1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ALTAVISTA INTERNET SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7379 04-3321986
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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30 PORTER ROAD
LITTLETON, MASSACHUSETTS 01460
(508) 486-2700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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ILENE H. LANG, PRESIDENT
ALTAVISTA INTERNET SOFTWARE, INC.
30 PORTER ROAD
LITTLETON, MASSACHUSETTS 01460
(508) 486-2700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
Copies to:
GAIL S. MANN, ESQ. EDWIN L. MILLER, JR., ESQ. RAYMOND W. WAGNER, ESQ.
DIGITAL EQUIPMENT CORPORATION TESTA, HURWITZ & THIBEAULT, LLP SIMPSON THACHER & BARTLETT
111 POWDERMILL ROAD 125 HIGH STREET 425 LEXINGTON AVENUE
MAYNARD, MASSACHUSETTS 01754 BOSTON, MASSACHUSETTS 02110 NEW YORK, NEW YORK 10017
(508) 493-5111 (617) 248-7000 (212) 455-2000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement has become effective.
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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, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(b)
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. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE(1)
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Common Stock, $.01 par value......................... $50,000,000 $17,242
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(1) Calculated pursuant to Rule 457(o).
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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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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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 SUCH STATE.
Subject to Completion, dated August 27, 1996
PROSPECTUS
SHARES
[INTERNET SOFTWARE LOGO]
CLASS A COMMON STOCK
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All of the shares of Class A Common Stock offered hereby are being sold by
AltaVista Internet Software, Inc. ("AltaVista" or the "Company"), a wholly-owned
subsidiary of Digital Equipment Corporation ("Digital"). Following the Offering
(as defined below), Digital will own all of the outstanding shares of
Class B Common Stock of the Company, which will represent approximately
% of the economic interest (or rights of holders of common equity to
participate in distributions in respect of the common equity) in the Company
(assuming no exercise of the Underwriters' over-allotment options).
Of the shares of Class A Common Stock offered hereby,
shares are being offered in the United States and Canada (the "U.S. Offering")
by the U.S. Underwriters (as defined in "Underwriting"), and shares
are being offered outside the United States and Canada in a concurrent
international offering (the "International Offering") by the International
Managers (as defined in "Underwriting", and, together with the U.S.
Underwriters, the "Underwriters"). These offerings are collectively referred to
herein as the "Offering." See "Underwriting."
Holders of Class A Common Stock generally have identical rights to holders
of Class B Common Stock and vote together as a single class, except that holders
of Class A Common Stock are entitled to one vote per share while holders of
Class B Common Stock are entitled, with certain exceptions, to three votes per
share on all matters submitted to a vote of stockholders. Following the
Offering, the shares of Class B Common Stock owned by Digital will represent
approximately % of the combined voting power of all classes of voting stock of
the Company (assuming no exercise of the Underwriters' over-allotment options).
Each share of Class B Common Stock is convertible into one share of Class A
Common Stock at the option of Digital, and is automatically converted under
certain circumstances. See "Relationship with Digital" and "Description of
Capital Stock."
Prior to the Offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $ and $ per share. See "Underwriting" for the
factors to be considered in determining the initial public offering price.
Application will be made to list the Class A Common Stock on the Nasdaq National
Market under the symbol "ALTV."
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THE CLASS A COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
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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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UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
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Per Share................................
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Total(3).................................
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(1) The Company and Digital have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the U.S. Underwriters a 30-day option to purchase up
to an additional shares of Class A Common Stock solely to cover
over-allotments, if any. The International Managers have been granted a
similar option to purchase up to additional shares solely to cover
over-allotments, if any. If such options are exercised in full, the total
Price to Public would be $ , the total Underwriting Discounts and
Commissions would be $ and the total Proceeds to Company before
estimated expenses would be $ . See "Underwriting."
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The shares of Class A Common Stock offered by this Prospectus are offered by
the U.S. Underwriters subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
U.S. Underwriters and to certain further conditions. It is expected that
delivery of the shares will be made at the offices of Lehman Brothers Inc., New
York, New York, on or about , 1996.
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LEHMAN BROTHERS
COWEN & COMPANY
J.P. MORGAN & CO.
, 1996
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ALTAVISTA: MAKING THE INTERNET
THE WORK ENVIRONMENT OF CHOICE
[ILLUSTRATION OF THE ALTAVISTA PRODUCT PORTFOLIO.]
The Company's portfolio of innovative software products enables business
users of the Internet and intranets to find useful information; control access
to information and transmit it securely; and collaborate and communicate from
multiple locations.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK OF THE COMPANY 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.
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AltaVista and the AltaVista logo are trademarks of the Company. All other
trademarks or tradenames referred to in this Prospectus are the property of
their respective owners.
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PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information contained in this Prospectus. Unless
otherwise indicated, the information contained in this Prospectus assumes no
exercise of the over-allotment options granted to the Underwriters and reflects
the filing of an Amended and Restated Certificate of Incorporation of the
Company increasing the number of authorized shares of capital stock and
effecting a recapitalization of the outstanding shares of common stock.
THE COMPANY
The Company develops and markets software products for use in the emerging
integrated
Internet/intranet business environment. The Company's portfolio of innovative
software products enables users of the Internet and intranets to (i) find useful
information, (ii) control access to information and transmit it securely and
(iii) collaborate and communicate from multiple locations. The Company's
products and services are designed to integrate all levels of the work
environment -- Internet, enterprise, workgroup and individual user -- and to
allow location- and platform-independent computing. To increase global awareness
of the AltaVista brand and showcase AltaVista software technologies and
products, the Company provides the popular AltaVista Internet Search Service and
other Internet services free on the World Wide Web. The Company also licenses
its Internet services to major telecommunications and media companies outside
the United States and to major Internet content providers.
The Internet and the Web have grown dramatically primarily due to the
platform-independence of Internet technologies and the ease of use of standard
Web browsers. Recognizing these benefits, many organizations have begun to
create "intranets" by adopting Internet technologies on their private networks.
Intranets provide users substantially increased access to information and other
users both inside an organization and, via the Internet, throughout the world.
To take advantage of these expanded capabilities and resources and allow the
Internet/intranet environment to become the work environment of choice, users
need products and services that integrate all levels of their work environment.
The Company has developed the following portfolio of products to address these
needs:
- SEARCH/DIRECTORY PRODUCTS. AltaVista Search assists users in finding
relevant information in all levels of their work environment. AltaVista
Directory provides a single, integrated on-line directory of employees,
customers or other affiliated individuals.
- SECURITY PRODUCTS. AltaVista Firewall provides an easy-to-manage, secure
gateway between an organization's private intranet and the Internet, or
between sub-networks of an intranet. AltaVista Tunnel employs advanced
authentication and encryption technologies to create a secure Internet
pathway over which external users can connect inexpensively and securely
to an organization's intranet, thereby allowing external users to work as
if directly connected to the organization's private network.
- COLLABORATION AND COMMUNICATION PRODUCTS. AltaVista Forum provides an
environment for members of workgroups to share documents, conduct
asynchronous discussions or real-time conferences from multiple locations
and search the entire text of a Forum, all using a standard Web browser.
AltaVista Mail is Internet/intranet email server software that provides
email services and supports a wide range of email clients and
attachments.
The Company's target customers are business users. To date, customers for
one or more of the Company's products include AT&T, Inc., British Columbia Hydro
and Power Authority, Computer Sciences Corporation, Woods Hole Research Center
and Xerox Corporation.
As an integral part of its marketing strategy, the Company provides free of
charge its AltaVista Internet Search Service, which assists Web users in finding
information anywhere on the Web. The AltaVista Internet Search Service uses
advanced search engine and indexing technology developed in Digital's Palo Alto
research laboratories in response to the industry-wide challenge of indexing the
entire Web. This service recorded over 300,000 requests for information or
"hits" on its December 15, 1995 Web-wide launch date, and recorded over
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17.5 million hits per day during the week of August 5, 1996. The Company's goal
is to establish the AltaVista Internet Search Service as the global standard for
Internet search results by licensing it to major telecommunications and media
companies outside the United States to provide "mirror sites" for local markets
and by licensing major Internet content providers to deliver branded AltaVista
Internet Search Service results to their users through "value added links" on
their Web sites. The Company has entered into letters of intent for mirror sites
to be established by Telia TeleCom AB (Sweden) and Telstra Corporation Ltd.
(Australia) and into value added link agreements with Yahoo! Inc. and CNET,
Inc., thereby generating a revenue stream from the AltaVista Internet Search
Service. Because the Company does not accept advertising on its own Web sites
and, therefore, does not compete for Internet advertising revenue, the Company
is able to partner with Internet companies that derive revenue from advertising.
The Company's goal is to be the leading supplier of software products and
services for use in the emerging integrated Internet/intranet business
environment. The Company's strategy includes the following elements:
- INCREASE ALTAVISTA BRAND RECOGNITION WORLDWIDE. The Company provides
free Internet services from its Web sites and licenses AltaVista branded
services to leading Internet partners to showcase AltaVista technologies
and increase global awareness of the AltaVista brand.
- DELIVER INNOVATIVE SOFTWARE PRODUCTS FOR INTERNET/INTRANET USERS. In
addition to its current portfolio of software products, the Company
intends to build upon its technical expertise and that of its partners
and Digital to develop additional innovative products, product suites and
services for general and specific industry and business application needs
in the emerging Internet/intranet environment.
- CONDUCT BUSINESS ON THE WEB. The Company conducts a significant portion
of its business over the Web, including marketing, communications,
partner registration, sales, software distribution and partner and
customer support. The Company believes that this "Web-centric" strategy
will establish it as a highly visible Internet/intranet software leader,
as well as facilitate responsive, low-cost, global business operations.
The Company intends to achieve broad market penetration with its products
by employing multiple Internet-focused distribution channels.
- LEVERAGE RELATIONSHIP WITH DIGITAL. The Company intends to leverage its
relationship with Digital, one of the world's leading suppliers of
computer hardware, software and services. The Company's products are sold
by Digital's worldwide direct and channel sales organizations, which also
provide the Company access to Digital's major customers, channel partners
and strategic alliance partners. In addition, the Company has a preferred
relationship with Digital's research laboratories.
The Company is currently wholly owned by Digital. As used herein, unless
the context requires otherwise, the "Company" means AltaVista Internet Software,
Inc. and its subsidiaries, and "Digital" means Digital Equipment Corporation and
its subsidiaries (other than the Company and its subsidiaries). References
herein to the Company also include, as required by the context, the business of
the Company as conducted by Digital prior to the transfer of that business to
the Company, which transfer will occur prior to the consummation of the
Offering; this Prospectus assumes that such transfer has occurred. The Company
was incorporated in Delaware on June 28, 1996. Its principal executive offices
are located at 30 Porter Road, Littleton, Massachusetts 01460, and its telephone
number is (508) 486-2700. The Company's primary Web site is located at
http://www.altavista.software.digital.com. Information contained in such Web
site or any other Web site referred to in this Prospectus shall not be deemed a
part of this Prospectus.
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THE OFFERING(1)
Class A Common Stock offered hereby:
U.S. Offering................................ shares
International Offering....................... shares
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Total................................ shares
Common Stock to be outstanding after the
Offering(2):
Class A Common Stock......................... shares
Class B Common Stock......................... shares
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Total................................ shares
Working capital and other general corporate
purposes, including product development,
expansion of sales and marketing efforts and
capital expenditures. In addition, the Company
may make one or more acquisitions of
complementary technologies, products or
Use of proceeds................................ businesses. See "Use of Proceeds."
Proposed Nasdaq National Market symbol......... ALTV
The holders of Class A Common Stock generally
have rights identical to, and generally vote
together as a single class with, the holders
of the Class B Common Stock, except that the
holders of Class A Common Stock are entitled
to one vote per share and the holders of the
Class B Common Stock, are entitled, with
certain exceptions, to three votes per share.
See "Relationship with Digital" and
"Description of Capital Stock -- Common
Voting rights.................................. Stock -- Voting Rights."
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(1) Does not include up to shares of Class A Common Stock that are
subject to the over-allotment options granted to the Underwriters by the
Company. See "Underwriting."
(2) Does not include an aggregate of shares of Class A Common Stock
reserved for issuance in respect of employee stock options granted as of the
date of this Prospectus with an exercise price equal to the initial public
offering price set forth on the cover page of this Prospectus. See
"Capitalization" and "Management -- Compensation of Executive Officers."
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED
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JULY 2, JULY 1, JUNE 29,
1994 1995 1996
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STATEMENT OF OPERATIONS DATA(1):
Total operating revenues..................................... $ 298 $ 964 $ 3,632
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Costs and expenses:
Cost of operating revenues.............................. 47 374 1,110
Research and engineering expenses....................... 2,235 4,516 15,352
Selling and marketing expenses.......................... 50 248 10,522
General and administrative expenses..................... 684 1,062 6,516
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Total costs and expenses........................... 3,016 6,200 33,500
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Operating loss............................................. (2,718) (5,236) (29,868)
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Net loss................................................... $(2,718) $(5,236) $(29,868)
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Unaudited pro forma net loss per common share(2)........... $
========
AS OF JUNE 29, 1996
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PRO FORMA,
HISTORICAL(1) AS ADJUSTED(3)
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BALANCE SHEET DATA:
Working capital.................................................. $ (925) $
Total assets..................................................... 7,508
Net parent's investment.......................................... 5,528 --
Total stockholders' equity....................................... --
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(1) Historical amounts are included in or derived from the AltaVista Internet
Software Products Financial Statements included elsewhere in this
Prospectus.
(2) Historical earnings per share data is omitted from the statement of
operations data because it is not meaningful. Unaudited pro forma net loss
per common share is calculated based on the net loss divided by the number
of shares of Class B Common Stock to be issued to Digital prior to the
consummation of the Offering.
(3) Balance sheet data for the Company on a pro forma, as adjusted basis gives
effect to the contribution, as of June 29, 1996, of assets from Digital to
the Company and the Company's assumption of certain liabilities from
Digital, includes the assets and stockholder's equity of AltaVista Internet
Software, Inc. and gives effect to the net proceeds from the sale of
shares of Class A Common Stock offered by the Company hereby at an
assumed initial public offering price of $ per share. Net parent's
investment has been restated as total stockholders' equity as if Digital's
investment was in the Class B Common Stock of the Company to be issued to
Digital prior to the consummation of the Offering. See "Use of Proceeds" and
"Capitalization."
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RELATIONSHIP WITH DIGITAL
The Company is currently wholly owned by Digital. Upon consummation of the
Offering, Digital will beneficially own all of the Class B Common Stock, which
will represent approximately % of the combined voting power of all classes
of voting stock ( % if the Underwriters' over-allotment options are
exercised in full) and thus will continue to have the ability to direct the
election of all of the directors of the Company and otherwise exercise a
controlling influence over the business and affairs of the Company.
Digital has advised the Company that its current intent is to continue to
hold all of the Class B Common Stock. However, Digital has no agreement with the
Company not to sell or distribute such shares, and there can be no assurance
concerning the period of time during which Digital will maintain its beneficial
ownership of Common Stock after the expiration of the 180-day lock-up agreement
contained in the Underwriting Agreements. See "Relationship with
Digital -- Corporate Agreement" and "Underwriting."
Each share of Class B Common Stock is convertible while held by Digital or
any of its subsidiaries at such holder's option into one share of Class A Common
Stock. Any shares of Class B Common Stock transferred to a person other than
Digital or any of its subsidiaries shall automatically convert to shares of
Class A Common Stock upon such disposition, except for a disposition effected in
connection with a transfer of Class B Common Stock to stockholders of Digital as
a dividend intended to be on a tax-free basis (a "Tax-Free Spin-Off") under the
Internal Revenue Code of 1986, as amended (the "Code"). See "Description of
Capital Stock -- Common Stock -- Conversion."
Upon consummation of the Offering, Digital will continue to provide certain
services to the Company and make available certain employee benefit plans to the
Company's employees in a manner generally consistent with past practices. The
Company and Digital will enter into a number of intercompany agreements with
respect to such services and other matters. See "Relationship with Digital."
------------------------
Certain statements under the captions "Prospectus Summary," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and elsewhere in this Prospectus, including statements regarding the
intent, belief or current expectations of the Company with respect to, among
other things, (i) the Company's operating strategies, (ii) the markets for the
Company's products and (iii) the development and release of the Company's
products and services, and other statements contained herein regarding matters
that are not historical facts, constitute "forward-looking statements." Such
forward-looking statements are not guarantees of future performance and involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance and achievements of the Company, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to, those discussed herein under "Risk
Factors."
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RISK FACTORS
In addition to the other information contained in this Prospectus,
investors should carefully consider the following risk factors:
LIMITED OPERATING HISTORY; ANTICIPATED CONTINUING LOSSES
The Company has commercially introduced most of its products and services
since November 1995. Further, the Company's prospects are dependent upon the
commercial release of additional products and services which are in the process
of being developed or tested. Accordingly, the Company has only a limited
operating history upon which an evaluation of its business and prospects can be
based. The Company has incurred net operating losses in each of the last three
fiscal years and expects that it will continue to incur net operating losses at
least through fiscal year 1997. As of June 29, 1996, the Company had an
accumulated deficit of $39.8 million. The limited operating history of the
Company makes the prediction of future results of operations difficult or
impossible, and the Company and its prospects must be considered in light of the
risks, costs and difficulties frequently encountered by companies in their early
stages of development, particularly companies in the new and rapidly evolving
Internet/intranet market. There can be no assurance that the Company can
generate substantial revenue growth, or that any revenue growth that is achieved
can be sustained. Revenue growth that the Company has achieved or may achieve
may not be indicative of future operating results. In addition, the Company has
increased, and plans to increase further, its operating expenses in order to
fund higher levels of research and development, increase its sales and marketing
efforts, develop new distribution channels, broaden its customer support
capabilities and increase its administrative resources in anticipation of future
growth. To the extent that increases in such expenses precede or are not
subsequently followed by increased revenues, the Company's business, results of
operations and financial condition would be materially adversely affected.
Moreover, due to the intense competition in the Company's markets, the Company
must seek to expand all aspects of its business rapidly, which increases the
challenges facing the Company. There can be no assurance that the Company will
achieve or sustain profitability. In addition, in view of recent revenue growth,
the rapidly evolving nature of its business and markets and its short operating
history, the Company believes that period-to-period comparisons of financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company is likely to experience significant fluctuations in quarterly
operating results caused by many factors, including the rate of growth, usage
and acceptance of intranets and the Internet, changes in the demand for the
Company's products and services, introductions or enhancements of products and
services by the Company and its competitors, delays in the introduction or
enhancement of products and services by the Company or its competitors, customer
order deferrals in anticipation of upgrades and new products, changes in the
Company's pricing policies or those of its competitors, changes in the
distribution channels through which products are sold, the Company's ability to
anticipate and effectively adapt to developing markets and rapidly changing
technologies, the Company's ability to attract, retain and motivate qualified
personnel, changes in the mix of products and services sold, changes in the mix
of international and North American revenues, changes in foreign currency
exchange rates and changes in general economic conditions. The Company is
attempting to expand its channels of distribution, and increases in the
Company's revenues will be dependent on its ability to implement its
distribution strategy. There also may be other factors that significantly affect
the Company's quarterly results which are difficult to predict given the
Company's limited operating history, such as seasonality and the timing of
receipt and delivery of orders within a fiscal quarter.
As a software business, the Company expects to operate with little or no
backlog. As a result, quarterly sales and operating results depend generally on
the volume and timing of orders and the ability of the Company to fulfill orders
received within the quarter, all of which are difficult to forecast. The
Company's expense levels are based in part on its expectations as to future
orders and sales, which, given the Company's limited operating history, are also
extremely difficult to predict. The Company's expense levels are to a large
extent fixed, and it will be difficult for the Company to adjust spending in a
timely manner to compensate for
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10
any unexpected revenue shortfall. Accordingly, any significant shortfall in
demand for the Company's products and services in relation to the Company's
expectations would have an immediate adverse impact on the Company's business,
results of operations and financial condition, which could be material.
Due to all of the foregoing factors, the Company believes that its
quarterly operating results are likely to vary significantly in the future.
Therefore, in some future quarter the Company's operating results may fall below
the expectations of securities analysts and investors. In such event, the
trading price of the Company's Class A Common Stock would likely be materially
adversely affected.
UNPROVEN ACCEPTANCE OF THE COMPANY'S PRODUCTS AND SERVICES; DEVELOPING MARKET
Many of the Company's products and services have been introduced only
recently, have yet to be introduced or will be introduced in a substantially
enhanced form. See "Business -- AltaVista Internet Services" and "-- AltaVista
Software Products." The Company's success will depend largely upon the success
of these and future products and services and enhancements. Failure of these
products and services or enhancements to achieve significant market acceptance
and usage would materially adversely affect the Company's business, results of
operations and financial condition. If the Company were unable to successfully
market its current products and services, develop new products and services and
enhancements to current products and services or complete products and services
currently under development, or if such new products and services or
enhancements do not achieve market acceptance, the Company's business, results
of operations and financial condition would be materially adversely affected.
The primary markets for the Company's products and services have only
recently begun to develop and are rapidly evolving. As is typical in the case of
a new and rapidly evolving industry, demand for and market acceptance of
products and services that have been released recently or that are planned for
future release are subject to a high level of uncertainty. If the markets for
the Company's products and services fail to develop, develop more slowly than
expected or become saturated with competitors, or if the Company's products and
services do not achieve market acceptance, the Company's business, results of
operations and financial condition would be materially adversely affected.
DEPENDENCE ON THE INTERNET; UNCERTAIN ADOPTION OF THE INTERNET AS A
MEDIUM OF COMMUNICATIONS AND COMMERCE
Rapid growth of interest in and use of the Internet is a recent phenomenon.
The markets for certain of the Company's products and services are highly
dependent upon the increased acceptance and use of the Internet, particularly
for commercial applications. In addition, the Company plans to distribute
certain products and services electronically over the Internet. Critical issues
concerning the commercial use of the Internet, including security, reliability,
capacity, cost, ease of use, access, quality of service and acceptance of
advertising, remain unresolved and may retard the growth of Internet use for
commercial applications. If widespread commercial use of the Internet does not
develop or if widespread adoption of the Internet causes the performance and
reliability of the Internet to suffer, the Company's business, results of
operations and financial condition would be materially adversely affected.
DEPENDENCE ON THE ADOPTION OF INTRANETS; UNCERTAIN ADOPTION OF INTRANETS
The Company will be substantially dependent on the development of markets
for products that support or increase the functionality of intranets. There can
be no assurance that intranets will be adopted by large numbers of
organizations, that organizations will seek to enable users to collaborate over
intranets or that the Company's products will appeal to organizations that do
so. If intranets are not adopted by large numbers of organizations, or if
organizations adopting intranets do not select the Company's products, the
Company's business, results of operations and financial condition would be
materially adversely affected.
COMPETITION; NEW ENTRANTS
The markets for the Company's products and services are new, intensely
competitive, evolving quickly and subject to rapid technological change. The
Company expects competition to persist, increase and intensify
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in the future as the markets for the Company's products and services continue to
develop and as additional companies enter each of its markets. The Company is
aware of numerous major software developers as well as smaller entrepreneurial
companies that are focusing significant resources on developing and marketing
products and services that will compete with the Company's products and
services. Numerous releases of products and services that compete with those of
the Company can be expected in the near future. Intense price competition may
develop in the Company's markets.
The Company faces competition in the overall Internet/intranet software
market, as well as in each of the market segments where its products and
services compete. The Company has multiple competitors for each of its products
and services. See "Business -- Competition." Many of the Company's current and
potential competitors in each of its markets have longer operating histories and
significantly greater financial, technical and marketing resources, name
recognition and installed product base than the Company. The Company's
competitors include Microsoft Corporation and Netscape Communications
Corporation, each of which provides or has announced an intention to provide a
range of software products based on Internet protocols and to compete in the
broad Internet/intranet software market, as well as in specific market segments
where the Company competes.
The Company does not believe its markets will support the increasing number
of competitors and their products and services. In the past, a number of
software markets have become dominated by one or a small number of suppliers,
and a small number of suppliers or even a single supplier may dominate one or
more of the Company's market segments. The Company's competitors may bundle
their products with other software, including operating system and browser
software, in a manner that may discourage users from purchasing products offered
by the Company. This strategy may be particularly effective for companies with
leading market shares in their respect markets, such as Microsoft and Netscape.
If the Company does not provide products and services that achieve success in
their respective segments in the short term, the Company could suffer an
insurmountable loss in market share and brand name acceptance, which would
result in a material adverse effect on the Company's business, results of
operations and financial condition.
There can be no assurance that the Company will be able to compete
effectively with current and future competitors. See "Business -- Competition."
NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
The emerging market for Internet/intranet products and services is
characterized by rapid technological developments, evolving industry standards
and customer demands, and frequent new product introductions and enhancements.
In addition, many companies are expected to introduce new Internet/intranet
products and services in the near future. The Company's success will depend on
its ability to design, develop, test, market, sell and support new products and
services and enhancements of current products and services on a timely basis in
response to both competitive products and services and evolving demands of the
marketplace. In addition, new products and services and enhancements must remain
compatible with standard platforms and file formats. The Company's ability to
successfully develop and release new products and services and enhancements in a
timely manner is subject to a variety of factors, including its ability to solve
technical problems and test products, competing priorities of the Company, the
availability of development and other resources and other factors outside the
control of the Company. There can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new products and services and enhancements. If the
Company is unable to develop new products and services and enhancements to
existing products and services or to complete products and services currently
under development, or if such new products and services or enhancements do not
achieve market acceptance, the Company's business, results of operations and
financial condition would be materially adversely affected. See
"Business -- AltaVista Software Products" and "-- Product Development."
FUTURE LIQUIDITY NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently anticipates that the net proceeds of the Offering
will be sufficient to meet its anticipated liquidity needs for at least the next
twelve months. Thereafter, the Company may need to raise
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additional funds. The Company may need to raise additional funds sooner in order
to fund more rapid expansion, to develop new or enhanced products or services,
to respond to competitive pressures or to acquire complementary products,
businesses or technologies. If additional funds are raised through the issuance
of equity or securities convertible into equity, the percentage ownership of the
stockholders of the Company will be reduced, stockholders may experience
dilution and such securities may have rights, preferences or privileges senior
to those of the holders of the Common Stock. There can be no assurance that
additional financing will be available on terms favorable to the Company, if at
all. Digital has not made any commitment to supply such funds to the Company. If
adequate funds are not available or are not available on acceptable terms, the
Company may not be able to fund its expansion, take advantage of acquisition
opportunities, develop or enhance products or services or respond to competitive
pressures. Such inability could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
MANAGEMENT OF POTENTIAL GROWTH; NEW MANAGEMENT TEAM
The Company recently has experienced rapid growth in its sales and
operations and in the number and complexity of its products and product
distribution channels. Several key members of the Company's management team,
including its chief executive officer, have recently joined the Company. See
"Management -- Executive Officers and Directors." The Company recently increased
the size of its sales force and has recently established and is continuing to
establish additional distribution channels through third party relationships.
The Company's growth, coupled with the rapid evolution of the Company's markets,
has placed, and is likely to continue to place, significant strains on its
administrative, operational and financial resources and increased demands on its
internal systems, procedures and controls. If the Company is unable to manage
any future growth effectively, the Company's business, results of operations and
financial condition could be materially adversely affected.
DEPENDENCE ON KEY PERSONNEL; RECENT HIRES
The Company's performance is substantially dependent on the performance of
its key technical and senior management personnel, most of whom have worked
together for a relatively short period of time and none of whom is bound by an
employment agreement. The Company also intends to utilize the services of
certain of Digital's technical personnel for certain technical assistance
services. See "Management" and "Relationship with Digital -- Technical
Assistance Agreement." The loss of the services of any of such personnel could
have a material adverse effect on the business, results of operations and
financial condition of the Company. The Company does not maintain "key person"
life insurance policies on any of its employees. The Company's success is highly
dependent on its continuing ability to identify, hire, train, retain and
motivate highly qualified management, technical and sales and marketing
personnel, including recently hired officers and other employees. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to attract, assimilate or retain highly qualified technical and
managerial personnel in the future. The inability to attract and retain the
necessary management, technical and sales and marketing personnel could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business -- Employees" and "Management."
RELIANCE ON EVOLVING DISTRIBUTION CHANNELS
The Company's distribution strategy is to develop multiple distribution
channels, including sales over the Web and sales through Digital's sales
organization, major system integrators, value added resellers, Internet service
providers, telecommunications companies, original equipment manufacturers and
independent software vendors (collectively "channel partners"). To date, the
Company has sold its products principally through Digital's sales force and
Digital's channel partners. The Company intends to develop a large number of new
channel partner relationships. Accordingly, the success of the Company will be
dependent in large part on its ability to develop these additional distribution
relationships and on the performance and success of these third parties, which
are outside the Company's control. The Company's existing channel partner
relationships
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have been established recently, and the Company cannot predict the extent to
which its channel partners will be successful in marketing the Company's
products. The Company generally expects that its agreements with its channel
partners will be terminable by either party without cause. The Company's
inability to attract channel partners, their inability to penetrate their
respective market segments, or the loss of any of the Company's channel
partners, as a result of competitive products offered by other companies or
products developed internally by these channel partners or otherwise, could
materially adversely affect the Company's business, results of operations and
financial condition. See "Business -- Sales and Marketing."
The Company has expanded, and plans to continue expanding, its sales force.
The Company's strategy is to use its sales force principally to develop and
support its relationships with its channel partners. The Company also intends to
use its Web site to demonstrate, market and sell its products. This Web-centric
aspect of the Company's sales and marketing strategy is largely untested. The
inability of the Company to successfully expand its sales force, the inability
of its sales force to successfully establish new channel partner relationships
or the failure to successfully implement a Web-centric sales and marketing
program could materially adversely affect the Company's business, results of
operations and financial condition.
DEPENDENCE ON MIRROR SITES AND INTERNET CONTENT PROVIDERS
The Company intends to license major telecommunications and media companies
to establish a number of AltaVista Internet Search Service mirror sites outside
the United States to improve service response times for users outside the United
States, to facilitate worldwide distribution of the AltaVista Internet Search
Service and increase global awareness of the AltaVista brand. In addition, the
Company is seeking to establish value added links with leading Internet content
providers to allow a content provider's users to use the AltaVista Internet
Search Service without leaving the content provider's Web site. The Company
expects to derive revenue from mirror sites and value added links and to
increase AltaVista brand recognition among their users. To date, the Company has
entered into letters of intent with respect to two mirror sites and has
established value added links with two Internet content providers. See
"Business -- AltaVista Partner-Provided Services." The success of the Company in
establishing the AltaVista brand name and achieving market acceptance of certain
of its products and services is dependent, in part, on its and its partners'
success in establishing and maintaining additional mirror sites and value added
links and on the success of the mirror sites and value added links. The
Company's or its partners' inability to achieve such success would materially
adversely affect the Company's business, results of operations and financial
condition.
RISK OF CAPACITY CONSTRAINTS AND SYSTEM FAILURE RELATING TO THE ALTAVISTA SEARCH
SITES
A key element of the Company's marketing strategy and promotional efforts
is the AltaVista Internet Search Service, which the Company makes available at
no charge to users of the Internet through its Web site and mirror sites.
Accordingly, the performance of the AltaVista Internet Search Service is
critical to the Company's ability to establish the AltaVista brand name and the
value of its products and services. An increase in the volume of searches
conducted using the AltaVista Internet Search Service could strain its capacity,
which could lead to slower response times or complete system failures. In
addition, as the number of Internet users and of Web pages and other Internet
content increases, there can be no assurance that the AltaVista Internet Search
Service will be able to be scaled appropriately. The Company has made certain
performance and support commitments under its mirror site and value added link
agreements, and, accordingly, any failure by the Company to meet these
commitments could result in the termination of, or exposure to damages under,
one or more of these agreements. The Company is also dependent on hardware
suppliers, particularly Digital, for prompt delivery, installation and service
of servers and other equipment used to operate the AltaVista Internet Search
Service and for Internet access. The servers for the Company's Web site, located
in Palo Alto, California, and for the mirror sites are vulnerable to damage from
fire, earthquakes, power loss, telecommunications failures and similar events.
Despite the implementation of network security measures by the Company and
mirror site providers, their servers are also vulnerable to computer viruses,
break-ins and similar disruptive problems. Computer viruses, break-ins or other
problems caused by third parties could lead to interruptions, delays or
cessation in service in the AltaVista Internet Search Service. Any loss of
availability, decrease in response time or other deterioration in performance of
the AltaVista Internet
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Search Service at the Company's Web site or any mirror site could affect the
success of the AltaVista Internet Search Service, which could materially
adversely affect the Company's business, results of operations and financial
condition.
RISK OF PRODUCT DEFECTS; PRODUCT LIABILITY
As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released. There
can be no assurance that, despite testing by the Company and testing and use by
current and potential customers, errors will not be found in new products after
commencement of commercial shipments or, if discovered, that the Company will be
able to successfully correct such errors in a timely manner or at all. Computer
break-ins and other disruptions, if caused or permitted by errors or failures in
the Company's security products, would jeopardize the security of information
stored in and transmitted through or by the computer systems of the Company's
customers, which may result in significant liability to the Company and deter
potential customers. The occurrence of errors and failures in the Company's
products could result in loss of or delay in market acceptance of the Company's
products, and alleviating such errors and failures could require significant
expenditure of capital and resources by the Company. The consequences of such
errors and failures could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company's license
agreements with its customers are expected to typically contain provisions
designed to limit the Company's exposure to potential product liability claims.
It is possible, however, that the limitation of liability provisions contained
in the Company's license agreements may not be effective under the laws of
certain jurisdictions. A product liability claim brought against the Company
could have a material adverse effect on the Company's business, results of
operations and financial condition.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The Company's success depends significantly upon proprietary technology.
The Company relies on a combination of patent, copyright, trademark and trade
secret laws, non-disclosure agreements and other contractual provisions to
establish, maintain and protect its proprietary rights, all of which afford only
limited protection. Digital has several pending U.S. patent applications
relating to the Company's products. The Company has acquired certain
non-exclusive license rights related to these patents from Digital. See
"Relationship with Digital -- Asset Transfer and License Agreement." There can
be no assurance that patents will issue from these pending applications or from
any future applications or that, if issued, any claims will be sufficiently
broad to protect the Company's rights in such technology. In addition, there can
be no assurance that any patents that may be issued will not be challenged,
invalidated or circumvented, or that any rights granted thereunder would provide
protection of the Company's proprietary rights. The Company may not prevent
Digital from granting other licenses under such patents, will not be able to
realize licensing revenues from any such licenses, cannot require Digital to
enforce any such patents against competitors of the Company and cannot control
any enforcement proceedings Digital undertakes. Digital may choose not to
enforce these patents because of its own policies and business relationships
even though enforcement would be in the best interests of the Company. Also,
Digital has cross licensing arrangements with certain computer hardware and
software companies, including Microsoft. The patent license rights granted to
the Company by Digital are subject to such cross licenses, and therefore both
the Company and Digital will be unable to enforce these patents against any of
such cross licensees. In addition, patented technology developed by the Company
in the future may become subject to such cross licenses. Failure of any patents
to protect the Company's rights in technology and such cross licensing
arrangements may make it easier for the Company's competitors to offer
equivalent or superior technology.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or
services or to obtain and use information that the Company regards as
proprietary. Third parties may also independently develop similar technology
without breach of the Company's proprietary rights. In addition, the laws of
some foreign countries do not protect proprietary rights to as great an extent
as do the laws of the United States. In addition, some of the Company's products
are licensed under "shrink wrap" license agreements or license agreements
distributed over the Web that are not signed by
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licensees and therefore may not be binding under the laws of certain
jurisdictions. The Company's plan to distribute certain software over the Web
and allow potential customers to electronically download its software for a free
evaluation period would make the Company's software more susceptible to
unauthorized copying and use.
The Company has applied for U.S. and foreign registrations of AltaVista as
a trademark and a service mark and will continue to evaluate registration of
additional trademarks and service marks as appropriate. The Company is aware
that certain third parties are using the name "AltaVista" as a trademark or as
part of their Internet address. No assurance can be given that such parties will
not challenge the right of the Company to use AltaVista as a trademark, service
mark or as part of its Internet address. See "Business -- Intellectual Property
Rights."
Although the Company does not believe it is infringing the intellectual
property rights of others, claims of infringement are becoming increasingly
common as the software industry develops and legal protections, including
patents, are applied to software products.
Litigation may be necessary to protect the Company's proprietary technology
and rights, and third parties may assert infringement claims against the Company
with respect to their proprietary rights. Any claims or litigation can be
time-consuming and expensive regardless of their merit. Infringement claims
against the Company can cause product release delays, require the Company to
redesign its products or require the Company to enter into royalty or license
agreements, which agreements may not be available on terms acceptable to the
Company or at all.
See "Business -- Intellectual Property Rights."
POSSIBLE REGULATION OF THE INTERNET; LIABILITY FOR INFORMATION RETRIEVED FROM
THE INTERNET
Other than laws and regulations applicable to businesses generally, there
are currently few laws or regulations expressly applicable to access and
commerce on the Internet. Due to the increased popularity and use of the
Internet, it is possible that new laws or regulations may be adopted with
respect to the Internet relating to issues such as user privacy, pricing and
characteristics and quality of products and services. The adoption of any such
laws or regulations may retard the growth of use of the Internet, which could
adversely affect demand for the Company's products and services. Such laws or
regulations also could result in significant additional costs and technological
challenges in complying with any mandatory requirements. In addition, claims
have been brought, and sometimes successfully pressed, against on-line services,
for defamation, negligence, copyright or trademark infringement or under other
theories with respect to materials disseminated through such services. The
Company maintains a Web site to which users can upload materials, and there can
be no assurance that the Company will not be subject to similar claims.
EFFECT OF GOVERNMENT REGULATION OF TECHNOLOGY EXPORTS
The Company's international sales and operations, especially with respect
to AltaVista Tunnel and AltaVista Firewall, may be subject to risks such as the
imposition of governmental controls, export license requirements, restrictions
on the export of critical technology, trade restrictions and changes in tariffs.
In particular, because of current government controls on the exportation of
encryption technology, the Company is unable to export its most robust security
products. As a result, competitors outside the United States that face less
stringent controls on their products may be able to compete more effectively
than the Company in the global network security market. There can be no
assurance that these factors will not have a material adverse effect on the
Company's business, results of operations and financial condition.
RISKS ASSOCIATED WITH GLOBAL OPERATIONS
The Company expects to derive a substantial portion of its revenues from
customers outside the United States. The Company intends to expand its
operations outside of the United States and enter additional international
markets, which will require significant management attention and financial
resources. The Company's ability to expand its products and services
internationally is limited by the general acceptance of
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the Internet and intranets in other countries. The Company expects to commit
additional time and development resources to customizing its products and
services for selected international markets and to developing international
sales and support channels. There can be no assurance that such efforts will be
successful.
International operations are subject to a number of risks, including costs
of customizing products and services for international markets, dependence on
independent resellers, multiple and conflicting regulations regarding
communications, use of data and control of Internet access, longer payment
cycles, unexpected changes in regulatory requirements, import and export
restrictions and tariffs, difficulties in staffing and managing international
operations, greater difficulty or delay in accounts receivable collection,
potentially adverse tax consequences, the burden of complying with a variety of
laws outside the United States, the impact of possible recessionary environments
in economies outside the United States, and political and economic instability.
In addition, the Company's ability to expand its business in certain countries
will require the modification of its products to operate compatibly with
different hardware and software standards. Furthermore, the Company expects that
its export sales will be denominated predominantly in United States dollars. An
increase in the value of the United States dollar relative to other currencies
could make the Company's products and services more expensive and, therefore,
potentially less competitive in international markets. As the Company increases
its international sales, its total revenue may also be affected to a greater
extent by seasonal fluctuations resulting from lower sales that typically occur
during the summer months in Europe and other parts of the world.
CONTROL BY DIGITAL
Ownership of Stock
Digital is currently the only stockholder of the Company. Upon consummation
of the Offering, Digital will own, directly or indirectly, all of the
outstanding Class B Common Stock of the Company (which Class B Common Stock is
entitled, with certain exceptions, to three votes per share on any matter
submitted to a vote of the Company's stockholders). The Class B Common Stock
will represent approximately % of the combined voting power of all classes of
voting stock ( % if the Underwriters' over-allotment options are exercised in
full) and thus will be able to direct the election of all of the members of the
Company's Board of Directors, change the size and composition of the Board of
Directors and exercise a controlling influence over the business and affairs of
the Company, including determinations with respect to mergers or other business
combinations, acquisitions or dispositions of assets, incurrence of
indebtedness, issuance of additional Common Stock or other equity securities and
payment of dividends. Similarly, Digital will have the power to determine
matters submitted to a vote of the Company's stockholders without the consent of
the Company's other stockholders, will have the power to prevent a change of
control of the Company and could take other actions that might be favorable to
Digital. In addition, the grant pursuant to employee benefit plans of Common
Stock to, or the acquisition of Common Stock upon the exercise of stock options
held by, employees of the Company would reduce further the percentage ownership
and voting interest in the Company of the public stockholders of the Company.
Digital has advised the Company that its current intent is to continue to
hold all of the Class B Common Stock. However, Digital has no agreement with the
Company not to sell or distribute such shares, and, except for the restrictions
in the Underwriting Agreements set forth below, there can be no assurance
concerning the period of time during which Digital will maintain its beneficial
ownership of Common Stock. Pursuant to the Underwriting Agreements, Digital has
agreed, subject to certain exceptions, not to sell or otherwise dispose of,
directly or indirectly, any shares of Common Stock (or any security convertible
into or exchangeable or exercisable for Common Stock) owned by it for a period
of 180 days after the date of this Prospectus without the prior written consent
of Lehman Brothers Inc. The Company has agreed, at the request of Digital, to
use its best efforts to effect the future registration under applicable federal
and state securities laws of any of the Class B Common Stock held by Digital.
The Code requires beneficial ownership by Digital of at least 80% of the
total voting power and value of the outstanding Common Stock of the Company in
order to continue to include the Company in its
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consolidated group for federal income tax purposes. In addition, Digital must
beneficially own at least 80% of the total voting power and 80% of each class of
nonvoting capital stock of the Company in order to be able to effect a tax-free
spin-off of the Company under the Code. Because Digital may seek to maintain its
beneficial ownership percentage of the Company for tax planning purposes or
otherwise and may not desire to acquire additional shares of Common Stock in
connection with a future issuance of shares by the Company, the Company may be
constrained in its ability to raise equity capital in the future or to issue
Common Stock or other equity securities in connection with acquisitions.
Corporate Agreement
The terms of a corporate agreement between Digital and the Company
restrict, for so long as Digital maintains beneficial ownership of a majority of
the number of outstanding shares of Common Stock, the Company's ability to act
in any way which may reasonably be anticipated to result in a contravention by
Digital of (i) Digital's corporate charter or by-laws, (ii) any credit agreement
or other material instrument binding upon Digital, (iii) any judgment, order or
decree of any governmental body having jurisdiction over Digital or (iv) any
provision of applicable law or regulation. See "Relationship with
Digital -- Corporate Agreement."
Control of Tax Matters; Tax and ERISA Liability
By virtue of its controlling beneficial ownership and the terms of the
tax-sharing agreement entered into between the Company and Digital, Digital will
effectively control all of the Company's tax decisions. Under the tax-sharing
agreement, Digital will have sole authority to respond to and conduct all tax
proceedings (including tax audits) relating to the Company, to file all returns
on behalf of the Company and to determine the amount of the Company's liability
to (or entitlement to payment from) Digital under the tax-sharing agreement. See
"Relationship with Digital -- Tax-Sharing Agreement." Digital may choose to
contest, compromise or settle any adjustment or deficiency proposed by the
relevant taxing authority in a manner that may be beneficial to Digital and
detrimental to the Company.
Each member of a consolidated group for federal income tax purposes is
jointly and severally liable for the federal income tax liability of each other
member of the consolidated group. In addition, under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and federal income tax law,
each member of the controlled group is jointly and severally liable for funding
and termination liabilities of tax qualified defined benefit retirement plans as
well as certain plan taxes. Accordingly, during the period in which the Company
is included in Digital's consolidated or controlled group, the Company could be
liable if such liability or tax is incurred, and not discharged, by any other
member of Digital's consolidated or controlled group.
Intercompany Agreements Not Subject to Arm's-Length Negotiations
Digital or one or more of its subsidiaries and the Company have entered
into certain intercompany agreements, including agreements pursuant to which
Digital or one or more of its subsidiaries will provide various services to the
Company that may be material to the conduct of the Company's business. With
respect to matters covered by the services agreement, the relationship between
Digital and the Company is intended to continue in a manner generally consistent
with past practices. See "Relationship with Digital -- Services Agreement."
Because the Company is a wholly owned subsidiary of Digital, none of such
intercompany agreements resulted from arm's-length negotiations. These
agreements may include terms and conditions that may be more or less favorable
to the Company than terms contained in similar agreements negotiated with third
parties. For instance, the prices charged to the Company for services provided
under the services agreement may be higher or lower than prices that may be
charged by third parties.
POTENTIAL CONFLICTS OF INTEREST; LIMITATIONS ON LIABILITY
Various conflicts of interest between the Company and Digital could arise
following consummation of the Offering, and persons serving as directors,
officers and employees of both the Company and Digital may have
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conflicting duties to each. The Company's Board of Directors currently consists
of one member. Prior to the consummation of the Offering, the Company
anticipates that four additional directors will be added to the Board of
Directors who will be officers or employees of Digital. Ownership interests of
directors or officers of the Company in common stock of Digital could also
create or appear to create potential conflicts of interest when directors and
officers are faced with decisions that could have different implications for the
Company and Digital. In addition, for financial reporting purposes, the
Company's financial results will be included in Digital's consolidated financial
statements. The members of the Board of Directors of the Company who are
affiliated with Digital will consider not only the short-term and long-term
impact of financial and operating decisions on the Company, but also the impact
of such decisions on Digital's consolidated financial results. In some
instances, the impact of such decisions could be disadvantageous to the Company
while advantageous to Digital, or vice versa.
The Company's Amended and Restated Certificate of Incorporation includes
provisions relating to competition by Digital with the Company, allocations of
corporate opportunities, transactions with interested parties and intercompany
agreements and provisions limiting the liability of certain persons. See
"Description of Capital Stock -- Certain Certificate of Incorporation and By-law
Provisions." Certain of such provisions in the Company's Amended and Restated
Certificate of Incorporation were adopted in light of the fact that the Company
and Digital are both engaged in the software business and intend to enter into
contracts and other arrangements with each other after the Offering. The
enforceability under Delaware corporate law of such provisions which eliminate
certain rights that might have been available to stockholders under Delaware law
had such provisions not been included has not been established and, due to the
absence of relevant judicial authority, counsel to the Company is not able to
deliver an opinion as to the enforceability of such provisions. The Company's
Amended and Restated Certificate of Incorporation provides that any person
purchasing or acquiring an interest in shares of capital stock of the Company,
including the Underwriters, shall be deemed to have consented to the provisions
in the Amended and Restated Certificate of Incorporation relating to competition
by Digital with the Company, conflicts of interest, corporate opportunities and
intercompany agreements, and such consent may restrict such person's ability to
challenge transactions carried out in compliance with such provisions. The
Company intends to disclose the existence of such provisions in its Annual
Reports on Form 10-K as well as in certain other filings with the Securities and
Exchange Commission (the "Commission"). The corporate charter of Digital does
not include comparable provisions and, as a result, persons who are directors
and/or officers of the Company and who are also directors and/or officers of
Digital may choose to take action in reliance on such provisions rather than act
in a manner that might be favorable to the Company but adverse to Digital.
Competition with Digital; Corporate Opportunities
Digital is one of the largest providers of computer hardware, software and
services in the world. Digital is not restricted in any manner from competing
with the Company, and there can be no assurance that Digital will not expand,
through development of new lines of products or businesses, acquisition or
otherwise, its operations in a way that might compete with the Company's
business. The Company's Amended and Restated Certificate of Incorporation
provides that Digital shall not have a duty to refrain from engaging directly or
indirectly in the same or similar business activities or lines of business as
the Company and that neither Digital nor any officer or director thereof shall
be liable to the Company or its stockholders for breach of any fiduciary duty by
reason of any such actions of Digital or any such person's participation
therein.
The Company's Amended and Restated Certificate of Incorporation also
provides that, in the event that Digital acquires knowledge of a potential
transaction or matter that may be a corporate opportunity for both Digital and
the Company, Digital, its officers and its directors shall have no duty to
communicate or offer such corporate opportunity to the Company. In addition,
directors, officers or employees of the Company who are also directors, officers
or employees of Digital shall be entitled to offer any corporate opportunity for
the Company or Digital (whether such potential transaction or matter is proposed
by a third-party or is conceived of by such director, officer or employee of the
Company) to the Company or Digital as such director, officer or employee deems
appropriate under the circumstances, in his or her sole discretion.
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The Company's Amended and Restated Certificate of Incorporation further
provides that Digital, its officers and its directors shall not be liable to the
Company or its stockholders for breach of any fiduciary duty as a stockholder of
the Company or controlling person of a stockholder by reason of the fact that
Digital pursues or acquires such corporate opportunity for itself, directs such
corporate opportunity to another person or entity, or does not communicate
information regarding, or offer, such corporate opportunity to the Company. In
addition, directors, officers or employees of the Company who are also
directors, officers or employees of Digital shall be not be liable to the
Company or its stockholders for breach of any fiduciary duty or duty of loyalty
or failure to act in (or not opposed to) the best interests of the Company if
such director, officer or employee offers any corporate opportunity (whether
such opportunity is proposed by a third-party or is conceived of by such
director, officer or employee of the Company) to Digital and not the Company or
does not communicate information regarding such opportunity to the Company.
Transactions with Interested Parties
Directors and officers of the Company, Digital or any Related Entity (as
such terms are defined below) may be required to enter into, vote to authorize
or take any action under certain agreements between the Company and Digital, any
Related Entity or any individual director or officer. The Company's Amended and
Restated Certificate of Incorporation provides that no contract, agreement,
arrangement or transaction (or any amendment, modification or termination
thereof) between the Company and Digital, any Related Entity or any director or
officer of the Company, Digital or any Related Entity, shall be void or voidable
solely for the reason that Digital, a Related Entity or any one or more of the
officers or directors of the Company, Digital or any Related Entity are parties
thereto, or solely because any such directors or officers are present at,
participate in or vote with respect to the authorization of such contract,
agreement, arrangement or transaction (or any amendment, modification or
termination thereof). No vote cast or other action taken by any person in his or
her capacity as an officer, director or other representative of Digital or any
Related Entity shall constitute an action of or the exercise of a right by or a
consent of Digital or such Related Entity for the purpose of any such agreement
or contract.
The Company's Amended and Restated Certificate of Incorporation provides
that neither Digital nor any officer or director thereof or of any Related
Entity shall be liable to the Company or its stockholders for breach of any
fiduciary duty or duty of loyalty or failure to act in (or not opposed to) the
best interests of the Company or the derivation of any improper personal benefit
by reason of the fact that Digital or an officer or director thereof or of such
Related Entity in good faith takes any action or exercises any rights or gives
or withholds any consent in connection with any agreement or contract between
Digital or such Related Entity and the Company.
For the purpose of the foregoing, the "Company" and "Digital" include all
corporations and other entities in which the Company or Digital, as the case may
be, owns 50% or more of the outstanding voting stock, and "Related Entity"
refers to one or more corporations or other entities in which one or more of the
directors of the Company have a direct or indirect financial interest.
The provisions described above are applicable to the intercompany
agreements between the Company and Digital. See "Relationship with Digital."
Limitations on Personal Liability, Including for Gross Negligence
Under the Company's Amended and Restated Certificate of Incorporation, the
personal monetary liability of the directors of the Company for breach of their
fiduciary duty of care, including actions involving gross negligence, are
eliminated to the fullest extent permitted under Delaware law. See "Description
of Capital Stock -- Certain Certificate of Incorporation and By-law
Provisions -- Limitations on Directors' Liability."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Class A Common Stock in the Offering will experience an
immediate dilution of $ per share in the net tangible book value of
their Class A Common Stock from the assumed initial
18
20
public offering price of $ per share. Prior to consummation of the
Offering, the Company's pro forma net tangible book value per share of Common
Stock will be $ , whereas upon consummation of the Offering, based on
such assumed price, it will be $ . This will result in an increase in
net tangible book value of $ per share of Class B Common Stock that
will be received by Digital attributable to the Offering.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the shares of
Class A Common Stock, and there can be no assurance that an active public market
for the shares of Class A Common Stock will develop or be sustained after the
Offering. The initial public offering price will be determined by negotiation
between the Company and 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 shares of Class A
Common Stock may be highly volatile and could be subject to wide fluctuations in
response to variations in operating results, announcements of technological
innovations or new products or services by the Company or its competitors,
changes in financial estimates by securities analysts or other events or
factors. In addition, the financial markets have experienced significant price
and volume fluctuations that have particularly affected the market prices of
equity securities of many high technology companies and that often have been
unrelated to the operating performance of such companies or have resulted from
the failure of the operating results of such companies to meet market
expectations in a particular quarter. Broad market fluctuations or any failure
of the Company's operating results in a particular quarter to meet market
expectations may adversely affect the market price of the shares of Class A
Common Stock. 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, results of operations and
financial condition.
POSSIBLE FUTURE SALES OF COMMON STOCK BY DIGITAL
Subject to applicable federal securities laws and the restrictions set
forth below in the Underwriting Agreements, Digital may sell any and all of the
shares of Common Stock beneficially owned by it or distribute any or all of the
shares of Common Stock to its stockholders. Pursuant to the Underwriting
Agreements, Digital has agreed, subject to certain exceptions, not to sell or
otherwise dispose of, directly or indirectly, any shares of Common Stock (or any
security convertible into or exchangeable or exercisable for Common Stock) for a
period of 180 days after the date of this Prospectus without the prior written
consent of Lehman Brothers Inc. Sales or distributions by Digital of substantial
amounts of Common Stock in the public market or to its stockholders could
adversely affect prevailing market prices for the Class A Common Stock. See
"Relationship with Digital" and "Shares Eligible for Future Sale."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Class A Common Stock offered by the Company hereby are estimated to be
$ ($ if the Underwriters' over-allotment options are exercised
in full) assuming an initial public offering price of $ per share. The
Company expects to use the net proceeds for working capital and other general
corporate purposes, including product development, expansion of the Company's
sales and marketing efforts and capital expenditures. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." In
addition, the Company may make one or more acquisitions of complementary
technologies, products or businesses that broaden or enhance the Company's
current products and services. No such acquisitions are being negotiated as of
the date of this Prospectus, and no portion of the net proceeds has been
allocated for any specific acquisition. Pending such uses, the net proceeds of
the Offering will be invested in interest-bearing securities, either directly by
the Company or through Digital's cash management system.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain any future earnings to fund the development and
growth of its business.
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CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company as of June 29, 1996 which is included in the AltaVista Internet Software
Products Financial Statements included elsewhere in this Prospectus, (ii) the
capitalization of the Company as of June 29, 1996 on a pro forma basis to
reflect an amendment to the Company's Certificate of Incorporation prior to the
consummation of the Offering to increase the number of authorized shares and to
reflect the reclassification of 1,000 shares of common stock of the Company held
by Digital into shares of Class B Common Stock, and (iii) the pro
forma capitalization of the Company as of June 29, 1996, as adjusted to reflect
the issuance of the shares of Class A Common Stock offered hereby at an assumed
initial offering price of $ per share (after deduction of the estimated
underwriting discounts and commissions and offering expenses payable by the
Company). This table should be read in conjunction with the financial statements
and related notes appearing elsewhere in this Prospectus.
AS OF JUNE 29, 1996
--------------------------------------
AS
HISTORICAL PRO FORMA ADJUSTED
----------- --------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
Parent's investment.......................................... $ 45,322 -- --
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; none issued and outstanding................. -- -- --
Class A common stock, $0.01 par value; 50,000,000 shares
authorized; shares issued and outstanding(1)..... --
Class B common stock, $0.01 par value; 50,000,000 shares
authorized; shares issued and outstanding........ --
Additional paid-in capital................................. --
Retained deficit........................................... (39,794)
------- ------ ------
Total stockholders' equity/net parent's
investment....................................... $ 5,528 $ 5,529 $
======= ====== ======
- ---------------
(1) Excludes an aggregate of shares of Class A Common Stock reserved
for issuance under the Company's stock-based compensation plans. Options to
purchase an aggregate of shares of Class A Common Stock have been
granted thereunder as of the date of this Prospectus with an exercise price
equal to the initial public offering price set forth on the cover page of
this Prospectus. See "Management -- Compensation of Executive Officers,"
Note H to the AltaVista Internet Software Products Financial Statements and
Note 2 to the AltaVista Internet Software, Inc. Balance Sheet.
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DILUTION
The pro forma net tangible book value of the Company as of June 29, 1996
would have been $ , or $ per share of Common Stock, based upon
shares of Class B Common Stock outstanding. Pro forma net tangible book
value per share is equal to the Company's total tangible assets less total
liabilities, divided by the total number of shares of Common Stock outstanding
on a pro forma basis. After giving effect to the sale of the shares of
Class A Common Stock offered by the Company hereby at an assumed initial public
offering price per share of $ (after deduction of the estimated
underwriting discounts and commissions and offering expenses payable by the
Company), the pro forma net tangible book value of the Company as of June 29,
1996 would have been $ , or $ per share of Common Stock. This
represents an immediate increase in such pro forma net tangible book value of
$ per share of Class B Common Stock to Digital and an immediate
dilution of $ per share to new investors purchasing shares in the
Offering. The following table illustrates this per share dilution:
Assumed initial public offering price per share............... $
Pro forma net tangible book value per share before the
Offering................................................. $
Increase per share attributable to new investors............
----------
Pro forma net tangible book value per share after the
Offering....................................................
----------
Dilution per share to new investors........................... $
==========
The following table summarizes, on a pro forma basis as of June 29, 1996,
the differences between the number of shares held by, the voting rights of, the
total investment in the Company of, and the average cost per share paid by
Digital and the new investors purchasing shares of Class A Common Stock in the
Offering, assuming an initial public offering price of $ per share:
SHARES HELD TOTAL INVESTMENT
----------------------------------------- ------------------------------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF AVERAGE COST
NUMBER THE COMPANY VOTING RIGHTS AMOUNT INVESTMENT PER SHARE
------- ------------- ---------------- ---------- ------------- ------------
Digital............... % % $ (1) % $
New investors......... $
Total....... 100.0% 100.0% $ 100.0%
====== ====== ======
- ---------------
(1) Represents the book value of the net assets transferred by Digital to the
Company in exchange for shares of Class B Common Stock.
The foregoing tables assume no exercise of the Underwriters' over-allotment
options or any outstanding stock options, all of which have an exercise price
equal to the initial public offering price. See "Management -- Compensation of
Executive Officers" for information regarding stock options.
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SELECTED FINANCIAL DATA
The selected financial data presented below for each of the three fiscal
years in the period ended June 29, 1996 have been derived from the AltaVista
Internet Software Products Financial Statements, which have been audited by
Coopers & Lybrand L.L.P., independent accountants. This data should be read in
conjunction with the financial statements and the notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information appearing elsewhere in this Prospectus.
FISCAL YEAR ENDED
--------------------------------
JULY 2, JULY 1, JUNE 29,
1994 1995 1996
------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
STATEMENT OF OPERATIONS DATA:
Total operating revenues..................................... $ 298 $ 964 $ 3,632
------- ------- --------
Costs and expenses:
Cost of operating revenues................................. 47 374 1,110
Research and engineering expenses.......................... 2,235 4,516 15,352
Selling and marketing expenses............................. 50 248 10,522
General and administrative expenses........................ 684 1,062 6,516
------- ------- --------
Total costs and expenses.............................. 3,016 6,200 33,500
Operating loss............................................. (2,718) (5,236) (29,868)
------- ------- --------
Net loss..................................................... $(2,718) $(5,236) $(29,868)
======= ======= ========
Unaudited pro forma net loss per common share(1)............. $
========
JULY 2, JULY 1, JUNE 29,
1994 1995 1996
------- ------- --------
BALANCE SHEET DATA:
Working capital.............................................. $ 189 $ (16) $ (925)
Total assets................................................. 1,125 888 7,508
Net parent's investment...................................... 1,104 629 5,528
- ---------------
(1) Historical earnings per share data is omitted from the statement of
operations data because it is not meaningful. Unaudited pro forma net loss
per common share is calculated based on net loss divided by the number of
shares of Class B Common Stock to be issued to Digital prior to the
consummation of the Offering.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
AltaVista Internet Software, Inc. was formed on June 28, 1996 to develop
and market software products for use in the emerging integrated
Internet/intranet business environment. The Company's products were developed
within various business units of Digital and have been managed since January
1996 within Digital's Internet Software Business Unit. The AltaVista Internet
Software Products Financial Statements included in this Prospectus (the
"Products Financial Statements") have been carved out of Digital's consolidated
financial statements and reflect the actual revenues from and direct costs of
the Company's products, as well as an allocation from Digital of all related
support and overhead costs. The Products Financial Statements may not reflect
the operating results of a stand-alone company and should not be relied upon as
indicative of future results. The Company and its prospects should be considered
in light of the risks, expenses and difficulties frequently encountered by
companies in the new and rapidly evolving markets for Internet/intranet products
and services. See "Risk Factors."
The Company's total operating revenues have increased in each of the last
three fiscal years as a result of the successful introduction of an expanding
portfolio of Internet/intranet products. Due primarily to investments in
research and engineering and sales and marketing, the Company has experienced
operating losses in each of its last three fiscal years. The operations of the
Company have been funded by Digital. Such funding is reflected in the Products
Financial Statements as parent's investment. Future operating results will
depend on many factors, including demand for the Company's products and
services, the introduction of new products and services by the Company and its
competitors, the enhancement of existing products and services, the growth of
the Internet/intranet market and the ability of the Company to develop the
required sales and marketing infrastructure. There can be no assurance that the
Company will achieve or sustain profitability.
The Company first recognized revenues from software products introduced
during the last three fiscal years as follows: AltaVista Directory in the third
quarter of fiscal 1994; AltaVista Firewall in the fourth quarter of fiscal 1995;
and AltaVista Tunnel and AltaVista Forum in the second quarter of fiscal 1996.
These products were primarily packaged with Digital's hardware systems and were
priced to promote sales of Digital's hardware and services. Following the
Offering, the Company will sell its products and services to Digital (both as an
end-user and a reseller) on commercial terms. The Company is expanding its
software product portfolio; the Company introduced AltaVista Mail in the fourth
quarter of fiscal 1996 and expects to introduce AltaVista Search Private
eXtensions beginning in September 1996. In addition, the Company has created
additional sources of revenue by expanding its AltaVista Internet Search Service
offerings to include licensed mirror sites, value added links and web custom
crawls.
Warranty and maintenance support revenues have not been included in the
Products Financial Statements because warranty and maintenance support have
historically been provided by Digital through a separate business unit.
Following the Offering, the Company expects to offer warranty and maintenance
support to its customers either directly or through authorized service
providers, including Digital. Authorized service providers that sell maintenance
service contracts pay a commission to the Company.
Prior to fiscal 1996, no equipment was dedicated to the business conducted
by the Company or is recorded on the balance sheet as of July 1, 1995 contained
in the Products Financial Statements. However, a rental charge for the use of
equipment was included in the statements of operations. During fiscal 1996,
equipment became fully dedicated to the business conducted by the Company, and
assets with a net book value of $3,989,000 were transferred to the business. The
business also acquired new equipment from Digital which was recorded at cost.
Cost of operating revenues includes the cost of software media,
documentation and distribution, and the amortization of certain capitalized
software costs. Following the Offering, warranty and maintenance support costs
will be included in cost of operating revenues when such services are provided
by the Company. Beginning in fiscal 1997, cost of operating revenues also will
include costs incurred in support of mirror sites, value added links and web
custom crawls.
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Research and engineering expenses consist primarily of compensation and
consulting fees paid to software engineers to support new product and technology
development and new version releases. Research and engineering expenses also
include rental charges and depreciation expense associated with equipment used
in research and engineering and allocations from Digital of overhead costs.
Selling and marketing expenses consist primarily of compensation paid to
sales employees, advertising, new product introduction programs and promotional
costs associated with the launch of the AltaVista brand. Selling and marketing
expenses also include rental charges and, in fiscal 1996, depreciation expense
associated with equipment used in selling and marketing and allocations from
Digital of overhead costs. Beginning in fiscal 1996, selling and marketing
expenses include the cost of the Company's free Web promotional sites that
showcase the AltaVista Internet Search Service and the AltaVista software
technologies and products. The Company expects to significantly expand its sales
force in fiscal 1997 to support the development of additional sales channels.
Marketing efforts also will be increased to include the trial use of software,
commercial transactions on the Web and programs to increase AltaVista brand
awareness.
General and administrative expenses consist primarily of compensation paid
to administrative, executive, finance and human resource employees. General and
administrative expenses also include rental charges and, in fiscal 1996,
depreciation expense associated with equipment used in administrative activities
and allocations from Digital of overhead costs. Following the Offering, Digital
will provide certain administrative support services pursuant to certain
intercompany agreements, the costs of which are expected to be consistent with
Digital's historical cost allocation methodologies. See "Relationship with
Digital."
RESULTS OF OPERATIONS
Total Operating Revenues
Total operating revenues were $3.6 million in fiscal 1996, $1.0 million in
fiscal 1995 and $0.3 million in fiscal 1994. The increase in 1996 was due
principally to increased demand for AltaVista Firewall and, to a lesser extent,
the introduction of AltaVista Forum and AltaVista Tunnel. The increase in 1995
was due principally to increased demand for AltaVista Directory and, to a lesser
extent, the introduction of AltaVista Firewall. Fiscal 1994 revenues consisted
solely of sales of AltaVista Directory. All revenues were generated via Digital
sales channels.
Non-U.S. revenues (sales to customers outside the United States) accounted
for 64% of total operating revenues in fiscal 1996, down from 69% and up from
63% in fiscal 1995 and 1994, respectively. See Note C to Products Financial
Statements.
Cost of Operating Revenues
Cost of operating revenues were $1.1 million in fiscal 1996, $0.4 million
in fiscal 1995 and nominal in fiscal 1994. The increase in fiscal 1996 was
primarily the result of increased sales of AltaVista Firewall, the cost of
certain versions of which included the cost of third party software incorporated
therein, and increased amortization of capitalized software costs. The increase
in fiscal 1995 was primarily the result of the amortization of capitalized
software costs.
Research and Engineering Expenses
Research and engineering expenses were $15.4 million in fiscal 1996, $4.5
million in fiscal 1995 and $2.2 million in fiscal 1994. The increase in research
and engineering expenses reflects principally the development of new products
and technologies.
Selling and Marketing Expenses
Selling and marketing expenses were $10.5 million in fiscal 1996, $0.2
million in fiscal 1995 and nominal in fiscal 1994. In fiscal 1996, selling and
marketing expenses increased significantly primarily due to new software and
version introductions and the approximately $4.0 million of costs associated
with the launch of the AltaVista brand in the fourth quarter of fiscal 1996.
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General and Administrative Expenses
General and administrative expenses were $6.5 million in fiscal 1996, $1.1
million in fiscal 1995 and $0.7 million in fiscal 1994. The increase in fiscal
1996 was primarily attributable to costs incurred beginning in the second
quarter to organize the business of the Company into a separate operating unit
with separate administrative functions; in addition, a fourth quarter accrual of
$0.4 million was recorded for employee termination benefits. The fiscal 1995 and
1994 costs represent allocations from Digital for general and administrative
support. The increase in fiscal 1995 was primarily due to increased support
costs for products in development.
Operating Loss
Due to the foregoing factors, the Company experienced operating losses of
$29.9 million in fiscal 1996, $5.2 million in fiscal 1995 and $2.7 million in
fiscal 1994.
Income Taxes
The operations of the business are included in Digital's consolidated U.S.
tax returns. No income tax provision has been included in the Products Financial
Statements because net losses were realized throughout the reporting period. The
Company has entered into a tax-sharing agreement with Digital effective upon the
consummation of the Offering. See "Relationship with Digital -- Tax-Sharing
Agreement."
Net Loss
Due to the foregoing factors, the Company experienced net losses of $29.9
million in fiscal 1996, $5.2 million in fiscal 1995 and $2.7 million in fiscal
1994.
Unaudited Pro Forma Net Loss Per Common Share
Unaudited pro forma net loss per common share results from the net loss
divided by the number of shares of Class B Common Stock to be issued to Digital
prior to consummation of the Offering.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly financial
information for the eight fiscal quarters ended June 29, 1996. In the opinion of
the Company's management, this information has been prepared on the same basis
as the audited financial statements appearing elsewhere in this Prospectus and
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the unaudited quarterly results set forth herein.
The Company's quarterly results may fluctuate significantly in the future. See
"Risk Factors -- Potential Fluctuations in Quarterly Operating Results."
FISCAL YEAR ENDED JULY 1, 1995 FISCAL YEAR ENDED JUNE 29, 1996
----------------------------------------- --------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
----- ------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS)
Total operating revenues...... $ 165 $ 145 $ 354 $ 300 $ 393 $ 803 $ 1,137 $ 1,299
Costs and expenses:
Cost of operating
revenues.................. 83 84 85 122 165 129 250 566
Research and engineering
expenses.................. 742 1,050 1,171 1,553 2,211 4,116 4,077 4,948
Selling and marketing
expenses.................. 37 21 65 125 157 685 1,468 8,212
General and administrative
expenses.................. 129 147 318 468 618 1,016 2,395 2,487
----- ------- ------- ------- ------- ------- ------- --------
Operating loss.............. (826) (1,157) (1,285) (1,968) (2,758) (5,143) (7,053) (14,914)
----- ------- ------- ------- ------- ------- ------- --------
Net loss...................... $(826) $(1,157) $(1,285) $(1,968) $(2,758) $(5,143) $(7,053) $(14,914)
===== ======= ======= ======= ======= ======= ======= ========
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LIQUIDITY AND CAPITAL RESOURCES
The Company had negative cash flow of $34.8 million in fiscal 1996, $4.8
million in fiscal 1995 and $3.8 million in fiscal 1994 due to operating losses
and increased requirements for working capital, and, in fiscal 1996, capital
expenditures. The Company's operations historically have been funded by Digital.
Digital intends to continue to fund the Company's operations until the
consummation of the Offering.
In fiscal 1996, cash flows used in investing activities were $7.1 million
in respect of additions to and transfers of equipment by Digital to the Company
and $0.6 million in respect of investment in capitalized software transferred by
Digital to the Company. The transfer of these assets by Digital to the Company
is reflected as cash flows from financing activities. In fiscal 1997, the
Company anticipates capital expenditures of approximately $10 million for
additional equipment.
The Company currently anticipates that the net proceeds of the Offering
will be sufficient to meet its anticipated capital needs for at least the next
twelve months. The Company may need to raise additional funds. There can be no
assurance that additional funds will be available on terms favorable to the
Company, or at all. Digital has not made any commitment to supply such funds to
the Company. See "Risk Factors -- Future Liquidity Needs; Uncertainty of
Additional Financing" and "Use of Proceeds."
ADOPTION OF STATEMENTS OF ACCOUNTING STANDARDS
In the fourth quarter of fiscal 1996, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 121 -- Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of. The adoption of SFAS No. 121 did not have a
material impact on the results of operations or financial position of the
Company, and there was no cash flow impact associated with the adoption.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 -- Accounting for Stock-Based Compensation. SFAS No. 123 encourages
companies to recognize compensation costs for all stock-based compensation
arrangements using a fair value method of accounting. Alternatively, SFAS No.
123 permits a company to continue accounting for these arrangements under
Accounting Principles Board Opinion No. 25 -- Accounting for Stock Issued to
Employees, accompanied by footnote disclosure of the pro forma effects on net
income and earnings per share had the new accounting rules been applied. The
Company will implement the alternative approach in fiscal 1997. The adoption of
SFAS No. 123 will have no cash flow impact on the Company.
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BUSINESS
The Company develops and markets software products for use in the emerging
integrated Internet/intranet business environment. The Company's portfolio of
innovative software products enables users of the Internet and intranets to (i)
find useful information, (ii) control access to information and transmit it
securely and (iii) collaborate and communicate from multiple locations. The
Company's products and services are designed to integrate all levels of the work
environment -- Internet, enterprise, workgroup and individual user -- and to
allow location- and platform-independent computing. To increase global awareness
of the AltaVista brand and showcase AltaVista software technologies and
products, the Company provides the popular AltaVista Internet Search Service and
other Internet services free on the World Wide Web. The Company also licenses
its Internet services to major telecommunications and media companies outside
the United States and to major Internet content providers.
INDUSTRY BACKGROUND
The Internet is a worldwide network of separate computer networks that
enables commercial organizations, educational institutions, government agencies
and individuals to communicate, access and share information and, increasingly,
to conduct business. The Internet uses a standard communications protocol known
as TCP/IP. In 1993, certain additional protocols were adopted to facilitate the
navigation of portions of the Internet with graphical point-and-click interfaces
and to permit multimedia content such as audio, video and animation. These
protocols consist of a standard document format (HTML), a standard information
transfer protocol (HTTP) and a standard Internet addressing scheme (URL). The
portion of the Internet that has adopted these additional protocols is called
the World Wide Web. The widespread availability of platform-independent,
graphically-based user interfaces known as "browsers" has resulted in tremendous
growth of the Web. International Data Corporation has estimated that
approximately 200 million people worldwide will have access to the Internet by
the end of 1999, up from approximately 38 million at the end of 1995.
Contemporaneously with the development of the Internet, corporations,
universities and other large organizations have been developing private data
networks to serve the needs of their organizations. These networks have been
custom-built using proprietary protocols to connect specific communities or
groups of users through local area networks (LANs) and wide area networks
(WANs). Private networks are expensive to build and maintain, and the
proprietary nature of these networks and their applications has made it
difficult to manage and exchange information between them. In addition, these
networks use expensive leased telephone lines, modem banks and other proprietary
systems to connect geographically distinct parts of the same private network
(for example, the connection of a field office in San Francisco with a home
office in Boston), to link separate private networks (for example, a
manufacturer with a supplier) and to permit access by remote individual users
(for example, salespeople).
The Development of Intranets
Recognizing the benefits of platform-independent communications over the
Internet and the increasing availability of innovative software applications,
such as graphically-based browsers, that use Internet protocols, many
organizations have begun to create "intranets" by adopting Internet protocols on
their private networks. The adoption of Internet protocols to create intranets
generally can be accomplished without abandoning existing hardware, applications
and data in proprietary formats. Because the Internet and intranets use the same
protocols, intranets provide users with substantially increased access to
information and other users both inside an organization and, via the Internet,
throughout the world. Organizations have also begun to replace expensive leased
lines and communications equipment with Internet gateways to connect networks
and remote individual users. A July 1996 Forrester Research Survey of 50 Fortune
1000 companies reported that 64% of the respondents were currently using
intranets and another 32% were building intranets. According to International
Data Corporation, the market for intranet software products and services in the
year 2000 will exceed $3 billion, up from approximately $276 million in 1995 and
the estimated expenditures for Internet software products and services will
exceed $6 billion in the year 2000, up from approximately $259 million in 1995.
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Emerging Internet/Intranet Market Opportunity
The adoption of Internet protocols on private networks to create intranets
and the increasing use of the Internet to link private networks has created a
need for location- and platform-independent software products and services that
integrate all levels of the work environment -- Internet, enterprise, workgroup
and individual user -- and that address the following problems:
- Finding Useful Information. Current solutions for searching and
retrieving information from the Web and private data sources generally
involve the use of catalogs, search services or other specially designed
applications. The Company believes that the tools in use today lack
sufficient speed, accuracy, comprehensiveness or ease of use. In
addition, these products are not well suited to an integrated
Internet/intranet environment due to their inability to access seamlessly
the vast amount of information available at all levels of the work
environment. The Company believes that the rapid growth of intranets and
their linkage to the Internet has created demand for products capable of
working across such networks in order to make the vast amount of
information on such networks more readily accessible to users.
- Security. One of the greatest impediments to making private networks
accessible to users through the Internet is the fear of exposing
confidential data to unauthorized persons and allowing unauthorized
persons to tamper with data. Similarly, organizations that have
implemented intranets are concerned with the risk of unauthorized access
to sub-networks containing sensitive data within their organizations. The
Company believes that there is a need for highly reliable, easy-to-manage
products, known as "firewalls," that control access to and from private
networks and sub-networks. In addition, the Company believes that there
is a need for products, known as "tunnels," that allow authenticated
users to traverse firewalls and that provide encrypted communication over
the Internet and intranets. While there has been significant development
of firewalls and, to a lesser extent, tunnels, many such products prevent
legitimate users from obtaining flexible access to network resources, are
difficult to install and manage and are not compatible with a range of
systems.
- Collaboration and Communication. The increasing use of the Internet and
intranets has highlighted the incompatibility, high resource demands and
inflexibility of many current collaboration and communication products.
Few current workgroup solutions are designed to work in the new open-
standards environment, but rely instead on proprietary software and
hardware with substantial installation, maintenance and support
requirements. Email, one of the most popular applications used on the
Internet and private networks, is difficult and expensive to administer
in a mixed environment of proprietary systems, intranets and the
Internet. The Company believes that there is a need for flexible
collaboration and communication products based on standard Web browsers
and Internet communication protocols that permit the sharing and
communication of information and documents among intended users.
ALTAVISTA STRATEGY
The Company's goal is to be the leading supplier of software products and
services for use in the emerging integrated Internet/intranet business
environment. The Company's strategy includes the following elements:
- Increase AltaVista Brand Recognition Worldwide. The Company believes
that global brand recognition on the Internet is central to the effective
marketing of Internet/intranet products and services. The Company is
offering its AltaVista Internet Search Service without charge to Web
users to showcase AltaVista technology, establish the Company as a
premier provider of services on the Web and generate strong awareness of
the AltaVista brand. The Company has built a high volume of traffic on
its AltaVista Internet Search Service Web site
(http://www.altavista.digital.com) and seeks to make the AltaVista
Internet Search Service the de facto global standard for Internet search
results by (i) licensing major telecommunications and media companies
outside the United States to offer the AltaVista Internet Search Service
at "mirror sites" to achieve worldwide coverage and (ii) licensing major
Internet content providers to deliver branded AltaVista Internet Search
Service results to their users through "value added links" on the
providers' Web sites. The Company plans to make available
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additional free services on the Web to showcase its technology and to
extend awareness of the AltaVista brand.
- Deliver Innovative Software Products for Internet/Intranet Users. The
Company provides business users with software products that integrate the
Internet and intranets to create location- and platform-independent work
environments. The Company currently offers a portfolio of flexible and
scaleable products under the AltaVista brand name that permit users to
(i) find useful information (AltaVista Search Private eXtensions,
AltaVista Directory), (ii) control access to information and transmit it
securely (AltaVista Firewall, AltaVista Tunnel) and (iii) collaborate and
communicate from multiple locations (AltaVista Forum, AltaVista Mail), in
each case seamlessly at all levels of the work environment. The Company
also intends to build upon its technical expertise and that of its
partners and Digital to develop additional innovative products, product
suites and services for general and specific industry and business
application needs in the emerging Internet/intranet environment.
- Realize Revenue from Products and Services, not from Internet
Advertising. The Company earns revenue from (i) the sale of software
products and related support and services and (ii) fees from mirror site
and value added link licenses. Because the Company does not accept
advertising on its own Web sites and, therefore, does not compete for
Internet advertising revenue, the Company is able to partner with
Internet companies that derive revenue from advertising.
- Conduct Business on the Web. The Company conducts a significant portion
of its business over the Web, including marketing, communications,
partner registration, sales, software distribution and partner and
customer support. The Company's AltaVista Marketspace Web site
(http://www.altavista.software.digital.com) is the "front door" of its
business, available 24 hours a day throughout the world. The AltaVista
Marketspace offers the Company's prospects, customers and business
partners an interactive multimedia environment where they can access
information about the Company's products, download software products,
receive support and conduct commercial transactions with the Company. The
Company believes that this "Web-centric" strategy will establish it as a
highly visible Internet/intranet software leader, as well as facilitate
responsive, low-cost, global business operations.
- Accelerate Product Adoption with Targeted Marketing and Aggressive
Pricing. The Company seeks to build significant market share for its
products with free trial programs, aggressive pricing and licensing of
selected products for inclusion in major hardware and software vendors'
product lines. In addition, the Company targets self-selected early
adopters and industry influencers to use preliminary versions of the
Company's products, provide feedback to the Company and generate valuable
word-of-mouth publicity.
- Distribute Products through Multiple Internet-Focused Channels. The
Company intends to achieve broad market penetration by employing multiple
distribution channels, including direct sales over the Web and sales
through Digital's sales organization, major system integrators, value
added resellers, Internet service providers, telecommunications companies
and software and hardware vendors.
- Leverage Relationship with Digital. The Company intends to leverage its
relationship with Digital, one of the world's leading suppliers of
computer hardware, software and services. The Company's products are sold
by Digital's worldwide direct and channel sales organizations, which also
provide the Company access to Digital's major customers, channel partners
and strategic alliance partners. In addition, the Company has a preferred
relationship with Digital's research laboratories.
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ALTAVISTA INTERNET SERVICES
The Company offers a portfolio of Internet services, directly and through
partners, free of charge to Web users to showcase AltaVista technologies, to
increase AltaVista brand recognition worldwide and, through partner-provided
services, to generate revenue.
Below is a summary of the main Internet services currently offered or
planned to be offered by the Company, including a brief description of each
service, its target users or third-party service providers and its status or
availability. Detailed information regarding each service can be found under the
appropriate heading following the table.
ALTAVISTA INTERNET SERVICES
TARGET USERS OR
ALTAVISTA SERVICE APPLICATION SERVICE PROVIDERS STATUS
ALTAVISTA TECHNOLOGY
SHOWCASES
AltaVista Internet
Search Service
Web and Usenet data indexing, Web users Available since December
search and retrieval 1995
AltaVista Internet
Forum Service
Web-based Internet Web users Scheduled for September
collaboration 1996 availability
AltaVista Internet
Directory Service
Comprehensive on-line listing Web users In development
of Internet users' email
addresses
ALTAVISTA PARTNER-
PROVIDED SERVICES
Mirror Sites
AltaVista Internet Search Non-U.S. tele- Letters of intent with
Service licensed to and communications and Telia TeleCom AB (Sweden)
provided by third parties media companies and Telstra Corporation
Ltd. (Australia)
Value Added Links
Third-party delivery of Internet content Agreement with Yahoo! Inc.
AltaVista Internet Search providers and CNET, Inc.
Service results
Web Custom Crawls
Indexing, search and Internet content Scheduled for September
retrieval software for a providers 1996 availability
focused subset of the Web
- ------------------------------------------------------------------------------------------------------------------
ALTAVISTA TECHNOLOGY SHOWCASES
As an essential element of the Company's strategy to showcase AltaVista
technology and to increase global awareness of the AltaVista brand, the Company
offers, free of charge to Web users, the Internet services described below.
AltaVista Internet Search Service
The AltaVista Internet Search Service assists Web users in finding
information anywhere on the Web or in Internet Usenet News groups. The Company
believes that the AltaVista Internet Search Service is the fastest Internet
search service, that its index is among the most comprehensive and current
indexes available and that it produces highly relevant search results. On March
14, 1996 at CeBIT '96 in Europe, PC-Online magazine gave the AltaVista Internet
Search Service the "Web Site of the Year" award, and on April 30, 1996 at the
Internet World Conference in California, Internet World magazine awarded the
AltaVista Internet Search Service the "Industry Award for Outstanding Service."
The Company offers the AltaVista Internet Search Service to Web users without
charge or advertising.
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The AltaVista Internet Search Service was developed by Digital's research
laboratories in Palo Alto, California as a showcase for a variety of Digital
technologies. The goal of the project was to index every word contained on the
Web, a goal then considered unattainable. The AltaVista Internet Search Service
was made available for internal use at Digital in September 1995 and was
launched on the Web on December 15, 1995. On its first day of Web operation, it
recorded approximately 300,000 requests for information or "hits." The site
recorded over 17.5 million hits per day during the week of August 5, 1996.
The key factors in the popularity of the AltaVista Internet Search Service
are its size, speed, currency and relevance.
- Size. As of August 7, 1996, the AltaVista Internet Search Service had
indexed approximately 16 billion words from over 32 million pages. The
data included in the AltaVista Internet Search Service index are
collected by a "spider," which continuously "crawls" the Web searching
for new and revised Web pages and retrieving their contents for indexing.
The AltaVista Internet Search Service spider, known as "Scooter," which
the Company believes is the fastest spider in use, is capable of
retrieving approximately three million Web pages per day. Every word on
every page that Scooter retrieves is added to the index at a rate of up
to one gigabyte of text per hour. In addition, the AltaVista Internet
Search Service currently has an index of over 4.5 million articles from
over 14,000 Usenet News groups.
- Speed. The AltaVista Internet Search Service is extremely fast,
responding to queries in an average of 0.7 seconds (although transmission
of search queries and results from and to the end-user across the
Internet may take longer) with no significant degradation in performance
as the scope of the query is expanded or the number of search results
increases. This short and predictable response time results primarily
from a proprietary search algorithm.
- Currency. Currency measures the degree to which the data in an index is
"fresh" or up to date. Scooter is programmed to conduct "intelligent"
searches, returning more frequently to pages which it learns change often
and less frequently to pages which change less often. In addition, the
AltaVista Internet Search Service retrieves and indexes specific Web
pages upon request. The Company believes that because of Scooter's speed,
intelligent search method and continuous crawling, the AltaVista Internet
Search Service is among the most current indexes available.
- Relevance. Relevance measures how closely the results of a search
conform to a specific query. The ability of a search service to deliver
relevant responses depends upon the comprehensiveness of the underlying
index, the flexibility of the query interface and the criteria used to
determine relevance. The AltaVista Internet Search Service currently
ranks documents found according to the number of times the search terms
occur in each document and the position of the search terms within the
document. The Company intends to add technology to allow users to specify
other ranking methods. The Company believes that its ranking algorithms,
combined with the size and currency of its index and the flexibility of
its query language, enable the AltaVista Internet Search Service to
deliver highly relevant search results.
Technology. Operating through Digital's Palo Alto Internet gateway at one
of the principal interconnection points of the Internet in North America, the
AltaVista Internet Search Service can maintain multiple connections to the
Internet with over 135 megabits per second of bandwidth. Six index servers, each
of which holds a complete copy of the Web index (currently exceeding 40
gigabytes) to facilitate high-speed retrieval, run on the fastest Digital Alpha
servers, each with either eight or ten 64-bit Alpha processors, six or eight
gigabytes of main memory and 210 gigabytes of disk storage. Scooter obeys "Web
etiquette" by not retrieving pages that the site's owner has requested not be
indexed, and by limiting its requests to ensure that it never uses more than 1%
of the resources of the server from which it is retrieving Web pages. The
Company is committed to continuing to use the best and most efficient technology
available to maintain the performance of the AltaVista Internet Search Service.
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AltaVista Internet Forum Service
On August 12, 1996, the Company announced the AltaVista Internet Forum
Service, a free showcase of the Company's collaboration technology on the
Internet. Implemented using a skyscraper metaphor, the AltaVista Internet Forum
Service Web site (http://www.altavista.forum.digital.com) consists of
ready-to-use time-limited Forums organized one per floor of the office building.
In the lobby, users can either register to create a new time-limited Forum or
join an existing Forum. The Company manages the Forums for the users during the
time-limited trial period. At the end of the trial period, the user may license
the AltaVista Internet Forum product for private use on the user's own Web site
or intranet. The Company expects the AltaVista Internet Forum Service to be
available for public Internet use in September 1996. See " -- Software
Products -- AltaVista Forum."
AltaVista Internet Directory Service
The Company is developing the AltaVista Internet Directory Service, a free
directory of Internet users' email addresses, to showcase the Company's
directory technology on the Internet. The AltaVista Internet Directory Service
will contain Internet email addresses from many sources, including leading
on-line services and the AltaVista Internet Search Service index. Users will be
encouraged to add or edit their own entries using any standard Web browser. The
Company's goal is to create the largest, most comprehensive and most up-to-date
directory of email users on the Internet. Users of the AltaVista Internet
Directory Service will also be offered the opportunity to buy the Company's
AltaVista Directory software product. See " -- Software Products -- AltaVista
Directory."
AltaVista Partner-Provided Services
The Company earns revenue from the AltaVista Internet Search Service by
licensing mirror sites outside the United States, by establishing value added
links with major Internet content providers and by licensing versions of the
Company's search and indexing software as web custom crawls to allow Internet
content providers to offer search services for a focused subset of the Web. The
Company intends to develop additional revenue-generating opportunities based on
its AltaVista Internet Services as part of its strategy of showcasing AltaVista
technologies and increasing global awareness of the AltaVista brand.
Mirror Sites
The Company has established the AltaVista Network Affiliate program to
license major telecommunications and media companies to provide AltaVista
Internet Search Service mirror sites outside the United States. Mirror sites are
intended to improve service response times and language support for users
located outside the United States, to facilitate worldwide distribution of the
AltaVista Internet Search Service and to increase global recognition of the
AltaVista brand. Each mirror site will provide users in its region with local
service that eliminates the delays associated with sending queries across long
distances to the Company's Palo Alto Web site.
Under the AltaVista Network Affiliate program, an AltaVista Network
Affiliate invests in the hardware, communications equipment, high bandwidth
Internet connections and staff to operate the site, and licenses the AltaVista
Internet Search Service from the Company for a monthly fee. In addition, the
Affiliate pays the Company a transaction fee based on the number of pages of
search results viewed by the mirror site's users. The Company provides the
search and query processing software and the index (with regular updates),
training and promotion of the Affiliate's site. The Affiliate also provides
local language translation of the AltaVista Internet Search Service query and
help pages. The Affiliate is required to provide the AltaVista Internet Search
Service without charge to users, but may run advertising with the service and
use the service to attract users to its other revenue-generating services. The
Company's goal is to have the AltaVista Network, when fully operational, able to
process up to 100 million hits per day. The Company plans to license additional
services to the AltaVista Network Affiliates, including the AltaVista Internet
Forum Service and the AltaVista Internet Directory Service in development.
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The Company has entered into letters of intent with Telia TeleCom AB for a
mirror site in Northern Europe and with Telstra Corporation Ltd. for a mirror
site in Australia, New Zealand and several other countries. The letter of intent
with Telia contemplates an initial term of 18 months, renewable for additional
one-year terms, subject to renegotiation of pricing terms prior to each renewal.
The letter of intent with Telstra contemplates an initial term of two years,
renewable for additional one-year terms, subject to renegotiation of pricing
terms after the first year and prior to each renewal term.
The Company's goal is to establish additional mirror sites to service
regions of the world where Internet usage is high or rapidly increasing.
Value Added Links
Certain Internet content providers allow their users to search the Web as a
means to augment the content found at the providers' sites. Often these search
capabilities are provided by linking users to the sites of Web search services
such as the AltaVista Internet Search Service. When a user decides to search the
Web, however, the user leaves the content provider's site, thereby depriving the
provider of the opportunity to display advertising with the search results and
generate more revenue. The Company's goal is to implement value added links with
leading Internet content providers to allow a content provider's users to use
the AltaVista Internet Search Service without leaving the provider's Web site.
The content provider has the opportunity to add value by making
context-sensitive modifications to a user's query and/or the search results. The
content provider can return the AltaVista-branded search results to the user
along with targeted advertisements that generally command a much higher rate
than advertisements run on general purpose Web pages. Content providers are not
permitted to charge users separate fees to use value added links to the
AltaVista Internet Search Service.
The Company receives transaction fees from content providers based on the
number of AltaVista Internet Search Service-generated pages of results viewed by
users. Because the Company does not compete for Internet advertising revenue, it
can partner, rather than compete, with Internet content providers who do,
thereby building AltaVista brand recognition and generating continuing revenue.
The Company has implemented a value added link relationship with Yahoo! Inc.,
the leading guide service on the Web, has signed an agreement with CNET, Inc., a
leading online publisher of technology information, and is in negotiations with
other Internet content providers.
Web Custom Crawls
The Company's web custom crawls allow Internet content providers to offer
search services for a focused subset of the Web as a means to augment the
subject-specific content they offer on their site. Using software licensed from
the Company similar to the AltaVista Internet Search Service, the Internet
content provider is able to create, maintain and allow its users to search a
specialized index of Web sites selected by the provider. Because the content
provider's index consists of a limited subset of the entire Web, it is more
likely to deliver search results of high relevance to the content provider's
users and is able to be updated more frequently than a full-Web index. The
content provider is required to display the AltaVista brand with all search
results. In addition to licensing and maintenance fees for the search and
indexing software, the Company plans to receive transaction fees linked to the
number of pages of results viewed by the user. The Company plans to deliver the
first web custom crawl in September 1996.
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ALTAVISTA SOFTWARE PRODUCTS
The Company offers a portfolio of software products that enable users of
the Internet and intranets to (i) find useful information, (ii) control access
to information and transmit it securely and (iii) collaborate and communicate
from multiple locations. Below is a summary of the main products currently
offered or planned to be offered by the Company, including a brief description
of each product, its target market and its current status. Detailed information
regarding each product can be found under the appropriate heading following the
table.
ALTAVISTA SOFTWARE PRODUCTS
TARGET
ALTAVISTA PRODUCT APPLICATION MARKET COMMERCIAL AVAILABILITY
ALTAVISTA SEARCH
Intranet Private
eXtension
Indexing, search and retrieval of Fortune 500 businesses and large Scheduled September 1996;
data on an intranet organizations in beta testing
Workgroup Private
eXtension
Indexing, search and retrieval of Business units/departments, Scheduled November 1996
data on specified servers workgroups and small
organizations
My Computer Private
eXtension
Indexing, search and retrieval of Individual users Scheduled October 1996; in
private data on individual beta testing
computers and servers
ALTAVISTA DIRECTORY
Directory of user, customer or Large and medium-size November 1993
other information organizations
ALTAVISTA FIREWALL
Intranet security Large, medium-size and small May 1994
organizations
ALTAVISTA TUNNEL
Workgroup Edition
Secure communications through Organizations needing to connect November 1995
firewalls between sites and to multiple locations and/or
remote users remote users
Personal Edition
Secure communications through Mobile/remote workers November 1995
firewalls between a remote user
and a site
ALTAVISTA FORUM
Internet/intranet collaboration Business units/departments, December 1995
and conferencing workgroups, small organizations
and Internet service providers
ALTAVISTA MAIL
Internet/intranet email server Business units/departments, June 1996
software workgroups, small to medium-size
organizations and Internet
service providers
- ------------------------------------------------------------------------------------------------------------------
FINDING USEFUL INFORMATION
AltaVista Search Private Extensions
Using the same technology as the AltaVista Internet Search Service,
AltaVista Search Private eXtensions extend the AltaVista Internet Search Service
through a single user interface to provide comprehensive, fast and relevant
search results seamlessly at all levels of the work environment -- Internet,
enterprise, workgroup and individual user. The AltaVista Search Private
eXtensions find information from all sources visible to the search software
through a standard Web browser. The eXtensions support full text indexing of
HTML (Web page) data and, in the case of Workgroup Private eXtension and My
Computer Private eXtension, the file formats used by many Windows-based word
processors, email clients, spreadsheets and other applications.
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- Intranet Private eXtension. By indexing data found on all accessible
pages in an intranet, Intranet Private eXtension allows employees of an
organization to find information anywhere on their intranet. This
eXtension is designed for medium-size to large intranets (up to 50
million Web pages). Intranet Private eXtension is currently available on
Digital's 64-bit UNIX operating system. The Company believes that it can
be easily adapted for other platforms as market conditions warrant.
Intranet Private eXtension currently searches HTML data; however, the
Company intends to offer an application programming interface known as
the AltaVista Search Software Developers Kit to allow customized indexing
of proprietary document formats. Targeted customers are Fortune 500
businesses and large organizations. The Company expects Intranet Private
eXtension to be commercially available in September 1996.
Intranet Private eXtension is distributed through system integrators that
customize it for use in large organizations and to work with proprietary
data types. The initial license fee for Intranet Private eXtension ranges
from $25,000 to $1 million, depending on the number of end user licenses
and other factors, and not including customization and integration
service fees.
- Workgroup Private eXtension. Workgroup Private eXtension searches
specified files, directories and HTML data to create an index of
information available and of interest to members of a business unit or
department, workgroup or small organization. A workgroup administrator
configures the data collector to index specific files and directories at
specified intervals. Workgroup Private eXtension runs on the Windows NT
platform. The Company expects Workgroup Private eXtension to be
commercially available in November 1996.
Workgroup Private eXtension is distributed to end user organizations
through the AltaVista Marketspace Web site and through value added
resellers. The Company expects license fees to range from $500 to
$20,000, depending on the number of end user licenses and other factors,
and not including customization services that may be provided by the
channel partner.
- My Computer Private eXtension. My Computer Private eXtension creates an
index of specified files and directories on a user's local drives and
network drives. The user configures the data collector to index specific
files and directories at specified intervals. My Computer Private
eXtension resides on an individual user's computer running Windows 95 or
Windows NT and is able to index the file formats used by over 140
Windows-based applications. A beta version of My Computer Private
eXtension has been available for free download via the Web since July 22,
1996 and had been downloaded by over 16,000 users as of August 18, 1996.
The Company expects My Computer Private eXtension to be commercially
available in October 1996.
My Computer Private eXtension will be distributed directly to end users
through the AltaVista Marketspace and hardware and software vendors, and
to organizations through value added resellers and system integrators.
The list price of My Computer Private eXtension is $29.95.
AltaVista Directory
Directories are specialized databases that typically contain names,
addresses, telephone numbers, email addresses, and biographical and other
personal data. AltaVista Directory allows information service managers to
provide their users a single, integrated on-line directory of users, customers
or other affiliated individuals that eliminates the need to print and distribute
paper directories and separately update other databases as changes occur. In
addition to traditional directory data, the AltaVista Directory permits the
attachment to an entry of other files or objects, such as photographs and other
multimedia content. AltaVista Directory allows people in different places to
make changes on local copies of the directory and automatically replicates the
changes at all sites.
AltaVista Directory complies with the industry standard X.500 protocol. It
also supports the LDAP protocol, which is becoming the Internet standard for
directory access from standard Web browsers and Internet email clients, and
MAPI, Microsoft's Windows application programming interface for email-enabled
applications. AltaVista Directory is highly scaleable, supporting small numbers
of entries at the low end and up
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to 15 million entries at the high end. The product has been commercially
available on the Digital UNIX platform since November 1993, and the Company
expects a Windows NT version to be commercially available in late 1996.
AltaVista Directory is targeted at medium to large organizations which need
to construct directories that can be accessed by users and applications, both on
intranets and through the Internet. In fiscal 1996, AltaVista Directory was sold
to approximately 100 organizations. AltaVista Directory is distributed through
value added resellers and system integrators. The license fee for AltaVista
Directory ranges from $500 to $20,000 depending on the number of directory
entries and other factors.
SECURITY
AltaVista Firewall
AltaVista Firewall provides an easy-to-manage, secure gateway between an
organization's private intranet and the Internet, or between a sub-network and
the rest of an intranet. AltaVista Firewall provides a flexible interface which
allows a system administrator to control who may send data into or out of the
intranet or sub-network, what kind of data can be transmitted and when such data
can be transmitted (for example, HTML traffic can be disabled during normal
business hours). A system administrator can selectively activate or deactivate
transmission of HTML, email, FTP (file transfer protocol), News group or telnet
(remote log-in) traffic. AltaVista Firewall can also be customized to allow
filtering of other protocols. AltaVista Firewall provides for real-time logging,
auditing, monitoring and reporting to recognize and trace attempts to gain
unauthorized entry to a network. The product has been commercially available on
Digital UNIX since May 1994, and on BSDI (Intel-based) UNIX and Windows NT since
August 1996. The January 29, 1996 edition of Network World ranked AltaVista
Firewall's management interface as being the "best thought-out" and "most
powerful" of the firewall products it reviewed.
AltaVista Firewall offers a scaleable solution, from a low-end firewall
with pre-defined security policies for small and medium-size organizations to a
high-end customized multi-firewall solution for large organizations. AltaVista
Firewall is sold through system integrators and value added resellers to
organizations installing intranets at competitive, tiered prices.
AltaVista Tunnel
AltaVista Tunnel allows authenticated external users connected to the
Internet, such as telecommuters, remote sites, partners, customers and
consultants, to connect inexpensively and securely to an organization's
intranet, including through firewalls. The Company believes that AltaVista
Tunnel is compatible with all existing firewalls. Using advanced authentication
and encryption technologies, AltaVista Tunnel creates a secure Internet pathway
between two intranets or between a remote individual user and an intranet,
thereby allowing an external user to work as if directly connected to that
organization's private network. AltaVista Tunnel allows the secure use of the
Internet as an extension of an intranet to create a "virtual private network,"
thereby eliminating the high cost and administrative burden of leased lines,
modem banks and other proprietary interconnection systems. AltaVista Tunnel can
also be used to provide secure communications between two firewall-protected
segments of an intranet.
Because AltaVista Tunnel works at the network connection level, all network
applications will work through AltaVista Tunnel as if they were running on a
private network. Security features include RSA 512-bit public/private key
authentication to validate user identity, as well as RSA RC4 128-bit secret key
encryption for use within the United States and RSA RC4 40-bit secret key
encryption for export. Keys are exchanged every 30 minutes for maximum
protection against data interception.
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The two editions of AltaVista Tunnel are:
- AltaVista Tunnel Workgroup Edition permits secure communications between
independent intranets or between sub-networks of an intranet. The
Workgroup Edition also operates as a server for multiple AltaVista Tunnel
Personal Edition clients to allow remote individual users to connect to
the intranet or sub-network. The Workgroup Edition has been commercially
available on Digital UNIX since November 1995, and the Company expects
that it will be commercially available on BSDI (Intel-based) UNIX and
Windows NT in September 1996.
- AltaVista Tunnel Personal Edition permits a remote individual user to
connect securely to an intranet or a sub-network via AltaVista Tunnel
Workgroup Edition server software. Personal Edition has been commercially
available on Windows 95 since November 1995, and the Company expects that
it will be commercially available on Windows NT in September 1996.
Targeted customers include organizations that have implemented intranets
and that have remote users, branch offices or customers or suppliers that need
to communicate securely with the organization's intranet. For example, Digital
is installing AltaVista Tunnel to support its remote sales force. AltaVista
Tunnel can also be licensed to Internet service providers for inclusion in
services offered to their customers.
AltaVista Tunnel is distributed through value added resellers and system
integrators. In addition, manufacturers of networking hardware are beginning to
integrate encryption technology into their routers to provide secure
connectivity transparently to the user. Digital intends to embed AltaVista
Tunnel in its routers, and the Company seeks to license AltaVista Tunnel for
incorporation into other manufacturers' routers. The Company also seeks to enter
into licensing agreements with client-server application vendors that would
embed AltaVista Tunnel in their applications to allow their applications to
operate securely over the Internet, independent of the type of networking
hardware or firewalls used by their customers. For example, Digital integrates
AltaVista Tunnel into the Internet version of its transaction processing
software product.
The license fee for AltaVista Tunnel Workgroup Edition ranges from $995 to
$2,495, depending on the number of end users supported and other factors. The
list price of AltaVista Tunnel Personal Edition is $99.95.
COLLABORATION AND COMMUNICATION
AltaVista Forum
AltaVista Forum provides an environment for members of workgroups to share
documents, conduct asynchronous discussions or real-time conferences from
multiple locations and search the entire text of a Forum, all using a standard
Web browser.
AltaVista Forum supports the following workgroup activities:
- Team Working Environments. AltaVista Forum allows groups of users to set
up and administer a team working environment without requiring
participation from an organization's information services personnel.
Users can create a team home page for both pre-defined and ad hoc teams,
manage team membership lists, send email to all team members and schedule
team conferences. AltaVista Forum workgroup administrators can control
access to documents and discussion groups for different users and
different groups of users by setting password control and access
privileges.
- Document Sharing. AltaVista Forum allows users to create a repository
for documents, applications, links to Web sites and other data that can
be accessed from any Web browser, as an alternative to mass emailing or
other cumbersome distribution methods. AltaVista Forum provides a
traceable edit history of all postings and requests, as well as email
notifications of new postings.
- Discussion Groups. AltaVista Forum supports the creation of discussion
areas that can be used to conduct discrete, topical, asynchronous
discussions. Users can post questions or comments, attach or include
links to other documents or Web pages and poll other users to vote on
selected topics, with
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results displayed graphically in real-time. Users can view postings by
date or by author; in addition, the threaded discussion feature enables
users to view postings in the context of related responses.
- Real-Time Conferencing. AltaVista Forum supports the use of real-time
text-based conference sessions. Users can schedule "chat" sessions using
an on-line group calendar. Participants are connected to the on-line
conference automatically and the session can be recorded for later
viewing.
- Built-In Search. The entire text of an AltaVista Forum can be indexed
and subsequently searched using built-in AltaVista Search technology.
- Customized Applications. AltaVista Forum provides an interface that
permits users, systems integrators and value added resellers to customize
it for additional uses, such as a Web-based problem tracking and
reporting system.
AltaVista Forum, Version 1.0, was ranked "Editor's Choice" by PC Magazine
in its April 23, 1996 edition and "Analyst's Choice" in the Web-based
conferencing systems category by PC Week in its February 26, 1996 edition.
AltaVista Forum has been commercially available on the Digital UNIX and Windows
NT platforms since December 1995 and on the Sun Microsystems Solaris platform
since March 1996. Version 2.0, which has been commercially available since
August 1996, introduced real time conferencing and certain features to
facilitate working in groups.
Targeted customers include business units and departments, workgroups and
small organizations, as well as Internet service providers seeking to offer
Web-based collaboration and conferencing services to their users and
subscribers. The Company uses AltaVista Forum on its AltaVista Marketspace Web
site to host discussion groups with customers, answer questions and manage
software downloads. AltaVista Forum can also be licensed to Internet service
providers for inclusion in services offered to their customers.
AltaVista Forum is distributed through value added resellers, system
integrators and direct sales via the Web. The license fee for AltaVista Forum
begins at $495 for an entry-level 25-user license and ranges up to several
thousand dollars, depending on the number of end users supported and other
factors, and not including customization services that may be provided by a
channel partner.
AltaVista Mail
AltaVista Mail is Internet/intranet mail server software that complies with
the SMTP and POP3 standards, the de facto protocols for email servers on the
Internet and intranets. The use of these standards allows the AltaVista Mail
server to support a wide range of client software (including Microsoft Exchange,
Netscape Mail and Eudora) which communicates with the mail server to allow a
user to read and send email. AltaVista Mail supports text messages and the full
range of attachments from word processing documents and spreadsheets to
multimedia presentations. AltaVista Mail has been commercially available on
Windows NT since June 1996. Version 2.0 of AltaVista Mail, which the Company
expects to be commercially available in October 1996, supports gateways to MS
Mail and cc:Mail post offices, as well as the IMAP4 protocol.
AltaVista Mail is targeted at business units and departments, workgroups
and small to medium-size organizations looking for an easy-to-use Internet mail
server, as well as Internet service providers seeking to provide email services
to users and subscribers. The product is sold directly over the Web and is
distributed through value added resellers and OEMs. The entry level license
price is $495 per server.
SALES AND MARKETING
The Company's sales strategy is to achieve broad market penetration by
employing multiple distribution channels, including direct sales over the Web
and sales through Digital's sales organization, major system integrators, value
added resellers (VARs), Internet service providers (ISPs), telecommunications
companies (Telcos), original equipment manufacturers (OEMs) and independent
software vendors (ISVs).
Direct Sales on the Web. The Company uses its AltaVista Marketspace Web
site (http://www.altavista.software.digital.com) to demonstrate, promote and
sell software products that can be downloaded directly to the customer's
computer. Direct sales over the Web generally will be offered only at
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list price in order to avoid competing with channel partners. Products currently
sold on the Web are AltaVista Search My Computer Private eXtension, AltaVista
Mail and AltaVista Forum. In addition, to seed widespread use of its products,
the Company has created the AltaVista Visionary Club, a reserved area of the
AltaVista Marketspace where Web users anywhere in the world can register and
thereafter receive free time-limited beta test versions and trial copies of new
products and participate in other promotions. The Company particularly targets
early adopters and industry influencers (for example, product evaluators and
reviewers, technology consultants and "webmasters") to preview its products,
provide feedback to the Company and generate valuable word-of-mouth publicity.
Digital's Sales Organizations. The Company's products are sold by
Digital's worldwide direct and channel sales organizations. Approximately 100
Digital salespeople and more than 200 Digital channel partners have been trained
in using and selling the Company's products. In addition, the Company's close
relationship with Digital provides it access to and credibility with Digital's
large customer base, channel partners and strategic alliance partners. See
"Relationship with Digital -- Strategic Alliance Agreement."
System Integrators. System integrators, who specialize in planning,
installing, customizing and upgrading large private networks for large
organizations, customize, configure and install the Company's software products
with complementary hardware, software and services. By combining products and
services, system integrators are able to deliver complete information management
solutions to address specific customer needs. System integrators are most
important to the sale of AltaVista Search Intranet Private eXtension and
AltaVista Directory, each of which requires substantial consulting, design,
customization and integration services to ensure full access to legacy data and
existing systems.
Value Added Resellers. VARs, like system integrators, customize, configure
and install the Company's products with complementary hardware, software and
services. VARs generally offer solutions to smaller scale information technology
needs, including pieces of a large private network, networking solutions for
small to medium-size organizations and customizations that address the needs of
specific industry and business applications.
Internet Service Providers and Telecommunications Companies. ISPs and
Telcos offer Internet access and a growing set of value added Internet
applications and services. ISPs and Telcos can offer value added services based
on AltaVista Mail, AltaVista Tunnel and AltaVista Forum, especially in the small
company market. The Company currently has agreements with a number of ISPs and
Telcos, and is targeting approximately 50 of the largest ISPs and Telcos
worldwide.
Original Equipment Manufacturers and Independent Software Vendors. The
Company selectively markets its products to OEMs and ISVs with the goal of
having its products and technologies embedded in OEM and ISV products that enjoy
strong positions in specific target markets or large installed customer bases.
The Company has OEM and ISV arrangements with Digital for AltaVista Tunnel and
an ISV agreement with Worldtalk Corporation for AltaVista Mail. The Company
intends to pursue additional OEM and ISV opportunities to gain broad market
share for AltaVista Tunnel, AltaVista Mail and AltaVista Search Private
eXtensions.
Company Sales Force. The Company's sales force is currently focusing on
expanding its network of channel partners. Sales force compensation is highly
leveraged; sales personnel receive incentive compensation for selling products
and establishing relationships with selected channel partners. The sales force
includes technical pre-sales engineers. The Company's sales force does not sell
to end users, but supports channel partners in pursuing major sales
opportunities with large or influential organizations.
International Sales
The Company sells its products worldwide from its AltaVista Marketspace Web
site and plans to use the same types of channel partners internationally as it
does in the United States. The Company has international sales force coverage
for Canada and Latin America, and is currently hiring marketing and sales
representatives in Western Europe, with initial emphasis on the major and
leading-edge Internet markets in the United Kingdom, Germany, France, The
Netherlands and Scandinavia. The Company intends to expand into
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Southern and Central Europe as opportunities emerge. Similarly, the Company
intends to deploy marketing and sales representatives in Australia and Japan,
the early-adopter Internet markets in Asia, as opportunities develop, followed
by expansion into other Asian, Middle Eastern and African markets. In addition,
Digital's strong international presence and existing customer and channel
relationships offer the Company increased access to international business
opportunities.
The Company plans to localize (translate and adapt for local use) its
products in French, German, Spanish, Japanese and other languages as market
conditions warrant. AltaVista Search and its underlying search and indexing
technology can process most Western European languages; the Company intends to
add technology to support additional language families in conjunction with
partners in relevant locations.
CUSTOMER SUPPORT AND SERVICES
Product Support. The Company believes that a high level of customer
support and service for its products will be critical to its success. The
Company's principal focus has been to provide training, documentation and
technical support to its channel partners to ensure that they have the knowledge
required to sell, implement, maintain and provide technical support for the
Company's products. The Company's AltaVista Marketspace Web site is the focal
point of its support program. The Company uses, and provides incentives for
channel partners to use, email to log calls and communicate product maintenance
updates, interim (bug) fixes, frequently asked questions and beta software
releases. Channel partners will also have direct access to the Company's support
personnel by telephone to address high priority issues. The Company also offers
product support and services directly to customers through its AltaVista
Marketspace Web site.
The Company recognizes that some channel partners may have limited product
support capability. To ensure quality support for its products, the Company has
created an Authorized Service Provider ("ASP") program. ASPs are certified to
provide a broad range of support services for the Company's products, including
installation, remedial support and update services. The Company has entered into
a nonexclusive agreement under which Digital will be an ASP worldwide. See
"Relationship with Digital -- Strategic Alliance Agreement." The Company intends
to add additional ASPs as the demand for its products warrants.
Support for Partner-Provided Internet Services. The Company's Web site
operations team provides support to mirror site, value added link and web custom
crawl partners.
Custom Engineering Services. Many of the Company's major customers require
customization of products purchased from the Company. Although most
customization services will be provided by channel partners, the Company plans
to provide some customization services directly for a fee.
COMPETITION
The markets for the Company's products and services are new, intensely
competitive, evolving quickly and subject to rapid technological change. The
Company faces competition in the overall Internet/intranet software market, as
well as each of the market segments where its products and services compete. The
Company expects competition to persist, increase and intensify in the future as
the markets for its products and services continue to develop and as additional
companies enter its markets.
Microsoft and Netscape provide or have announced intentions to provide a
range of software products based on Internet protocols and to compete in the
broad Internet/intranet software market as well as in specific market segments
where the Company competes. Both Microsoft and Netscape occasionally acquire
technology and products from other companies to augment their product lines, in
addition to developing their own technology and products.
The Company's AltaVista Internet Search Service faces competition from
America Online, Inc. (WebCrawler), Excite, Inc. (Excite), Inktomi Corporation
and Wired Ventures, Inc. (Hotbot), Infoseek Corporation (Infoseek and
Ultraseek), Lycos, Inc. (Lycos and a2z), The McKinley Group, Inc. (which has
announced its intention to merge with Excite, Inc.) (Magellan), and Open Text
Corporation (Open Text Index). America Online, Inc., Excite, Inc., Infoseek
Corporation, Lycos, Inc. and Open Text Corporation have been offering search
services on the Internet longer than the Company. Increased use and visibility
of the
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AltaVista Internet Search Service depends in part on the Company's ability to
build and host a larger Web index as the Web grows in size and to maintain
average sub-second operational performance levels. The Company believes that
significant investments and business alliances will be essential to longer-term
success to keep up with the technological and operational demands imposed by the
explosive worldwide growth of the Web.
In the market for information search and retrieval software, the Company
competes with Excalibur Technologies Corporation, Fulcrum Technologies, Inc.,
Information Dimensions, Inc., Open Text Corporation, Personal Library Software,
Inc. and Verity, Inc., among others. In the future, the Company may also compete
with database vendors should they offer intranet versions of their information
search and retrieval capabilities with their core database products. The Company
may also encounter competition from companies that currently sell document
management systems, groupware applications, Internet and intranet products and
operating systems if they decide to enhance their products by including
information search and retrieval functions.
In the market for directory services, the Company competes with both
standards-based companies such as Control Data Systems, Inc., ISOCOR and Siemens
Nixdorf Informationsysteme AG and proprietary technology companies such as
Banyan Systems, Inc. and Novell, Inc. The proprietary technology companies have
been aggressively pursuing partnerships with key Internet software vendors, such
as Netscape and Software.Com, Inc., to establish their technology as the de
facto standard for Internet directories.
In the market for security software, the Company competes with CheckPoint
Software Technologies, Ltd., Raptor Systems, Inc. and Secure Computing
Corporation, among others. These companies offer integrated packages of both
firewall and tunnel products and have also been in the security software market
longer than the Company.
In the market for Web-based collaboration software, the Company competes
with vendors such as Lundeen & Associates (Web Crossing), O'Reilly & Associates
Inc. (WebBoard), and OS TECHnologies Corporation (WebNotes). AltaVista Forum may
also be perceived as competing with products such as Attachmate Corporation's
OpenMind and Lotus Development Corporation's Lotus Notes, which are workgroup
solutions that offer significantly greater customization and application
development, workflow and complex conferencing functionality and that are priced
significantly higher than AltaVista Forum. Netscape has announced its intention
to introduce an intranet version of its Collabra Share product late in 1996;
Microsoft has announced its intention to create a workgroup collaboration
product based on Microsoft Exchange; and Lotus has announced plans to deliver an
Internet-based version of Lotus Notes.
In the market for Internet email server software, the Company competes with
Internet software vendors such as Software.Com, Inc. and Netscape. AltaVista
Mail may also be perceived as competing with proprietary email server software,
such as Microsoft Exchange, Lotus's cc:Mail and Lotus Notes, all of which
provide Internet mail gateways.
The Company is aware of numerous other major software developers as well as
smaller entrepreneurial companies that are focusing significant resources on
developing and marketing software products and services that will compete with
the Company's products and services. Certain of the Company's current and
potential competitors may bundle their products with other software or hardware,
including operating systems and browsers, in a manner that may discourage users
from purchasing products offered by the Company. Many of the Company's current
and potential competitors in each of its markets have longer operating histories
and significantly greater financial, technical and marketing resources, name
recognition and installed product base than the Company. There can be no
assurance that the Company will be able to compete effectively with current and
future competitors. If significant price competition were to develop, the
Company would likely be forced to lower its prices, which could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Risk Factors -- Competition; New Entrants."
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PRODUCT DEVELOPMENT
As of July 27, 1996, the Company's research and development organization
consisted of 114 employees and 15 Digital contract employees. The Company's
research and development facilities are located in Littleton, Massachusetts;
Palo Alto, California; and Reading, England.
The Company's current product development efforts are focused on enhancing
and broadening its information, security and collaboration and communication
products. Areas of particular emphasis are the refinement of the AltaVista
Search index and search capabilities and the integration of this technology with
other Internet/intranet-focused products. The Company intends to actively
support industry standards and incorporate new standards-compliant features into
its products. Although the principal technologies used in the Company's products
have been developed internally, the Company also licenses and incorporates
third-party technology to supplement its own efforts. The Company spent $2.2
million, $4.5 million and $15.4 million in fiscal 1994, 1995 and 1996,
respectively, on Company-sponsored research and engineering activities.
The Company's ability to successfully develop and release new products and
services and enhancements in a timely manner is subject to a variety of factors,
including its ability to solve technical problems and test products, competing
priorities of the Company, the availability of development and other resources
and other factors outside the control of the Company. There can be no assurance
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction or marketing of new products and
services and enhancements. See "Risk Factors -- New Product Development and
Technological Change."
INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of patent, copyright, trademark and
trade secret laws, non-disclosure agreements and other contractual provisions to
establish, maintain and protect its proprietary rights.
The Company and Digital intend to enter into an asset transfer and license
agreement (the "Asset Transfer Agreement") pursuant to which the Company will
acquire from Digital intellectual property rights relating to the Company's
products and services, including certain patent licenses, copyrights, trademarks
and licenses from third parties. The core technologies of the Company's products
and services were developed by Digital and are either owned by or licensed to
the Company. See "Relationship with Digital -- Asset Transfer and License
Agreement."
Digital has several pending U.S. patent applications relating to the
Company's products. Pursuant to the Asset Transfer Agreement, the Company will
acquire from Digital a license to such patent rights. There can be no assurance
that patents will issue from these pending applications or from any future
applications or that, if issued, any claims will be sufficiently broad to
protect the Company's rights in technology. In addition, there can be no
assurance that any patents that may be issued will not be challenged,
invalidated or circumvented, or that any rights granted thereunder would provide
protection of the Company's proprietary rights. Failure of any patents to
protect the Company's rights in technology may make it easier for the Company's
competitors to offer equivalent or superior technology.
Pursuant to the Asset Transfer Agreement, the Company also will acquire
from Digital all of Digital's rights in the AltaVista trademark, service mark
and logo. Digital has acquired all right, title and interest of AltaVista
Technologies, Inc., an unaffiliated California corporation, in the AltaVista
mark and will transfer such rights to the Company. In addition, the Company is
aware of the existence of AltaVista Computer Company ("ACC"), a California
corporation, and of AltaVista Software ("AS"), a California sole proprietorship.
To the Company's knowledge, neither ACC nor AS has applied for the registration
of any trademarks or service marks incorporating the term "AltaVista." To the
Company's knowledge, no entity has applied to register any trademarks or service
marks incorporating the term "AltaVista" for use in the computer industry. If
necessary, the Company will challenge the efforts by any third party to register
trademarks or service marks incorporating the term "AltaVista" or any other
trade or service marks of the Company, although there can be no assurance that
the Company will be successful.
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Although the Company does not believe it is infringing the intellectual
property rights of others, claims of infringement are becoming increasingly
common as the software industry develops and legal protections, including
patents, are applied to software products.
See "Risk Factors -- Uncertain Protection of Intellectual Property Rights."
EMPLOYEES
As of July 27, 1996, the Company had 186 full-time employees, including 114
in research and development, 36 in marketing and sales, 16 in technical/customer
support and 20 in management, finance and administration. In addition, the
Company contracts with Digital and others for the services of certain of its
employees. The Company's future success will depend, in part, on its ability to
continue to attract retain and motivate highly qualified technical and
management personnel, particularly highly skilled engineers for new product
development, for whom competition is intense. The Company's employees are not
represented by any collective bargaining unit and the Company has never
experienced a work stoppage. The Company believes its relationship with its
employees is good. See "Risk Factors -- Management of Potential Growth; New
Management Team" and "Risk Factors -- Dependence on Key Personnel; Recent
Hires."
FACILITIES
The Company's principal administrative, sales, marketing and research and
development operations are located in a facility owned by Digital in Littleton,
Massachusetts, consisting of approximately 100,000 square feet of office space,
of which approximately half is now occupied by the Company under a facilities
agreement being entered into with Digital. Under the facilities agreement, the
Company also occupies approximately 8,500 square feet in San Mateo, California;
approximately 3,000 square feet in Palo Alto, California; and approximately
7,500 square feet in Reading, England. See "Relationship with
Digital -- Facilities Agreement." The Company believes that suitable alternative
space is available in each of its locations.
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RELATIONSHIP WITH DIGITAL
Upon consummation of the Offering, Digital will own all of the outstanding
Class B Common Stock of the Company, which will represent approximately % of
the combined voting power of all of the outstanding Common Stock (or
approximately % if the Underwriters' over-allotment options are exercised in
full). For so long as Digital continues to own shares of Common Stock
representing more than 50% of the combined voting power of the Common Stock of
the Company, Digital will be able, among other things, to determine any
corporate action requiring approval of holders of Common Stock representing a
majority of the combined voting power of the Common Stock, including the
election of the entire Board of Directors of the Company, without the consent of
the other stockholders of the Company. In addition, through its control of the
Board of Directors and beneficial ownership of Common Stock, Digital will be
able to control certain decisions, including decisions with respect to the
Company's dividend policy, the Company's access to capital (including borrowing
from third-party lenders and the issuance of additional equity securities),
mergers or other business combinations involving the Company, the acquisition or
disposition of assets by the Company and any change in control of the Company.
Digital has advised the Company that its current intent is to continue to
hold all of the Class B Common Stock. However, Digital has no agreement with the
Company not to sell or distribute such shares, and, other than pursuant to the
Underwriting Agreements, in which Digital has agreed, subject to certain
exceptions, not to sell or otherwise dispose of any shares of Common Stock (or
any security convertible into or exchangeable or exercisable for Common Stock)
owned by it for a period of 180 days following the date of this Prospectus
without the prior written consent of Lehman Brothers Inc., there can be no
assurance concerning the period of time during which Digital will maintain its
beneficial ownership of Common Stock. Beneficial ownership of at least 80% of
the total voting power and value of the outstanding Common Stock is required in
order for Digital to continue to include the Company in its consolidated group
for federal income tax purposes and ownership of at least 80% of the total
voting power and 80% of each class of nonvoting capital stock is required in
order for Digital to be able to effect a tax-free spin-off of the Company under
the Code.
The Company's relationship with Digital will also be governed by agreements
to be entered into in connection with the Offering, including a services
agreement, a facilities agreement, a tax-sharing agreement, a corporate
agreement, a strategic alliance agreement, a technical assistance agreement and
an asset transfer and license agreement, the material terms of which are
summarized below. It is anticipated that such agreements will be entered into
prior to the consummation of the Offering. With respect to matters covered by
the services agreement, the relationship between Digital and the Company is
intended to continue in a manner generally consistent with past practices.
Because the Company is a wholly owned subsidiary of Digital, none of these
arrangements will result from arm's-length negotiations and, therefore, the
prices charged to the Company for services provided thereunder may be higher or
lower than prices that may be charged by third parties.
The Company's Amended and Restated Certificate of Incorporation contains
provisions relating to competition by Digital with the Company, potential
conflicts of interest that may arise between the Company and Digital, the
allocation of business opportunities that may be suitable for either of Digital
or the Company and the approval of transactions between the Company and Digital.
For additional information concerning such provisions and circumstances under
which the Class A Common Stock and Class B Common Stock may be converted, see
"Description of Capital Stock."
The descriptions of agreements set forth below are intended to be summaries
and, while material terms of the agreements are set forth herein, the
descriptions are qualified in their entirety by reference to the relevant
agreements filed as exhibits to the Registration Statement of which this
Prospectus forms a part.
SERVICES AGREEMENT
The Company and Digital intend to enter into an intercompany services and
operating agreement (the "Services Agreement") with respect to services to be
provided by Digital (or subsidiaries of Digital) to the Company. The Services
Agreement will provide that such services will be provided in exchange for fees
which (based on current costs for such services) management of the Company
believes would not exceed fees that
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would be paid if such services were provided by independent third parties and
which are substantially consistent with the allocation of the costs of such
services set forth in the historical financial statements of the Company. See
the financial statements included elsewhere herein. Such fees will be paid
monthly in arrears. The Company may request an expansion or termination of
services, in which case the parties will discuss, without obligation, the
provision or termination of such services and an appropriate change or reduction
in charges for such services. Services will be provided to the Company based on
several billing methodologies. Pursuant to one of such billing methodologies,
specified services will be provided to the Company at costs comparable to those
charged to other businesses operated by Digital from time to time, and the
Company will be obligated to purchase those services at the specified costs. In
the event Digital proposes changes in billing methodology which would result in
a significant increase (being the greater of a 10% increase in costs or
$100,000) in costs for the affected services, the Company may terminate such
services.
The purpose of the Services Agreement is to ensure that Digital continues
to provide to the Company the range of services that Digital provided to the
Company prior to the Offering. With respect to matters covered by the Services
Agreement, the relationship between Digital and the Company is intended to
continue in a manner generally consistent with current practices. The services
initially to be provided by Digital to the Company under the Services Agreement
include, among other things, certain accounting, audit, cash management,
corporate development, corporate secretary, employee benefit plan
administration, governmental affairs, human resources and compensation, investor
and public relations, legal, risk management, tax and treasury services.
In addition to the identified services, Digital intends to agree to
continue coverage of the Company under Digital's umbrella liability, property,
casualty and fiduciary insurance policies. The Company intends to agree to
reimburse Digital for the portion of Digital's premium cost with respect to such
insurance that is attributable to coverage of the Company. Either Digital or the
Company may terminate such coverage under Digital's policies at any time on 90
days' written notice, provided that termination of coverage by the Company may
only be for nonpayment and only if a replacement policy, acceptable to Digital,
is entered into by the Company.
Also, in addition to the identified services, Digital intends to agree to
allow eligible employees of the Company to participate in certain of Digital's
employee benefit plans. In addition to a monthly services fee under the Services
Agreement, the Company will reimburse Digital for Digital's costs (including any
contributions and premium costs and including certain third-party expenses and
allocations of certain personnel expenses), generally in accordance with past
practice, relating to participation by the Company's employees in any of
Digital's benefit plans.
The Services Agreement will have an initial term of two years and will be
renewed automatically thereafter for successive one-year terms unless either the
Company or Digital elects not to renew it. After the initial two-year term, the
Services Agreement may be terminated at any time by either party upon 90 days'
written notice. The Services Agreement is subject to early termination by either
the Company or Digital upon 90 days' written notice if Digital ceases to own
shares of Common Stock representing more than 50% of the combined voting power
of the Common Stock of the Company.
Pursuant to the Services Agreement, the Company will indemnify Digital
against any damages that Digital may incur in connection with its performance of
services under the Services Agreement (other than those arising from Digital's
gross negligence or willful misconduct), and Digital will indemnify the Company
against any damages arising out of Digital's gross negligence or willful
misconduct in connection with its rendering of services under the Services
Agreement.
FACILITIES AGREEMENT
The Company and Digital intend to enter into a facilities agreement (the
"Facilities Agreement"). The Facilities Agreement provides that the Company may
occupy space located in facilities owned or leased by Digital in exchange for
rental fees determined at charges comparable to those charged to other
businesses operated by Digital and subject to adjustment from time to time. Rent
is payable monthly in arrears. The purpose of the Facilities Agreement is to
ensure that Digital continues to provide the Company with the same
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or comparable facilities that Digital provided to the Company prior to the
Offering. With respect to matters covered by the Facilities Agreement, the
relationship between Digital and the Company is intended to continue in a manner
generally consistent with past practices.
The Facilities Agreement has an initial term of two years and is renewable
automatically thereafter for successive one-year terms unless either the Company
or Digital elects not to renew it. The Facilities Agreement is subject to early
termination by either the Company or Digital upon six months' written notice if
Digital ceases to own shares of Common Stock representing more than 50% of the
combined voting power of the Common Stock of the Company, and by the Company
with respect to any particular facility upon 30 days' written notice for any
reason. The Company's use of any particular property subject to the Facilities
Agreement is limited by the term of any underlying lease between Digital and a
landlord with respect to those properties leased by Digital and by any
disposition by Digital of any property owned by it.
TAX-SHARING AGREEMENT
The Company is, and immediately after the Offering will continue to be,
included in Digital's federal consolidated income tax group, and the Company's
federal income tax liability will be included in the consolidated federal income
tax liability of Digital and its subsidiaries. In certain circumstances, the
Company and certain of its subsidiaries will also be included with certain other
subsidiaries of Digital in combined, consolidated or unitary income tax groups
for state and local tax purposes. The Company and Digital intend to enter into a
tax-sharing agreement (the "Tax-Sharing Agreement") pursuant to which the
Company and Digital will make payments between them such that, with respect to
any period, the amount of taxes to be paid by the Company, subject to certain
adjustments, will be determined as though the Company were to file separate
federal, state and local income tax returns (including, except as provided
below, any amounts determined to be due as a result of a redetermination of tax
liability of Digital arising from an audit or otherwise) as the common parent of
an affiliated group of corporations filing combined, consolidated or unitary (as
applicable) federal, state and local returns rather than a consolidated
subsidiary of Digital with respect to federal, state and local income taxes.
Pursuant to the Tax-Sharing Agreement, under certain circumstances, the Company
will be reimbursed for tax attributes that it generates after the Offering, such
as net operating losses. Such reimbursement, if any, will be made for
utilization of the Company's losses only after Digital's losses are fully
utilized.
In determining the amount of tax-sharing payments under the Tax-Sharing
Agreement, Digital will prepare for the Company pro forma returns with respect
to federal and applicable state and local income taxes that reflect the same
positions and elections used by Digital in preparing the returns for Digital's
consolidated group and other applicable groups. Digital will continue to have
all the rights of a parent of a consolidated group (and similar rights provided
for by applicable state and local law with respect to a parent of a combined,
consolidated or unitary group), will be the sole and exclusive agent for the
Company in any and all matters relating to the income, franchise and similar tax
liabilities of the Company, will have sole and exclusive responsibility for the
preparation and filing of consolidated federal and consolidated or combined
state income tax returns (or amended returns), and will have the power, in its
sole discretion, to contest or compromise any asserted tax adjustment or
deficiency and to file, litigate or compromise any claim for refund on behalf of
the Company. In addition, Digital has agreed to undertake to provide the
aforementioned services with respect to the Company's separate state and local
returns and the Company's foreign returns. Under the Tax-Sharing Agreement, the
Company will pay Digital a fee intended to reimburse Digital for all direct and
indirect costs and expenses incurred with respect to the Company's share of the
overall costs and expenses incurred by Digital with respect to tax related
services.
In general, the Company will be included in Digital's consolidated group
for federal income tax purposes for so long as Digital beneficially owns at
least 80% of the total voting power and value of the outstanding Common Stock.
Each member of a consolidated group is jointly and severally liable for the
federal income tax liability of each other member of the consolidated group.
Accordingly, although the Tax-Sharing Agreement allocates tax liabilities
between the Company and Digital, during the period in which the Company is
included in Digital's consolidated group, the Company could be liable in the
event that any federal tax liability is
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incurred, but not discharged, by any other member of Digital's consolidated
group. See "Risk Factors -- Relationship with Digital."
CORPORATE AGREEMENT
The Company and Digital intend to enter into a corporate agreement (the
"Corporate Agreement") under which the Company will grant to Digital a
continuing option, transferable to any of its subsidiaries, to purchase, under
certain circumstances, additional shares of Class B Common Stock or shares of
nonvoting capital stock of the Company (the "Stock Option"). The Stock Option
may be exercised by Digital simultaneously with the issuance of any equity
security of the Company (other than in the Offering or upon the exercise of the
Underwriters' over-allotment options), with respect to Class B Common Stock,
only to the extent necessary to maintain its then-existing percentage of the
total voting power and value of the Company and, with respect to shares of
nonvoting capital stock, to the extent necessary to own 80% of each outstanding
class of such stock. The purchase price of the shares of Class B Common Stock
purchased upon any exercise of the Stock Option, subject to certain exceptions,
will be based on the market price at which such stock may be purchased by third
parties. The Stock Option expires in the event that Digital reduces its
beneficial ownership of Common Stock in the Company to Common Stock representing
less than 60% of the number of outstanding shares of Common Stock. The Company
does not intend to issue additional shares of Class B Common Stock except
pursuant to the exercise of the Stock Option.
The Corporate Agreement will further provide that, upon the request of
Digital, the Company will use its best efforts to effect the registration under
applicable federal and state securities laws of any of the shares of Class B
Common Stock and nonvoting capital stock (and any other securities issued in
respect of or in exchange for either) held by Digital for sale in accordance
with Digital's intended method of disposition thereof, and will take such other
actions as may be necessary to permit the sale thereof in other jurisdictions,
subject to certain limitations specified in the Corporate Agreement. Digital
will also have the right, which it may exercise at any time and from time to
time, to include the shares of Class B Common Stock and nonvoting capital stock
(and any other securities issued in respect of or in exchange for either) held
by it in certain other registrations of common equity securities of the Company
initiated by the Company on its own behalf or on behalf of its other
stockholders. The Company will agree to pay all out-of-pocket costs and expenses
(other than underwriters' discounts and commissions and transfer taxes) in
connection with each such registration that Digital requests or in which Digital
participates. Subject to certain limitations specified in the Corporate
Agreement, such registration rights will be assignable by Digital and its
assigns. The Corporate Agreement will contain indemnification and contribution
provisions: (i) by Digital and its permitted assigns for the benefit of the
Company and related persons; and (ii) by the Company for the benefit of Digital
and the other persons entitled to effect registrations of Common Stock (and
other securities) pursuant to its terms and related persons.
The Corporate Agreement will also provide that, for so long as Digital
maintains beneficial ownership of a majority of the number of outstanding shares
of Common Stock, the Company may not take any action or enter into any
commitment or agreement which may reasonably be anticipated to result, with or
without notice and with or without lapse of time, or otherwise, in contravention
(or an event of default) by Digital of: (i) any provision of applicable law or
regulation, including but not limited to provisions pertaining to the Code or
ERISA; (ii) any provision of Digital's corporate charter or by-laws; (iii) any
credit agreement or other material instrument binding upon Digital; or (iv) any
judgment, order or decree of any governmental body, agency or court having
jurisdiction over Digital or any of its assets. See "Description of Capital
Stock -- Certain Certificate of Incorporation and By-law Provisions."
STRATEGIC ALLIANCE AGREEMENT
The Company and Digital intend to enter into a strategic alliance agreement
(the "Strategic Alliance Agreement") that provides that Digital will distribute
the Company's products on a non-exclusive, worldwide basis through Digital's
reseller and distribution networks. The Strategic Alliance Agreement also
designates Digital as an Authorized Service Provider of the Company to provide
training, documentation, technical support and maintenance services to the
Company's customers and end-users. In addition, the Strategic
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Alliance Agreement provides that Digital will loan the Company certain hardware
equipment for product development purposes and provide the Company with certain
hardware and software for internal use at Digital's then prevailing rates and
prices. Digital and the Company have also established a joint marketing
relationship with respect to the Company's products and services.
The Agreement has an initial term of two years and is renewable
automatically thereafter for successive one-year terms, subject to termination
by either the Company or Digital upon six months' written notice if Digital
ceases to own shares of Common Stock representing more than 50% of the combined
voting power of the Common Stock of the Company.
TECHNICAL ASSISTANCE AGREEMENT
The Company and Digital intend to enter into a technical assistance
agreement (the "Technical Assistance Agreement") pursuant to which the Company
may, from time to time, request Digital (including its research laboratories) to
provide consulting and technical assistance to the Company with respect to
technology related to or derived from the Company's products. The Company will
pay Digital fees for any consulting or technical assistance provided by Digital
under the Technical Assistance Agreement at Digital's prevailing rates for
consulting services. Ownership of and rights to any and all ideas, improvements
and inventions conceived or created under the performance of work under the
Technical Assistance Agreement will be determined in writing between the parties
prior to Digital performing the work.
ASSET TRANSFER AND LICENSE AGREEMENT
The Company and Digital intend to enter into an asset transfer and license
agreement (the "Asset Transfer Agreement") which will provide for the transfer
to the Company of all assets and the assumption by the Company of all
liabilities that relate principally to the Company's business, including all
assets and liabilities reflected on the AltaVista Internet Software Products
Balance Sheet included in this Prospectus as adjusted to give effect to the
conduct of the Company's business in the ordinary course from such balance sheet
date to the date of transfer.
Pursuant to the Asset Transfer Agreement, Digital will assign to the
Company all of Digital's rights in the AltaVista trademark, service mark and
logo and will license to the Company all of its Internet addresses. Digital will
retain the right to use such trademarks in advertising, marketing literature and
corporate communications that refer to the Company.
Under the Asset Transfer Agreement, Digital will grant the Company a
non-exclusive, irrevocable, royalty-free license to all Digital patents and
pending and future patent applications covering inventions made as of the
consummation of the Offering that are embodied in the Company's products and
services. Under this license, the Company will have a right to sell to its
customers products embodying technology covered by the patents. The Company will
not otherwise have a right to sublicense its rights under this license or to
assign or transfer the license except in connection with a change of control of
the Company or the sale of all or substantially all of the Company's assets. The
Company may not prevent Digital from granting other licenses under such patents,
will not be able to realize licensing revenues from any such licenses, cannot
require Digital to enforce any such patents against competitors of the Company
and cannot control any enforcement proceedings Digital undertakes.
Under the Asset Transfer Agreement, Digital will assign to the Company all
of Digital's rights in software code developed specifically for and included in
the Company's products and services, subject to the terms of the patent license
described above ("Transferred Code"). Digital will retain an irrevocable,
royalty-free license to use Transferred Code for its internal use, including
research and development. All rights to any performance or functionality
improvements or enhancements ("Modifications") to Transferred Code developed by
or on behalf of Digital will be owned by Digital; provided, however, that
Digital will grant the Company an irrevocable, royalty-free license to use
Modifications developed by Digital during the two years following the
consummation of the Offering. Similarly, all rights to any Modifications
developed by or on behalf of the Company will be owned by the Company; provided,
however, that the Company will grant to
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Digital an irrevocable, royalty-free license to use for Digital's internal use
Modifications developed by the Company during the two years following the
consummation of the Offering.
For two years following the consummation of the Offering, Digital will not
have the right to commercialize any new software product derived from
Transferred Code ("Derived Software") that is designed for use primarily in the
Internet/intranet market, that runs on Windows, Windows NT or UNIX platforms and
that offers functionality substantially similar to any of the AltaVista Products
as of the consummation of the Offering. Notwithstanding the foregoing, Digital
will be free to commercialize without restriction any Digital product, excluding
the AltaVista products, existing as of the consummation of the Offering that
includes Transferred Code as of the consummation of the Offering without
restriction.
Under the Asset Transfer Agreement, Digital will retain all of its rights
in software code used in, but not developed specifically for, the Company's
products ("Shared Code"). Digital will grant the Company a non-exclusive,
irrevocable, royalty-free license to use Shared Code. Under the license, the
Company will have the right to sell to its customers products containing Shared
Code. The Company will not otherwise have a right to sublicense its rights or to
assign or transfer such license except in connection with a change of control of
the Company or the sale of all or substantially all of the Company's assets.
Pursuant to the Asset Transfer Agreement, Digital will license to the
Company all of its rights in all know-how related to and necessary to use, make
and sell the Company's products. Any third party technology used in the
Company's products will, to the extent permitted, be sublicensed or assigned by
Digital to the Company under the Asset Transfer Agreement.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
June 29, 1996 are as follows:
NAME AGE POSITION
- ------------------------------------- --- -----------------------------------------------------
Ilene H. Lang........................ 52 President, Chief Executive Officer and Director
Jeanette A. Horan.................... 40 Vice President, Product Development
Robert E. Hult....................... 49 Vice President, Finance and Operations, Chief
Financial Officer and Treasurer
William A. Laing..................... 44 Chief Technical Officer
Freddy J. Mini....................... 35 Vice President, Worldwide Marketing
James E. Toale....................... 43 Vice President, Human Resources
Ray J. Wilkes........................ 46 Vice President, Sales-Americas
Carel F.H. de Bos.................... 49 Vice President, Sales-Europe, Middle East and Africa
All of the Company's directors are elected annually by the stockholders and
hold office until their respective successors are duly elected and qualified.
Prior to the consummation of the Offering, the Company anticipates that four
additional directors will be added to the Board of Directors who will be
officers or employees of Digital. Upon consummation of the Offering, the Company
anticipates that two additional directors will be added to the Board of
Directors who will be persons not associated with the Company or Digital. In
light of its voting power in the Company, Digital has the ability to change the
size and composition of the Board of Directors.
The Board of Directors is expected to appoint members to a compensation
committee of the Board of Directors (the "Compensation Committee") and an audit
committee of the Board of Directors (the "Audit Committee") after the
independent directors referred to above are elected. The Compensation Committee
will establish remuneration levels for certain officers of the Company and
perform such functions as may be delegated to it under employee benefit programs
and executive compensation programs. The Audit Committee will select and engage,
on behalf of the Company, the independent public accountants to audit the
Company's annual financial statements. The Audit Committee will also review and
approve the planned scope of the annual audit.
Executive officers are elected annually by the Board of Directors and serve
at its discretion. All of the current directors and executive officers of the
Company were elected to their current officer positions with the Company shortly
following the organization of the Company in June 1996.
Ilene H. Lang joined Digital in November 1995 and has been the Vice
President of Digital's Internet Software Business Unit (formerly the
Connectivity Software Business Unit) since its inception in January 1996. From
January 1993 to September 1995, she was employed by Lotus Development
Corporation, most recently as Senior Vice President, Desktop Business Group.
Prior to joining Lotus, from August 1991 to June 1992, she was the Chief
Operating Officer of the Industrial Technology Institute. Prior to that time,
she was President of Adelie Corporation, a wholly owned AT&T, Inc. subsidiary;
Vice President, Products and Services for Ontologic Inc.; and Vice President,
Marketing and Software Products for Symbolics, Inc. Ms. Lang received an A.B.
from Radcliffe College and an M.B.A. from Harvard Business School.
Jeanette A. Horan joined Digital in 1994 and has been Vice President,
Product Development of the Internet Software Business Unit since January 1996.
From 1989 to 1994 she was employed by The Open Software Foundation as Director
of Engineering and later Vice President, Interoperable Technologies. From 1981
to 1989 she was employed by Gould Computer Systems Division, most recently as
Director, Software Engineering. Ms. Horan received a B.Sc. in Mathematics from
the University of London and an M.B.A. from Boston University.
Robert E. Hult has been employed by Digital since 1972 in various finance
and general management positions, including Vice President, Finance and
Operations of the Internet Software Business Unit since
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January 1996; Vice President, Investor Relations; Area Vice President, Asia
Pacific and Americas; and Vice President, Western States Region. Prior to
joining Digital, Mr. Hult was a consultant at Arthur Andersen & Co. Mr. Hult
received a B.S./M.S. from Rensselaer Polytechnic Institute and an M.B.A. from
Babson College. He also completed the Harvard Business School Executive Program
for Management Development.
William A. Laing has been employed by Digital from 1982 to 1986 and since
1987, most recently as a Corporate Consulting Engineer and the Technical
Director of the Internet Software Business Unit since January 1996. Prior to
that, he held a number of senior technical positions, including Technical
Director OpenVMS Engineering, Technical Director Engineering Europe and as a
software strategist in the Computer Systems Division. From 1986 to 1987 he was
the Software Director for European Silicon Structures Ltd., and from 1972 to
1981 he was a researcher and lecturer at the University of Edinburgh. Mr. Laing
received a B.Sc. in Mathematics and Computer Science and a M.Phil., Computer
Science, both from the University of Edinburgh.
Freddy J. Mini joined Digital in May 1996 as Director of Marketing of the
Internet Software Business Unit. From 1991 to 1996 he was employed by Lotus
Development Corporation, most recently as Senior Director, Product and Business
Electronic Marketing. From 1990 to 1991 he was the Director of Marketing for
Evolution France, an IBM subsidiary, and from 1989 to 1990 he was Director of
Business Development for BIG Systeme. Mr. Mini received a Baccalaureate in
Science and a Master of Engineering from the Ecole Nationale Superieure
d'Ingenieur in France.
James E. Toale has been employed by Digital since July 1984 in various
human resource management capacities, most recently as Director, Human
Resources, of the Internet Software Business Unit since January 1996. From 1981
to 1984 he was Manager of Corporate Employment and Affirmative Action for Philip
Morris Companies, Inc., and from 1971 to 1981 was employed by the Atlantic
Mutual Companies insurance group, most recently as Manager Human Resource
Planning. Mr. Toale received a B.B.A. from the College of Insurance and an M.A.
in Human Resource Management from The New School.
Ray J. Wilkes has been employed by Digital since 1977 in various sales and
sales management assignments, most recently as Vice President, Sales-Americas of
the Internet Software Business Unit since January 1996. Prior to that time, he
was Director of Business Operations for the Americas Systems Business Unit and
the Regional Channels Sales Manager for the Eastern Region. From 1974 to 1977 he
was a financial planning consultant with Dayton Hudson Corporation. Mr. Wilkes
received a B.S. from Boston College and an M.B.A. from Boston University.
Carel F.H. de Bos joined Digital in May 1996 as Vice President,
Sales-Europe, Middle East and Africa of the Internet Software Business Unit.
From 1993 to 1996 he was Director of Information Services/Europe for R.R.
Donnelley & Sons Company. From 1987 to 1991 he was Corporate Business Manager
for Philips Information Systems, and from 1991 to 1993, after the acquisition by
Digital of that business unit, he was the Business Manager for 800 Software,
Inc. in Europe, a corporate reseller of desktop software. Mr. de Bos holds a
B.Sc. in electronic engineering from the HTS in Amsterdam.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company, Digital or any other
subsidiary of Digital (also referred to as "outside directors") will receive an
annual retainer of $ and a fee of $ per day for attending regular
meetings of the Board of Directors and $ per day for participating in
meetings of the Board of Directors held by means of conference telephone and for
participating in certain meetings of committees of the Board of Directors.
Payment of director fees will be made quarterly. Directors will also be
reimbursed for reasonable out-of-pocket expenses incurred in attending such
meetings.
Directors Stock Option Plan. The Company has adopted a directors stock
option plan (the "Directors Plan") providing for the annual grant of stock
options to purchase shares of Class A Common Stock to outside directors as
additional compensation for their service as directors. A total of
shares of Class A Common Stock have been reserved for issuance under the
Directors Plan.
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Under the Directors Plan, each eligible director initially joining the
Board of Directors in fiscal 1997 will be granted an option to purchase
shares of Class A Common Stock upon the later of the adoption of the plan or the
director's appointment or election. With respect to each eligible director who
is a director as of June 29, 1997 or who joins the Board of Directors on or
after June 29, 1997, options to purchase shares of Class A Common Stock
will be granted on the date of the Company's next annual meeting of stockholders
provided that such director's service as a director will continue after such
meeting.
The exercise price of options granted under the Directors Plan will be 100%
of the fair market value per share of the Class A Common Stock on the date the
option is granted. Options granted under the Directors Plan will become
exercisable at the rate of 33% on the first and second anniversaries of the date
of grant and 34% on the third anniversary of the date of grant. The options will
expire on the tenth anniversary of the grant date, unless terminated earlier in
accordance with the Directors Plan. However, any option granted to a director
who ceases to be a director of the Company because of death will expire one year
from the date of death. If an optionee ceases to be a director of the Company
because of permanent disability or death or by reason of retirement from the
Board of Directors and has completed at least five years of service as a
director at the time of such retirement, his or her option will become
immediately exercisable in full. If an optionee ceases to be a director of the
Company after his or her option becomes exercisable, the option will remain
exercisable in accordance with its terms. If an optionee ceases to be a director
of the Company for any reason other than those described above prior to the time
his or her option becomes fully exercisable, the option will terminate with
respect to the shares as to which the option is not then exercisable.
COMPENSATION OF EXECUTIVE OFFICERS
Summary Compensation Table
The following table summarizes compensation for services to the Company,
Digital and its subsidiaries in all capacities awarded to, earned by or paid to
the Company's chief executive officer and the four most highly compensated
executive officers of the Company for the fiscal year ended June 29, 1996.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL --------------
COMPENSATION(1) SECURITIES
FISCAL --------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(2) COMPENSATION(3)
- -------------------------------- ----- -------- -------- -------------- ---------------
Ilene H. Lang................... 1996 $300,000 $ 67,500(4) (ALTV) --
President and CEO 30,000 (DEC) --
Jeanette A. Horan............... 1996 209,000 -- (ALTV) --
Vice President, 5,000 (DEC) $3,294
Product Development
Robert E. Hult.................. 1996 173,617 -- (ALTV) --
Vice President, Finance and 5,000 (DEC) 3,979
Operations, Chief Financial
Officer
and Treasurer
William A. Laing................ 1996 139,680(5) 35,000(5)(6) (ALTV) --
Chief Technical Officer 5,000 (DEC) --
Ray J. Wilkes................... 1996 133,536 10,000(7) (ALTV) --
Vice President, 5,000 (DEC) 3,347
Sales-Americas
- ---------------
(1) The Company was organized on June 28, 1996, and the persons named in the
table above became executive officers of the Company at that time or shortly
thereafter. Reported in the table under "Annual Compensation" and "All Other
Compensation" are the total amounts paid to such persons for their service
in all capacities to Digital and its subsidiaries.
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(2) Includes options to purchase shares of the Company's Class A Common Stock
(designated in the table as ALTV)will be granted prior to the consummation
of the Offering but are included in the table for clarity of presentation.
Includes options to purchase shares of Digital common stock (designated in
the table as DEC) granted under Digital's 1995 Equity Plan on August 21,
1996, but does not include any other stock-based compensation received from
Digital.
(3) Includes matching contributions by Digital under its Savings and Investment
Plan ("SAVE Plan") for each executive officer as follows: Ms. Horan, $3,294;
Mr. Hult, $2,462; and Mr. Wilkes, $2,563; and under the Digital Equipment
Corporation Restoration Pension Plan, adopted effective as of May 1, 1992
(amended and renamed the Digital Equipment Corporation Cash Account Pension
Plan effective as of March 1, 1996), for each executive officer as follows:
Mr. Hult, $1,517 and Mr. Wilkes, $784. Neither Ms. Lang nor Mr. Laing
participate in Digital's SAVE Plan.
(4) Represents an amount Digital agreed to pay to Ms. Lang in fiscal year 1996
as an inducement for her to commence employment with Digital.
(5) Paid in British Pounds Sterling. The amount given in U.S. dollar equivalents
is based on the British Pounds Sterling/U.S. dollar exchange rate of .6433,
as quoted in the Wall Street Journal on June 28, 1996, the last business day
of Digital's 1996 fiscal year.
(6) Represents a cash retention award paid by Digital in December 1995.
(7) Represents sales commissions.
Stock Options
The following table sets forth information concerning individual grants of
stock options made during fiscal 1996 to the Company's chief executive officer
and the other named executive officers. No grants of stock appreciation rights
to such persons have been made at any time.
OPTION GRANTS
POTENTIAL
PERCENT OF REALIZED VALUE
TOTAL AT ASSUMED RATES
NUMBER OF OPTIONS OF STOCK PRICE
SHARES GRANTED TO APPRECIATION FOR
UNDERLYING COMPANY EXERCISE OPTION TERM(3)(4)
OPTIONS EMPLOYEES PRICE EXPIRATION -----------------
NAME GRANTED(1) IN 1996(2) PER SHARE DATE 5% 10%
- --------------------- ------------ ---------- --------- -------- ------ ------
Ilene H. Lang........ (ALTV) % $ $ $
30,000 (DEC) 1.00 37.75 8/21/06 -- --
Jeanette A. Horan.... (ALTV)
5,000 (DEC) 0.17 37.75 8/21/06 -- --
Robert E. Hult....... (ALTV)
5,000 (DEC) 0.17 37.75 8/21/06 -- --
William A. Laing..... (ALTV)
5,000 (DEC) 0.17 37.75 8/21/06 -- --
Ray J. Wilkes........ (ALTV)
5,000 (DEC) 0.17 37.75 8/21/06 -- --
- ---------------
(1) All options to purchase shares of Class A Common Stock of the Company
(designated in the table as ALTV) will be granted prior to the consummation
of the Offering but are included in the table for clarity of presentation.
Options to purchase shares of common stock of Digital (designated in the
table as DEC) were granted on August 21, 1996 to the named executive
officers. Options with respect to one-half of the shares of Class A Common
Stock of the Company become exercisable on October 1, 1998, one quarter on
October 1, 1999 and one quarter on October 1, 2000. These options expire on
the tenth anniversary of the grant date, unless the optionee dies or ceases
to serve as an employee of the Company prior to that date. Options granted
by the Company prior to the consummation of the Offering are to be effective
and deemed to be granted as of the date of this Prospectus, and the exercise
price of all such options is equal to the public offering price set forth on
the cover page of this Prospectus.
The stock options granted by Digital include incentive and non-qualified
stock options granted under Digital's 1995 Equity Plan at exercise prices
equal to the fair market value of Digital's common stock on
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the date of grant. The stock options granted by Digital have a term of ten
years and become exercisable ratably over three years from the date of
grant.
(2) In the case of Digital, reflects percentage of total options granted to all
employees by Digital on August 21, 1996.
(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compounded rates of appreciation on the
Company's Class A Common Stock over the term of the options. These numbers
are calculated based on rules promulgated by the Securities and Exchange
Commission and do not reflect the Company's estimates of future stock price
growth. Actual gains, if any, on stock option exercises and Class A Common
Stock holdings are dependent on the timing of such exercise and sale of the
shares and the future performance of the Company's Class A Common Stock.
There can be no assurances that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by the
individuals.
(4) The following is applicable to Digital:
GRANT DATE VALUE
-----------------------------------------
MARKET VALUE GRANT DATE
NAME ON GRANT DATE PRESENT VALUE
- --------------------------------------------------- ------------------ ------------------
Ilene H. Lang................................. $37.75 $392,643
Jeanette A. Horan............................. 37.75 65,440
Robert E. Hult................................ 37.75 65,440
William A. Laing.............................. 37.75 65,440
Ray J. Wilkes................................. 37.75 65,440
The grant date present values shown were determined using a Black-Scholes
pricing model with the following assumptions and adjustments: stock price
volatility of 35%, and interest rate of 6.3% representing the interest rate
on a U.S. Treasury security on the dates of grant with a maturity date
corresponding to that of the option term; and an assumed 3.6-year option
term. The use of this model should not be construed as an endorsement of
its accuracy. Whether the model's assumptions will prove to be accurate
cannot be known at the date of grant. The ultimate value of the options, if
any, will depend on the future value of the underlying Digital common
stock, which cannot be forecast with reasonable accuracy, and on the
holder's investment decisions.
Stock Options Exercised During Fiscal 1996 and Fiscal Year-end Option
Values
The following table reports certain information regarding Digital stock
option exercises during fiscal 1996 and outstanding Digital stock options held
at the end of fiscal 1996 by the Company's chief executive officer and the other
named executive officers. There were no Company stock options outstanding at any
time during fiscal 1996. The value of unexercised, in-the-money options at
fiscal year-end is the difference between the exercise price and the fair market
value of the underlying stock on June 28, 1996, the last business day of the
fiscal year. The closing price of Digital's common stock on the New York Stock
Exchange on such date was $45.6875. No stock appreciation rights were exercised
or were outstanding with respect to such persons during fiscal 1996.
AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND
FISCAL 1996 YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED ------------------------------ ---------------------------------
ON VALUE RESTRICTED/ RESTRICTED/
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- -------- -------- ----------- ---------------- ----------- -------------------
Ilene H. Lang............... 0 -- 0 45,000 $ 0 $ 0
Jeanette A. Horan........... 0 -- 2,840 5,960 13,148 31,603
Robert E. Hult.............. 0 -- 6,866 8,922 107,896 89,551
William A. Laing............ 0 -- 6,230 3,356 158,091 84,737
Ray J. Wilkes............... 1,400 $11,453 3,830 920(1) 2,558 1,224
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- ---------------
(1) All of these options represent immediately exercisable restricted stock
options, with restrictions on disposition of the underlying shares lapsing
ratably over periods of three to ten years from date of grant.
Pension Plans
The Company's employees currently participate in Digital's pension plans
which cover substantially all of the Company's and Digital's employees.
Effective March 1, 1996, Digital's defined benefit pension plan (the "Prior
Pension Plan") for its U.S. employees was amended and renamed the Cash Account
Pension Plan (the "New Pension Plan").
Under the Prior Pension Plan, benefits were based upon the employee's
earnings during service with Digital and were payable after retirement in the
form of annuities or a lump sum benefit and the annual amount payable upon
retirement at age 65 was, in general, 1.5% of the aggregate amount of the
participant's eligible compensation earned on and after July 1, 1989. Those
persons who were active participants under the Prior Pension Plan on July 1,
1989, or who later become active participants and were credited with prior
service, were also eligible to receive 1.5% of the average of the participant's
annual compensation between July 1, 1984 and July 1, 1989, multiplied by the
number of years of accredited service prior to July 1, 1989.
Under the New Pension Plan, benefits for U.S. employees are based upon the
employee's eligible earnings during service with Digital, and are credited
quarterly by Digital at the rate of 4% of the employee's total eligible pay for
that quarter, plus interest. The accumulated, vested account balance is payable
in one lump sum or in monthly payments, as elected by the participant, upon the
employee's retirement or termination of employment with Digital. The opening
account balance under the New Pension Plan for employees who were participants
under the Prior Pension Plan on February 29, 1996 was determined by calculating
the highest of (a) the lump sum value of the benefit that would have been
payable under the Prior Pension Plan as of February 29, 1996, (b) the lump sum
value of the benefit that would have been payable under the Prior Pension Plan
but using average pay for the five-year period ending June 30, 1995, in place of
average pay during all years of employment with Digital, or (c) a percentage
factor (between 4.5% and 7.0%) times years of service times base pay as of
December 18, 1995. The New Pension Plan continues the Prior Pension Plan formula
for five years for all employees who on February 29, 1996 had reached age 50 and
had completed at least five years of vesting service, or who were age 60 or
older. At the earlier of March 31, 2001 or the employee's date of termination,
his or her benefit will be the greater of the value of the benefit accrued under
the Prior Pension Plan's formula or the employee's then current account balance
under the New Pension Plan. A participant is 100% vested in his or her benefit
after completing five years of vesting service with Digital. For purposes of
calculating a participant's pension benefit under either the Prior Pension Plan
or the New Pension Plan, annual compensation is currently limited to $150,000,
subject to adjustment to reflect cost of living increases, pursuant to the Code.
The Digital Equipment Corporation Restoration Pension Plan (the
"Restoration Plan"), adopted effective as of May 1, 1992 (amended and renamed
the Digital Equipment Corporation Cash Account Pension Plan effective as of
March 1, 1996), compensates Digital's employees for reductions in the benefits
calculated under either the Prior or the New Pension Plan, as the case may be,
due to legislative and regulatory limitations. The Restoration Plan, which is a
non-qualified plan under the Code, and which is unfunded, provides additional
retirement compensation equal to the difference between the benefit a
participant would receive under either Pension Plan without the legislative and
regulatory limitations and the benefit actually payable to the participant under
either Pension Plan.
Estimated annual retirement benefits payable as a straight life annuity
under the New Pension Plan and Restoration Plan at age 65 based on projected
compensation and continued employment for the following individuals would be:
Ms. Lang, $23,040; Ms. Horan, $54,617; Mr. Hult, $87,830; and Mr. Wilkes,
$71,299. Mr. Laing is not covered by the New Pension Plan.
In addition, Digital has a Savings and Investment Plan ("SAVE Plan") which
allows eligible U.S. employees to defer up to 12% (14% as of June 30, 1996) of
their eligible compensation on a tax-deferred basis into a tax exempt trust
pursuant to rules set forth in the Code. Beginning in fiscal year 1996, Digital
makes a matching contribution to the trust for the benefit of each participant
in the SAVE Plan at the rate equal to the
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lesser of (a) 33 1/3% of such employee's contributions or (b) 2% of such
employee's annual eligible compensation (subject to Code limitations). The
employee accounts are invested by the plan trustee in up to nine investment
alternatives, as directed by the employee. Annual employee pre-tax deferrals are
currently limited to $9,500 for the 1996 calendar year.
The Digital Equipment Corporation SAVE Restoration Plan was adopted
effective on July 1, 1995. The SAVE Restoration Plan, which is a non-qualified
plan under the Code and is unfunded, allows any SAVE Plan participant whose
annual eligible compensation is at least $150,000 (subject to adjustment to
reflect cost of living increases) and who defers the maximum amount of his or
her eligible compensation under the SAVE Plan for the year to receive a credit
equal to 2% of the amount by which such employee's eligible compensation for
that year exceeds $150,000 (as adjusted) resulting in a total matching
contribution equal to what would have otherwise been provided under the SAVE
Plan but for legislative and regulatory limitations.
PRINCIPAL STOCKHOLDER
All of the shares of Class B Common Stock outstanding immediately
prior to the consummation of the Offering are owned by Digital. Upon
consummation of the Offering, Digital will own all of the outstanding Class B
Common stock and, accordingly, will own Common Stock representing approximately
% of the economic interest in the Company ( % if the Underwriters'
over-allotment options are exercised in full) and representing approximately
% of the combined voting power of the Company's outstanding Common Stock
(or % if the Underwriters' over-allotment options are exercised in full).
The address of Digital is 111 Powdermill Road, Maynard, Massachusetts 01754.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have shares
of Class A Common Stock issued and outstanding ( if the Underwriters'
over-allotment options are exercised in full) and shares of Class B
Common Stock issued and outstanding. All of the shares of Class A Common Stock
to be sold in the Offering will be freely tradeable without restrictions under
the Securities Act of 1933, as amended (the "Securities Act"), except for any
shares acquired by an "affiliate" of the Company (as that term is defined in
Rule 144 adopted under the Securities Act ("Rule 144")), which will be subject
to the resale limitations of Rule 144 unless sold under an effective
registration statement under the Securities Act or pursuant to another exemption
from registration. All of the outstanding shares of Class B Common Stock are
owned by Digital and have not been registered under the Securities Act and may
not be sold in the absence of an effective registration statement under the
Securities Act other than in accordance with Rule 144 or another exemption from
registration. Digital has certain rights to require the Company to effect
registration of shares of Class B Common Stock owned by Digital, which rights
may be assigned. See "Relationship with Digital -- Corporate Agreement."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned shares of
Common Stock for at least two years, including a person who may be deemed an
"affiliate" of the Company, is entitled to sell within any three-month period a
number of shares that does not exceed the greater of one percent of the total
number of outstanding shares of the class of stock being sold or the average
weekly reported trading volume of the class of stock being sold during the four
calendar weeks preceding the sale. A person who is not deemed an "affiliate" of
the Company at any time during the three months preceding a sale and who has
beneficially owned shares for at least three years is entitled to sell such
shares without regard to the volume limitations described above. As defined in
Rule 144, an "affiliate" of an issuer is a person that directly or indirectly
through the use of one or more intermediaries controls, is controlled by, or is
under common control with, such issuer. The Securities and Exchange Commission
has proposed to amend the holding period required by Rule 144 to permit sales of
"restricted securities" after one year rather than two years (and to permit
sales without any volume limitation after two years, rather than three years,
for non-affiliates).
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Rule 144A under the Securities Act ("Rule 144A") provides a non-exclusive
safe harbor exemption from the registration requirements of the Securities Act
for specified resales of restricted securities to certain institutional
investors. In general, Rule 144A allows unregistered resales of restricted
securities to a "qualified institutional buyer," which generally includes an
entity, acting for its own account or for the account of other qualified
institutional buyers, that in the aggregate owns or invests at least $100
million in securities of unaffiliated issuers. Rule 144A does not extend an
exemption to the offer or sale of securities that, when issued, were of the same
class as securities listed on a national securities exchange or quoted on an
automated quotation system. The shares of Class B Common Stock outstanding as of
the date of this Prospectus would be eligible for resale under Rule 144A because
such shares, when issued, were not of the same class as any listed or quoted
securities.
Prior to the Offering, there has been no market for the Class A Common
Stock. No predictions can be made of the effect, if any, that market sales of
currently outstanding shares of Class B Common Stock or the availability of such
shares for sale will have on the market price of Class A Common Stock prevailing
from time to time. Nevertheless, sales of substantial amounts of Class B Common
Stock in the public market, or the perception that such sales could occur, could
adversely affect prevailing market prices for Class A Common Stock. Although
Digital in the future may effect or direct sales or other dispositions of Common
Stock that would reduce its ownership interest in the Company, Digital has
advised the Company that its current intention is to continue to hold all of the
Class B Common Stock owned by it immediately after the completion of the
Offering. However, Digital has no agreement with the Company not to sell or
distribute such shares, and, other than pursuant to the Underwriting Agreements
described below, there can be no assurance concerning the period of time during
which Digital will maintain its ownership of Common Stock. Beneficial ownership
of at least 80% of the total voting power and value of the outstanding Common
Stock is required in order for Digital to continue to include the Company in its
consolidated group for federal tax purposes, and ownership of at least 80% of
the total voting power and 80% of each class of non-voting capital stock is
required in order for Digital to be able to effect a tax-free spin-off of the
Company. Digital has indicated to the Company that any decision by Digital to
reduce such ownership interest would be made in the future on the basis of all
of the circumstances existing at such time, including the effect of any such
reduction on Digital (including any benefit to Digital from the removal from
Digital's consolidated balance sheet of the Company's assets and liabilities in
the event Digital's interest in the Common Stock is reduced below 50%), the
needs of Digital, the performance of Digital, stock market conditions and other
factors. In connection with the Offering, subject to certain exceptions, the
Company and Digital will agree with the Underwriters not to sell or otherwise
dispose of, directly or indirectly, any shares of Common Stock (or any security
convertible into or exchangeable or exercisable for Common Stock) for a period
of 180 days after the date of this Prospectus without the prior written consent
of Lehman Brothers Inc.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company will consist of (a) 100,000,000
shares of Common Stock, par value $0.01 per share, of which: (i) 50,000,000
shares initially will be designated as Class A Common Stock; and (ii) 50,000,000
shares initially will be designated as Class B Common Stock; and (b) 5,000,000
shares of Preferred Stock, par value $0.01 per share, of which no shares are
outstanding as of the date hereof. Of the 50,000,000 shares of Common Stock
designated as Class A Common Stock, shares are being offered hereby
and shares are reserved for issuance upon conversion of Class B Common
Stock into Class A Common Stock. Of the 50,000,000 shares of Common Stock
designated as Class B Common Stock, shares will be outstanding and
held by Digital upon consummation of the Offering. Each of the Class A Common
Stock and Class B Common Stock constitutes a series of Common Stock under the
General Corporation Law of the State of Delaware (the "DGCL"). A description of
the material terms and provisions of the Company's Amended and Restated
Certificate of Incorporation affecting the relative rights of the Class A Common
Stock, the Class B Common Stock and the Preferred Stock is set forth below. The
description is intended as a summary and is qualified in its entirety by
reference to the form of the Company's Amended and Restated Certificate of
Incorporation filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.
COMMON STOCK
Voting Rights
The holders of Class A Common Stock and Class B Common Stock generally have
identical rights, except that holders of Class A Common Stock are entitled to
one vote per share while holders of Class B Common Stock, with some exceptions
described below, are entitled to three votes per share on all matters to be
voted on by stockholders. Holders of shares of Class A Common Stock and Class B
Common Stock are not entitled to cumulate their votes in the election of
directors. Generally, all matters to be voted on by stockholders must be
approved by a majority (or, in the case of election of directors, by a
plurality) of the votes entitled to be cast by all shares of Class A Common
Stock and Class B Common Stock present in person or represented by proxy, voting
together as a single class, subject to any voting rights granted to holders of
any Preferred Stock. Except as otherwise provided by law, and subject to any
voting rights granted to holders of any outstanding Preferred Stock, amendments
to the Company's Amended and Restated Certificate of Incorporation must be
approved by a majority of the combined voting power of all Class A Common Stock
and Class B Common Stock, voting together as a single class. However, amendments
to the Company's Amended and Restated Certificate of Incorporation that would
alter or change the powers, preferences or special rights of the Class A Common
Stock or the Class B Common Stock so as to affect them adversely also must be
approved by a majority of the votes entitled to be cast by the holders of the
shares affected by the amendment, voting as a separate class.
Dividends
The Board of Directors of the Company currently does not intend to pay
dividends on the Class A Common Stock and Class B Common Stock. By virtue of its
stock ownership, Digital will have the ability to change the size and
composition of the Company's Board of Directors and thereby control the payment
of dividends by the Company.
Conversion
Each share of Class B Common Stock will be convertible at the holder's
option into one share of Class A Common Stock while such share of Class B Common
Stock is held by Digital or any of its subsidiaries and until the earlier of:
(i) the date on which shares of Class B Common Stock are issued to stockholders
of Digital or its successor in a Tax-Free Spin-Off; and (ii) the date on which
the number of shares of Class B Common Stock outstanding is less than 60% of the
aggregate number of shares of Common Stock
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outstanding. Any shares of Class B Common Stock transferred to a person other
than Digital or any of its subsidiaries shall automatically convert to shares of
Class A Common Stock upon such disposition, except for a disposition effected in
connection with a transfer of Class B Common Stock to stockholders of Digital as
a dividend in a Tax-Free Spin-Off. In the event of a Tax-Free Spin-Off, shares
of Class B Common Stock shall automatically convert into shares of Class A
Common Stock on the fifth anniversary of the Tax-Free Spin-Off, unless prior to
such Tax-Free Spin-Off Digital delivers to the Company an opinion of counsel
(which counsel shall be reasonably satisfactory to the Company) to the effect
that such conversion would preclude Digital from obtaining a favorable ruling
from the Internal Revenue Service that the distribution would be tax-free under
the Code. If such an opinion is received, approval of such conversion shall be
submitted to a vote of the holders of the Company's Common Stock as soon as
practicable after the fifth anniversary of the Tax-Free Spin-Off unless Digital
delivers to the Company an opinion of Digital's counsel (which counsel shall be
reasonably satisfactory to the Company) prior to such anniversary that such vote
would adversely affect the status of the Tax-Free Spin-Off. Approval of such
conversion will require the affirmative vote of the holders of a majority of the
shares of both the Company's Class A Common Stock and Class B Common Stock
present and voting, voting together as a single class, with each share entitled
to one vote for such purpose. No assurance can be given that such conversion
would be consummated. Digital has no current plans with respect to a Tax-Free
Spin-Off of the Company.
Digital expects to convert its Class B Common Stock into Class A Common
Stock immediately prior to a Tax-Free Spin-Off if, after such conversion, it
would have beneficial ownership of at least 80% of the voting power of the
outstanding Common Stock. All shares of Class B Common Stock shall automatically
convert into Class A Common Stock if a Tax-Free Spin-Off has not occurred and
the number of outstanding shares of Class B Common Stock falls below 60% of the
aggregate number of outstanding shares of Common Stock. This will prevent
Digital from decreasing its economic interest in the Company to less than 60%
while still retaining control of approximately 81.8% of the Company's voting
power. All conversions will be effected on a share-for-share basis.
The requirement that Digital retain beneficial ownership of at least 80% of
the voting power of the outstanding Common Stock after any conversion prior to a
Tax-Free Spin-Off is intended to ensure that the tax treatment of the Tax-Free
Spin-Off is preserved. Similarly, the requirement to submit such conversion to a
vote of the holders of Common Stock is intended to preserve such tax treatment
should the Internal Revenue Service challenge automatic conversion on the fifth
anniversary of the Tax-Free Spin-Off as violating the 80% vote requirement.
Automatic conversion of the Class B Common Stock into Class A Common Stock if a
Tax-Free Spin-Off has not occurred and Digital decreases its economic interest
in the Company to less than 60% is intended to ensure that Digital retains
voting control by virtue of its ownership of Class B Common Stock only if it has
a sizable economic interest in the Company.
In addition, in order to give any holder of the Class A Common Stock or
Class B Common Stock the right to participate in any offer for a significant
amount of the shares of the other class that is not similarly offered for the
shares of such holder's class, following a Tax-Free Spin-Off shares of Common
Stock of each class will be convertible, at the option of the registered holder
thereof, on a share-for-share basis, into shares of the other class if any
person (other than Digital or any of its consolidated subsidiaries), or any
group of persons (other than Digital or any one or more of its subsidiaries)
agreeing to act together for the purpose of acquiring, holding, voting or
disposing of shares of Common Stock, makes an offer, which the Company's Board
of Directors deems, in its sole discretion, to be a bona fide offer, to purchase
5% or more of the other class of Common Stock for cash or a combination of cash
and other securities or property without making a similar offer for the shares
of such class. The shares of Common Stock of a class may only be so converted
during the period in which such bona fide offer is in effect. Any share of
Common Stock so converted and not acquired by the offeror prior to the
termination, rescission or completion of the offer will automatically reconvert
to a share of the class from which it was converted upon such termination,
rescission or completion.
Other Rights
In the event of any merger or consolidation of the Company with or into
another company in connection with which shares of Common Stock are converted
into or exchangeable for shares of stock, other securities or
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property (including cash), all holders of Common Stock, regardless of class,
will be entitled to receive the same kind and amount of shares of stock and
other securities and property (including cash).
On liquidation, dissolution or winding up of the Company after payment in
full of the amounts required to be paid to holders of Preferred Stock, all
holders of Common Stock, regardless of class, are entitled to share ratably in
any assets available for distribution to holders of shares of Common Stock.
No shares of either class of Common Stock are subject to redemption or have
preemptive rights to purchase additional shares of Common Stock. However, the
Company and Digital intend to enter into a corporate agreement under which the
Company will grant to Digital a continuing option, transferable to any of its
subsidiaries, to purchase, under certain circumstances, at market price,
additional shares of Class B Common Stock or shares of nonvoting capital stock
of the Company to the extent necessary to maintain its then-existing percentage
of the total voting power and value of the Company and, with respect to shares
of nonvoting capital stock, to the extent necessary to own 80% of each
outstanding class of such stock. See "Relationship with Digital -- Corporate
Agreement."
Upon consummation of the Offering, all the outstanding shares of Class A
Common Stock and Class B Common Stock will be legally issued, fully paid and
nonassessable.
PREFERRED STOCK
The Preferred Stock is issuable from time to time in one or more series and
with such designations and preferences for each series as shall be stated in the
resolutions providing for the designation and issue of each such series adopted
by the Board of Directors of the Company. The Board of Directors is authorized
by the Company's Amended and Restated Certificate of Incorporation to determine,
among other things, the voting, dividend, redemption and liquidation preferences
and limitations pertaining to such series. The Board of Directors, without
stockholder approval, may issue Preferred Stock with voting and other rights
that could adversely affect the voting power of the holders of the Common Stock
and could have certain antitakeover effects. The Company has no present plans to
issue any shares of Preferred Stock. The ability of the Board of Directors to
issue Preferred Stock without stockholder approval could have the effect of
delaying, deferring or preventing a change in control of the Company or the
removal of existing management.
CERTAIN CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS
The Company's Amended and Restated Certificate of Incorporation provides
that any person purchasing or acquiring an interest in shares of capital stock
of the Company is deemed to have consented to the following provisions relating
to intercompany agreements and to transactions with interested parties and
corporate opportunities. The corporate charter of Digital does not include
comparable provisions relating to intercompany agreements, transactions with
interested parties or corporate opportunities.
Transactions With Interested Parties
The Company's Amended and Restated Certificate of Incorporation provides
that no contract, agreement, arrangement or transaction (or any amendment,
modification or termination thereof) between the Company and Digital or any
Related Entity (as such terms are defined below) or between the Company and any
director or officer of the Company, Digital or any Related Entity shall be void
or voidable solely for the reason that Digital, a Related Entity or any one or
more of the officers or directors of the Company, Digital or any Related Entity
are parties thereto, or solely because any such directors or officers are
present at, participate in or vote with respect to the authorization of such
contract, agreement, arrangement or transaction (or any amendment, modification
or termination thereof). Further, the Company's Amended and Restated Certificate
of Incorporation provides that neither Digital nor any officer or director
thereof or of any Related Entity shall be liable to the Company or its
stockholders for breach of any fiduciary duty or duty of loyalty or failure to
act in (or not opposed to) the best interests of the Company or the derivation
of any improper personal benefit by reason of the fact that Digital or an
officer or director thereof or of such Related Entity in good faith takes any
action or exercises any rights or gives or withholds any consent in connection
with any agreement or contract between Digital or such Related Entity and the
Company. No vote cast or other action
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taken by any person who is an officer, director or other representative of
Digital or such Related Entity, which vote is cast or action is taken by such
person in his capacity as a director of the Company, shall constitute an action
of or the exercise of a right by or a consent of Digital, such subsidiary or
Related Entity for the purpose of any such agreement or contract. For purposes
of the foregoing, the "Company" and "Digital" include all corporations and other
entities in which the Company or Digital, as the case may be, owns fifty percent
or more of the outstanding voting stock, and "Related Entity" means one or more
corporations or other entities in which one or more of the directors of the
Company have a direct or indirect financial interest.
Competition by Digital with the Company; Corporate Opportunities
The Company's Amended and Restated Certificate of Incorporation provides
that except as Digital may otherwise agree in writing:
(i) neither Digital nor any subsidiary of Digital (other than the
Company) shall have a duty to refrain from engaging directly or indirectly
in the same or similar business activities or lines of business as the
Company; and
(ii) neither Digital nor any subsidiary (other than the Company),
officer or director thereof will be liable to the Company or to its
stockholders for breach of any fiduciary duty by reason of any such
activities or of such person's participation therein.
The Company's Amended and Restated Certificate of Incorporation also
provides that if Digital or any subsidiary of Digital (other than the Company)
acquires knowledge of a potential transaction or matter which may be a corporate
opportunity both for Digital or such subsidiary and for the Company, neither
Digital nor such subsidiary (nor the officers and directors of either thereof)
shall have a duty to communicate or offer such corporate opportunity to the
Company and shall not be liable to the Company or its stockholders for breach of
fiduciary duty as a stockholder of the Company or controlling person of a
stockholder by reason of the fact that Digital or such subsidiary pursues or
acquires such opportunity for itself, directs such corporate opportunity to
another person, or does not communicate information regarding such corporate
opportunity to the Company.
Further, the Company's Amended and Restated Certificate of Incorporation
provides that in the event that a director, officer or employee of the Company
who is also a director, officer or employee of Digital acquires knowledge of a
potential transaction or matter that may be a corporate opportunity both for the
Company and Digital (whether such potential transaction or matter is proposed by
a third party or is conceived of by such director, officer or employee of the
Company), such director, officer or employee shall be entitled to offer such
corporate opportunity to the Company or Digital as such director, officer or
employee deems appropriate under the circumstances in his or her sole
discretion, and no such director, officer or employee shall be liable to the
Company or its stockholders for breach of any fiduciary duty or duty of loyalty
or failure to act in (or not opposed to) the best interests of the Company or
the derivation of any improper personal benefit by reason of the fact that (i)
such director, officer or employee offered such corporate opportunity to Digital
(rather than the Company) or did not communicate information regarding such
corporate opportunity to the Company or (ii) Digital pursues or acquires such
corporate opportunity for itself or directs such corporate opportunity to
another person or does not communicate information regarding such corporate
opportunity to the Company.
The enforceability of the provisions discussed above under Delaware
corporate law has not been established and, due to the absence of relevant
judicial authority, counsel to the Company is not able to deliver an opinion as
to the enforceability of such provisions. These provisions of the Company's
Amended and Restated Certificate of Incorporation eliminate certain rights that
might have been available to stockholders under Delaware law had such provisions
not been included in the Amended and Restated Certificate of Incorporation,
although the enforceability of such provisions has not been established.
At the time of the consummation of the Offering, certain of the directors
of the Company will also be employees of Digital.
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The foregoing provisions of the Company's Amended and Restated Certificate
of Incorporation shall expire on the date that Digital ceases to own
beneficially Common Stock representing at least 20% of the number of outstanding
shares of Common Stock and no person who is a director or officer of the Company
is also a director or officer of Digital or its subsidiaries.
Actions Under Intercompany Agreements
The Company's Amended and Restated Certificate of Incorporation will also
limit the liability of Digital and its subsidiaries for certain breaches of
their fiduciary duties in connection with action that may be taken or not taken
in good faith under the intercompany agreements. See "Relationship with
Digital."
Advance Notice Provision
The Company's Amended and Restated By-Laws provide for an advance notice
procedure for the nomination, other than by or at the direction of the Board of
Directors, of candidates for election as directors as well as for other
stockholder proposals to be considered at annual meetings of stockholders. In
general, notice of intent to nominate a director or raise matters at such
meetings will have to be received by the Company not less than 120 or more than
150 days prior to the first anniversary of the Company's proxy statement in
connection with the previous year's annual meeting, and must contain certain
information concerning the person to be nominated or the matters to be brought
before the meeting and concerning the stockholder submitting the proposal.
Limitations on Directors' Liability
The Company's Amended and Restated Certificate of Incorporation and the
applicable provisions of the DGCL provide that no director of the Company shall
be liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) in respect of certain unlawful dividend payments or
stock redemptions or repurchases or (iv) for any transaction from which the
director derived an improper personal benefit. The effect of these provisions
will be to eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits on behalf of the Company) to recover monetary
damages against a director for breach of fiduciary duty as a director (including
breaches resulting from grossly negligent behavior), except in the situations
described above.
The Delaware General Corporation Law
The Company is a Delaware corporation subject to Section 203 of the DGCL.
Section 203 provides that, subject to certain exceptions specified therein, a
corporation shall not engage in any business combination with any "interested
stockholder" for a three-year period following the date that such stockholder
becomes an interested stockholder unless: (i) prior to such date, the Board of
Directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding certain shares); or (iii) on or subsequent to
such date, the business combination is approved by the Board of Directors of the
corporation and by the affirmative vote of at least 66% of the outstanding
voting stock which is not owned by the interested stockholder. Except as
specified in Section 203 of the DGCL, an interested stockholder is defined to
include (x) any person that is the owner of 15% or more of the outstanding
voting stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation, at any time within three years immediately prior to the
relevant date and (y) the affiliates and associates of any such person. Under
certain circumstances, Section 203 of the DGCL makes it more difficult for an
"interested stockholder" to effect various business combinations with a
corporation for a three-year period, although the stockholders of a corporation
may elect to exclude a corporation from the restrictions imposed thereunder. By
virtue of its beneficial ownership of Class B Common Stock, Digital is in a
position to
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elect to exclude the Company from the restrictions under Section 203 of the
DGCL, although it currently has no intention to do so.
TRANSFER AGENT
The Company's transfer agent and registrar for its Common Stock is First
Chicago Trust Company of New York.
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-UNITED
STATES HOLDERS
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of the
Common Stock applicable to Non-United States Holders of such Common Stock. For
the purposes of this discussion, a "Non-United States Holder" is any person
other than (i) a citizen or resident of the United States, (ii) a corporation,
partnership or other entity created or organized in the United States or under
the laws of the United States or any state, or (iii) an estate or trust the
income of which is includible in gross income for United States federal income
tax purposes regardless of its source. The term "Non-United States Holder" does
not include individuals who were United States citizens within the ten-year
period immediately preceding the date of this Prospectus and whose loss of
United States citizenship had as one of its principal purposes the avoidance of
United States taxes. This discussion does not deal with all aspects of United
States federal income and estate taxation and does not deal with foreign, state
and local tax consequences that may be relevant to Non-United States Holders in
light of their personal circumstances. Furthermore, the following discussion is
based on current provisions of the Code and administrative and judicial
interpretations as of the date hereof, all of which are subject to change.
Prospective non-United States investors are urged to consult their tax advisors
regarding the United States federal, state, local and non-United States income
and other tax consequences of owning and disposing of Common Stock.
DIVIDENDS
Generally, any dividend paid to a Non-United States Holder of Common Stock
will be subject to United States withholding tax either at a rate of 30% of the
gross amount of the dividend or such lower rate as may be specified by an
applicable tax treaty. Under current United States Treasury regulations,
dividends paid to an address outside the United States are presumed to be paid
to a resident of such country (absent knowledge that such presumption is not
warranted) for purposes of the withholding discussed above and, under the
current interpretation of United States Treasury regulations, for purposes of
determining applicability of a tax treaty rate. However, under proposed United
States Treasury regulations not currently in effect, a Non-United States Holder
of Common Stock (including a beneficial owner of an interest in certain
Non-United States Holders) who wishes to claim the benefit of an applicable
treaty rate would be required to satisfy certain certification and disclosure
requirements. Dividends received by a Non-United States Holder that are
effectively connected with a United States trade or business conducted by such
Non-United States Holder are exempt from such withholding tax. However, such
effectively connected dividends, net of certain deductions and credits, are
taxed at the same graduated rates applicable to United States persons.
Currently, certain certification and disclosure requirements must be complied
with in order to be exempt from withholding under the effectively connected
income exemption.
In addition to the graduated tax described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a United
States trade or business of the corporate Non-United States Holder may also be
subject to a branch profits tax at a rate of 30% or such lower rate as may be
specified by an applicable tax treaty.
A Non-United States Holder of Common Stock eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate claim for refund
with the U.S. Internal Revenue Service.
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GAIN ON DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
his Common Stock unless: (i) such gain is effectively connected with a United
States trade or business of the Non-United States Holder; (ii) the Non-United
States Holder is an individual who holds such Common Stock as a capital asset
and who is present in the United States for 183 days or more during the calendar
year in which such sale or disposition occurs and certain other conditions are
met; or (iii) the Company is or has been a "United States real property holding
corporation" for federal income tax purposes at any time within the shorter of
the five-year period preceding such disposition or such holder's holding period.
The Company has determined that it is not and does not believe that it will
become a "United States real property holding corporation" for federal income
tax purposes. If the Company were to become a "United States real property
holding corporation," gains realized on a disposition of Common Stock by a
Non-United States Holder which did not directly or indirectly own more than 5%
of the Common Stock during the shorter of the periods described above generally
would not be subject to United States federal income tax, provided that the
Common Stock is "regularly traded" on an established securities market.
An individual Non-United States Holder described in clause (i) above will
be taxed on the net gain derived from the sale under regular graduated United
States federal income tax rates. An individual Non-United States Holder
described in clause (ii) above will be subject to a flat 30% tax on the gain
derived from the sale, which may be offset by United States capital losses
(notwithstanding the fact that the individual is not considered a resident of
the United States). If a Non-United States Holder that is a foreign corporation
falls under clause (i) above, it will be taxed on its gain under regular
graduated United States federal income tax rates and, in addition, may be
subject to the branch profits tax equal to 30% of its effectively connected
earnings and profits within the meaning of the Code for the taxable year, as
adjusted for certain items, unless it qualifies for a lower rate under an
applicable income tax treaty.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, the Company must report to the U.S. Internal Revenue Service the
amount of dividends paid, the name and address of the recipient of such
dividends, and the amount, if any, of tax withheld. A similar report is sent to
the recipient of such dividends. Pursuant to tax treaties or other agreements,
the U.S. Internal Revenue Service may make its reports available to tax
authorities in the recipient's country of residence.
Under current Treasury Regulations, dividends paid to a Non-United States
Holder at an address within the United States may be subject to backup
withholding at a rate of 31% if the Non-United States Holder fails to establish
that it is entitled to an exemption or to provide a correct taxpayer
identification number and other information to the payor. Under current Treasury
Regulations, backup withholding will generally not apply to dividends paid to
Non-United States Holders at an address outside the United States (unless the
payor has knowledge that the payee is a U.S. person). Under proposed United
States Treasury regulations not currently in effect, however, a Non-United
States Holder will be subject to back-up withholding unless applicable
certification requirements are met.
Under current Treasury Regulations, the payment of the proceeds of the
disposition of Common Stock to or through the United States office of a broker
is subject to information reporting and backup withholding at a rate of 31%
unless the holder certifies its Non-United States Holder status under penalties
of perjury or otherwise establishes an exemption. Generally, the payment of the
proceeds of the disposition by a Non-United States Holder of Common Stock
outside the United States to or through a foreign office of a broker will not be
subject to backup withholding. However, information reporting requirements (but
not backup withholding) will apply to a payment of disposition proceeds outside
the United States through an office outside the United States of a broker that
is (a) a United States person, (b) a United States "controlled foreign
corporation" for U.S. tax purposes or (c) a foreign person 50% or more of whose
gross income for certain periods is from the conduct of a United States trade or
business unless such broker has documentary evidence in its files of the owner's
foreign status and has no knowledge to the contrary or the holder otherwise
establishes an exemption.
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Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the U.S.
Internal Revenue Service.
ESTATE TAX
A Non-United States Holder who is an individual and who owns Common Stock
at the time of his death or has made certain lifetime transfers of an interest
in Common Stock will be required to include the value of such stock in his gross
estate for United States federal estate tax purposes, unless an applicable
estate tax treaty provides otherwise.
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UNDERWRITING
The underwriters of the U.S. Offering of the Class A Common Stock (the
"U.S. Underwriters"), for whom Lehman Brothers Inc., Cowen & Company and J.P.
Morgan Securities Inc. are serving as representatives (the "Representatives"),
have severally agreed, subject to the terms and conditions of the U.S.
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement, to purchase from the Company, and the Company has agreed
to sell to each U.S. Underwriter, the following number of shares of Class A
Common Stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
U.S. UNDERWRITERS NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
Lehman Brothers Inc. ................................................
Cowen & Company......................................................
J.P. Morgan Securities Inc. .........................................
----------------
Total......................................................
=============
The managers of the International Offering named below (the "International
Managers"), for whom Lehman Brothers International (Europe), Cowen & Company and
J.P. Morgan Securities Ltd. are acting as lead managers, have severally agreed,
subject to the terms and conditions of the International Underwriting Agreement,
the form of which is filed as an exhibit to the Registration Statement, to
purchase from the Company, and the Company has agreed to sell to each
International Manager, the following aggregate number of shares of Class A
Common Stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
INTERNATIONAL MANAGERS NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
Lehman Brothers International (Europe)...............................
Cowen & Company......................................................
J.P. Morgan Securities Ltd. .........................................
----------------
Total......................................................
=============
The U.S. Underwriting Agreement and the International Underwriting
Agreement (collectively, the "Underwriting Agreements") provide that the
obligations of the U.S. Underwriters and the International Managers,
respectively, to purchase shares of Class A Common Stock are subject to the
approval of certain legal matters by counsel and to certain other conditions and
that if any of the shares of Class A Common Stock are purchased by the U.S.
Underwriters pursuant to the U.S. Underwriting Agreement or by the International
Managers pursuant to the International Underwriting Agreement, all the shares of
Class A Common Stock agreed to be purchased by either the U.S. Underwriters or
the International Managers, as the case may be, pursuant to their respective
Underwriting Agreement, must be so purchased. The offering price and
underwriting discounts and commissions for the U.S. Offering and the
International Offering are identical. The closing of the International Offering
is a condition to the closing of the U.S. Offering and the closing of the U.S.
Offering is a condition to the closing of the International Offering.
The Company has been advised that the U.S. Underwriters and the
International Managers propose to offer shares of Class A Common Stock directly
to the public initially at the public offering price set forth on the cover page
of this Prospectus and to certain selected dealers (who may include the U.S.
Underwriters and International Managers) at such public offering price less a
selling concession not to exceed $ per share. The Underwriters may allow and
the selected dealers may reallow a concession not to exceed $ per share.
After the initial offering of the Class A Common Stock, the public offering
price, the concession to selected
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dealers and the reallowance to other dealers may be changed by the U.S.
Underwriters and the International Managers. The Representatives have informed
the Company that the Underwriters do not intend to confirm sales of shares of
Class A Common Stock to any accounts over which they exercise discretionary
authority.
The U.S. Underwriters and the International Managers have entered into an
Agreement Between U.S. Underwriters and International Managers (the "Agreement
Between") pursuant to which each U.S. Underwriter has agreed that, as part of
the distribution of the shares of Class A Common Stock offered in the U.S.
Offering, (a) it is not purchasing any of such shares for the account of anyone
other than a U.S. or Canadian Person (as defined below) and (b) it has not
offered or sold, and will not offer, sell, resell or deliver, directly or
indirectly, any of such shares or distribute any prospectus relating to the U.S.
Offering outside the United States or Canada or to anyone other than a U.S. or
Canadian Person. In addition, pursuant to the Agreement Between, each
International Manager has agreed that, as part of the distribution of the shares
of Class A Common Stock offered in the International Offering, (a) it is not
purchasing any of such shares for the account of any U.S. or Canadian Person and
(b) it has not offered or sold, and will not offer, sell, resell or deliver,
directly or indirectly, any of such shares or distribute any prospectus relating
to the International Offering within the United States or Canada or to any U.S.
or Canadian Person. The foregoing limitations do not apply to stabilization
transactions or to certain other transactions specified in the Underwriting
Agreements and the Agreement Between, including (i) certain purchases and sales
between the U.S. Underwriters and the International Managers; (ii) certain
offers, sales, resales, deliveries or distributions to or through investment
advisors or other persons exercising investment discretion; (iii) purchases,
offers or sales by a U.S. Underwriter who is also acting as an International
Manager or by an International Manager who also is acting as a U.S. Underwriter
and (iv) other transactions specifically approved by the U.S. Underwriters and
International Managers. As used herein, "U.S. or Canadian Person" means any
resident or citizen of the United States or Canada, any corporation, pension,
profit sharing or other trust or other entity organized under or governed by the
laws of the United States or Canada or any political subdivision thereof (other
than the foreign branch of any United States or Canadian Person), any estate or
trust the income of which is subject to United States or Canadian federal income
taxation regardless of the source of its income, and any United States or
Canadian branch of a person other than a United States or Canadian Person. The
term "United States" means the United States of America (including the states
thereof and the District of Columbia) and its territories, its possessions and
other areas subject to its jurisdiction. The term "Canada" means the provinces
of Canada, its territories, its possessions and other areas subject to its
jurisdiction.
Pursuant to the Agreement Between, sales may be made among the U.S.
Underwriters and the International Managers of such number of shares of Class A
Common Stock as may be mutually agreed. The price of any shares so sold shall be
the public offering price as then in effect for Class A Common Stock being sold
by the U.S. Underwriters and International Managers, less an amount not greater
than the selling concession unless otherwise determined by mutual agreement. To
the extent that there are sales pursuant to the Agreement Between, the number of
shares initially available for sale by the U.S. Underwriters and the
International Managers may be more or less than the amount specified on the
cover page of this Prospectus.
Each International Manager has represented and agreed that: (i) it has not
offered or sold and, prior to the date six months after the date of issue of the
shares of Class A Common Stock, will not offer or sell any shares of Class A
Common Stock to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied and will comply with
all applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Class A Common Stock in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on, and will only issue or pass on, to any person in the United Kingdom, any
document received by it in connection with the issue of the Class A Common Stock
if that person is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1995.
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Purchasers of the shares offered pursuant to the Offering may be required
to pay stamp taxes and other charges in accordance with the laws and practices
of the country of purchase in addition to the offering price set forth on the
cover page hereof.
The Company has granted to the U.S. Underwriters and the International
Managers options to purchase up to an additional and shares of
Class A Common Stock, respectively, at the initial public offering price less
the aggregate underwriting discounts and commissions shown on the cover page of
this Prospectus, solely to cover over-allotments, if any. The options may be
exercised at any time up to 30 days after the date of this Prospectus. To the
extent that the U.S. Underwriters and the International Managers exercise such
options, each of the U.S. Underwriters and the International Managers, as the
case may be, will be committed (subject to certain conditions) to purchase a
number of option shares proportionate to such U.S. Underwriter's or
International Manager's initial commitment.
The Company and Digital have agreed to indemnify the U.S. Underwriters and
the International Managers against certain liabilities, including liabilities
under the Securities Act, and to contribute to payments which the U.S.
Underwriters and the International Managers may be required to make in respect
thereof.
The Company and Digital have also agreed that they will not, without the
prior written consent of Lehman Brothers Inc., offer, sell, grant any options to
purchase or otherwise dispose of any shares of Common Stock within 180 days
after the date of this Prospectus, other than (i) the shares of Class A Common
Stock to be sold to the Underwriters in the Offering, (ii) the issuance of
options and sales of Common Stock pursuant to currently existing stock-based
compensation plans, (iii) sales of shares to Digital, and (iv) the issuance of
shares of Common Stock as consideration for the acquisition of one or more
businesses (provided that such Common Stock may not be resold prior to the
expiration of the 180-day period referenced above). See "Shares Eligible for
Future Sale."
Certain of the Underwriters from time to time have performed various
investment banking services for Digital and its subsidiaries.
Prior to the Offering there has been no public market for the Common Stock.
The initial public offering price for the Class A Common Stock will be
determined by negotiation among the Company and the Representatives. Among the
factors to be considered in determining the initial public offering price will
be prevailing market and economic conditions, estimates of the business
potential and prospects of the Company, the state of the Company's business
operations, an assessment of the Company's management, the consideration of the
above factors in relation to market valuations of companies in related
businesses and other factors deemed relevant. The estimated initial public
offering price range set forth on the cover page of this preliminary prospectus
is subject to change as a result of market conditions and other factors.
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered hereby will be
passed upon for the Company by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts. Certain legal matters in connection with the Offering will be
passed upon for the Underwriters by Simpson Thacher & Bartlett (a partnership
which includes professional corporations), New York, New York.
EXPERTS
The balance sheet of AltaVista Internet Software, Inc. as of June 29, 1996
and the balance sheets of AltaVista Internet Software Products as of June 29,
1996 and July 1, 1995 and the statements of operations, net parent's investment
and cash flows of AltaVista Internet Software Products for each of the three
fiscal years in the period ended June 29, 1996 included in this Prospectus have
been included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
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ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (including all amendments thereto, the "Registration Statement") under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the Common Stock offered hereby, reference is
hereby made to the Registration Statement and to the exhibits and schedules
filed therewith. Statements contained in this Prospectus regarding the contents
of any agreement or other document filed as an exhibit to the Registration
Statement are not necessarily complete, and in each instance reference is made
to the copy of such agreement filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, DC 20549, and copies of all or any part thereof
may be obtained from such office upon payment of the prescribed fees. In
addition, the Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants (including
the Company) that file electronically with the Commission which can be accessed
at http://www.sec.gov.
REPORTS TO SECURITY HOLDERS
The Company intends to furnish holders of its Class A Common Stock offered
hereby with annual reports containing financial statements audited by
independent accountants.
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ALTAVISTA INTERNET SOFTWARE, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
ALTAVISTA INTERNET SOFTWARE, INC.
Report of Independent Accountants................................................... F-2
Balance Sheet as of June 29, 1996................................................... F-3
Notes to Balance Sheet.............................................................. F-4
ALTAVISTA INTERNET SOFTWARE PRODUCTS
Report of Independent Accountants................................................... F-10
Statements of Operations for the fiscal years ended July 2, 1994, July 1, 1995 and
June 29, 1996.................................................................... F-11
Balance Sheets as of July 1, 1995 and June 29, 1996................................. F-12
Statements of Cash Flows for the fiscal years ended July 2, 1994, July 1, 1995 and
June 29, 1996.. F-13
Statements of Net Parent's Investment for the fiscal years ended July 2, 1994, July
1, 1995 and June 29, 1996........................................................ F-14
Notes to Financial Statements....................................................... F-15
F-1
73
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
AltaVista Internet Software, Inc.:
We have audited the accompanying balance sheet of AltaVista Internet
Software, Inc. as of June 29, 1996. This balance sheet is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. 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 audit provides us a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of AltaVista Internet Software, Inc.
as of June 29, 1996 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
August 26, 1996
F-2
74
ALTAVISTA INTERNET SOFTWARE, INC.
BALANCE SHEET
JUNE 29, 1996
ASSETS
Current assets:
Cash.............................................................................. $1,000
======
STOCKHOLDER'S EQUITY
Common stock, $0.01 par value; 1,000,000 shares
authorized; 1,000 shares issued and outstanding................................... $ 10
Paid-in capital..................................................................... 990
Retained earnings................................................................... --
------
Total stockholder's equity................................................ $1,000
======
The accompanying notes are an integral part of the balance sheet.
F-3
75
ALTAVISTA INTERNET SOFTWARE, INC.
NOTES TO BALANCE SHEET
1. ORGANIZATION
AltaVista Internet Software, Inc. (the "Company") was incorporated on June
28, 1996 and, except for organizational matters and activities undertaken in
connection with the proposed initial public offering of its common stock (the
"offering"), has been inactive since that date. As a result, the Company has not
had any income or expenses. On June 28, 1996, the Company issued 1,000 shares of
common stock to its sole stockholder, Digital Equipment Corporation ("Digital"),
for cash.
2. SUBSEQUENT EVENTS
AltaVista Internet Software, Inc. intends to enter into an agreement with
Digital pursuant to which AltaVista Internet Software Products (the "Business")
will contribute its assets to the Company and the Company will assume the
liabilities relating to the Business. On July 18, 1996, the Company opened a
subsidiary in the Netherlands under the name AltaVista Internet Software, B.V.
Prior to the consummation of the offering, the Company's certificate of
incorporation will be amended to authorize 50,000,000 shares of Class A common
stock and 50,000,000 shares of Class B common stock, each with a par value of
$0.01 per share. Holders of Class A common stock generally will have identical
rights to holders of Class B common stock except that holders of Class A common
stock will be entitled to one vote per share while holders of Class B common
stock will be entitled, with certain exceptions, to three votes per share on all
matters submitted to a vote of stockholders. Each share of Class B common stock
will be convertible while held by Digital or any of its subsidiaries into one
share of Class A common stock. The amended and restated certificate of
incorporation will also authorize 5,000,000 shares of preferred stock that may
be issued at the discretion of the Board of Directors. The Board is authorized
to determine the voting, dividend, redemption and liquidation preferences and
limitations of any preferred stock that may be issued.
Potential Conflicts of Interest
The Company's amended and restated certificate of incorporation includes
provisions relating to competition by Digital with the Company, allocations of
corporate opportunities, transactions with interested parties and intercompany
agreements and provisions limiting the liability of certain persons. Various
conflicts of interest between the Company and Digital could arise following the
consummation of the offering, and persons serving as directors, officers and
employees of both the Company and Digital may have conflicting duties to each.
The members of the Board of Directors of the Company who are affiliated with
Digital will consider not only the short-term and long-term impact of financial
and operating decisions on the Company, but also the impact of such decisions on
Digital's consolidated financial results. In some instances, the impact of such
decisions could be disadvantageous to the Company while advantageous to Digital,
or vice versa.
Agreements with Digital
The Company's relationship with Digital will be governed by intercompany
agreements. It is anticipated that such agreements will be entered into prior to
the consummation of the offering. With respect to matters covered by the
services agreement, the relationship between Digital and the Company is intended
to continue in a manner generally consistent with past practices. Because the
Company is a wholly-owned subsidiary of Digital, none of these arrangements will
result from arm's-length negotiations and, therefore, the prices charged to the
Company for services provided thereunder may be higher or lower than prices that
may be charged by third parties.
Services Agreement
The Company and Digital intend to enter into an intercompany services and
operating agreement (the "Services Agreement") with respect to services to be
provided by Digital (or subsidiaries of Digital) to the Company. Under the
Services Agreement, certain services will be provided in exchange for fees which
are
F-4
76
ALTAVISTA INTERNET SOFTWARE, INC.
NOTES TO BALANCE SHEET -- (CONTINUED)
based on Digital's costs for such services and are consistent in all material
respects with the allocation of the costs of such services set forth in the
financial statements of the Business. The services initially to be provided by
Digital to the Company under the Services Agreement include, among other things,
certain accounting, administration, cash management, employee benefit plan
administration, legal, risk management, tax and treasury services. The Company
may request an expansion or termination of services, in which case the parties
will discuss, without obligation, the provision or termination of such services
and an appropriate change or reduction in charges for such services. In the
event Digital proposes changes in billing methodology which would result in a
significant increase (being the greater of a 10% or $100,000) in costs for the
affected services, the Company may terminate such services.
In addition to the identified services, Digital intends to agree to
continue coverage of the Company under Digital's umbrella liability, property,
casualty and fiduciary insurance policies. The Company intends to agree to
reimburse Digital for the portion of Digital's premium cost with respect to such
insurance that is attributable to coverage of the Company. Either Digital or the
Company may terminate such coverage under Digital's policies at any time on 90
days' written notice.
Also, in addition to the identified services, Digital intends to agree to
allow eligible employees of the Company to participate in certain Digital
employee benefit plans. In addition to a monthly service fee under the Services
Agreement, the Company intends to agree to reimburse Digital for Digital's costs
(including any contributions and premium costs and including certain third-party
expenses and allocations of certain personnel expenses), generally in accordance
with past practice, relating to participation by the Company's employees in any
of Digital's benefit plans.
The Services Agreement will have an initial term of two years and will be
renewed automatically thereafter for successive one-year terms unless either the
Company or Digital elects not to renew it. After the initial 2-year term, the
Services Agreement may be terminated at any time by either party upon 90 days'
written notice. The Services Agreement may also be terminated at any time upon
90 days' written notice, if Digital ceases to own shares of common stock
representing more than 50% of the combined voting power of the common stock of
the Company.
Facilities Agreement
The Company and Digital intend to enter into an intercompany facilities
agreement (the "Facilities Agreement"). The Facilities Agreement provides that
the Company may occupy space located in facilities owned or leased by Digital in
exchange for rental fees determined at charges comparable to those charged to
other businesses operated by Digital.
The Facilities Agreement has an initial term of two years and is renewable
automatically thereafter for successive one-year terms unless either the Company
or Digital elects not to renew it. The Facilities Agreement is subject to early
termination by either the Company or Digital upon six months' written notice if
Digital ceases to own shares of common stock representing more than 50% of the
combined voting power of the common stock of the Company, and by the Company
with respect to any particular facility upon 30 days' written notice for any
reason. The Company's use of any particular property subject to the Facilities
Agreement is limited by the term of any underlying lease between Digital and a
landlord with respect to those properties leased by Digital and by any
disposition by Digital of any property owned by it.
Tax-Sharing Agreement
The Business is, and immediately after the offering the Company will
continue to be, included in Digital's federal consolidated income tax group, and
the Company's federal income tax liability will be included in the consolidated
federal income tax liability of Digital and its subsidiaries. In certain
circumstances, the Company and certain of its subsidiaries will also be included
with certain other subsidiaries of Digital in combined, consolidated or unitary
income tax groups for state and local tax purposes. The Company and Digital
intend to
F-5
77
ALTAVISTA INTERNET SOFTWARE, INC.
NOTES TO BALANCE SHEET -- (CONTINUED)
enter into a tax-sharing agreement (the "Tax-Sharing Agreement") pursuant to
which the Company and Digital will make payments between them such that, with
respect to any period, the amount of taxes to be paid by the Company, subject to
certain adjustments, will be determined as though the Company were to file
separate federal, state and local income tax returns. Pursuant to the
Tax-Sharing Agreement, under certain circumstances, the Company will be
reimbursed for tax attributes, such as net operating losses, that it generates
after the offering. Such reimbursement, if any, will be made for utilization of
the Company's losses only after Digital's losses are fully utilized.
Reimbursement will not be made for losses incurred by the Company while Digital
is subject to the alternative minimum tax. Under the Tax-Sharing Agreement, the
Company will pay Digital a fee intended to reimburse Digital for all direct and
indirect costs and expenses incurred with respect to the Company's share of the
overall costs and expenses incurred by Digital with respect to tax related
services.
In general, the Company will be included in Digital's consolidated group
for federal income tax purposes for so long as Digital beneficially owns at
least 80% of the total voting power and value of the outstanding common stock.
Each member of a consolidated group is jointly and severally liable for the
federal income tax liability of each other member of the consolidated group.
Accordingly, although the Tax-Sharing Agreement allocates tax liabilities
between the Company and Digital, during the period in which the Company is
included in Digital's consolidated group, the Company could be liable in the
event that any federal tax liability is incurred, but not discharged, by any
other member of Digital's consolidated group.
Asset Transfer and License Agreement
The Company and Digital intend to enter into an asset transfer and license
agreement (the "Asset Transfer Agreement") which will provide for the transfer
to the Company of all assets and the assumption by the Company of all
liabilities that relate principally to the Company's business, including all
assets and liabilities reflected on the AltaVista Internet Software Products
Balance Sheet included in this Prospectus as adjusted to give effect to the
conduct of the Company's business in the ordinary course from such balance sheet
date to the date of transfer.
Pursuant to the Asset Transfer Agreement, Digital will assign to the
Company all of Digital's rights in the AltaVista trademark and logo and will
license to the Company all of its Internet addresses. Digital will retain the
right to use such trademarks in advertising, marketing literature and corporate
communications that refer to the Company.
Under the Asset Transfer Agreement, Digital will grant the Company a
non-exclusive, irrevocable, royalty-free license to all Digital patents and
pending and future patent applications covering inventions made as of the
consummation of the offering that are embodied in the Company's products and
services. Under this license, the Company will have a right to sell to its
customers products embodying technology covered by the patents. The Company will
not otherwise have a right to sublicense its rights under this license or to
assign or transfer the license except in connection with a change of control of
the Company or the sale of all or substantially all of the Company's assets. The
Company may not prevent Digital from granting other licenses under such patents,
will not be able to realize licensing revenues from any such licenses, cannot
require Digital to enforce any such patents against competitors of the Company
and cannot control any enforcement proceedings Digital undertakes.
Under the Asset Transfer Agreement, Digital will assign to the Company all
of Digital's rights in software code developed specifically for and included in
the Company's products and services, subject to the terms of the patent license
described above ("Transferred Code"). Digital will retain an irrevocable,
royalty-free license to use Transferred Code for its internal use, including
research and development. All rights to any performance or functionality
improvements or enhancements ("Modifications") to Transferred Code developed by
or on behalf of Digital will be owned by Digital; provided, however, that
Digital will grant the Company an irrevocable, royalty-free license to use
Modifications developed by Digital during the two years
F-6
78
ALTAVISTA INTERNET SOFTWARE, INC.
NOTES TO BALANCE SHEET -- (CONTINUED)
following the consummation of the offering. Similarly, all rights to any
Modifications developed by or on behalf of the Company will be owned by the
Company; provided, however, that the Company will grant to Digital an
irrevocable, royalty-free license to use for Digital's internal use
Modifications developed by the Company during the two years following the
consummation of the offering.
For two years following the consummation of the offering, Digital will not
have the right to commercialize any new software product derived from
Transferred Code ("Derived Software") that is designed for use primarily in the
Internet/intranet market, that runs on Windows, Windows NT or UNIX platforms and
that offers functionality substantially similar to any of the AltaVista Products
as of the consummation of the offering. Notwithstanding the foregoing, Digital
will be free to commercialize without restriction any Digital product, excluding
the AltaVista products, existing as of the consummation of the Offering that
includes Transferred Code as of the consummation of the Offering without
restriction.
Under the Asset Transfer Agreement, Digital will retain all of its rights
in software code used in, but not developed specifically for, the Company's
products ("Shared Code"). Digital will grant the Company a non-exclusive,
irrevocable, royalty-free license to use Shared Code. Under the license, the
Company will have the right to sell to its customers products containing Shared
Code. The Company will not otherwise have a right to sublicense its rights or to
assign or transfer such license except in connection with a change of control of
the Company or the sale of all or substantially all of the Company's assets.
Pursuant to the Asset Transfer Agreement, Digital will license to the
Company all its rights in all know-how related to and necessary to use, make and
sell the Company's products. Any third party technology used in the Company's
products will, to the extent permitted, be sublicensed or assigned by Digital to
the Company under the Asset Transfer Agreement.
Technical Assistance Agreement
The Company intends to enter into a technical assistance agreement (the
"Technical Assistance Agreement") with Digital pursuant to which the Company
may, from time to time, request Digital (including its research laboratories) to
provide consulting and technical assistance to the Company with respect to
technology related to or derived from the Company's products. The Company will
pay Digital fees for any consulting or technical assistance provided by Digital
under the Technical Assistance Agreement at Digital's then prevailing rate for
consulting services. Ownership of and rights to any and all ideas, improvements
and inventions conceived or created under the performance of work under the
Technical Assistance Agreement shall be determined in writing between the
parties prior to Digital performing the work.
Strategic Alliance Agreement
The Company and Digital intend to enter into a strategic alliance agreement
(the "Strategic Alliance Agreement") that grants Digital a license to distribute
the Company's products on a non-exclusive, worldwide basis through Digital's
reseller and distribution networks. The Strategic Alliance Agreement also
designates Digital as an Authorized Service Provider of the Company to provide
training, documentation, technical support and maintenance services to the
Company's customers and end-users. Digital will pay to the Company a fee for the
license and support services as agreed upon in the Digital-AltaVista Fee
Schedule. In addition, the Strategic Alliance Agreement provides that Digital
will loan the Company certain hardware equipment for product development
purposes, and provide the Company with hardware and software for internal use at
Digital's then prevailing rates and prices. Digital and the Company have also
established a joint marketing relationship with respect to the Company's
products and services.
The Strategic Alliance Agreement has an initial term of two years and is
renewable automatically thereafter for successive one-year terms, subject to
termination by either the Company or Digital upon six
F-7
79
ALTAVISTA INTERNET SOFTWARE, INC.
NOTES TO BALANCE SHEET -- (CONTINUED)
months' written notice if Digital ceases to own shares of common stock
representing more than 50% of the combined voting power of the common stock of
the Company.
Corporate Agreement
The Company and Digital intend to enter into a corporate agreement (the
"Corporate Agreement") under which the Company will grant to Digital a
continuing option, transferable to any of its subsidiaries, to purchase, under
certain circumstances, additional shares of Class B common stock or shares of
nonvoting capital stock of the Company (the "Stock Option"). The Stock Option
may be exercised by Digital simultaneously with the issuance of any equity
security of the Company (other than in the Offering or upon the exercise of the
Underwriters' over-allotment options), with respect to Class B common stock,
only to the extent necessary to maintain its then-existing percentage of the
total voting power and value of the Company and, with respect to shares of
nonvoting capital stock, to the extent necessary to own at least 80% of the
total number of shares of each outstanding class of such stock.
The purchase price of the shares of Class B common stock purchased upon any
exercise of the Stock Option, subject to certain exceptions, will be based on
the market price of a share of Class A common stock. The purchase price of the
shares of nonvoting capital stock purchased upon any exercise of the stock
option, subject to certain exceptions, will be based on the market price at
which such stock may be purchased by third parties. The Stock Option expires in
the event that Digital reduces its beneficial ownership of common stock in the
Company to less than 60% of the number of outstanding shares of common stock.
The Company does not intend to issue additional shares of Class B common stock
except pursuant to the exercise of the Stock Option.
The Corporate Agreement will further provide that, upon the request of
Digital, the Company will use its best efforts to effect the registration under
the applicable federal and state securities laws of any of the shares of Class B
common stock and nonvoting capital stock (and any other securities issued in
respect of or in exchange for either) held by Digital for sale in accordance
with Digital's intended method of disposition thereof, and will take such other
actions as may be necessary to permit the sale thereof in other jurisdictions,
subject to certain limitations specified in the Corporate Agreement. Digital
will also have the right, which it may exercise at any time and from time to
time, to include the shares of Class B common stock and nonvoting capital stock
(and any other securities issued in respect of or in exchange for either) held
by it in certain other registrations of common equity securities of the Company
initiated by the Company on its own behalf or on behalf of its other
stockholders. The Company will agree to pay all out-of-pocket costs and expenses
(other than the underwriters' discounts and commissions and transfer taxes) in
connection with each such registration that Digital requests or in which Digital
participates. Subject to certain limitations specified in the Corporate
Agreement, such registration rights will be assignable by Digital and its
assignees.
Equity Incentive Plan
The Company intends to adopt, subject to Board of Directors and stockholder
approval, the Equity Incentive Plan (the "Incentive Plan") under which awards of
common stock options and restricted and unrestricted common stock, and deferred
stock may be granted to employees, officers and directors of, or consultants to,
the Company. Options granted under the Incentive Plan may be either incentive
stock options or non-statutory stock options. Incentive stock options granted
have an exercise price not less than fair market value of the stock at the grant
date (110% of fair value in certain instances) and vesting schedules as
determined by the Board. Non-statutory options are granted at prices and vesting
schedules as determined by the Board. Restricted stock is granted by the Board
permitting the recipient to purchase common stock at a price and subject to
restrictions specified by the Board. A participant who acquires shares of
restricted stock will have all the rights of a stockholder, including the right
to receive dividends and to vote. Deferred stock is granted by the Board
entitling the recipient to receive stock at a specified future date.
The Company intends to reserve shares of Class A common stock for issuance
under the Incentive Plan.
F-8
80
ALTAVISTA INTERNET SOFTWARE, INC.
NOTES TO BALANCE SHEET -- (CONTINUED)
Directors Stock Option Plan
The Company intends to adopt a directors stock option plan (the "Directors
Plan") providing for the annual grant of stock options to purchase shares of
Class A common stock to outside directors as additional compensation for their
service as directors. The Company plans to reserve shares of Class A common
stock for issuance under the Directors Plan.
Under the Directors Plan, each eligible director joining the Board of
Directors in 1996 will be granted an option to purchase shares of Class A common
stock upon the later of the adoption of the plan or the director's appointment
or election. With respect to each eligible director who is a director as of June
29, 1997 or who joins the Board of Directors on or after June 29, 1997, options
to purchase shares of Class A common stock will be granted on the date of the
Company's next annual meeting of stockholders, provided that such director's
service as a director will continue after such meeting.
The exercise price of options granted under the Directors Plan will be 100%
of the fair market value per share of the Class A common stock on the date the
option is granted. Options granted under the Directors Plan will become
exercisable at the rate of 33% on the first and second anniversaries of the date
of grant and 34% on the third anniversary of the date of grant. The options will
expire on the tenth anniversary of the grant date, unless terminated earlier in
accordance with the Directors Plan.
Value Added Link Agreements
On July 3, 1996, Yahoo! Inc. ("Yahoo!") and Digital signed an agreement
whereby Yahoo! established AltaVista as the preferred search engine for all
Yahoo! properties that contain World Wide Web functionality. Yahoo! pays a fee
to Digital based on the number of search result pages viewed according to an
agreed upon rate schedule.
The agreement has an initial term of two years and is renewable
automatically thereafter for successive one-year terms for up to three
successive one year terms, subject to termination by either Digital or Yahoo!
upon 90 days' written notice.
On August 23, 1996, CNET, Inc ("CNET") and Digital signed an agreement
enabling users of CNET Properties to conduct World Wide Web Searches through the
AltaVista Internet Search Service. CNET pays a fee to Digital based on the
number of search result pages viewed according to an agreed upon schedule.
The agreement has an initial term of one year and is renewable
automatically thereafter for successive one-year terms, subject to termination
by either Digital or CNET upon 30 days' written notice.
3. MIRROR SITE AGREEMENTS
Telia TeleCom AB
Digital signed a letter of intent in June 1996 with Telia TeleCom AB of
Sweden ("Telia") to establish a mirror site in Northern Europe. Telia would pay
Digital a monthly license fee as well as a fee based on the total number of hits
(requests for information) per day.
Telstra Corporation Ltd.
Digital signed a letter of intent in July 1996 with Telstra Corporation
Ltd. of Australia ("Telstra") to establish a mirror site in Australia, New
Zealand and several other countries. Telstra would pay Digital a monthly license
fee as well as a fee based on the total number of hits per day.
F-9
81
REPORT OF INDEPENDENT ACCOUNTANTS
To Digital Equipment Corporation:
We have audited the accompanying balance sheets of AltaVista Internet
Software Products (the "Business") as of June 29, 1996 and July 1, 1995, and the
related statements of operations, cash flows and net parent's investment for
each of the three fiscal years in the period ended June 29, 1996. These
financial statements are the responsibility of the Business' 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 financial statements referred to above present fairly,
in all material respects, the financial position of AltaVista Internet Software
Products as of June 29, 1996 and July 1, 1995 and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended June 29, 1996 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
August 26, 1996
F-10
82
ALTAVISTA INTERNET SOFTWARE PRODUCTS
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE FISCAL YEARS ENDED
--------------------------------
JULY 2, JULY 1, JUNE 29,
1994 1995 1996
------- ------- --------
Total operating revenues..................................... $ 298 $ 964 $ 3,632
------- ------- --------
Costs and expenses:
Cost of operating revenues................................. 47 374 1,110
Research and engineering expenses.......................... 2,235 4,516 15,352
Selling and marketing expenses............................. 50 248 10,522
General and administrative expenses........................ 684 1,062 6,516
------- ------- --------
Total costs and expenses........................... 3,016 6,200 33,500
Operating loss............................................... (2,718) (5,236) (29,868)
------- ------- --------
Net loss..................................................... $(2,718) $(5,236) $(29,868)
======= ======= ========
Unaudited pro forma net loss per common share................ $
========
The accompanying notes are an integral part of the financial statements.
F-11
83
ALTAVISTA INTERNET SOFTWARE PRODUCTS
BALANCE SHEETS
(IN THOUSANDS)
FOR THE FISCAL YEARS
ENDED
--------------------
JULY 1, JUNE 29,
1995 1996
------- --------
ASSETS
Current assets:
Accounts receivable, net of allowance of $15 and $76.................. $ 243 $ 1,010
Inventories........................................................... -- 45
------- --------
Total current assets.......................................... 243 1,055
Capitalized software, net............................................... 645 577
Equipment, net.......................................................... -- 5,876
------- --------
Total assets.................................................. $ 888 $ 7,508
======= ========
LIABILITIES AND NET PARENT'S INVESTMENT
Current liabilities:
Salaries, wages and related items..................................... $ 259 $ 1,980
------- --------
Total current liabilities..................................... 259 1,980
Parent's investment:
Parent's investment................................................... 10,555 45,322
Retained deficit...................................................... (9,926) (39,794)
------- --------
Net parent's investment....................................... 629 5,528
------- --------
Total liabilities and net parent's investment................. $ 888 $ 7,508
======= ========
The accompanying notes are an integral part of the financial statements.
F-12
84
ALTAVISTA INTERNET SOFTWARE PRODUCTS
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE FISCAL YEARS ENDED
--------------------------------
JULY 2, JULY 1, JUNE 29,
1994 1995 1996
------- ------- --------
Cash flows from (used in) operating activities:
Net loss................................................... $(2,718) $(5,236) $(29,868)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation............................................ -- -- 800
Amortization............................................ 46 320 438
Loss on disposition and write-down of equipment......... -- -- 390
Write-down of capitalized software to
net realizable value.................................. -- -- 238
Allowance for bad debts................................. 6 9 61
Changes in operating assets and liabilities:
Increase in accounts receivable....................... (216) (42) (828)
Increase in inventories............................... -- -- (45)
Increase in salaries, wages and related items......... 21 238 1,721
------- ------- --------
Net cash used in operating activities.............. (2,861) (4,711) (27,093)
Cash flows from (used in) investing activities:
Additions and transfers of equipment....................... -- -- (7,066)
Investment in capitalized software......................... (961) (50) (608)
------- ------- --------
Net cash used in investing activities.............. (961) (50) (7,674)
Cash flows from financing activities:
Proceeds from investment by parent......................... 3,822 4,761 34,767
------- ------- --------
Net cash provided from financing activities........ 3,822 4,761 34,767
------- ------- --------
Net increase (decrease) in cash.................... $ -- $ -- $ --
======= ======= ========
The accompanying notes are an integral part of the financial statements.
F-13
85
ALTAVISTA INTERNET SOFTWARE PRODUCTS
STATEMENTS OF NET PARENT'S INVESTMENT
FOR THE FISCAL YEARS ENDED JULY 2, 1994,
JULY 1, 1995 AND JUNE 29, 1996
(IN THOUSANDS)
NET
RETAINED PARENT'S PARENT'S
DEFICIT INVESTMENT INVESTMENT
-------- ---------- ----------
BALANCE AT JULY 3, 1993.................................... $ (1,972) $ 1,972 $ 0
Net loss................................................... (2,718) -- (2,718)
Investment by parent....................................... -- 3,822 3,822
-------- ------- --------
BALANCE AT JULY 2, 1994.................................... (4,690) 5,794 1,104
Net loss................................................... (5,236) -- (5,236)
Investment by parent....................................... -- 4,761 4,761
-------- ------- --------
BALANCE AT JULY 1, 1995.................................... (9,926) 10,555 629
Net loss................................................... (29,868) -- (29,868)
Investment by parent....................................... -- 34,767 34,767
-------- ------- --------
BALANCE AT JUNE 29, 1996................................... $(39,794) $ 45,322 $ 5,528
======== ======= ========
The accompanying notes are an integral part of the financial statements.
F-14
86
ALTAVISTA INTERNET SOFTWARE PRODUCTS
NOTES TO FINANCIAL STATEMENTS
A. THE BUSINESS
Nature of the Business
The accompanying financial statements include the revenues and expenses
(direct and allocated indirect) and assets and liabilities related to the
development and sales of the following products and services:
AltaVista Search
AltaVista Directory
AltaVista Firewall
AltaVista Tunnel
AltaVista Forum
AltaVista Mail
In the financial statements these products are collectively referred to as
"AltaVista Internet Software Products" or the "Business."
AltaVista Internet Software Products are software products and services for
use in the emerging integrated Internet/intranet business environment.
The software products included in the Business were developed within
various Digital Equipment Corporation ("Digital" or "Parent") business units.
These products have been managed within a single business unit for less than one
year. Most of the products were developed primarily in fiscal years 1995 and
1996 and did not generate revenues until fiscal 1996. AltaVista Directory and
AltaVista Firewall began generating revenues in fiscal 1994 and 1995,
respectively. AltaVista Mail was released in June 1996.
Basis of Presentation
The financial statements are derived from the historic books and records of
Digital and present the assets, liabilities, results of operations and cash
flows applicable to AltaVista Internet Software Products. Operations prior to
1994 consisted primarily of research and engineering expenses and are not
considered to be material. The Business' foreign sales are transacted by
Digital's subsidiaries and are denominated in local currencies. Certain costs
and expenses presented in these financial statements have been allocated based
on management's estimates of the cost of services provided to the Business by
Digital. Management believes that these allocations are based on assumptions
that are reasonable under the circumstances. The Business has incurred recurring
losses from operations through June 29, 1996. Digital has committed to provide
the funds required for the conduct of the Business' operations through the
earlier of June 30, 1997 or the closing of an initial public offering (the
"offering") of the Business' common stock. The historical operating results may
not be indicative of future results.
The financial statements have been prepared for inclusion in a registration
statement relating to the public offering of a portion of the common stock of a
wholly-owned subsidiary of Digital, AltaVista Internet Software, Inc. (the
"Company"), which was formed on June 28, 1996. Prior to the consummation of the
offering, Digital will transfer the assets of AltaVista Internet Software
Products to AltaVista Internet Software, Inc. and the Company will assume the
liabilities of AltaVista Internet Software Products. The transfers will be
accounted for at historical cost.
Operating losses through the consummation of the offering will be recorded
as contributions of capital to the Business by Digital. Prior to the
consummation of the offering, the Business intends to enter into various
agreements with Digital wherein Digital agrees to provide certain services,
facilities and technologies to the Business in accordance with the terms
described in Note H.
F-15
87
ALTAVISTA INTERNET SOFTWARE PRODUCTS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
B. SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The fiscal year of the Business is the fifty-two/fifty-three week period
ending the Saturday nearest the last day of June. The fiscal years ended July 2,
1994, July 1, 1995 and June 29, 1996 each included 52 weeks.
Revenue Recognition
The product revenues of the Business are principally derived from product
licensing fees. Product revenues are generally recognized upon shipment, net of
allowances for estimated future returns, provided that no significant vendor
obligations remain and collection of the resulting receivable is deemed
probable.
Warranty
Digital provides maintenance and support services to the Business. In
connection with these services, the Business paid Digital approximately $16,000,
$62,000 and $225,000 for the fiscal years ended July 2, 1994, July 1, 1995 and
June 29, 1996, respectively. Digital also sells extended warranty contracts and
maintenance contracts covering the products for which it pays the Business a fee
amounting to 22% of the extended warranty and maintenance contract revenue.
Unaudited Pro Forma Net Loss Per Common Share
Historical earnings per share data is omitted from the statements of
operations because it is not meaningful. Unaudited pro forma net loss per common
share is calculated based on the net loss divided by the number of shares of
Class B common stock to be issued to Digital prior to consummation of the
offering. Because the offering price and number of shares of Class B common
stock to be reclassified have not yet been determined, unaudited pro forma net
loss per common share has not been presented. These determinations will be made
prior to consummation of the offering and unaudited pro forma net loss per
common share based on the number of shares of Class B common stock issued to
Digital will be furnished by amendment and reflected in the definitive
Prospectus.
Taxes
The Business was not a separate taxable entity for federal, state or local
income tax purposes. The Business' operations are included in the consolidated
Digital tax returns. No income tax provision has been calculated on a separate
return basis because net losses were realized in each of the years presented as
to which there was no related realizable tax benefit due to the Parent's net
operating loss carryforward. Tax assets, including net operating loss
carryforwards incurred by the Business prior to the offering, will remain with
Digital. Prior to the consummation of the offering, the Business intends to
enter into a tax-sharing agreement with Digital as described in Note H.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
F-16
88
ALTAVISTA INTERNET SOFTWARE PRODUCTS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Equipment
Equipment is stated at cost.
JUNE 29,
1996
--------------
(IN THOUSANDS)
Equipment...................................................... $ 14,372
Less accumulated depreciation.................................. (8,496)
-------
Equipment, net................................................. $ 5,876
=======
Depreciation expense is computed principally on the following basis:
CLASSIFICATION DEPRECIATION LIVES AND METHODS
--------------------------------- ------------------------------------------------
Equipment........................ 3 to 10 years (principally accelerated methods)
When assets are retired, or otherwise disposed of, the assets and related
accumulated depreciation are removed from the accounts. Other resulting gains
and losses are included in income.
Prior to fiscal 1996, no equipment was dedicated to the Business or was
recorded in the Business' financial statements. However, in lieu of
depreciation, a rental charge for the use of equipment was included in the
statement of operations. During fiscal 1996, equipment became dedicated to the
Business. Assets with a net book value of $3,989,000 were transferred to the
Business. The Business also purchased new equipment from Digital at cost.
Capitalized Software
Software development costs are capitalized beginning at the time that
technical feasibility is established. These costs are amortized over no more
than three years from the date the products are available for general use.
Management Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates due to limited
operating history; anticipated continuing losses; potential fluctuations in
quarterly results; unproven acceptance of the Business' products and services;
dependence on the uncertain adoption of the Internet as a mode of communication;
dependence on the uncertain adoption of intranets; reliance on new product
development; and technological change; competition; future liquidity needs and
the uncertainty of additional financing; new management team and reliance on key
personnel; reliance on evolving distribution channels; dependence on mirror
sites and Internet content providers; product liability; risk of capacity
constraints or system failures; uncertain protection of intellectual property
rights; possible regulation of the Internet or government regulation of
technology exports; and risks associated with global operations and could impact
future results of operations and cash flows.
Fair Value
The carrying amounts reflected in the balance sheets for accounts
receivable approximate fair value due to the short maturities of these
instruments.
F-17
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ALTAVISTA INTERNET SOFTWARE PRODUCTS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk
Financial instruments which potentially subject the Business to
concentrations of credit risk consist principally of trade receivables.
Concentration of credit risk with respect to trade receivables is limited
due to the large number of customers comprising the Business' customer base, and
their dispersion across many different industries and geographies.
Allocated Costs
Expenses have been allocated based on a variety of methods depending on the
nature of the expense including: units produced; proportion of total product
revenue or expense to total business unit revenue or expense, and management
estimate. Allocated expenses are included in:
Cost of Operating Revenues
Cost of operating revenues includes an allocation of corporate
manufacturing costs.
Research and Engineering Expenses
Research and engineering expenses include an allocation of corporate
research and engineering expense.
Selling and Marketing Expenses
Selling and marketing expenses include an allocation of corporate selling
and marketing expenses.
General and Administrative Expenses
The components of general and administrative expenses include a full
allocation of the costs of administrative and corporate functions.
The amounts allocated to the Business in each of the fiscal years presented
are as follows:
1994 1995 1996
---- ------ ------
(IN THOUSANDS)
Cost of operating revenues................................. -- $ 10 $ 56
Research and engineering expenses.......................... $ 70 98 121
Selling and marketing expenses............................. 50 160 417
General and administrative expenses........................ 706 1,087 1,604
Interest Expense
There was no direct interest expense incurred by the Business. However,
interest expense of $27,000 included in general and administrative expenses for
the year ended June 29, 1996 is an allocation of Digital's worldwide interest
expense based upon the ratio of the Business' inventory and property and
equipment to total Digital inventory and property and equipment. Management
believes that this method provides a reasonable basis for allocation within the
Business' historical statements of operations.
F-18
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ALTAVISTA INTERNET SOFTWARE PRODUCTS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
C. SEGMENT AND GEOGRAPHIC INFORMATION
The Business operates within one industry segment, the development and sale
of Internet/intranet software products and services. The Business had sales to
customers outside the United States and Canada representing 63%, 69% and 64% in
1994, 1995 and 1996, respectively of operating revenues. Information about the
Business' sales by geographic regions is as follows:
FOR THE FISCAL YEARS ENDED
--------------------------------
JULY 2, JULY 1, JUNE 29,
1994 1995 1996
------- ------- --------
(IN THOUSANDS)
North America.............................................. $ 112 $ 300 $1,290
Europe..................................................... 162 606 1,726
Asia - Pacific............................................. 24 58 616
---- ---- ------
$ 298 $ 964 $3,632
==== ==== ======
No customer accounted for more than 10% of total revenues in any year.
D. CAPITALIZED SOFTWARE
Unamortized computer software development costs were $1,011,000 and
$905,000 at July 1, 1995 and June 29, 1996, respectively. Amortization expense
was $46,000, $320,000 and $438,000 for the years ended July 2, 1994, July 1,
1995 and June 29, 1996, respectively. Accumulated amortization was $366,000 and
$328,000 at July 1, 1995 and June 29, 1996, respectively.
E. POSTRETIREMENT AND OTHER POSTEMPLOYMENT BENEFITS
Pension Plans -- The Business participates in Digital's defined benefit and
defined contribution pension plans (the "Retirement Plan") covering
substantially all employees. Those Digital employees who accept employment with
the Company will terminate employment with Digital but will maintain their
vested rights in the Retirement Plan. The benefits are based on years of service
and compensation during the employee's career. Pension cost is based on
estimated benefit payment formulas. It is Digital's policy to make tax-
deductible contributions to the plans in accordance with local laws.
Contributions are intended to provide benefits for service to date and benefits
expected to be earned in the future. The projected benefit obligation was
determined using discount rates of 8.0%, 7.5% and 8.0% for the fiscal years
ending July 2, 1994, July 1, 1995 and June 29, 1996, respectively. For the U.S.
pension plan, there were no contributions in the fiscal years 1994, 1995 or
1996. The assets of the plans include corporate equity and debt securities,
government securities and real estate.
The statements of operations include allocated costs as fringe benefits
based upon an average cost per employee for the Retirement Plan of approximately
$53,900, $59,700 and $450,200 for the fiscal years ending July 2, 1994, July 1,
1995 and June 29, 1996, respectively.
Postretirement Benefits Other than Pensions -- The Business participates in
Digital's defined benefit postretirement plans that provide medical and dental
benefits for U.S. retirees and their eligible dependents. Substantially all of
Digital's U.S. employees may become eligible for postretirement benefits if they
reach retirement age while working for Digital. The majority of Digital's
non-U.S. subsidiaries do not offer postretirement benefits other than pensions
to retirees.
Digital's postretirement benefit plans other than pensions are funded as
costs are incurred. The postretirement benefit obligation was determined using
discount rates of 8.0%, 7.5% and 8.0% for the fiscal years ending July 2, 1994,
July 1, 1995 and June 29, 1996, respectively.
F-19
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ALTAVISTA INTERNET SOFTWARE PRODUCTS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The statements of operations include allocated costs as fringe benefits
based upon an average cost per employee for the postretirement benefit costs of
approximately $2,500, $3,900 and $21,600 for the years ended July 2, 1994, July
1, 1995 and June 29, 1996, respectively.
F. STOCK PLANS
Certain Digital employees who will become employees of the Company have
been granted options and restricted stock awards under various Digital stock
plans. Such options and awards will continue to vest under the terms of the
plans during their employment with the Company.
G. RESTRUCTURING ACTION
Included in general and administrative expenses for the year ended June 29,
1996 is a $353,000 charge for restructuring to cover costs associated with
reducing the size of the Business's workforce by 28 employees in the
administrative, marketing and engineering functions. The restructuring charge
includes the cost of employee termination benefits and related costs associated
with restructuring actions. Employee termination benefits include severance,
wage continuation, notice pay, medical and other benefits. Restructuring costs
were accrued and charged to expense in accordance with approved management
plans.
H. SUBSEQUENT EVENTS
AltaVista Internet Software, Inc.
AltaVista Internet Software Inc. (the "Company") intends to enter into an
agreement with Digital pursuant to which the Business will contribute its assets
to the Company and the Company will assume the liabilities relating to the
Business. On July 18, 1996, the Company opened a subsidiary in the Netherlands
under the name AltaVista Internet Software, B.V. Prior to the consummation of
the offering, the Company's certificate of incorporation will be amended to
authorize 50,000,000 shares of Class A common stock and 50,000,000 shares of
Class B common stock, each with a par value of $0.01 per share. Holders of Class
A common stock generally will have identical rights to holders of Class B common
stock except that holders of Class A common stock will be entitled to one vote
per share while holders of Class B common stock will be entitled, with certain
exceptions, to three votes per share on all matters submitted to a vote of
stockholders. Each share of Class B common stock will be convertible while held
by Digital or any of its subsidiaries into one share of Class A common stock.
The amended and restated certificate of incorporation will also authorize
5,000,000 shares of preferred stock that may be issued at the discretion of the
Board of Directors. The Board is authorized to determine the voting, dividend,
redemption and liquidation preferences and limitations of any preferred stock
that may be issued.
Potential Conflicts of Interest
The Company's amended and restated certificate of incorporation includes
provisions relating to competition by Digital with the Company, allocations of
corporate opportunities, transactions with interested parties and intercompany
agreements and provisions limiting the liability of certain persons. Various
conflicts of interest between the Company and Digital could arise following the
consummation of the offering, and persons serving as directors, officers and
employees of both the Company and Digital may have conflicting duties to each.
The members of the Board of Directors of the Company who are affiliated with
Digital will consider not only the short-term and long-term impact of financial
and operating decisions on the Company, but also the impact of such decisions on
Digital's consolidated financial results. In some instances, the impact of such
decisions could be disadvantageous to the Company while advantageous to Digital,
or vice versa.
F-20
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ALTAVISTA INTERNET SOFTWARE PRODUCTS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Agreements with Digital
The Company's relationship with Digital will be governed by intercompany
agreements. It is anticipated that such agreements will be entered into prior to
the consummation of the offering. With respect to matters covered by the
services agreement, the relationship between Digital and the Company is intended
to continue in a manner generally consistent with past practices. Because the
Company is a wholly-owned subsidiary of Digital, none of these arrangements will
result from arm's-length negotiations and, therefore, the prices charged to the
Company for services provided thereunder may be higher or lower than prices that
may be charged by third parties.
Services Agreement
The Company and Digital intend to enter into an intercompany services and
operating agreement (the "Services Agreement") with respect to services to be
provided by Digital (or subsidiaries of Digital) to the Company. Under the
Services Agreement, certain services will be provided in exchange for fees which
are based on Digital's costs for such services and are consistent in all
material respects with the allocation of the costs of such services set forth in
the financial statements of the Business. The services initially to be provided
by Digital to the Company under the Services Agreement include, among other
things, certain accounting, administration, cash management, employee benefit
plan administration, legal, risk management, tax and treasury services. The
Company may request an expansion or termination of services, in which case the
parties will discuss, without obligation, the provision or termination of such
services and an appropriate change or reduction in charges for such services. In
the event Digital proposes changes in billing methodology which would result in
a significant increase (being the greater of a 10% or $100,000) in costs for the
affected services, the Company may terminate such services.
In addition to the identified services, Digital intends to agree to
continue coverage of the Company under Digital's umbrella liability, property,
casualty and fiduciary insurance policies. The Company intends to agree to
reimburse Digital for the portion of Digital's premium cost with respect to such
insurance that is attributable to coverage of the Company. Either Digital or the
Company may terminate such coverage under Digital's policies at any time on 90
days' written notice.
Also, in addition to the identified services, Digital intends to agree to
allow eligible employees of the Company to participate in certain Digital
employee benefit plans. In addition to a monthly service fee under the Services
Agreement, the Company intends to agree to reimburse Digital for Digital's costs
(including any contributions and premium costs and including certain third-party
expenses and allocations of certain personnel expenses), generally in accordance
with past practice, relating to participation by the Company's employees in any
of Digital's benefit plans.
The Services Agreement will have an initial term of two years and will be
renewed automatically thereafter for successive one-year terms unless either the
Company or Digital elects not to renew it. After the initial 2-year term, the
Services Agreement may be terminated at any time by either party upon 90 days'
written notice. The Services Agreement may also be terminated at any time, upon
90 days' written notice, if Digital ceases to own shares of common stock
representing more than 50% of the combined voting power of the common stock of
the Company.
Facilities Agreement
The Company and Digital intend to enter into an intercompany facilities
agreement (the "Facilities Agreement"). The Facilities Agreement provides that
the Company may occupy space located in facilities owned or leased by Digital in
exchange for rental fees determined at charges comparable to those charged to
other businesses operated by Digital.
F-21
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ALTAVISTA INTERNET SOFTWARE PRODUCTS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Facilities Agreement has an initial term of two years and is renewable
automatically thereafter for successive one-year terms unless either the Company
or Digital elects not to renew it. The Facilities Agreement is subject to early
termination by either the Company or Digital upon six months' written notice if
Digital ceases to own shares of common stock representing more than 50% of the
combined voting power of the common stock of the Company, and by the Company
with respect to any particular facility upon 30 days' written notice for any
reason. The Company's use of any particular property subject to the Facilities
Agreement is limited by the term of any underlying lease between Digital and a
landlord with respect to those properties leased by Digital and by any
disposition by Digital of any property owned by it.
Tax-Sharing Agreement
The Business is, and immediately after the offering the Company will
continue to be, included in Digital's federal consolidated income tax group, and
the Company's federal income tax liability will be included in the consolidated
federal income tax liability of Digital and its subsidiaries. In certain
circumstances, the Company and certain of its subsidiaries will also be included
with certain other subsidiaries of Digital in combined, consolidated or unitary
income tax groups for state and local tax purposes. The Company and Digital
intend to enter into a tax-sharing agreement (the "Tax-Sharing Agreement")
pursuant to which the Company and Digital will make payments between them such
that, with respect to any period, the amount of taxes to be paid by the Company,
subject to certain adjustments, will be determined as though the Company were to
file separate federal, state and local income tax returns. Pursuant to the
Tax-Sharing Agreement, under certain circumstances, the Company will be
reimbursed for tax attributes, such as net operating losses, that it generates
after the offering. Such reimbursement, if any, will be made for utilization of
the Company's losses only after Digital's losses are fully utilized.
Reimbursement will not be made for losses incurred by the Company while Digital
is subject to the alternative minimum tax. Under the Tax-Sharing Agreement, the
Company will pay Digital a fee intended to reimburse Digital for all direct and
indirect costs and expenses incurred with respect to the Company's share of the
overall costs and expenses incurred by Digital with respect to tax related
services.
In general, the Company will be included in Digital's consolidated group
for federal income tax purposes for so long as Digital beneficially owns at
least 80% of the total voting power and value of the outstanding common stock.
Each member of a consolidated group is jointly and severally liable for the
federal income tax liability of each other member of the consolidated group.
Accordingly, although the Tax-Sharing Agreement allocates tax liabilities
between the Company and Digital, during the period in which the Company is
included in Digital's consolidated group, the Company could be liable in the
event that any federal tax liability is incurred, but not discharged, by any
other member of Digital's consolidated group.
Asset Transfer and License Agreement
The Company and Digital intend to enter into an asset transfer and license
agreement (the "Asset Transfer Agreement") which will provide for the transfer
to the Company of all assets and the assumption by the Company of all
liabilities that relate principally to the Company's business, including all
assets and liabilities reflected on the AltaVista Internet Software Products
Balance Sheet included in this Prospectus as adjusted to give effect to the
conduct of the Company's business in the ordinary course from such balance sheet
date to the date of transfer.
Pursuant to the Asset Transfer Agreement, Digital will assign to the
Company all of Digital's rights in the AltaVista trademark and logo and will
license to the Company all of its Internet addresses. Digital will retain the
right to use such trademarks in advertising, marketing literature and corporate
communications that refer to the Company.
Under the Asset Transfer Agreement, Digital will grant the Company a
non-exclusive, irrevocable, royalty-free license to all Digital patents and
pending and future patent applications covering inventions made
F-22
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ALTAVISTA INTERNET SOFTWARE PRODUCTS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
as of the consummation of the offering that are embodied in the Company's
products and services. Under this license, the Company will have a right to sell
to its customers products embodying technology covered by the patents. The
Company will not otherwise have a right to sublicense its rights under this
license or to assign or transfer the license except in connection with a change
of control of the Company or the sale of all or substantially all of the
Company's assets. The Company may not prevent Digital from granting other
licenses under such patents, will not be able to realize licensing revenues from
any such licenses, cannot require Digital to enforce any such patents against
competitors of the Company and cannot control any enforcement proceedings
Digital undertakes.
Under the Asset Transfer Agreement, Digital will assign to the Company all
of Digital's rights in software code developed specifically for and included in
the Company's products and services, subject to the terms of the patent license
described above ("Transferred Code"). Digital will retain an irrevocable,
royalty-free license to use Transferred Code for its internal use, including
research and development. All rights to any performance or functionality
improvements or enhancements ("Modifications") to Transferred Code developed by
or on behalf of Digital will be owned by Digital; provided, however, that
Digital will grant the Company an irrevocable, royalty-free license to use
Modifications developed by Digital during the two years following the
consummation of the offering. Similarly, all rights to any Modifications
developed by or on behalf of the Company will be owned by the Company; provided,
however, that the Company will grant to Digital an irrevocable, royalty-free
license to use for Digital's internal use Modifications developed by the Company
during the two years following the consummation of the offering.
For two years following the consummation of the Offering, Digital will not
have the right to commercialize any new software product derived from
Transferred Code ("Derived Software") that is designed for use primarily in the
Internet/intranet market, that runs on Windows, Windows NT or UNIX platforms and
that offers functionality substantially similar to any of the AltaVista Products
as of the consummation of the offering. Notwithstanding the foregoing, Digital
will be free to commercialize without restriction any Digital product, excluding
the AltaVista products, existing as of the consummation of the offering that
includes Transferred Code as of the consummation of the offering without
restriction.
Under the Asset Transfer Agreement, Digital will retain all of its rights
in software code used in, but not developed specifically for, the Company's
products ("Shared Code"). Digital will grant the Company a non-exclusive,
irrevocable, royalty-free license to use Shared Code. Under the license, the
Company will have the right to sell to its customers products containing Shared
Code. The Company will not otherwise have a right to sublicense its rights or to
assign or transfer such license except in connection with a change of control of
the Company or the sale of all or substantially all of the Company's assets.
Pursuant to the Asset Transfer Agreement, Digital will license to the
Company all its rights in all know-how related to and necessary to use, make and
sell the Company's products. Any third party technology used in the Company's
products will, to the extent permitted, be sublicensed or assigned by Digital to
the Company under the Asset Transfer Agreement.
Technical Assistance Agreement
The Company intends to enter into a technical assistance agreement (the
"Technical Assistance Agreement") with Digital pursuant to which the Company
may, from time to time, request Digital (including its research laboratories) to
provide consulting and technical assistance to the Company with respect to
technology related to or derived from the Company's products. The Company will
pay Digital fees for any consulting or technical assistance provided by Digital
under the Technical Assistance Agreement at Digital's then prevailing rate for
consulting services. Ownership of and rights to any and all ideas, improvements
and inventions conceived or created under the performance of work under the
Technical Assistance Agreement shall be determined in writing between the
parties prior to Digital performing the work.
F-23
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ALTAVISTA INTERNET SOFTWARE PRODUCTS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Strategic Alliance Agreement
The Company and Digital intend to enter into a strategic alliance agreement
(the "Strategic Alliance Agreement") that grants Digital a license to distribute
the Company's products on a non-exclusive, worldwide basis through Digital's
reseller and distribution networks. The Strategic Alliance Agreement also
designates Digital as an Authorized Service Provider of the Company to provide
training, documentation, technical support and maintenance services to the
Company's customers and end-users. Digital will pay to the Company a fee for the
license and support services as agreed upon in the Digital-AltaVista Fee
Schedule. In addition, the Strategic Alliance Agreement provides that Digital
will loan the Company certain hardware equipment for product development
purposes, and provide the Company with hardware and software for internal use at
Digital's then prevailing prices. Digital and the Company have also established
a joint marketing relationship with respect to the Company's products and
services.
The Strategic Alliance Agreement has an initial term of two years and is
renewable automatically thereafter for successive one-year terms, subject to
termination by either the Company or Digital upon six months' written notice if
Digital ceases to own shares of Common Stock representing more than 50% of the
combined voting power of the common stock of the Company.
Corporate Agreement
The Company and Digital intend to enter into a corporate agreement (the
"Corporate Agreement") under which the Company will grant to Digital a
continuing option, transferable to any of its subsidiaries, to purchase, under
certain circumstances, additional shares of Class B common stock or shares of
nonvoting capital stock of the Company (the "Stock Option"). The Stock Option
may be exercised by Digital simultaneously with the issuance of any equity
security of the Company (other than in the Offering or upon the exercise of the
Underwriters' over-allotment options), with respect to Class B common stock,
only to the extent necessary to maintain its then-existing percentage of the
total voting power and value of the Company and, with respect to shares of
nonvoting capital stock, to the extent necessary to own at least 80% of the
total number of shares of each outstanding class of such stock.
The purchase price of the shares of Class B common stock purchased upon any
exercise of the Stock Option, subject to certain exceptions, will be based on
the market price of a share of Class A common stock. The purchase price of the
shares of nonvoting capital stock purchased upon any exercise of the stock
option, subject to certain exceptions, will be based on the market price at
which such stock may be purchased by third parties. The Stock Option expires in
the event that Digital reduces its beneficial ownership of common stock in the
Company to less than 60% of the number of outstanding shares of common stock.
The Company does not intend to issue additional shares of Class B common stock
except pursuant to the exercise of the Stock Option.
The Corporate Agreement will further provide that, upon the request of
Digital, the Company will use its best efforts to effect the registration under
the applicable federal and state securities laws of any of the shares of Class B
common stock and nonvoting capital stock (and any other securities issued in
respect of or in exchange for either) held by Digital for sale in accordance
with Digital's intended method of disposition thereof, and will take such other
actions as may be necessary to permit the sale thereof in other jurisdictions,
subject to certain limitations specified in the Corporate Agreement. Digital
will also have the right, which it may exercise at any time and from time to
time, to include the shares of Class B common stock and nonvoting capital stock
(and any other securities issued in respect of or in exchange for either) held
by it in certain other registrations of common equity securities of the Company
initiated by the Company on its own behalf or on behalf of its other
stockholders. The Company will agree to pay all out-of-pocket costs and expenses
(other than the underwriters' discounts and commissions and transfer taxes) in
connection with each such registration that Digital requests or in which Digital
participates. Subject to certain limitations specified in the Corporate
Agreement, such registration rights will be assignable by Digital and its
assignees.
F-24
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ALTAVISTA INTERNET SOFTWARE PRODUCTS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Equity Incentive Plan
The Company intends to adopt, subject to Board of Director's and
stockholder approval, the Equity Incentive Plan (the "Incentive Plan") under
which awards of common stock options and restricted and unrestricted common
stock, and deferred stock may be granted to employees, officers and directors
of, or consultants to, the Company. Options granted under the Incentive Plan may
be either incentive stock options or non-statutory stock options. Incentive
stock options granted have an exercise price not less than fair market value of
the stock at the grant date (110% of fair value in certain instances) and
vesting schedules as determined by the Board. Non-statutory options are granted
at prices and vesting schedules as determined by the Board. Restricted stock is
granted by the Board permitting the recipient to purchase common stock at a
price and subject to restrictions specified by the Board. A participant who
acquires shares of restricted stock will have all the rights of a stockholder,
including the right to receive dividends and to vote. Deferred stock is granted
by the Board entitling the recipient to receive stock at a specified future
date.
The Company plans to reserve shares of Class A common stock for issuance
under the Incentive Plan.
Directors Stock Option Plan
The Company intends to adopt a directors stock option plan (the "Directors
Plan") providing for the annual grant of stock options to purchase shares of
Class A common stock to outside directors as additional compensation for their
service as directors. The Company plans to reserve shares of Class A common
stock for issuance under the Directors Plan.
Under the Directors Plan, each eligible director joining the Board of
Directors in 1996 will be granted an option to purchase shares of Class A common
stock upon the later of the adoption of the plan or the director's appointment
or election. With respect to each eligible director who is a director as of June
29, 1997 or who joins the Board of Directors on or after June 29, 1997, options
to purchase shares of Class A common stock will be granted on the date of the
Company's next annual meeting of stockholders, provided that such director's
service as a director will continue after such meeting.
The exercise price of options granted under the Directors Plan will be 100%
of the fair market value per share of the Class A common stock on the date the
option is granted. Options granted under the Directors Plan will become
exercisable at the rate of 33% on the first and second anniversaries of the date
of grant and 34% on the third anniversary of the date of grant. The options will
expire on the tenth anniversary of the grant date, unless terminated earlier in
accordance with the Directors Plan.
Value Added Link Agreements
On July 3, 1996, Yahoo! Inc. ("Yahoo!") and Digital signed an agreement,
whereby Yahoo! established AltaVista as the preferred search engine for all
Yahoo! properties that contain World Wide Web functionality. Yahoo! pays a fee
to Digital based on the number of search result pages viewed according to an
agreed upon rate schedule.
The agreement has an initial term of two years and is renewable
automatically thereafter for successive one-year terms for up to three
successive one year terms subject to termination by either Digital or Yahoo!
upon 90 days' written notice.
On August 23, 1996, CNET, Inc ("CNET") and Digital signed an agreement
enabling users of CNET Properties to conduct World Wide Web searches through the
AltaVista Internet Search Service. CNET pays a fee to Digital based on the
number of search result pages viewed according to an agreed upon rate schedule.
The agreement has an initial term of one year and is renewable
automatically thereafter for successive one-year terms, subject to termination
by either Digital or CNET upon 30 days' written notice.
F-25
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ALTAVISTA INTERNET SOFTWARE PRODUCTS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
I. MIRROR SITE AGREEMENTS
Telia TeleCom AB
Digital signed a letter of intent in June 1996 with Telia TeleCom AB of
Sweden ("Telia") to establish a mirror site in Northern Europe. Telia would pay
Digital a monthly license fee as well as a fee based on the total number of hits
(requests for information) per day.
Telstra Corporation Ltd.
Digital signed a letter of intent in July 1996 with Telstra Corporation
Ltd. of Australia ("Telstra") to establish a mirror site in Australia, New
Zealand and several other countries. Telstra would pay Digital a monthly license
fee as well as a fee based on the total number of hits per day.
F-26
98
AltaVista Search
Comprehensive, fast and relevant search results provided seamlessly at all
levels of the work environment -- Internet, enterprise, workgroup and individual
user -- through a single user interface.
[SCREEN SHOT OF THE ALTAVISTA SEARCH USER INTERFACE.]
99
==============================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, DIGITAL OR ANY U.S. UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE
TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................... 3
Risk Factors......................... 8
Use of Proceeds...................... 20
Dividend Policy...................... 20
Capitalization....................... 21
Dilution............................. 22
Selected Financial Data.............. 23
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.......... 24
Business............................. 28
Relationship with Digital............ 45
Management........................... 51
Principal Stockholder................ 57
Shares Eligible for Future Sale...... 57
Description of Capital Stock......... 59
Certain United States Federal Tax
Consequences to Non-United States
Holders............................ 64
Underwriting......................... 67
Legal Matters........................ 69
Experts.............................. 69
Additional Information............... 70
Reports to Security Holders.......... 70
Index to Financial Statements........ F-1
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
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.
==============================================================================
==============================================================================
SHARES
[INTERNET SOFTWARE LOGO]
CLASS A COMMON STOCK
---------------------------
PROSPECTUS
, 1996
---------------------------
LEHMAN BROTHERS
COWEN & COMPANY
J.P. MORGAN & CO.
==============================================================================
100
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 SUCH STATE.
[ALTERNATE FRONT COVER PAGE]
Subject to Completion, dated August 27, 1996
PROSPECTUS
SHARES
[INTERNET SOFTWARE LOGO]
CLASS A COMMON STOCK
---------------------------
All of the shares of Class A Common Stock offered hereby are being sold by
AltaVista Internet Software, Inc. ("AltaVista" or the "Company"), a wholly-owned
subsidiary of Digital Equipment Corporation ("Digital"). Following the Offering
(as defined below), Digital will own all of the outstanding shares of
Class B Common Stock of the Company, which will represent approximately
% of the economic interest (or rights of holders of common equity to
participate in distributions in respect of the common equity) in the Company
(assuming no exercise of the Underwriters' over-allotment options).
Of the shares of Class A Common Stock offered hereby, shares
are being offered outside the United States and Canada (the "International
Offering") by the International Managers (as defined in "Underwriting"), and
shares are being offered in the United States and Canada in a
concurrent U.S. offering (the "U.S. Offering") by the U.S. Underwriters (as
defined in "Underwriting", and, together with the International Managers, the
"Underwriters"). These offerings are collectively referred to herein as the
"Offering." See "Underwriting."
Holders of Class A Common Stock generally have identical rights to holders
of Class B Common Stock and vote together as a single class, except that holders
of Class A Common Stock are entitled to one vote per share while holders of
Class B Common Stock are entitled, with certain exceptions, to three votes per
share on all matters submitted to a vote of stockholders. Following the
Offering, the shares of Class B Common Stock owned by Digital will represent
approximately % of the combined voting power of all classes of voting stock of
the Company (assuming no exercise of the Underwriters' over-allotment options).
Each share of Class B Common Stock is convertible into one share of Class A
Common Stock at the option of Digital, and is automatically converted under
certain circumstances. See "Relationship with Digital" and "Description of
Capital Stock."
Prior to the Offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $ and $ per share. See "Underwriting" for the
factors to be considered in determining the initial public offering price.
Application has been made to list the Class A Common Stock on the Nasdaq
National Market under the symbol "ALTV."
---------------------------
THE CLASS A COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
---------------------------
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.
===========================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------------------
Per Share................................
- -----------------------------------------------------------------------------------------------------------
Total(3).................................
===========================================================================================================
(1) The Company and Digital have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the International Managers a 30-day option to
purchase up to an additional shares of Class A Common Stock solely to
cover over-allotments, if any. The U.S. Underwriters have been granted a
similar option to purchase up to additional shares solely to cover
over-allotments, if any. If such options are exercised in full, the total
Price to Public would be $ , the total Underwriting Discounts and
Commissions would be $ and the total Proceeds to Company before
estimated expenses would be $ . See "Underwriting."
---------------------------
The shares of Class A Common Stock offered by this Prospectus are offered by
the International Managers subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
International Managers and to certain further conditions. It is expected that
delivery of the shares will be made at the offices of Lehman Brothers Inc., New
York, New York, on or about , 1996.
---------------------------
LEHMAN BROTHERS
COWEN & COMPANY
J.P. MORGAN SECURITIES LTD.
, 1996
101
[ALTERNATE BACK COVER PAGE]
==============================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, DIGITAL OR ANY INTERNATIONAL
MANAGER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER
THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
---------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................... 3
Risk Factors......................... 8
Use of Proceeds...................... 20
Dividend Policy...................... 20
Capitalization....................... 21
Dilution............................. 22
Selected Financial Data.............. 23
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.......... 24
Business............................. 28
Relationship with Digital............ 45
Management........................... 51
Principal Stockholder................ 57
Shares Eligible for Future Sale...... 57
Description of Capital Stock......... 59
Certain United States Federal Tax
Consequences to Non-United States
Holders............................ 64
Underwriting......................... 67
Legal Matters........................ 69
Experts.............................. 69
Additional Information............... 70
Reports to Security Holders.......... 70
Index to Financial Statements........ F-1
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
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.
==============================================================================
==============================================================================
SHARES
[INTERNET SOFTWARE LOGO]
CLASS A COMMON STOCK
---------------------------
PROSPECTUS
, 1996
---------------------------
LEHMAN BROTHERS
COWEN & COMPANY
J.P. MORGAN SECURITIES LTD.
==============================================================================
102
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the Class A Common Stock offered hereby
are as follows:
SEC registration fee....................................................... $17,242
NASD filing fee............................................................ 5,500
Nasdaq National Market listing fee......................................... *
Printing and engraving expenses............................................ *
Legal fees and expenses.................................................... *
Accounting fees and expenses............................................... *
Blue Sky fees and expenses (including legal fees).......................... *
Transfer agent and registrar fees and expenses............................. *
Miscellaneous.............................................................. *
-------
---
Total............................................................ $ *
=======
- ---------------
* To be completed by amendment.
The Company will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law and the Company's corporate charter
and by-laws provide for indemnification of the Company's directors and officers
for liabilities and expenses that they may incur in such capacities. In general,
directors and officers are indemnified with respect to actions taken in good
faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the Company, and with respect to any criminal action or proceeding,
actions that the indemnitee had no reasonable cause to believe were unlawful.
Reference is made to the Company's amended and restated corporate charter and
by-laws filed as Exhibits 3.2 and 3.4 hereto.
The Massachusetts Business Corporation Law, Digital's by-laws and
indemnification agreements between Digital and the Company's directors and
officers provide for indemnification of the Company's directors and officers for
liabilities and expenses that they may incur in such capacities, except with
respect to any matter that the indemnified person shall have been adjudicated in
any proceeding not to have acted in good faith in the reasonable belief that his
or her action was in the best interest of Digital. Reference is made to
Digital's corporate charter and by-laws and form of indemnification agreement
filed as Exhibits 3.5 through 3.8 and Exhibit 10.10.
The Company's corporate charter also provides that any person purchasing or
acquiring an interest in a share of capital stock of the Company is deemed to
have consented to certain provisions in the corporate charter that (i) permit
the officers and directors of the Company and Digital to allocate corporate
opportunities to either the Company or Digital as such officers of directors
deem appropriate, and that none of the Company, Digital and their respective
officers or directors shall be liable for any breach of a fiduciary duty in
connection therewith, and (ii) eliminate the liability of Digital and its
officers and directors for engaging in business activities similar to those of
the Company and for any actions taken in connection with any agreements entered
into between the Company and Digital.
The Underwriting Agreements provide that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Act"). Reference is made to the
forms of Underwriting Agreements filed as Exhibits 1.1 and 1.2 hereto.
II-1
103
Digital maintains directors and officers liability insurance for the
benefit of its and the Company's directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company has not issued any unregistered securities except to its
parent, Digital, in connection with the organization of the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
1.1* Form of U.S. Underwriting Agreement.
1.2* Form of International Underwriting Agreement.
1.3* Form of Agreement Between U.S. Underwriters and International Managers.
3.1 Current form of Certificate of Incorporation of the Company.
3.2 Form of Amended and Restated Certificate of Incorporation of the Company, to be
effective prior to consummation of the Offering.
3.3 Current form of By-laws of the Company.
3.4 Form of Amended and Restated By-laws of the Company, to be effective prior to
consummation of the Offering.
3.5 Digital's Restated Articles of Organization (filed under cover of Form SE as
Exhibit 3(a) to Digital's Annual Report on Form 10-K for the fiscal year ended
June 29, 1991 and incorporated herein by reference).
3.6 Articles of Amendment to Digital's Restated Articles of Organization, filed with
the Secretary of State of the Commonwealth of Massachusetts on November 4, 1993
(filed as Exhibit 4.3 to Digital's Registration Statement on Form S-3, No.
33-51987, and incorporated herein by reference).
3.7 Certificate of Designation of Digital, filed with the Secretary of State of the
Commonwealth of Massachusetts on March 21, 1994 (filed as Exhibit 4.1 to Digital's
Report on Form 8-K filed on March 23, 1994 and incorporated herein by reference).
3.8 Digital's By-laws, as amended (filed as Exhibit 3(d) to Digital's Annual Report on
Form 10-K for the fiscal year ended July 1, 1995 and incorporated herein by
reference).
4.1* Specimen certificate representing the Class A Common Stock.
5.1* Opinion of Testa, Hurwitz & Thibeault, LLP.
10.1 Form of Services Agreement between the Company and Digital.
10.2 Form of Facilities Agreement between the Company and Digital.
10.3 Form of Tax-Sharing Agreement between the Company and Digital.
10.4 Form of Corporate Agreement between the Company and Digital.
10.5 Form of Strategic Alliance Agreement between the Company and Digital.
10.6 Form of Technical Assistance Agreement between the Company and Digital.
10.7* Form of Asset Transfer and License Agreement between the Company and Digital.
10.8*# Agreement between the Company and Yahoo! Inc.
10.9* 1996 Stock Plan.
10.10* 1996 Non-Employee Director Stock Option Plan.
10.11* Form of Indemnification Agreement between Digital and the Company's officers and
directors.
21.1 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-4).
27.1 Financial Data Schedule.
- ---------------
* To be filed by amendment.
# Confidential treatment requested as to certain portions.
II-2
104
(B) FINANCIAL STATEMENT SCHEDULES: None
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 14 above, 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 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 Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Act, the information omitted
from the form of prospectus filed as part of a registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be part of this registration statement as of the time it was declared
effective; and (3) that for the purpose of determining any liability under the
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-3
105
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Littleton, Massachusetts on August
27, 1996.
ALTAVISTA INTERNET SOFTWARE, INC.
By: /s/ Ilene H. Lang
------------------------------------
Ilene H. Lang
President and Chief Executive
Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of AltaVista Internet Software,
Inc., hereby severally constitute and appoint Ilene H. Lang, Robert E. Hult,
Gail S. Mann and Edwin L. Miller, Jr., and each of them singly, our true and
lawful attorneys, with full power to them and each of them singly, to sign for
us in our names in the capacities indicated below, any registration statement
related to the Offering that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933 (a "462(b) Registration Statement"), any
and all amendments and exhibits to this registration statement or any 462(b)
Registration Statement, and any and all applications and other documents to be
filed with the Securities and Exchange Commission pertaining to the registration
of the securities covered hereby or thereby, and generally to do all things in
our names and on our behalf in such capacities to enable AltaVista Internet
Software, Inc. to comply with the provisions of the Securities Act of 1933 and
all requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE
- --------------------------------------------- ------------------------------ -----------------
/s/ Ilene H. Lang President and Sole Director August 27, 1996
- --------------------------------------------- (Principal Executive Officer)
Ilene H. Lang
/s/ Robert E. Hult Vice President, Finance and August 27, 1996
- --------------------------------------------- Operations, and Treasurer
Robert E. Hult (Principal Financial and
Accounting Officer)
II-4
106
EXHIBIT INDEX
PAGE
-----
1.1* Form of U.S. Underwriting Agreement.
1.2* Form of International Underwriting Agreement.
1.3* Form of Agreement Between U.S. Underwriters and International Managers.
3.1 Current form of Certificate of Incorporation of the Company.
3.2 Form of Amended and Restated Certificate of Incorporation of the Company, to
be effective prior to consummation of the Offering.
3.3 Current form of By-laws of the Company.
3.4 Form of Amended and Restated By-laws of the Company, to be effective prior
to consummation of the Offering.
3.5 Digital's Restated Articles of Organization (filed under cover of Form SE as
Exhibit 3(a) to Digital's Annual Report on Form 10-K for the fiscal year
ended June 29, 1991 and incorporated herein by reference).
3.6 Articles of Amendment to Digital's Restated Articles of Organization, filed
with the Secretary of State of the Commonwealth of Massachusetts on November
4, 1993 (filed as Exhibit 4.3 to Digital's Registration Statement on Form
S-3, No. 33-51987, and incorporated herein by reference).
3.7 Certificate of Designation of Digital, filed with the Secretary of State of
the Commonwealth of Massachusetts on March 21, 1994 (filed as Exhibit 4.1 to
Digital's Report on Form 8-K filed on March 23, 1994 and incorporated herein
by reference).
3.8 Digital's By-laws, as amended (filed as Exhibit 3(d) to Digital's Annual
Report on Form 10-K for the fiscal year ended July 1, 1995 and incorporated
herein by reference).
4.1* Specimen certificate representing the Class A Common Stock.
5.1* Opinion of Testa, Hurwitz & Thibeault, LLP.
10.1 Form of Services Agreement between the Company and Digital.
10.2 Form of Facilities Agreement between the Company and Digital.
10.3 Form of Tax-Sharing Agreement between the Company and Digital.
10.4 Form of Corporate Agreement between the Company and Digital.
10.5 Form of Strategic Alliance Agreement between the Company and Digital.
10.6 Form of Technical Assistance Agreement between the Company and Digital.
10.7* Form of Asset Transfer and License Agreement between the Company and
Digital.
10.8*# Agreement between the Company and Yahoo! Inc.
10.9* 1996 Stock Plan.
10.10* 1996 Non-Employee Director Stock Option Plan.
10.11* Form of Indemnification Agreement between Digital and the Company's officers
and directors.
21.1 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-4).
27.1 Financial Data Schedule.
- ---------------
* To be filed by amendment.
# Confidential treatment requested as to certain portions.