
retailer. Since August 1987, Mr. Tarr has served as the President, Chief
Executive Officer and Chief Operating Officer of The Neiman Marcus Group,
Inc., a specialty retailer. Mr. Tarr is a director of Harcourt General, Inc.
and The Neiman Marcus Group, Inc.
Following this offering, the Board of Directors will be divided into three
classes, each of whose members will serve for a staggered three-year term. The
Board will consist of three Class I Directors (Messrs. Arshad, Judson and
Eichhorn), three Class II Directors (Messrs. Ghosh, Kaiser and Quinn)
35
and three Class III Directors (Dr. Gifford, Mr. Stata and Mr. Tarr). At each
annual meeting of stockholders, a class of directors will be elected for a
three-year term to succeed the directors of the same class whose terms are
then expiring. The terms of the Class I Directors, Class II Directors and
Class III Directors expire upon the election and qualification of successor
directors at the annual meeting of stockholders held during the calendar years
1997, 1998 and 1999, respectively.
Each officer serves at the discretion of the Board of Directors. There are
no family relationships among any of the directors and executive officers of
the Company.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee, which makes
recommendations concerning salaries and incentive compensation for employees
of and consultants to the Company and administers and grants stock options
pursuant to the Company's stock option plans, and an Audit Committee, which
reviews the results and scope of the audit and other services provided by the
Company's independent public accountants.
BOARD COMPENSATION
All of the directors are reimbursed for expenses incurred in connection with
their attendance at Board and committee meetings. Employees and founders of
the Company are not entitled to cash compensation in their capacities as
directors.
1996 DIRECTOR OPTION PLAN
The 1996 Director Option Plan (the "Director Plan") was adopted by the Board
of Directors and approved by the stockholders of the Company in April 1996 and
will become effective upon the closing of the Offerings. Under the terms of
the Director Plan, options to purchase that number of shares of Common Stock
determined by dividing $100,000 by the Option Exercise Price (as defined
below) will be granted to each director of the Company who first becomes a
member of the Board of Directors after the closing date of the Offerings and
who is not an employee or founder of the Company or any subsidiary of the
Company (an "Eligible Director"). In addition, on the date of each Annual
Meeting of Stockholders of the Company commencing with the Annual Meeting of
Stockholders to be held in 1997, each then current director who is not a
founder or employee of the Company will be granted an option to purchase that
number of shares of Common Stock determined by dividing $30,000 by the Option
Exercise Price. Each option will become exercisable in 16 equal quarterly
installments beginning on the date of the grant. The exercisability of these
options will be accelerated upon the occurrence of a Change in Control (as
defined in the Director Plan). The Option Exercise Price of options granted
under the Director Plan will equal the lesser of (i) the last reported sale
price per share of Common Stock thereon on the date of grant (if no such price
is reported on such date, such price on the nearest preceding date on which
such a price is reported) or (ii) the average of the last reported sales price
per share of Common Stock as published in The Wall Street Journal for a period
of ten consecutive trading days prior to such date.
Options granted under the Director Plan are not transferrable by the
optionee except by will or by the laws of descent and distribution. In the
event an optionee ceases to serve as a director, each option may be exercised
by the optionee for the portion then exercisable within 60 days after the
optionee ceases to serve as a director; provided, however, that in the event
that the optionee ceases to serve as a director due to his death or
disability, then the optionee, or his or her administrator, executor or heirs
may exercise the exercisable portion of the option for up to 180 days
following the date the optionee ceased to serve as a director. No option is
exercisable after the expiration of ten years from the date of grant.
Federal Income Tax Consequences. Options granted under the Director Plan do
not qualify as incentive stock options under the Internal Revenue Code of
1986, as amended (the "Code"). See
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"Management--Executive Compensation--1994 Stock Incentive Plan" for a
description of federal income tax consequences of options granted under the
Director Plan.
EXECUTIVE COMPENSATION
The following table sets forth the compensation for the year ended December
31, 1995 for the Company's Chief Executive Officer and its two executive
officers whose compensation exceeded $100,000 in 1995 (collectively, the
"Named Executives"):
SUMMARY COMPENSATION TABLE
[Download Table]
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------- -------------------
NAME AND SHARES UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
------------------ -------------------- ------------------- ------------
Gary B. Eichhorn(1)...... $ 11,538 $ 500,000 1,275,000 $ --
President, Chief
Executive Officer,
and Director
Shikhar Ghosh(2)......... 140,000 -- 150,000 --
Chairman of the Board
Robert C. Weinberger(3).. 110,769 -- 300,000 --
Vice President of
Corporate Marketing
--------
(1) Mr. Eichhorn joined the Company in December 1995; his annualized base
salary for 1995 was $200,000. See "Employment Agreement" below regarding
1995 bonus payment.
(2) Mr. Ghosh served as the President and Chief Executive Officer of the
Company until December 1995.
(3) Mr. Weinberger joined the Company in January 1995; his annualized base
salary for 1995 was $120,000.
EMPLOYMENT AGREEMENT
The Company has an employment agreement with Mr. Eichhorn under which Mr.
Eichhorn serves as the President and Chief Executive Officer of the Company.
The agreement provides for (i) a signing bonus of $1,000,000; (ii) an initial
annual salary of $200,000; (iii) an option to purchase 1,275,000 shares of the
Company's Common Stock at an exercise price of $.25 per share; and (iv) an
annual bonus in the amount of $100,000. The Company paid Mr. Eichhorn the
signing bonus in two installments of $500,000 each in November 1995 and
February 1996. The stock option is exercisable as follows: (i) 125,000 shares
from and after December 7, 1995, (ii) 64,063 shares from and after March 7,
1996, (iii) 125,000 shares from and after December 7, 1996, (iv) 510,937
shares from and after the closing of the Offerings and (v) the remaining
450,000 shares in fifteen equal quarterly installments commencing on June 7,
1996. The option is subject to earlier exercise in certain circumstances, and
up to 125,000 shares issuable upon exercise of the option are subject to
repurchase by the Company under certain circumstances. The Company has the
right to terminate the employment agreement with Mr. Eichhorn at any time. In
the event the Company terminates Mr. Eichhorn's employment agreement other
than for Cause (as defined in the employment agreement) or total and permanent
disability or if Mr. Eichhorn terminates his employment agreement for Good
Reason (as defined in the employment agreement), Mr. Eichhorn is entitled to
receive a severance payment equal to his annual base salary in effect on the
termination date plus his annual bonus for the employment year which ended
immediately preceding such termination date provided, however, if Mr. Eichhorn
terminates his employment agreement by reason of a Change of Control (as
defined in the employment agreement) such severance payments will only be
required to be made if Mr. Eichhorn terminates his employment within one year
of the date on which the Change of Control occurs.
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1994 STOCK INCENTIVE PLAN
The Company's 1994 Stock Incentive Plan (the "1994 Plan") was adopted by the
Board of Directors and approved by the stockholders of the Company on June 7,
1994. The 1994 Plan provides for the grant of restricted stock awards and
stock options to employees, officers and directors of, and consultants or
advisers to, the Company and its subsidiaries. Under the 1994 Plan, the
Company may grant options that are intended to qualify as incentive stock
options within the meaning of Section 422 of the Code ("incentive stock
options"), or options not intended to qualify as incentive stock options
("nonstatutory options"). Incentive stock options may only be granted to
employees of the Company. A total of 13,001,000 shares of Common Stock may be
issued upon the exercise of options granted under the 1994 Plan. Unless
otherwise terminated, the 1994 Plan will terminate on June 6, 2004.
The 1994 Plan is administered by the Compensation Committee of the Board of
Directors. Subject to the provisions of the 1994 Plan, the Compensation
Committee has the authority to select the employees to whom options are
granted and determine the terms of each option, including (i) the number of
shares of Common Stock subject to the option, (ii) when the option becomes
exercisable, (iii) the option exercise price, which, in the case of incentive
stock options, must be at least 100% (110% in the case of incentive stock
options granted to a stockholder owning in excess of 10% of the Company's
Common Stock) of the fair market value of the Common Stock as of the date of
grant, and (iv) the duration of the option (which, in the case of incentive
stock options, may not exceed ten years or five years in the case of incentive
stock options granted to stockholders owning in excess of 10% of the Company's
Common Stock). The Compensation Committee may, in its sole discretion, include
additional provisions in any option or award granted or made under the 1994
Plan, so long as not inconsistent with the 1994 Plan or applicable law. The
Compensation Committee may also, in its sole discretion, accelerate or extend
the date or dates on which all or any particular option or options granted
under the 1994 Plan may be exercised.
Payment of the option exercise price may be made in cash, shares of Common
Stock, a combination of cash or stock or by any other method (including
delivery of a promissory note payable on terms specified by the Compensation
Committee) approved by the Compensation Committee consistent with Section 422
of the Code and Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
As of March 31, 1996, the Company had 257 employees and independent
contractors, all of whom were eligible to participate in the 1994 Plan. The
number of individuals receiving stock options varies from year to year
depending on various factors, such as the number of promotions and the
Company's hiring needs during the year, and thus the Company cannot now
determine the number of shares of Common Stock to be awarded to any particular
current executive officer, to all current executive officers as a group or to
non-executive employees as a group.
All options are nontransferable other than by will or the law of descent and
distribution and, in the case of options which are not incentive stock
options, pursuant to a qualified domestic relations order. Incentive stock
options are exercisable during the lifetime of the option holder only while
the option holder is in the employ of the Company, or within three months
after termination of employment. In the event that termination is due to death
or disability, or if death occurs within three months after termination, the
option is exercisable for a one-year period thereafter.
To the extent not exercised, all options granted under the 1994 Plan shall
terminate immediately prior to a dissolution or liquidation of the Company. In
the event of a merger of the Company, or the sale of substantially all of the
assets of the Company, the Board of Directors shall have the discretion to
accelerate the vesting of the options granted under the 1994 Plan.
Federal Income Tax Consequences. No taxable income will be recognized by an
optionee upon the grant or exercise of an incentive stock option (provided
that the difference between the option
38
exercise price and the fair market value of the stock on the date of exercise
must be included in the optionee's "alternative minimum taxable income"), and
no corresponding expense deduction will be available to the Company.
Generally, if an optionee holds shares acquired upon the exercise of incentive
stock options until the later of (i) two years from the grant of the option
and (ii) one year from the date of transfer of the purchased shares to him or
her (the "Statutory Holding Period"), any gain to the optionee upon a sale of
such shares will be treated as capital gain. The gain recognized upon the sale
of the stock is the difference between the option price and the sale price of
the stock. The net federal income tax effect on the holder of incentive stock
options is to defer, until the stock is sold, taxation of any increase in the
stock's value from the time of grant to the time of exercise, and to cause all
such increase to be treated as capital gain.
If the optionee sells the shares prior to the expiration of the Statutory
Holding Period, he or she will realize taxable income at ordinary income tax
rates in an amount equal to the lesser of (i) the fair market value of the
shares on the date of exercise less the option price, or (ii) the amount
realized on the sale less the option price, and the Company will receive a
corresponding business expense deduction. Any additional gain will be treated
as long-term capital gain if the shares are held for more than one year prior
to the sale and as short-term capital gain if the shares are held for a
shorter period. If the optionee sells the stock for less than the option
price, he or she will recognize a capital loss equal to the difference between
the sale price and the option price. The loss will be a long-term capital loss
if the shares are held for more than one year prior to the sale and a short-
term capital loss if the shares are held for shorter period.
No taxable income is recognized by the optionee upon the grant of a
nonstatutory option. The optionee must recognize as ordinary income in the
year in which the option is exercised the amount by which the fair market
value of the purchased shares on the date of exercise exceeds the option price
(and the Company may be required to withhold an appropriate amount for tax
purposes). If the optionee is a person who is required to file reports
pursuant to Section 16(a) of the Exchange Act, then upon the exercise of an
option within six months from the date of grant no income will be recognized
by the optionee until six months have expired from the date the option was
granted, and the income then recognized will include any appreciation in the
value of the shares during the period between the date of exercise and the
date six months after the date of grant (unless the optionee makes an election
under Section 83(b) of the Code to have the difference between the exercise
price and fair market value on the date of exercise recognized as ordinary
income as of the time of exercise). The Company will be entitled to a business
expense deduction equal to the amount or ordinary income recognized by the
optionee, subject to the limitations of Section 162(m) of the Code. Any
additional gain or any loss recognized upon the subsequent disposition of the
purchased shares will be a capital gain or loss, and will be a long-term gain
or loss if the shares are held for more than one year.
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") will
take effect upon the closing of the Offerings. The Purchase Plan authorizes
the issuance of up to a total of 250,000 shares of Common Stock to
participating employees.
All employees of the Company, including directors of the Company who are
employees, and all employees of its participating subsidiary whose customary
employment is more than 20 hours per week and for more than five months in any
calendar year are eligible to participate in the Purchase Plan. Employees who
would immediately after the grant own 5% or more of the total combined voting
power or value of the stock of the Company or any subsidiary are not eligible
to participate. As of March 31, 1996, approximately 200 of the Company's
employees would have been eligible to participate in the Purchase Plan.
39
On the first day of a designated payroll deduction period (the "Offering
Period"), the Company will grant to each eligible employee who has elected to
participate in the Purchase Plan an option to purchase shares of Common Stock
as follows: the employee may authorize an amount (a whole percentage from 1%
to 10% of such employee's regular pay) to be deducted by the Company from such
pay during the Offering Period. On the last day of the Offering Period, the
employee is deemed to have exercised the option, at the option exercise price,
to the extent of accumulated payroll deductions. Under the terms of the
Purchase Plan, the option exercise price is an amount equal to 85% of the fair
market value per share of the Common Stock on either the first day or the last
day of the Offering Period, whichever is lower. In no event may an employee
purchase in any one Offering Period a number of shares which is more than 15%
of the employee's annualized base pay for the six-month period prior to the
Offering Period divided by 85% of the market value of a share of Common Stock
on the commencement date of the Offering Period. The Compensation Committee
may, in its discretion, choose an Offering Period of 6 months or less for each
of the Offerings and choose a different Offering Period for each Offering.
If an employee is not a participant on the last day of the Offering Period,
such employee is not entitled to exercise any option, and the amount of such
employee's accumulated payroll deductions will be refunded. An employee's
rights under the Purchase Plan terminate upon voluntary withdrawal from the
Purchase Plan at any time, or when such employee ceases employment for any
reason, except that upon termination of employment because of death, the
employee's beneficiary has certain rights to elect to exercise the option to
purchase the shares which the accumulated payroll deductions in the
participant's account would purchase at the date of death.
Because participation in the Purchase Plan is voluntary, the Company cannot
now determine the number of shares of Common Stock to be purchased by any
particular current executive officer, by all current executive officers as a
group or by non-executive employees as a group.
Federal Income Tax Consequences. The Purchase Plan is intended to qualify as
an "employee stock purchase plan" as defined in Section 423 of the Code, which
provides that an employee will not realize any federal tax consequences when
such employee joins the Purchase Plan, or when an Offering ends and such
employee receives shares of the Company's Common Stock. An employee must,
however, recognize income or loss on the difference, if any, between the price
at which he or she sells the shares and the price he or she paid for them. If
any employee has owned shares purchased under the plan for more than one year,
disposes of them at least two years after the date an Offering commenced, and
the sale price of the shares is equal to or less than the purchase price under
the Purchase Plan, he or she will recognize a long-term capital loss in the
amount equal to the price paid over the sale price. If an employee has owned
shares for more than one year, more than two years has elapsed from the date
the Offering commenced, and the sale price of the shares is higher than the
purchase price under the Purchase Plan, the employee must recognize ordinary
income in an amount equal to the lesser of (i) the excess of the market value
of the shares on the day the Offering commenced over the purchase price, or
(ii) the excess of the sale price over the purchase price. Any further gain
would be treated as long-term capital gain.
If an employee sells shares purchased under the Purchase Plan prior to
holding them for more than one year or prior to two years from the date the
Offering commenced, he or she must recognize ordinary income in the amount of
the difference between the price he or she paid and the market price of the
shares on the date of purchase and the Company will receive an expense
deduction for the same amount, subject to the limitations of Section 162(m) of
the Code. The employee will recognize a capital gain or loss on the difference
between the sale price and the market price on the date of purchase. The
Company will not be entitled to a tax deduction upon either the purchase or
sale of shares under the Purchase Plan if the holding period requirements set
forth above are met. The Purchase Plan is not qualified under Section 401(a)
of the Code.
40
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock option grants
made to the Named Executives during the year ended December 31, 1995. No stock
appreciation rights were granted during the year ended December 31, 1995.
OPTION GRANTS IN LAST FISCAL YEAR
[Enlarge/Download Table]
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
----------------------------------------------- AT ASSUMED
PERCENT OF ANNUAL RATES OF
TOTAL STOCK PRICE
NUMBER OF OPTIONS APPRECIATION
SECURITIES GRANTED TO FOR OPTION
UNDERLYING EMPLOYEES EXERCISE OR TERM(2)
OPTIONS IN FISCAL BASE PRICE PER EXPIRATION -----------------
NAME GRANTED YEAR SHARE(1) DATE 5% 10%
---- ---------- ---------- -------------- ---------- -------- --------
Gary B. Eichhorn........ 1,275,000 25.34% $0.25 12/07/05 $200,460 $508,005
Shikhar Ghosh........... 150,000 2.98 0.18 2/22/05 17,295 43,828
Robert C. Weinberger.... 300,000 5.96 0.17 2/15/05 31,445 79,687
--------
(1) All options were granted at fair market value as determined by the Board
of Directors of the Company on the date of the grant.
(2) This column shows the hypothetical gains or "option spreads" of the
options granted based on both the fair market value of the Common Stock
for financial reporting purposes and assumed annual compound stock
appreciation rates of 5% and 10% over the term of the options. The 5% and
10% assumed rates of appreciation are mandated by the rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of future Common Stock prices. The gains shown are
net of the option exercise price, but do not include deductions for taxes
or other expenses associated with the exercise of the option or the sale
of the underlying shares. The actual gains, if any, on the exercises of
stock options will depend on the future performance of the Common Stock.
The assumed annual rates of stock price appreciation result in a value per
share that is significantly below the proposed public offering price
range, due to the recent significant increase in the value of the Common
Stock. The potential realizable value of the options, at an initial public
offering price of $14.00 per share and annual rates of stock price
appreciation of 5% and 10% from the date of grant through the expiration
date of the options, would be as follows: Mr. Eichhorn $28,757,019 and
$45,979,553, respectively, Mr. Ghosh $3,393,179 and $5,419,359,
respectively and Mr. Weinberger $6,791,357 and $10,843,718 respectively.
41
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth certain information concerning exercises of
stock options during 1995 by each of the Named Executives and the number and
value of unexercised options held by each of the Named Executives on December
31, 1995. No stock appreciation rights were exercised during 1995 or
outstanding at year end.
AGGREGATE OPTION EXERCISES IN 1995
AND YEAR-END OPTION VALUES
[Enlarge/Download Table]
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT YEAR-END AT YEAR-END(1)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ----------- ------------------------- -------------------------
Gary B. Eichhorn........ 125,000 $1,718,750 0/1,150,000 $ -- /$15,812,500
Shikhar Ghosh........... -- -- 28,125/121,875 388,594/1,683,906
Robert C. Weinberger.... -- -- 56,250/243,750 778,125/3,371,875
--------
(1) There was no public trading market for the Common Stock as of December 31,
1995. Accordingly, these values have been calculated on the basis of an
initial public offering price of $14.00 per share, less the applicable
exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Company's Compensation Committee are Messrs.
Arshad, Kaiser and Tarr. No executive officer of the Company has served as a
director or member of the compensation committee (or other committee serving
an equivalent function) of any other entity, whose executive officers served
as a director of or member of the Compensation Committee of the Company.
42
CERTAIN TRANSACTIONS
Since the incorporation of the Company in December 1993, the Company has
issued, in private placement transactions, shares of Preferred Stock as
follows: 1,850,000 shares of Series A Convertible Preferred Stock at $1.00 per
share; 1,730,675 shares of Series B Convertible Preferred Stock at $5.4054 per
share and 2,695,000 shares of Series C Convertible Preferred Stock at $10.00
per share. Each share of Series A and Series B Convertible Preferred Stock
will automatically convert into three shares of Common Stock or an aggregate
of 10,742,025 shares of Common Stock upon the closing of the Offerings. Each
share of Series C Convertible Preferred Stock will automatically convert into
one share of Common Stock. The holders of the shares of Common Stock issuable
upon such conversion are entitled to certain registration rights. See "Shares
Eligible for Future Sale." The following table sets forth the shares of
Preferred Stock purchased by the Company's directors, executive officers, five
percent stockholders and their respective affiliates:
[Download Table]
SERIES OF PREFERRED STOCK
---------------------------
INVESTOR SERIES A SERIES B SERIES C
-------- --------- -------- --------
Advance Publications, Inc........................... -- 555,000 50,000
Gulrez Arshad....................................... 96,300 37,000 --
Greylock Equity Limited Partnership................. 1,200,000 318,200 350,000
Tribune Company..................................... -- 555,000 150,000
In addition, after giving effect to the conversion of Preferred Stock into
Common Stock at the closing of the Offerings, Gulrez Arshad (i) is the
beneficial owner of 150,000 shares of Common Stock held by the Gulrez Arshad
1995 Trust; (ii) is the trustee of two revocable trusts holding 142,200 shares
of Common Stock of which Mr. Arshad's children are beneficiaries; (iii) has
shared investment and voting power with respect to 823,150 shares of Common
Stock and (iv) has shared voting power with respect to 383,250 shares of
Common Stock. See "Principal Stockholders".
In June 1994, the Company sold 526,500 shares of Common Stock to a founder,
Dr. David K. Gifford, pursuant to the 1994 Stock Incentive Plan at a price of
$.00033 per share and issued 3,523,500 shares of Common Stock to Dr. David K.
Gifford in exchange for the assignment of a patent license to the Company. In
addition, in June 1994, the Company entered into a Founder's Agreement with
David K. Gifford pursuant to which Dr. Gifford agreed to serve as a consultant
to the Company at a monthly consulting fee of $5,400 until June 8, 1996 and
thereafter for two years, with such monthly consulting fee to increase by at
least ten percent (10%) on each of June 8, 1996 and June 8, 1997. If Dr.
Gifford's consulting agreement is terminated by the Company for any reason
other than for Cause (as defined in the agreement) or if Dr. Gifford
terminates the agreement due to a breach by the Company, the Company shall pay
Dr. Gifford consulting fees otherwise payable for twelve months.
On February 5, 1996 the Company loaned $1,500,000 to Dr. Gifford. The loan
is non-recourse to Dr. Gifford, secured by a pledge of 375,000 shares of
Common Stock owned by Dr. Gifford, bears interest at a rate of 5.61% per annum
and is due and payable on the earlier of February 5, 2001 or on the date of a
liquidation event. A liquidation event will occur when Dr. Gifford can sell a
sufficient number of shares of his Common Stock to repay the principal and
accrued interest on the loan.
In June 1994, the Company sold 4,050,000 shares of Common Stock to Shikhar
Ghosh pursuant to the 1994 Stock Incentive Plan at a price of $.00033 per
share for an aggregate purchase price of $1,350.
The Company believes that the securities issued in the transactions
described above were sold at their then fair market value and that the terms
of the transactions described above were no less favorable than the Company
could have obtained from unaffiliated third parties.
In January 1995, the Company and Time Inc. New Media ("Time"), which will
own approximately 1.0% of the outstanding capital stock of the Company after
the Offerings, entered into a development
43
and services agreement pursuant to which the Company agreed to grant to Time a
nonexclusive license to use certain of the Company's software, as well as
provide to Time certain related services. In 1995, the Company received an
aggregate of approximately $1,440,000 in license and service fees from Time
pursuant to the agreement, all of which has been deferred as of March 31, 1996
and a substantial portion of which is subject to certain acceptance
provisions. In addition, the agreement provides that in the event Time does
not accept the Company's software, the Company is obligated to pay Time
liquidated damages of $1,000,000. Bruce D. Judson, a director of the Company,
also serves as a General Manager of Time Inc. New Media. In April 1996, the
Company and Time entered into a second agreement pursuant to which the Company
agreed to grant Time a license to market and distribute OM-Express. This
license includes certain short-term exclusivity provisions.
In February 1995, the Company entered into a master development agreement
with Conde Net, Inc. ("Conde Net"), a subsidiary of Advance Publications, Inc.
which will own approximately 6.4% of the outstanding capital stock of the
Company after the Offerings, pursuant to which the Company granted to Conde
Net a nonexclusive license to use software developed by the Company and
provided to Conde Net certain consulting services. In 1995, the Company
received an aggregate of approximately $107,000 in license and related
services fees from Conde Net pursuant to the agreement. In May 1995, the
Company entered into a master development agreement with Parade Net Inc.
("Parade Net"), another subsidiary of Advance Publications, Inc., pursuant to
which the Company granted to Parade Net a nonexclusive license to use software
developed by the Company and provided to Parade Net certain consulting
services.
In February 1996, the Company entered into a software license agreement with
Tribune Interactive Network Services ("Tribune"), a subsidiary of Tribune
Company which will own approximately 6.7% of the outstanding capital stock of
the Company after the Offerings, pursuant to which the Company granted to
Tribune a nonexclusive license to use certain of the Company's software and an
option to license certain additional components of such software, and provided
certain related services to Tribune. In February 1996, the Company and Tribune
entered a services agreement pursuant to which the Company agreed to provide
Tribune certain start-up services with respect to the software licensed under
the software license agreement. Eugene F. Quinn, a director of the Company,
serves as the General Manager of Tribune Interactive Network Services of
Tribune Company.
For a description of the employment agreement between the Company and Gary
B. Eichhorn, its President and Chief Executive Officer, see "Management-
Employment Agreement".
The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must (i)
be approved by a majority of the members of the Company's Board of Directors
and by a majority of the disinterested members of the Company's Board of
Directors and (ii) be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties. In addition, this policy will
require that any loans by the Company to its officers, directors or other
affiliates be for bona fide business purposes only.
44
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of March 31, 1996, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each person or entity known to the Company to own beneficially more than
5% of the Company's Common Stock, (ii) each of the Company's directors, (iii)
each of the Named Executive Officers, and (iv) all directors and executive
officers as a group. Except as indicated below, none of these entities has a
relationship with the Company or, to the knowledge of the Company, any
Underwriters of the Offerings or their respective affiliates.
[Download Table]
PERCENTAGE OF SHARES
OF COMMON STOCK
BENEFICIALLY OWNED
NUMBER OF SHARES OF -------------------------
NAME AND ADDRESS COMMON STOCK PRIOR TO THE AFTER THE
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OFFERINGS OFFERINGS(2)
------------------- --------------------- ------------ ------------
Advance Publications, Inc.... 1,715,000 7.5% 6.4%
950 Fingerboard Road
Staten Island, NY 10305
Shikhar Ghosh(3)............. 3,600,000 15.6 13.3
c/o Open Market, Inc.
245 First Street
Cambridge, MA 02142
David K. Gifford(4).......... 3,600,000 15.6 13.3
c/o Open Market, Inc.
245 First Street
Cambridge, MA 02142
Greylock Equity Limited 4,904,600 21.4 18.2
Partnership.................
c/o Greylock Management
Corp.
One Federal Street
Boston, MA 02110
Tribune Company.............. 1,815,000 7.9 6.7
435 N. Michigan Avenue
Chicago, IL 60611
Gulrez Arshad(5)............. 1,898,500 8.3 7.0
Gary B. Eichhorn(6).......... 700,000 3.0 2.5
Bruce Judson................. -- -- --
William Kaiser(7)............ 4,904,600 21.4 18.2
Eugene Quinn................. -- -- --
Ray Stata(8)................. -- -- --
Robert J. Tarr, Jr........... -- -- --
Robert C. Weinberger(9)...... 300,000 1.3 1.1
All directors and executive
officers as a group (13
persons)(10)................ 15,114,975 62.5 53.6
--------
(1) The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares
as to which the individual has sole or shared voting power or investment
power and also any shares which the individual has the right to acquire
within 60 days after
45
March 31, 1996 through the exercise of any stock option or other right. The
inclusion herein of such shares, however, does not constitute an admission
that the named stockholder is a direct or indirect beneficial owner of such
shares. Unless otherwise indicated, each person or entity named in the
table has sole voting power and investment power (or shares such power with
his or her spouse) with respect to all shares of capital stock listed as
owned by such person or entity.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Includes 150,000 shares of Common Stock issuable to Mr. Ghosh within 60
days of March 31, 1996 upon exercise of stock options. Excludes 600,000
shares beneficially owned by a trust for the benefit of Mr. Ghosh's minor
children for which Mr. Ghosh disclaims beneficial ownership.
(4) Includes 150,000 shares of Common Stock issuable to Dr. Gifford within 60
days of March 31, 1996 upon exercise of stock options. Excludes 600,000
shares beneficially owned by a trust for the benefit of Dr. Gifford's
minor children for which Dr. Gifford disclaims beneficial ownership.
(5) Includes 150,000 shares of Common Stock held by the Gulrez Arshad 1995
Trust; 142,200 shares of Common Stock held in two revocable trusts of
which Mr. Arshad is a trustee and of which Mr. Arshad's children are
beneficiaries; 663,150 shares of Common Stock over which Mr. Arshad has
shared investment and voting power; 160,000 shares of Common Stock held by
N&A 1996 LLC and 383,250 shares of Common Stock held by Hoover Associates.
Mr. Arshad has shared investment and voting power with respect to the
shares held by N&A 1996 LLC and shared voting power with respect to the
shares held by Hoover Associates. Mr. Arshad, who may be deemed to be the
beneficial owner of such shares, disclaims beneficial ownership of such
shares, except to the extent of his pecuniary interest in such shares.
Excludes 71,100 shares of Common Stock held in an irrevocable trust of
which Mr. Arshad's child is a beneficiary as to which Mr. Arshad disclaims
beneficial ownership.
(6) Includes 575,000 shares of Common Stock issuable to Mr. Eichhorn within 60
days of March 31, 1996 upon exercise of stock options.
(7) Includes 4,904,600 shares of Common Stock held by Greylock Equity Limited
Partnership ("Greylock"). Mr. Kaiser is a general partner of Greylock and
may be deemed to share voting and investment power with respect to such
shares. Mr. Kaiser disclaims beneficial ownership of such shares, except
to the extent of his pecuniary interest in such shares.
(8) Excludes the shares of Common Stock which Mr. Stata has expressed a desire
to purchase in the Offerings. See "Underwriting".
(9) Represents 300,000 shares of Common Stock issuable to Mr. Weinberger
within 60 days of March 31, 1996 upon exercise of stock options.
(10) Includes 6,403,200 shares of Common Stock held by entities affiliated
with certain directors as described in Notes 5 and 7 and 1,253,125 shares
of Common Stock issuable to all directors and executive officers as a
group which are exercisable within 60 days of March 31, 1996 upon
exercise of stock options.
46
DESCRIPTION OF CAPITAL STOCK
Upon completion of the Offerings, the Company will be authorized to issue
100,000,000 shares of Common Stock, $.001 par value per share of which
26,939,910 shares will be issued and outstanding, and 2,000,000 shares of
undesignated Preferred Stock, $.10 par value per share of which no shares will
be issued and outstanding.
COMMON STOCK
Upon the closing of the Offerings, the Company's Restated Certificate of
Incorporation will authorize the issuance of up to 100,000,000 shares of
Common Stock, $.001 par value per share. Holders of Common Stock are entitled
to one vote for each share held on all matters submitted to a vote of
stockholders and do not have cumulative voting rights. Accordingly, holders of
a majority of the shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available therefor,
subject to any preferential dividend rights of outstanding Preferred Stock.
Upon the liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive ratably the net assets of the Company
available after the payment of all debts and other liabilities and subject to
the prior rights of any outstanding Preferred Stock. Holders of Common Stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of Common Stock are, and the shares offered by the Company
in the Offerings will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common
Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future. Certain holders of Common Stock have the
right to require the Company to effect the registration of their shares of
Common Stock in certain circumstances. See "Shares Eligible for Future Sale".
PREFERRED STOCK
Upon the closing of the Offerings, the Restated Certificate of Incorporation
will authorize the issuance of up to 2,000,000 shares of Preferred Stock, $.10
par value per share. Under the terms of the Restated Certificate of
Incorporation, the Board of Directors is authorized, subject to any
limitations prescribed by law, without stockholder approval, to issue such
shares of Preferred Stock in one or more series. Each such series of Preferred
Stock shall have such rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, as shall be determined by the Board of
Directors.
The purpose of authorizing the Board of Directors to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated
with a stockholder vote on specific issuances. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding voting stock of the Company. The
Company has no present plans to issue any shares of Preferred Stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions,
47
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The Restated Certificate of Incorporation provides for the division of the
Board of Directors into three classes as nearly equal in size as possible with
staggered three-year terms. See "Management". In addition, the Restated
Certificate of Incorporation provides that directors may be removed only for
cause by the affirmative vote of the holders of two-thirds of the shares of
capital stock of the corporation entitled to vote. Under the Restated
Certificate of Incorporation, any vacancy on the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the Board, may
only be filled by vote of a majority of the directors then in office. The
classification of the Board of Directors and the limitations on the removal of
directors and filling of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company.
The Restated Certification of Incorporation also provides that, after the
closing of the Offerings, any action required or permitted to be taken by the
stockholders of the Company at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before such meeting
and may not be taken by written action in lieu of a meeting. The Restated
Certificate of Incorporation further provides that special meetings of the
stockholders may only be called by the Chairman of the Board of Directors, the
Chief Executive Officer or, if none, the President of the Company or by the
Board of Directors. Under the Company's Restated By-Laws, in order for any
matter to be considered "properly brought" before a meeting, a stockholder
must comply with certain requirements regarding advance notice to the Company.
The foregoing provisions could have the effect of delaying until the next
stockholders meeting stockholder actions which are favored by the holders of a
majority of the outstanding voting securities of the Company. These provisions
may also discourage another person or entity from making a tender offer for
the Company's Common Stock, because such person or entity, even if it acquired
a majority of the outstanding voting securities of the Company, would be able
to take action as a stockholder (such as electing new directors or approving a
merger) only at a duly called stockholders meeting, and not by written
consent.
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's Certificate of Incorporation or By-Laws, unless a
corporation's Certificate of Incorporation or By-Laws, as the case may be,
requires a greater percentage. The Restated Certificate of Incorporation and
the Restated By-Laws require the affirmative vote of the holders of at least
75% of the shares of capital stock of the Company issued and outstanding and
entitled to vote to amend or repeal any of the provisions described in the
prior two paragraphs.
The Restated Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain
circumstances involving wrongful acts, such as the breach of a director's duty
of loyalty or acts or omissions which involve intentional misconduct or a
knowing violation of law. Further, the Restated Certificate of Incorporation
contains provisions to indemnify the Company's directors and officers to the
fullest extent permitted by the General Corporation Law of Delaware. The
Company believes that these provisions will assist the Company in attracting
and retaining qualified individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The First National
Bank of Boston.
48
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, based upon the number of shares
outstanding at March 31, 1996, there will be 26,939,910 shares of Common Stock
of the Company outstanding (exclusive of 663,938 shares covered by exercisable
options outstanding at March 31, 1996). Of these shares, the 4,000,000 shares
sold in the Offerings will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), except that any shares purchased by "affiliates" of the Company, as
that term is defined in Rule 144 ("Rule 144") under the Securities Act, may
generally only be sold in compliance with the limitations of Rule 144
described below.
The remaining 22,939,910 shares of Common Stock are deemed "Restricted
Shares" as defined under Rule 144. Restricted Shares may be sold in the public
market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, which rules are summarized below. Subject to the lock-up agreements
described below and the provisions of Rules 144, 144(k) and 701, additional
shares will be available for sale in the public market (subject in the case of
shares held by affiliates to compliance with certain volume restrictions) as
follows (i) no shares will be available for immediate sale in the public
market on the date of the Prospectus, (ii) 18,435 shares will be eligible for
resale 90 days after the date of this Prospectus, (iii) 15,034,450 shares will
be eligible for resale upon expiration of lock-up agreements 180 days after
the date of this Prospectus, and, thereafter, (iv) 7,887,025 shares will be
eligible for sale upon expiration of their respective two-year holding
periods.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least two years (and, with respect to non-affiliates of the Company, a
person who has beneficially owned Restricted Securities for at least two years
and less than three years), will be entitled to sell in any three-month period
a number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of the Company's Common Stock (approximately 269,399 shares
immediately after the offering) or (ii) the average weekly trading volume of
the Company's Common Stock in the Nasdaq Stock Market during the four calendar
weeks immediately preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission. Such sales pursuant to Rule 144 are
subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an
affiliate of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned Restricted Shares for at least three
years is entitled to sell such shares pursuant to Rule 144(k) without regard
to the limitations described above. The Securities and Exchange Commission has
recently proposed to reduce the two- and three-year holding periods under Rule
144 to one and two years, respectively. If enacted, such modification will
have a material effect on the timing of when certain shares of Common Stock
become eligible for resale.
Rule 701 promulgated under the Securities Act provides that shares of Common
Stock acquired pursuant to written plans such as the 1994 Stock Incentive Plan
may be resold by persons other than affiliates, beginning 90 days after the
date of this Prospectus, subject only to the manner of sale provisions of Rule
144, and by affiliates, beginning 90 days after the date of this Prospectus,
subject to all provisions of Rule 144 except its two-year minimum holding
period.
The Company has agreed, subject to certain exceptions, not to offer, sell or
otherwise dispose of any shares of Common Stock for a period of 180 days after
the date of this Prospectus, except that the Company may issue, and grant
options to purchase, shares of Common Stock under its current stock option and
purchase plans and other currently outstanding options. In addition, the
Company may issue shares of Common Stock in connection with any acquisition of
another company if the terms of such issuance provide that such Common Stock
shall not be resold prior to the expiration of the 180 day period referenced
in the preceding sentence.
49
The executive officers, directors (except for Messrs. Judson and Quinn, who
own no shares of Common Stock of the Company), and certain securityholders of
the Company (who in the aggregate hold approximately 25,788,623 shares of
Common Stock, including 2,867,148 shares of Common Stock that may be acquired
pursuant to the exercise of exercisable options held by them at March 31,
1996) have agreed pursuant to Lock-Up Agreements, subject to certain
exceptions, not to offer, sell or otherwise dispose of any shares of Common
Stock beneficially owned by them for a period of 180 days after the date of
this Prospectus. Substantially all of the securityholders of the Company (i)
who hold shares of Common Stock issued other than pursuant to the 1994 Plan or
(ii) who hold, or have the right to acquire within approximately 180 days
after the date of this Prospectus, 5,000 or more shares of Common Stock issued
pursuant to the 1994 Plan have executed Lock-Up Agreements.
The Company intends to file registration statements on Form S-8 under the
Securities Act to register all shares of Common Stock issuable under the 1994
Stock Incentive Plan, Director Plan and Purchase Plan. The registration
statements are expected to be filed shortly after the effective date of the
Registration Statement of which this Prospectus is a part and will be
effective upon filing. Shares issued upon the exercise of stock options after
the effective date of the Form S-8 registration statements will be eligible
for resale in the public market without restriction, subject to Rule 144
limitations applicable to affiliates and the Lock-up Agreements noted above.
The holders of an aggregate of 13,437,025 shares of Common Stock are
entitled to certain rights with respect to the registration of such shares
under the Securities Act. Under the terms of the Registration Rights
Agreement, if the Company proposes to register any of its securities under the
Securities Act either for its own account or for the account of other security
holders exercising registration rights, such holders are entitled to notice of
such registration and are entitled to include such shares of Common Stock in
the registration. The rights are subject to certain conditions and
limitations, among them the right of the underwriters of a registered offering
to limit the number of shares included in such registration.
Prior to the Offerings, there has been no public market for the Common Stock
of the Company, and no prediction can be made as to the effect, if any, that
market sales of shares of Common Stock or the availability of shares for sale
will have on the market price of the Common Stock prevailing from time to
time. Nevertheless, sales of significant numbers of shares of the Common Stock
in the public market could adversely affect the market price of the Common
Stock and could impair the Company's future ability to raise capital through
an offering of its equity securities.
LEGAL MATTERS
The validity of the shares of Common Stock offered by the Company hereby
will be passed upon for the Company by Hale and Dorr, Boston, Massachusetts,
and for the Underwriters by Ropes & Gray, Boston, Massachusetts. Certain
partners of Hale and Dorr own an aggregate of 75,000 shares of Common Stock of
the Company.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31, 1994
and 1995 and for the period from Inception (April 25, 1994) to December 31,
1994 and for the year ended December 31, 1995, included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports included
herein in reliance on the authority of said firm as experts in giving said
reports.
50
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement (which term
shall include all amendments, exhibits and schedules thereto) on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission, to which Registration Statement
reference is hereby made. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such
reference. The Registration Statement and the exhibits thereto may be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
----------------
As a result of the Offerings, the Company will become subject to the
information and reporting requirements of the Securities Exchange Act of 1934,
as amended, and in accordance therewith will file periodic reports, proxy
statements and other information with the Securities and Exchange Commission.
The Company intends to furnish to its stockholders annual reports containing
audited financial statements and to make available to its stockholders
quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year of the Company.
51
OPEN MARKET, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995, March 31,
1996 (unaudited) and Pro forma March 31, 1996 (unaudited)................. F-3
Consolidated Statements of Operations for the period from inception (April
25, 1994) to
December 31, 1994, for the year ended December 31, 1995 and for the three
months ended March 31, 1995 and 1996 (unaudited).......................... F-4
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit) for the period from inception (April 25,
1994) to December 31, 1995, for the three months ended March 31, 1996
(unaudited), and Pro forma March 31, 1996 (unaudited)..................... F-5
Consolidated Statements of Cash Flows for the period from inception (April
25, 1994) to
December 31, 1994, for the year ended December 31, 1995 and for the three
months ended March 31, 1995 and 1996 (unaudited).......................... F-6
Notes to Consolidated Financial Statements................................. F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Open Market, Inc.:
We have audited the accompanying consolidated balance sheets of Open Market,
Inc. (a Delaware corporation) and subsidiary as of December 31, 1994 and 1995,
and the related consolidated statements of operations, redeemable convertible
preferred stock and stockholders' equity (deficit) and cash flows for the
period from inception (April 25, 1994) to December 31, 1994 and for the year
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Open Market, Inc. and subsidiary as of December 31, 1994 and 1995, and the
results of its operations and its cash flows for the period from inception
(April 25, 1994) to December 31, 1994 and for the year ended December 31,
1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
February 5, 1996 (except with
respect to the matter discussed in
Note 6 regarding Series C
redeemable convertible preferred
stock as to which the date is March
15, 1996)
F-2
OPEN MARKET, INC.
CONSOLIDATED BALANCE SHEETS
[Download Table]
DECEMBER 31, PRO FORMA
------------------------- MARCH 31, MARCH 31,
1994 1995 1996 1996
----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
(NOTE 2)
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 635,986 $ 3,711,883 $ 18,682,210 $ 18,682,210
Marketable
securities........... -- -- 2,965,490 2,965,490
Accounts receivable,
net of allowance for
doubtful accounts of
$25,000 and $63,000
in 1995 and 1996,
respectively......... -- 1,226,601 805,476 805,476
Deferred charges...... -- 391,609 358,952 358,952
Prepaid expenses and
other current
assets............... 21,649 156,910 212,964 212,964
----------- ------------ ------------ ------------
Total current assets.... 657,635 5,487,003 23,025,092 23,025,092
----------- ------------ ------------ ------------
Property and equipment,
at cost:
Computers and office
equipment............ 296,136 2,428,981 2,981,147 2,981,147
Furniture and
fixtures............. 33,827 245,255 323,267 323,267
Leasehold
improvements......... 8,238 527,664 628,129 628,129
----------- ------------ ------------ ------------
338,201 3,201,900 3,932,543 3,932,543
Less-Accumulated
depreciation and
amortization......... 37,043 845,231 1,203,652 1,203,652
----------- ------------ ------------ ------------
301,158 2,356,669 2,728,891 2,728,891
----------- ------------ ------------ ------------
Loan to founder......... -- -- 1,500,000 1,500,000
Other assets............ -- 103,087 345,347 345,347
----------- ------------ ------------ ------------
$ 958,793 $ 7,946,759 $ 27,599,330 $ 27,599,330
=========== ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...... $ 86,149 $ 1,373,402 $ 1,541,346 $ 1,541,346
Accrued expenses...... 73,044 2,656,508 3,370,351 3,370,351
Deferred revenues..... 15,000 6,901,355 5,906,292 5,906,292
Current maturities of
long-term
obligations.......... 22,602 338,549 574,913 574,913
----------- ------------ ------------ ------------
Total current
liabilities............ 196,795 11,269,814 11,392,902 11,392,902
----------- ------------ ------------ ------------
Long-term obligations,
net of current
maturities............. 194,770 658,998 985,573 985,573
----------- ------------ ------------ ------------
Commitments (Note 7)
Redeemable convertible
preferred stock
(Note 6)............... 1,850,000 11,204,991 38,154,991 --
----------- ------------ ------------ ------------
Stockholders' equity
(deficit):
Preferred stock, $.10
par value
Authorized--
2,000,000 shares
Issued and
outstanding--none.. -- -- -- --
Common stock, $.001
par value-
Authorized-
100,000,000 shares
Issued and
outstanding-
9,336,000 shares,
9,390,312 shares,
9,502,885 shares
and 22,939,910
shares,
respectively....... 9,336 9,390 9,503 22,940
Additional paid-in
capital.............. -- 31,591 50,911 38,192,465
Accumulated deficit... (1,292,108) (15,228,025) (22,994,550) (22,994,550)
----------- ------------ ------------ ------------
Total stockholders'
equity (deficit)....... (1,282,772) (15,187,044) (22,934,136) 15,220,855
----------- ------------ ------------ ------------
$ 958,793 $ 7,946,759 $ 27,599,330 $ 27,599,330
=========== ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
PERIOD FROM
INCEPTION THREE MONTHS
(APRIL 25, 1994) YEAR ENDED ENDED MARCH 31,
TO DECEMBER 31, DECEMBER 31, ------------------------
1994 1995 1995 1996
---------------- ------------ ----------- -----------
(UNAUDITED)
Revenues:
Product revenues............ $ -- $ 364,526 $ -- $ 2,247,409
Service revenues............ -- 1,441,235 87,665 427,184
----------- ------------ ----------- -----------
Total revenues............ -- 1,805,761 87,665 2,674,593
----------- ------------ ----------- -----------
Cost of revenues:
Product revenues............ -- 43,666 -- 136,533
Service revenues............ -- 969,448 57,469 297,292
----------- ------------ ----------- -----------
Total cost of revenues.... -- 1,013,114 57,469 433,825
----------- ------------ ----------- -----------
Gross profit.............. -- 792,647 30,196 2,240,768
----------- ------------ ----------- -----------
Operating expenses:
Research and development.... 839,637 6,716,406 522,430 3,700,435
Selling and marketing....... 163,829 4,517,046 317,089 4,119,321
General and administrative.. 276,580 3,587,255 194,789 1,469,289
----------- ------------ ----------- -----------
Total operating expenses.. 1,280,046 14,820,707 1,034,308 9,289,045
----------- ------------ ----------- -----------
Loss from operations...... (1,280,046) (14,028,060) (1,004,112) (7,048,277)
----------- ------------ ----------- -----------
Interest income............... 30,162 242,606 1,544 200,579
Interest expense.............. -- (86,433) (9,425) (18,827)
----------- ------------ ----------- -----------
Net loss.................. $(1,249,884) $(13,871,887) $(1,011,993) $(6,866,525)
=========== ============ =========== ===========
Pro forma net loss per common
and common equivalent share
(Note 2)..................... $ (.53) $ (.26)
============ ===========
Pro forma weighted average
number of common and common
equivalent shares outstanding
(Note 2)..................... 26,250,439 26,345,460
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
[Enlarge/Download Table]
STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------------
REDEEMABLE CONVERTIBLE
PREFERRED STOCK COMMON STOCK TOTAL
------------------------ --------------------- ADDITIONAL STOCKHOLDERS'
NUMBER CARRYING NUMBER $.001 PAID-IN ACCUMULATED EQUITY
OF SHARES VALUE OF SHARES PAR VALUE CAPITAL DEFICIT (DEFICIT)
---------- ------------ ---------- --------- ----------- ------------ -------------
Issuance of common
stock, April 25, 1994.. -- $ -- 9,336,000 $ 9,336 $ -- $ (6,224) $ 3,112
Issuance of Series A
redeemable convertible
preferred stock, net
of issuance costs of
$36,000............... 1,850,000 1,850,000 -- -- -- (36,000) (36,000)
Net loss............... -- -- -- -- -- (1,249,884) (1,249,884)
---------- ------------ ---------- ------- ----------- ------------ ------------
Balance, December 31,
1994................... 1,850,000 1,850,000 9,336,000 9,336 -- (1,292,108) (1,282,772)
Issuance of Series B
redeemable convertible
preferred stock, net
of issuance costs of
$64,079............... 1,730,675 9,354,991 -- -- -- (64,079) (64,079)
Repurchase and
retirement of
restricted common
stock................. -- -- (73,500) (74) -- 49 (25)
Exercise of common
stock options......... -- -- 127,812 128 31,591 -- 31,719
Net loss............... -- -- -- -- -- (13,871,887) (13,871,887)
---------- ------------ ---------- ------- ----------- ------------ ------------
Balance, December 31,
1995................... 3,580,675 11,204,991 9,390,312 9,390 31,591 (15,228,025) (15,187,044)
Issuance of Series C
redeemable convertible
preferred stock, net of
issuance costs of
approximately
$900,000............... 2,695,000 26,950,000 -- -- -- (900,000) (900,000)
Exercise of common
stock options......... -- -- 112,573 113 19,320 -- 19,433
Net loss............... -- -- -- -- -- (6,866,525) (6,866,525)
---------- ------------ ---------- ------- ----------- ------------ ------------
Balance, March 31, 1996
(unaudited)............ 6,275,675 38,154,991 9,502,885 9,503 50,911 (22,994,550) (22,934,136)
Pro forma effect of
conversion of
redeemable convertible
preferred stock into
common stock
(unaudited)............ (6,275,675) (38,154,991) 13,437,025 13,437 38,141,554 -- 38,154,991
---------- ------------ ---------- ------- ----------- ------------ ------------
Pro forma balance, March
31, 1996 (unaudited)... -- $ -- 22,939,910 $22,940 $38,192,465 $(22,994,550) $ 15,220,855
========== ============ ========== ======= =========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Download Table]
PERIOD FROM
INCEPTION THREE MONTHS
(APRIL 25, 1994) YEAR ENDED ENDED MARCH 31,
TO DECEMBER 31, DECEMBER 31, ------------------------
1994 1995 1995 1996
---------------- ------------ ----------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net loss............... $(1,249,884) $(13,871,887) $(1,011,993) $(6,866,525)
Adjustments to
reconcile net loss to
net cash used in
operating activities--
Depreciation and
amortization........ 37,043 808,188 69,101 358,421
Obligation under
license agreement... 217,372 -- -- --
Changes in assets and
liabilities--
Accounts
receivable......... -- (1,226,601) (49,144) 421,125
Deferred charges.... -- (391,609) (76,380) 32,657
Prepaid expenses and
other current
assets............. (21,649) (135,261) (100,405) (56,054)
Accounts payable.... 86,149 1,287,253 (63,905) 167,944
Accrued expenses.... 73,044 2,583,464 131,430 713,843
Deferred revenues... 15,000 6,886,355 (15,000) (995,063)
----------- ------------ ----------- -----------
Net cash used in
operating
activities...... (842,925) (4,060,098) (1,116,296) (6,223,652)
----------- ------------ ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of property
and equipment......... (338,201) (2,863,699) (374,104) (730,643)
Issuance of loan to
founder............... -- -- -- (1,500,000)
Purchases of marketable
securities............ -- -- -- (2,965,490)
Increase in other
assets................ -- (103,087) (26,214) (242,260)
----------- ------------ ----------- -----------
Net cash used in
investing
activities...... (338,201) (2,966,786) (400,318) (5,438,393)
----------- ------------ ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from long-term
obligations........... -- 850,000 267,559 633,770
Payments on long-term
obligations........... -- (69,825) -- (70,831)
Proceeds from issuance
of redeemable
convertible preferred
stock, net of issuance
costs................. 1,814,000 9,290,912 -- 26,050,000
Proceeds from issuance
of common stock, net
of repurchases........ 3,112 31,694 -- 19,433
Proceeds from bridge
financing............. -- -- 1,050,000 --
----------- ------------ ----------- -----------
Net cash provided
by financing
activities...... 1,817,112 10,102,781 1,317,559 26,632,372
----------- ------------ ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... 635,986 3,075,897 (199,055) 14,970,327
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. -- 635,986 635,986 3,711,883
----------- ------------ ----------- -----------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 635,986 $ 3,711,883 $ 436,931 $18,682,210
=========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Interest paid during
period................ $ -- $ 86,433 $ 9,425 $ 12,880
=========== ============ =========== ===========
SUPPLEMENTAL SCHEDULE
OF NON-CASH FINANCING
ACTIVITIES:
Conversion of bridge
financing into
redeemable convertible
preferred stock....... $ -- $ 1,050,000 $ -- $ --
=========== ============ =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS
Open Market, Inc. (the Company) was incorporated in the State of Delaware on
December 6, 1993 and began operations on April 25, 1994. The Company, which
was formerly in the development stage, develops, markets, licenses and
supports high performance software products that allow its customers to engage
in business-to-consumer and business-to-business electronic commerce on the
Internet and to deploy business applications within an enterprise.
The Company is subject to risks common to rapidly growing technology-based
companies, including limited operating history, dependence on key personnel,
raising equity capital, rapid technological change, competition from
substitute products and larger companies, and the successful development and
marketing of commercial products and services.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements, which include the
accounts of the Company and its wholly owned subsidiary, Open Market U.K.
Limited, and reflect the application of accounting policies described in this
note and elsewhere in the accompanying notes to consolidated financial
statements. The preparation of the accompanying consolidated financial
statements required the use of certain estimates by management in determining
the Company's assets, liabilities, revenues and expenses.
(A) UNAUDITED PRO FORMA PRESENTATION
The unaudited pro forma consolidated balance sheet and unaudited
consolidated statement of redeemable convertible preferred stock and
stockholders' equity (deficit) as of March 31, 1996 reflect the automatic
conversion of the Series A, B and C redeemable convertible preferred stock
into 13,437,025 shares of common stock upon the closing of the Company's
proposed initial public offering (see Note 6).
(B) INTERIM FINANCIAL STATEMENTS
The accompanying consolidated balance sheet as of March 31, 1996, the
consolidated statements of operations and cash flows for the three months
ended March 31, 1995 and 1996 and the consolidated statement of redeemable
convertible preferred stock and stockholders' equity(deficit) for the three
months ended March 31, 1996 are unaudited, but in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of results for the interim periods. Results
for the three months ended March 31, 1996 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1996.
(C) REVENUE RECOGNITION
The Company recognizes revenue in accordance with the provisions of
Statement of Position No. 91-1 (SOP 91-1), Software Revenue Recognition. The
Company generates revenue from licensing the rights to use its software
products to end users, porting its products to hardware manufacturers'
operating environments and sublicense fees from resellers. The Company also
generates service revenues from the sale of postcontract support to its
customers and, in certain isolated circumstances, the sale of consulting and
development services.
Revenues from software license agreements are recognized upon delivery of
the software if there are no significant postdelivery obligations, and
payment is due within one year. If
F-7
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(C) REVENUE RECOGNITION--(CONTINUED)
acceptance 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. Sublicense fees are recognized on a per-unit basis
as reported to the Company by its licensees. Revenues for postcontract
customer support services are deferred at the time of product revenue
recognition and are recognized ratably over the term of the support period,
which is typically one year. Revenues from development and consulting
services are recognized upon customers' acceptance or the period in which
services are provided if customer acceptance is not required and the revenues
are fixed and determinable.
Cost of product revenues consists of costs to distribute the product,
including the cost of the media on which it is delivered. Cost of service
revenues consists primarily of consulting and support personnel salaries and
related costs.
Deferred revenues represent cash received from customers for products and
services in advance of revenue recognition.
(D) CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company accounts for investments under Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Under SFAS No. 115, investments for which the
Company has the positive intent and ability to hold to maturity, consisting
of cash equivalents and marketable securities, are reported at amortized
cost, which approximates fair market value. Cash equivalents are highly
liquid investments with original maturities of less than three months.
Marketable securities consist of investment grade commercial paper with
original maturities of greater than three months but less than one year. The
average maturity of the Company's marketable securities is approximately four
months.
(E) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization using the straight-
line method to allocate the cost of property and equipment over their
estimated useful lives, as follows:
[Download Table]
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------- ---------------------
Computers and office equipment...................... 3-5 Years
Furniture and fixtures.............................. 7 Years
Leasehold improvements.............................. Lease term
(F) RESEARCH AND DEVELOPMENT EXPENSES
The Company expenses research and development costs as incurred. The
Company has evaluated the establishment of technological feasibility of its
products in accordance with SFAS No. 86, Accounting for the Costs of Computer
Software To Be Sold, Leased or Otherwise Marketed. The Company sells products
in a market that is subject to rapid technological change, new product
development and changing customer needs; accordingly, the Company has
concluded that technological feasibility is not established until the
development stage of the product is nearly complete. The Company defines
technological feasibility as the completion of a working model. The time
period during which costs could be capitalized from the point of reaching
technological feasibility until the time of general product release is very
short and, consequently, the amounts that could be capitalized are not
material to the Company's financial position or results of operations.
Therefore, the Company has charged all such costs to research and development
in the period incurred.
F-8
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(G) PRO FORMA NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
For the year ended December 31, 1995 and the three months ended March 31,
1996, pro forma net loss per common and common equivalent share is computed
by dividing the net loss by the pro forma weighted average number of common
and common equivalent shares outstanding during the period which consist of
(i) the weighted average number of common shares outstanding, (ii) the number
of shares of common stock issuable upon conversion of all shares of Series A,
B and C redeemable convertible preferred stock and (iii) stock options
granted after March 31, 1995, which have been reflected as outstanding as
required by the Securities and Exchange Commission using the treasury stock
method. Common stock equivalents issued in earlier periods have not been
included, as the effect would be antidilutive. Historical net loss per share
data has not been presented, as such information is not considered to be
relevant or meaningful.
(H) CONCENTRATION OF CREDIT RISK
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentration of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit
risk concentrations. The Company has no significant off-balance-sheet
concentration of credit risk such as foreign exchange contracts, option
contracts or other foreign hedging arrangements. The Company maintains its
cash, cash equivalents and marketable securities balances with several
financial institutions, and its accounts receivable balances are all
domestic. The Company has not written off any of its accounts receivable to
date. The Company received revenues of greater than 10% of total revenues
from the following customers during the following periods:
[Download Table]
SIGNIFICANT PERCENTAGE OF CUSTOMER
CUSTOMERS REVENUES
----------- ----------------------------
A B* C D E
---- ----- ---- ---- ----
Year ended December 31, 1995.... 2 33% 16% -- --
Three months ended March 31,
1995........................... 2 -- -- 71% 29% --
Three months ended March 31,
1996........................... 1 -- -- -- -- 75%
--------
* This customer is a related party as discussed in Note 8.
(I) POSTRETIREMENT BENEFITS
The Company has no obligations for postretirement benefits.
(J) FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments, which
include cash equivalents, marketable securities, accounts receivable and
long-term debt, approximates their carrying value.
(3) LONG-TERM OBLIGATIONS
(A) LINE OF CREDIT AND TERM NOTES PAYABLE
In 1995, the Company entered into a capital equipment line of credit under
which it could borrow up to $1,500,000. In October 1995 and March 1996, the
Company converted $850,000 and $635,000, respectively, of its capital
equipment line of credit into term notes payable, repayable in 36 and 33
monthly installments, respectively. Borrowings under these term notes payable
bear interest at the prime rate (8.5% at December 31, 1995) plus 1.5% and are
secured by substantially
F-9
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(3) LONG-TERM OBLIGATIONS--(CONTINUED)
(A) LINE OF CREDIT AND TERM NOTES PAYABLE--(CONTINUED)
all assets of the Company. In addition, the Company is required to comply
with certain restrictive covenants, which include, among other items, minimum
levels of tangible net worth and a $2,500,000 minimum cash balance.
(B) OBLIGATION UNDER LICENSE AGREEMENT
During 1994, the Company entered into a license agreement with a university
to utilize certain patented computer software. The Company recorded the
present value of the future commitments under the contract, $217,372, as a
component of research and development expense in the accompanying
consolidated statement of operations for the period from inception (April 25,
1994) to December 31, 1994.
At March 31, 1996, the Company's obligations under its license agreement and
term notes payable are as follows:
[Download Table]
LICENSE TERM NOTES
AGREEMENT PAYABLE
--------- ----------
Year Ended December 31,
1996............................................... $ 52,000 $ 408,959
1997............................................... 52,000 513,794
1998............................................... 52,000 442,963
1999............................................... 52,000 --
2000............................................... 52,000 --
-------- ----------
Total future payments............................. 260,000 1,365,716
Less--Amount representing interest................. 65,230 --
-------- ----------
Present value of obligation....................... $194,770 $1,365,716
======== ==========
(4) INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes, the objective of which is to recognize the amount of current and
deferred income taxes payable or refundable at the date of the financial
statements as a result of all events that have been recognized in the
accompanying financial statements as measured by enacted tax laws.
At December 31, 1995, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $13,588,000, which
expire through 2010. The Company also has certain tax credits available to
offset future federal and state income taxes, if any. Net operating loss
carryforwards and credits are subject to review and possible adjustments by
the Internal Revenue Service and may be limited in the event of certain
cumulative changes in the ownership interests of significant stockholders over
a three-year period in excess of 50%. The Company believes it has experienced
a change in ownership in excess of 50% and that it may experience an
additional change in ownership in excess of 50% upon completion of the
proposed initial public offering. The Company does not believe that these
changes in ownership will significantly impact the Company's ability to
utilize its net operating loss carryforwards.
F-10
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(4) INCOME TAXES--(CONTINUED)
The components of the Company's deferred tax asset are as follows:
[Download Table]
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
-------- ---------- ----------
Operating loss carryforwards.............. $246,000 $5,435,000 $7,655,000
Tax credit carryforwards.................. 34,000 130,000 155,000
Temporary differences..................... 253,000 576,000 818,000
-------- ---------- ----------
533,000 6,141,000 8,628,000
Less--Valuation allowance................. (533,000) (6,141,000) (8,628,000)
-------- ---------- ----------
$ -- $ -- $ --
======== ========== ==========
It is the Company's objective to become a profitable enterprise and to
realize the benefits of its deferred tax assets. However, in evaluating the
realizability of these deferred tax assets, management has considered the
Company's short operating history, the volatility of the market in which it
competes, the operating losses incurred to date and the operating losses
anticipated for the foreseeable future, and believes that given the
significance of this evidence a full valuation reserve against its deferred
tax assets is required as of December 31, 1994 and 1995 and March 31, 1996.
The increase in the valuation allowance during these periods primarily relates
to the Company's operating results.
(5) STOCKHOLDERS' EQUITY (DEFICIT)
In April 1996, the Company's Board of Directors approved, subject to
stockholder approval and the closing of the proposed initial public offering,
the (i) 1996 Director Option Plan (the Director Plan), (ii) 1996 Employee
Stock Purchase Plan (the Purchase Plan) (iii) authorization of 2,000,000
shares of undesignated preferred stock, and (iv) authorization of the issuance
of up to 100,000,000 shares of common stock. Additionally the Company's Board
of Directors approved, subject to stockholder approval, the authorization of
an increase in shares of common stock under the 1994 Stock Incentive Plan (the
Plan) by 500,000 shares up to 13,001,000 shares.
(A) STOCK SPLIT
On September 10, 1995, the Company effected a three-for-one stock split of
its common stock in the form of a stock dividend. The accompanying financial
statements and notes have been retroactively adjusted to reflect the stock
split.
(B) 1994 STOCK INCENTIVE STOCK PLAN
The Company's Board of Directors adopted the Plan which, as amended, allows
for the issuance of up to 13,001,000 shares of common stock or options to
purchase common stock under the Plan, and reserved all shares of common stock
necessary for issuance under the Plan. The Company is accounting for options
and stock grants in accordance with Accounting Principles Board Opinion No.
25.
Restricted Common Stock
In 1994, the Company sold 5,812,500 shares of restricted common stock to
employees at $.00033 per share. These shares are subject to repurchase
agreements and vest over a four-year period. The Company may repurchase any
unvested shares of common stock held by these individuals upon the
termination of their employment at $.00033 per share. During 1995, the
Company repurchased 73,500 shares of unvested common stock. At March 31,
1996, 2,382,450 shares of the outstanding restricted common stock were
unvested and subject to repurchase.
F-11
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(5) STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
(B) INCENTIVE STOCK PLAN--(CONTINUED)
Options
Under the terms of the Plan, the Board of Directors may grant incentive
stock options or nonqualified stock options to purchase shares of the
Company's common stock. The exercise price of stock options granted under the
Plan will be not less than the fair value of the common stock on the date of
grant. The purchase price and vesting schedule applicable to each option
grant are determined by the Board of Directors. Options generally vest
quarterly over a four-year period and expire 10 years from the date of grant.
Options under the Plan have been granted at their then fair market value as
determined by the Company's Board of Directors. Accordingly, no compensation
expense has been recorded on grants under the Plan.
The following is a summary of all stock option activity:
[Download Table]
NUMBER OF PRICE
OPTIONS PER OPTION
--------- ------------
Outstanding, December 31, 1994................... -- $ --
Granted........................................ 5,032,102 .17- 1.50
Exercised...................................... (127,812) .17- .25
--------- ------------
Outstanding, December 31, 1995................... 4,904,290 $ .17-$ 1.50
--------- ------------
Granted........................................ 764,400 4.00- 12.00
Exercised...................................... (112,573) .17- .25
Terminated..................................... (16,500) .17- 4.00
--------- ------------
Outstanding, March 31, 1996...................... 5,539,617 $ .17-$12.00
--------- ------------
Exercisable, March 31, 1996...................... 663,938 $ .17-$ .25
========= ============
Upon the closing of the proposed initial public offering of the Company's
common stock or a change in control, as defined, certain unvested options and
restricted shares of common stock will vest automatically. As of March 31,
1996, 1,765,690 unvested options and all unvested, restricted shares of
common stock will vest upon the closing of the proposed initial public
offering.
(C) THE 1996 DIRECTOR PLAN
Under the terms of the Director Plan each Director will be granted an
option to purchase that number of shares of common stock determined by
dividing $100,000 by the option exercise price, at the then fair market
value, as defined. In addition, commencing with the 1997 Annual Meeting of
the Stockholders, each Director who is not a founder or employee of the
Company will annually be granted an option to purchase that number shares of
common stock determined by dividing $30,000 by the option exercise price.
These options vest quarterly over a four-year period and expire 10 years from
the date of grant. The vesting of these options will accelerate upon a change
of control, as defined.
(D) THE 1996 EMPLOYEE STOCK PURCHASE PLAN
Under the terms of the Purchase Plan, the Company has reserved and may
issue up to an aggregate of 250,000 shares of common stock in semi-annual
grants at a price equal to 85% of fair market value, as defined.
F-12
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company's Board of Directors has authorized 7,500,000 shares of
preferred stock and designated 1,850,000, 1,850,000 and 3,000,000 of such
shares as Series A, B and C redeemable convertible preferred stock,
respectively (Series A, B and C Preferred Stock). The Company issued Series A,
B and C Preferred Stock as follows:
[Download Table]
DATE DESCRIPTION NUMBER OF SHARES PRICE PER SHARE
---- ------------------------ ---------------- ---------------
June 1994............. Series A Preferred Stock 1,850,000 $ 1.000
April, August and Oc-
tober 1995........... Series B Preferred Stock 1,730,675 $ 5.405
January and March
1996................. Series C Preferred Stock 2,695,000 $10.000
The rights, preferences and privileges of Series A, B and C Preferred Stock
are as follows.
(A) CONVERSION
Series A and B Preferred Stock are convertible at the option of the holder
into common stock on a three-for-one basis, and Series C Preferred Stock is
convertible into common stock on a one-for-one basis, adjustable for certain
dilutive events, as defined. All shares of Preferred Stock are required to be
converted into common stock upon the closing of an initial public offering of
the Company's common stock at an offering price of $12.00 per share and
yielding aggregate gross proceeds to the Company of at least $30,000,000.
(B) REDEMPTION
At the request of the majority of the Series A, B and C Preferred
Stockholders at any date after April 12, 1999 but before March 15, 2000, the
Company is required to redeem up to an aggregate of 50% of the Preferred
Stock outstanding one year from the date of request and an additional 50% on
the first anniversary thereafter. The redemption price for the Series A, B
and C Preferred Stock is $1.00, $5.405 and $10.00, respectively, plus any
declared but unpaid dividends.
(C) LIQUIDATION, DISSOLUTION AND WINDING UP
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of Series A, B and C Preferred Stock
shall be entitled to be paid out of the assets available for distribution,
the redemption price of the respective shares, plus any declared but unpaid
dividends. If the assets of the Company are insufficient to pay the full
preferential amounts to the Preferred Stockholders, the assets shall be
distributed ratably among the Preferred Stockholders in proportion to their
aggregate liquidation preference amounts.
In the event of a merger, consolidation or a sale of essentially all of the
assets of the Company, the majority of the outstanding Series C Preferred
Stockholders may elect to have the merger, consolidation or asset sale deemed
a liquidation of the Company and all consideration shall be distributed as
defined above.
(D) VOTING RIGHTS
The holders of Series A, B and C Preferred Stock are entitled to the number
of votes equal to the number of common stock shares into which it is
convertible. The Preferred Stockholders vote with the common stockholders as
a single class. The Company cannot change, alter or repeal the
F-13
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) REDEEMABLE CONVERTIBLE PREFERRED STOCK--(CONTINUED)
(D) VOTING RIGHTS--(CONTINUED)
preferences, special rights or other powers of the Series C Preferred Stock
agreement without approval by 70% of the Series C Preferred Stockholders. The
Company is required to obtain approval by 60% of the Preferred Stockholders
before the Company liquidates, dissolves or winds up, sells substantially all
of the assets of the Company, or merges or consolidates with another entity,
as defined.
(E) DIVIDENDS
The holders of the Series A, B and C Preferred Stock are entitled to
receive, when and if declared by the Board of Directors, any dividend
declared or paid on any shares of common stock in preference to any dividends
on common stock.
(F) REGISTRATION RIGHTS
At any time after the earlier of June 8, 1999 or the closing of the
Company's first underwritten public offering, Preferred Stockholders holding
in the aggregate of at least 40% the shares eligible for registration then
outstanding may request the Company to register the shares, as defined. This
right expires on June 8, 2004.
(G) RIGHT OF FIRST REFUSAL
The Company's Series A, B and C Preferred Stockholders have the right of
first refusal to purchase any new securities offered by the Company. The
right of first refusal terminates upon the closing of an initial public
offering of the Company's common stock resulting in gross proceeds to the
Company of at least $30,000,000 at a minimum price of $12.00 per share or the
sale of substantially all of the assets of the Company.
(H) SERIES C PREFERRED STOCK RIGHT OF FIRST REFUSAL AND REPURCHASE AGREEMENT
In the event that a Series C Preferred Stockholder is acquired by one of
the Company's competitors, the Company has the right to repurchase, at the
then current fair market value, all of the shares held by such Preferred
Stockholder. In addition, if a Series C Preferred Stockholder is to sell any
of its shares, the Series C Preferred Stockholder must grant the Company the
option to repurchase the shares, as defined. This agreement terminates upon
the earlier of (i) the written agreement of purchasers of at least 50% of the
Series C Preferred Stock and the Company to terminate the agreement, (ii) the
sale of substantially all of the assets of the Company, or (iii) the closing
of an initial public offering of the Company's common stock.
F-14
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(INCLUDED DATA APPLICABLE TO UNAUDITED PERIODS)
(7) COMMITMENTS
(A) FACILITIES
The Company leases its facilities and certain equipment under operating
leases that expire through January 2001. The future minimum lease commitments
at December 31, 1995 are as follows:
[Download Table]
YEAR ENDED DECEMBER 31,
-----------------------
1996........................................................ $1,562,000
1997........................................................ 1,545,000
1998........................................................ 1,511,000
1999........................................................ 1,488,000
2000........................................................ 1,499,000
Thereafter.................................................. 125,000
----------
$7,730,000
==========
Rent expense included in the accompanying consolidated statements of
operations was approximately $41,000, $478,000, $16,000 and $414,000 for the
period from inception (April 25, 1994) to December 31, 1994, for the year
ended December 31, 1995 and for the three months ended March 31, 1995 and
1996, respectively.
(B) EMPLOYMENT AGREEMENT
The Company has entered into a two-year employment agreement with an
executive officer which provides for bonus and severance benefits for a
period of 12 months upon termination of employment under certain
circumstances.
(8) RELATED PARTY TRANSACTIONS
The Company has entered into agreements with certain stockholders which
provide for product and service revenues. The Company believes that the terms
of these transactions are on terms no less favorable to the Company than could
be obtained from unaffiliated third parties. The Company recognized service
revenues of approximately $295,000 for certain application development
services for a Series B and C Preferred Stockholder in the year ended December
31, 1995. The Company had related party accounts receivable of approximately
$331,000 and $128,000 and related party deferred revenue of approximately
$1,605,000 and $2,208,000 included in the accompanying consolidated balance
sheets as of December 31, 1995 and March 31, 1996, respectively, from certain
Series B and C Preferred Stockholders.
On February 5, 1996, the Company loaned $1,500,000 to a founder and director
of the Company. The loan is non-recourse, secured by a pledge of 375,000
shares of common stock, bears interest at a rate of 5.61% per annum and is due
and payable on the earlier of February 5, 2001 or on the date of a liquidation
event. A liquidation event will occur when the founder and director can sell a
sufficient number of shares of his common stock to repay the principal and
accrued interest on the loan.
(9) EMPLOYEE BENEFIT PLAN
In October 1995, the Company adopted a 401(k) savings and investment plan
for eligible employees. Each participant may elect to contribute up to 15% of
his or her compensation for the plan year, subject to certain Internal Revenue
Service limitations. Company matching contributions are made to the plan at
the discretion of the Board of Directors. There have been no discretionary
contributions made by the Company to the plan to date.
F-15
OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDED DATA APPLICABLE TO UNAUDITED PERIODS)
(10) ACCRUED EXPENSES
Accrued expenses consist of the following:
[Download Table]
DECEMBER 31,
------------------ MARCH 31,
1994 1995 1996
------- ---------- ----------
Payroll and related expenses.......... $54,163 $1,034,100 $1,620,501
Professional and consulting fees...... 5,000 622,298 704,800
All other............................. 13,881 1,000,110 1,045,050
------- ---------- ----------
$73,044 $2,656,508 $3,370,351
======= ========== ==========
(11) DEFERRED REVENUES
Deferred revenues consist of the following:
DECEMBER 31,
------------------ MARCH 31,
1994 1995 1996
------- ---------- ----------
Payments for future product
deliverables......................... $ -- $3,202,750 $1,456,800
Prepaid sublicense fees............... -- 2,650,000 2,950,000
Prepaid service revenues.............. 15,000 1,048,605 1,499,492
------- ---------- ----------
$15,000 $6,901,355 $5,906,292
======= ========== ==========
F-16
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company agreed to sell to each of the U.S. Underwriters named below, and each
of such U.S. Underwriters, for whom Goldman, Sachs & Co., Cowen & Company and
Montgomery Securities are acting as representatives, has severally agreed to
purchase from the Company, the respective number of shares of Common Stock set
forth opposite its name below:
[Download Table]
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
Goldman, Sachs & Co. .........................................
Cowen & Company...............................................
Montgomery Securities.........................................
---------
Total....................................................... 3,200,000
=========
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at
such price less a concession of $ per share. The U.S. Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain brokers and dealers. After the shares of Common Stock are
released for sale to the public, the offering price and other selling terms
may from time to time be varied by the representatives.
The Company has entered into an underwriting agreement (the "International
Underwriting Agreement") with the underwriters of the International Offering
(the "International Underwriters") providing for the concurrent offer and sale
of 800,000 shares of Common Stock in an international offering outside the
United States. The offering price and aggregate underwriting discounts and
commissions per share for the Offerings are identical. The closing of the U.S.
Offering made hereby is a condition to the closing of the International
Offering and vice versa. The representatives of the International Underwriters
are Goldman Sachs International, Cowen & Company and Montgomery Securities.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the Offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution
of the shares offered hereby and subject to certain exceptions, it will offer,
sell or deliver the shares of Common Stock, directly or indirectly, only in
the United States of America (including the States and the District of
Columbia), its territories, its possessions and other areas subject to its
jurisdiction (the "United States") and to U.S. persons, which term shall mean,
for purposes of this paragraph: (a) any individual who is a resident of the
United States or (b) any corporation, partnership or other entity organized in
or under the laws of the United States or any political subdivision thereof
and whose office most directly involved with the purchase is located in the
United States. Each of the International Underwriters has agreed pursuant to
the Agreement Between that, as a part of the distribution of the shares
offered as a part of the International Offering, and subject to certain
exception, it will (i) not, directly or indirectly, offer, sell or deliver
shares of Common Stock (a) in the United States or to any U.S. persons or (b)
to any person who it believes intends to reoffer, resell or deliver the shares
in the United States or to any U.S. persons, and (ii) cause any dealer to whom
it may sell such shares at any concession to agree to observe a similar
restriction.
U-1
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall
be the public offering price, less an amount not greater than the selling
concession.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
480,000 additional shares of Common Stock to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the U.S. Underwriters
have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
3,200,000 shares of Common Stock offered. The Company has granted the
International Underwriters a similar option exercisable for up to an aggregate
of 120,000 additional shares of Common Stock.
The Company has agreed that, subject to certain exceptions, during the
period beginning from the date of this Prospectus and continuing to and
including the date 180 days after the date of this Prospectus, not to offer,
sell, contract to sell or otherwise dispose of any securities of the Company
(other than pursuant to employee stock option or purchase plans existing, or
on the conversion or exchange of convertible or exchangeable securities
outstanding on the date of this Prospectus) which are substantially similar to
the shares of Common Stock or which are convertible or exchangeable into
securities which are substantially similar to the shares of Common Stock
without the prior written consent of the representatives, except for the
shares of Common Stock offered in connection with the concurrent U.S. and
International Offerings. The executive officers, directors (except for Messrs.
Judson and Quinn, who own no shares of Common Stock of the Company), and
certain directors and securityholders of the Company (who in the aggregate
hold approximately 25,788,623 shares of Common Stock at March 31, 1996) have
agreed to not offer, sell, contract to sell or otherwise dispose of or agree
to dispose of any shares of Common Stock or substantially similar securities
owned beneficially by them for a period of 180 days after the date of this
Prospectus, without the prior written consent of the representatives. See
"Shares Eligible for Future Sale".
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Common Stock offered by them.
The Company anticipates that Ray Stata, a director of the Company, will be
offered the opportunity to purchase in the U.S. Offering approximately 142,857
shares of Common Stock (assuming an initial public offering price of $14.00
per share) for an aggregate purchase price of approximately $2,000,000. Any
such sale will be made on the same terms as sales to other investors in the
Offerings, except that Mr. Stata has agreed not to offer, sell, contract to
sell or otherwise dispose of or agree to dispose of any shares of Common Stock
or substantially similar securities owned beneficially by him for a period of
180 days after the date of this Prospectus, without the prior written consent
of the representatives. No assurance can be given that Mr. Stata will purchase
any or all of such shares. To the extent that Mr. Stata purchases such shares
of Common Stock, the number of shares available to the general public in the
U.S. Offering will be reduced. Any such shares not purchased by Mr. Stata will
be offered by the U.S. Underwriters to the general public on the same terms
and conditions as the other shares offered hereby. Any purchase of shares of
Common Stock by Mr. Stata will be for investment purposes and not with a view
to distributing such shares to the public. See "Principal Stockholders."
Prior to the Offerings, there has been no public market for the shares. The
initial public offering price will be negotiated among the Company and the
representatives. Among the factors to be considered in determining the initial
public offering price of the Common Stock, in addition to prevailing market
conditions, will be the Company's historical performance, estimates of the
business potential and earnings prospects of the Company, an assessment of the
Company's management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
U-2
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "OMKT".
This Prospectus may be used by underwriters and dealers in connection with
offers and sales of the Common Stock, including shares initially sold in the
International Offering, to persons located in the United States.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
U-3
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-------------------
TABLE OF CONTENTS
[Download Table]
PAGE
----
Prospectus Summary....................................................... 3
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Dilution................................................................. 14
Capitalization........................................................... 15
Selected Consolidated Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 24
Management............................................................... 34
Certain Transactions..................................................... 43
Principal Stockholders................................................... 45
Description of Capital Stock............................................. 47
Shares Eligible for Future Sale.......................................... 49
Legal Matters............................................................ 50
Experts.................................................................. 50
Additional Information................................................... 51
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
-------------------
THROUGH AND INCLUDING , 1996 (THE 25TH DAY AFTER THE DATE OF THIS PRO-
SPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPEC-
TUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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4,000,000 SHARES
OPEN MARKET, INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
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GOLDMAN, SACHS & CO.
COWEN & COMPANY
MONTGOMERY SECURITIES
REPRESENTATIVES OF THE UNDERWRITERS
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.
[Download Table]
SEC Registration Fee............................................. $ 23,794
NASD Filing Fee.................................................. 7,400
Nasdaq National Market Listing Fee............................... 50,000
Blue Sky Fees and Expenses....................................... 20,000
Transfer Agent and Registrar Fees................................ 10,000
Accounting Fees and Expenses..................................... 150,000
Legal Fees and Expenses.......................................... 300,000
Printing, Engraving and Mailing Expenses......................... 175,000
Miscellaneous.................................................... 63,806
--------
Total.......................................................... $800,000
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article EIGHTH of the Registrant's Amended and Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") provides that no
director of the Registrant shall be personally liable for any monetary damages
for any breach of fiduciary duty as a director, except to the extent that the
Delaware General Corporation Law prohibits the elimination or limitation of
liability of directors for breach of fiduciary duty.
Article NINTH of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any
litigation or other legal proceeding (other than an action by or in the right
of the Registrant) brought against him by virtue of his position as a director
or officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests
of the Registrant, except that no indemnification shall be made with respect
to any matter as to which such person shall have been adjudged to be liable to
the Registrant, unless a court determines that, despite such adjudication but
in view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount
advanced if it is ultimately determined that he is not entitled to
indemnification for such expenses.
Indemnification is required to be made unless the Registrant determines that
the applicable standard of conduct required for indemnification has not been
met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
II-1
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent
to the right of indemnification, the director or officer must give the
Registrant notice of the action for which indemnity is sought and the
Registrant has the right to participate in such action or assume the defense
thereof.
Article NINTH of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive,
and provides that in the event that the Delaware General Corporation Law is
amended to expand the indemnification permitted to directors or officers the
Registrant must indemnify those persons to the fullest extent permitted by
such law as so amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent
of the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred
in connection with an action or proceeding to which he is or is threatened to
be made a party by reason of such position, if such person shall have acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, in any criminal proceeding, if
such person had no reasonable cause to believe his conduct was unlawful;
provided that, in the case of actions brought by or in the right of the
corporation, no indemnification shall be made with respect to any matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the adjudicating court determines that such
indemnification is proper under the circumstances.
Under Section 8 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of Underwriting Agreement filed
as Exhibit 1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of Common Stock issued, and the number of options granted, by the
Registrant since December 6, 1993. Further included is the consideration, if
any, received by the Registrant for such shares and options, and information
relating to the section of the Securities Act of 1933, as amended (the
"Securities Act"), or rule of the Securities and Exchange Commission under
which exemption from registration was claimed. The following transactions give
effect to the Company's three-for-one split of its Common Stock, in the form
of a stock dividend, which became effective as of October 12, 1995.
(1) In June 1994, the Registrant sold 526,500 and 4,050,000 shares of
Common Stock to David K. Gifford and Shikhar Ghosh, respectively, pursuant
to the 1994 Stock Incentive Plan. Messrs. Gifford and Ghosh each paid
$.00033 per share.
(2) In June 1994, the Registrant sold 3,523,500 shares of Common Stock to
David K. Gifford in exchange for the assignment of a certain patent license
to the Company.
(3) In October 1994, the Registrant sold a total of 1,236,000 shares of
Common Stock to certain employees of the Company at $.00033 per share for
aggregate consideration of $412.
(4) In June 1994, the Registrant sold a total of 1,850,000 shares of
Series A Convertible Preferred Stock to certain investors at $1.00 per
share for aggregate consideration of $1,850,000.
(5) In April 1995, the Registrant sold a total of 1,545,675 shares of
Series B Convertible Preferred Stock to certain investors at $5.4054 per
share for aggregate consideration of $8,354,991.62.
II-2
(6) In August 1995, the Registrant sold 92,500 shares of Series B
Convertible Preferred Stock to Time Inc. New Media at $5.4054 per share for
aggregate consideration of $499,999.50.
(7) In October 1995, the Registrant sold 92,500 shares of Series B
Convertible Preferred Stock to Tribune Company at $5.4054 per share for
aggregate consideration of $499,999.50.
(8) In January 1996, the Registrant sold a total of 2,545,000 shares of
Series C Convertible Preferred Stock to certain investors at $10.00 per
share for aggregate consideration of $25,450,000.
(9) In March 1996, the Registrant sold a total of 150,000 shares of
Series C Convertible Preferred Stock to a certain investor at $10.00 per
share for aggregate consideration of $1,500,000.
(10) From inception through March 31, 1996, the Registrant issued an
aggregate of 240,385 shares of Common Stock to officers, employees and
consultants of the Registrant pursuant to the Registrant's 1994 Stock
Incentive Plan upon the exercise of the options at prices ranging from
$0.17 to $0.25 per share for an aggregate consideration of approximately
$51,200. During that period, the Registrant also issued options to
officers, employees and consultants of the Registrant to purchase an
aggregate of 5,796,502 shares of Common Stock pursuant to the Registrant's
1994 Stock Incentive Plan at exercise prices ranging from $0.17 to $12.00.
The shares of capital stock and securities issued in the above transactions
were offered and sold in reliance upon the exemption from registration under
Section 4(2) of the Securities Act or Regulation D or Rule 701 promulgated
under the Securities Act, relative to sales by an issuer not involving a
public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
[Download Table]
EXHIBIT
NO. DESCRIPTION
------- -----------
1.1* Form of U.S. Underwriting Agreement.
1.2* Form of International Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant, as amended.
3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant (to be filed upon the closing of the offering to which this
Registration Statement relates).
3.3 By-Laws of the Registrant.
3.4 Form of Amended and Restated By-laws of the Registrant (to be
effective upon the Offerings to which this Registration Statement
relates).
4.1 Specimen Certificate for shares of Common Stock, $.001 par value, of
the Registrant.
5* Opinion of Hale and Dorr with respect to the validity of the
securities being offered.
10.1 1994 Stock Incentive Plan.
10.2 1996 Employee Stock Purchase Plan.
10.3 1996 Director Option Plan.
10.4 Employment Agreement between the Registrant and Gary B. Eichhorn,
dated November 7, 1995.
10.5 Incentive Stock Option Agreement dated November 10, 1995, between the
Registrant and Gary B. Eichhorn.
10.6 Invention and Non-Disclosure Agreement dated November 10, 1995,
between the Registrant and Gary B. Eichhorn.
10.7 Promissory Note dated February 5, 1996 in the principal amount of
$1,500,000 issued by David K. Gifford to the Registrant.
10.8 Pledge Agreement dated February 5, 1996, between the Company and David
K. Gifford.
II-3
[Download Table]
EXHIBIT
NO. DESCRIPTION
------- -----------
10.9 Series A Preferred Stock Purchase Agreement, dated June 8, 1994, among
the Registrant and certain stockholders of the Registrant.
10.10 Series B Preferred Stock Purchase Agreement, dated April 12, 1995,
among the Registrant and certain stockholders of the Registrant.
10.11 Series C Preferred Stock Purchase Agreement, dated January 26, 1996,
among the Registrant and certain stockholders of the Registrant.
10.12 Second Amended and Restated Registration Rights Agreement, dated
January 26, 1996, among the Registrant and certain stockholders of the
Registrant.
10.13+ Master Agreement, dated as of August 23, 1995, by and between FTP
Software, Inc. and the Registrant.
10.14+ Development and Services Agreement dated as of January 1, 1995 by and
between Time Inc. New Media and the Registrant, as amended.
10.15+ Master Development Agreement, dated as of February 21, 1995, by and
between Conde Net, Inc. and the Registrant.
10.16+ TMS Software License Agreement, dated as of February 27, 1996, by and
between Tribune Interactive Network Services and the Registrant.
10.17+ License Agreement dated October 17, 1994 by and between Massachusetts
Institute of Technology and the Registrant.
10.18 Letter Agreement dated January 11, 1995 by and between Silicon Valley
Bank and the Registrant.
10.19 Promissory Note dated August 14, 1995 issued by the Registrant to
Silicon Valley Bank, as modified to date.
10.20 Form of OM-Transact Software License Agreement of Registrant.
10.21 Form of Agreement for Annual Software Support of Registrant.
10.22 Form of Master Development Agreement of Registrant.
10.23 Form of Software License and Distribution Agreement of Registrant.
10.24 Form of Start-Up Services Agreement of Registrant.
10.25 Form of Professional Services Agreement of Registrant.
10.26+ Software License Agreement, effective March 15, 1996, by and between
Novell, Inc. and the Registrant.
10.27+ Master Development Agreement, dated as of May 22, 1995, by and between
Parade Net, Inc. and the Registrant.
10.28+ OEM Master License Agreement, dated June 30, 1995, by and between RSA
Data Security, Inc. and the Registrant.
10.29+ Public Key Patent License, effective as of September 6, 1995, by and
between Caro-Kann Corporation and the Registrant.
10.30 Commercial Security Agreement, dated January 11, 1995 by and between
the Registrant and Silicon Valley Bank.
10.31 Start-Up Services Agreement, dated as of February 27, 1996, by and
between the Registrant and Tribune Interactive Network Services.
10.32 Promissory Note dated January 11, 1995 issued by the Registrant to
Silicon Valley Bank, as modified to date.
10.33 Founder's Agreement dated June 8, 1994 by and between David K. Gifford
and the Registrant.
II-4
[Download Table]
EXHIBIT
NO. DESCRIPTION
------- -----------
10.34+ License and Exclusive Distribution Agreement dated as of April 10,
1996 by and between Time Inc. New Media and the Registrant.
11 Computation of income per common share.
21 Subsidiary of the Registrant.
23.1* Consent of Hale and Dorr (included in Exhibit 5).
23.2* Consent of Arthur Andersen LLP.
24 Powers of Attorney.
24.1* Additional Power of Attorney
--------
*Filed herewith.
+Confidential treatment requested as to certain portions.
All other exhibits have been previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not required or because the
required information is given in the Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Restated Certificate of
Incorporation and Amended and Restated By-Laws of the Registrant and the laws
of the State of Delaware, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF BOSTON, COMMONWEALTH OF MASSACHUSETTS, ON THIS 14TH DAY OF MAY, 1996.
Open Market, Inc.
/s/ Gary B. Eichhorn
By: _________________________________
GARY B. EICHHORN PRESIDENT AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
[Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
President, Chief
/s/ Gary B. Eichhorn Executive Officer May 14, 1996
------------------------------------- and Director
GARY B. EICHHORN (Principal
Executive Officer)
Regina O. Sommer* Chief Financial
------------------------------------- Officer (Principal May 14, 1996
REGINA O. SOMMER Financial and
Accounting Officer)
Gulrez Arshad* Director
------------------------------------- May 14, 1996
GULREZ ARSHAD
Shikhar Ghosh* Director
------------------------------------- May 14, 1996
SHIKHAR GHOSH
David K. Gifford* Director
------------------------------------- May 14, 1996
DAVID K. GIFFORD
II-6
[Download Table]
Bruce Judson* Director
------------------------------------- May 14, 1996
BRUCE JUDSON
William S. Kaiser* Director
------------------------------------- May 14, 1996
WILLIAM S. KAISER
Ray Stata Director May 14, 1996
-------------------------------------
RAY STATA
Robert J. Tarr, Jr.* Director
------------------------------------- May 14, 1996
ROBERT J. TARR, JR.
Eugene F. Quinn* Director
------------------------------------- May 14, 1996
EUGENE F. QUINN
Gary B. Eichhorn
---------------------------------
*By:
GARY B. EICHHORN
ATTORNEY-IN-FACT
II-7
EXHIBIT INDEX
[Download Table]
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
1.1* Form of U.S. Underwriting Agreement.
1.2* Form of International Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant, as amended.
3.2 Form of Amended and Restated Certificate of Incorporation of
the Registrant (to be filed upon the closing of the offering to
which this Registration Statement relates).
3.3 By-Laws of the Registrant.
3.4 Form of Amended and Restated By-laws of the Registrant (to be
effective upon the Offerings to which this Registration
Statement relates).
4.1 Specimen Certificate for shares of Common Stock, $.001 par
value, of the Registrant.
5* Opinion of Hale and Dorr with respect to the validity of the
securities being offered.
10.1 1994 Stock Incentive Plan.
10.2 1996 Employee Stock Purchase Plan.
10.3 1996 Director Option Plan.
10.4 Employment Agreement between the Registrant and Gary B.
Eichhorn, dated November 7, 1995.
10.5 Incentive Stock Option Agreement dated November 10, 1995,
between the Registrant and Gary B. Eichhorn.
10.6 Invention and Non-Disclosure Agreement dated November 10, 1995,
between the Registrant and Gary B. Eichhorn.
10.7 Promissory Note dated February 5, 1996 in the principal amount
of $1,500,000 issued by David K. Gifford to the Registrant.
10.8 Pledge Agreement dated February 5, 1996, between the Company
and David K. Gifford.
10.9 Series A Preferred Stock Purchase Agreement, dated June 8,
1994, among the Registrant and certain stockholders of the
Registrant.
10.10 Series B Preferred Stock Purchase Agreement, dated April 12,
1995, among the Registrant and certain stockholders of the
Registrant.
10.11 Series C Preferred Stock Purchase Agreement, dated January 26,
1996, among the Registrant and certain stockholders of the
Registrant.
10.12 Second Amended and Restated Registration Rights Agreement,
dated January 26, 1996, among the Registrant and certain
stockholders of the Registrant.
10.13+ Master Agreement, dated as of August 23, 1995, by and between
FTP Software, Inc. and the Registrant.
10.14+ Development and Services Agreement dated as of January 1, 1995
by and between Time Inc. New Media and the Registrant, as
amended.
10.15+ Master Development Agreement, dated as of February 21, 1995, by
and between Conde Net, Inc. and the Registrant.
10.16+ TMS Software License Agreement, dated as of February 27, 1996,
by and between Tribune Interactive Network Services and the
Registrant.
10.17+ License Agreement dated October 17, 1994 by and between
Massachusetts Institute of Technology and the Registrant.
[Download Table]
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
10.18 Letter Agreement dated January 11, 1995 by and between Silicon
Valley Bank and the Registrant.
10.19 Promissory Note dated August 14, 1995 issued by the Registrant
to Silicon Valley Bank, as modified to date.
10.20 Form of OM-Transact Software License Agreement of Registrant.
10.21 Form of Agreement for Annual Software Support of Registrant.
10.22 Form of Master Development Agreement of Registrant.
10.23 Form of Software License and Distribution Agreement of
Registrant.
10.24 Form of Start-Up Services Agreement of Registrant.
10.25 Form of Professional Services Agreement of Registrant.
10.26+ Software License Agreement, effective March 15, 1996, by and
between Novell, Inc. and the Registrant.
10.27+ Master Development Agreement, dated as of May 22, 1995, by and
between Parade Net, Inc. and the Registrant.
10.28+ OEM Master License Agreement, dated June 30, 1995, by and
between RSA Data Security, Inc. and the Registrant.
10.29+ Public Key Patent License, effective as of September 6, 1995,
by and between Caro-Kann Corporation and the Registrant.
10.30 Commercial Security Agreement, dated January 11, 1995 by and
between the Registrant and Silicon Valley Bank.
10.31 Start-Up Services Agreement, dated as of February 27, 1996, by
and between the Registrant and Tribune Interactive Network
Services.
10.32 Promissory Note dated January 11, 1995 issued by the Registrant
to Silicon Valley Bank, as modified to date.
10.33 Founder's Agreement dated June 8, 1994 by and between David K.
Gifford and the Registrant.
10.34+ License and Exclusive Distribution Agreement dated as of April
10, 1996 by and between Time Inc. New Media and the Registrant.
11 Computation of income per common share.
21 Subsidiary of the Registrant.
23.1* Consent of Hale and Dorr (included in Exhibit 5).
23.2* Consent of Arthur Andersen LLP.
24 Powers of Attorney.
24.1* Additional Power of Attorney.
--------
*Filed herewith.
+Confidential treatment requested as to certain portions.
All other exhibits have been previously filed.
Dates Referenced Herein and Documents Incorporated by Reference
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