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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2001
Commission file number 0-26376
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ON TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3162846
(State or incorporation) (IRS Employer
Identification Number)
880 Winter Street, Building 4 Waltham, Massachusetts 02451-1449
(781) 487-3300
(Address and telephone of principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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Indicate by check mark whether registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $41,635,903, as of March 13, 2002.
The number of shares of Common Stock, $0.01 par value, outstanding as of
March 13, 2002 was 23,030,593
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report on Form 10-K, to
the extent not set forth herein, is incorporated by reference from specified
portions of the Registrant's definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders scheduled for May 16, 2002.
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Note: ON Technology, CCM, ON Command, and ON Command CCM are either registered
trademarks or trademarks of ON Technology Corporation in the United States,
European Union, Australia, Canada, and/or other countries. Other products and
company names mentioned herein may be trademarks of their respective owners.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's prospects are subject to certain uncertainties and risks. This
Annual Report on Form 10-K also contains certain forward-looking statements
within the meaning of the Federal Securities Laws. The Company's future results
may differ materially from its current results and actual results could differ
materially from those projected in the forward-looking statements as a result
of certain risk factors. READERS SHOULD PAY PARTICULAR ATTENTION TO THE
CONSIDERATIONS DESCRIBED IN THE SECTION OF THIS REPORT ENTITLED "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS." Readers should
also carefully review the risk factors described in the other documents the
Company files from time to time with the Securities and Exchange Commission.
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Part I
Item 1. Business
THE COMPANY
ON Technology Corporation and its subsidiaries ("ON" or the "Company")
provide remote software management solutions for desktops, mobile PCs,
handhelds, servers, retail Point-of-Sale (POS) devices, and banking
workstations. The Company's principal product, ON Command CCM(R) or CCM(R), is
used by enterprise Information Technology ("IT") organizations and service
providers to remotely manage and rapidly deliver business-critical software
over corporate networks. Our products are designed to reduce operational costs
while enhancing both IT and end-user productivity.
The Company was incorporated in Delaware in 1985. Its corporate headquarters
is located at 880 Winter Street, Waltham, Massachusetts 02451-1449. The
telephone number is 781-487-3300. The Company's European headquarters is
located at Enzianstrase 4, 82319 Starnberg, Germany. The telephone number is
49-81-51369-0.
INDUSTRY BACKGROUND
In many organizations, Information Technology ("IT") is increasingly viewed
as a strategic resource rather than simply a support function. At the same
time, IT organizations are under increasing pressure to support more PCs with
fewer resources as well as deliver a higher quality of service to end-users.
For example, reducing PC downtime is a major concern for many organizations
because downtime can quickly result in lost revenue or lost customers due to
non-functioning business-critical applications such as Customer Relationship
Management (CRM) or retail Point-of-Sale applications. The dynamics of the
current business and technology environment are also placing significant
demands on IT, such as the need to efficiently service a growing number of
mobile users and remote offices, provide centralized support for disparate
organizations created via mergers and acquisitions, and rapidly implement
enterprise-wide initiatives such as Windows 2000 and Windows XP migrations and
upgrades to the latest versions of Lotus Notes or Microsoft Outlook, in order
to provide end-users with enhanced performance, security and usability.
Traditionally, IT tasks such as software installation, configuration and
troubleshooting have been handled in a costly and time-consuming manner. In
many organizations, this typically involves sending a technician with a CD-ROM
to a remote location, such as a regional call center or remote branch office.
In addition, detailed information about PC and server configurations--such as
network settings, lists of installed software and revisions, and dependencies
between installed software packages--has traditionally been managed in an ad
hoc manner, making it difficult and time consuming to troubleshoot and
reconfigure PCs and servers in the event of hardware failure, user
misconfiguration, or addition of new software applications.
2
THE ON SOLUTION
Our products are designed to reduce operating costs while enhancing both IT
and end-user productivity. ON accomplishes this by providing automated
procedures for remotely executing software installation and configuration
procedures on multiple PCs and servers simultaneously, over corporate networks,
and performing disaster recovery on corrupted or misconfigured systems. In
addition, our products allow IT organizations to efficiently manage remote
locations and mobile users, track detailed configuration information in
management databases, and access management information and functions via
intuitive, point-and-click, graphical interfaces. Our products are based on an
open, scalable, standards-based and extensible architecture, providing maximum
flexibility and ease-of-use.
ON Command CCM, our flagship product, is typically used to "push" software
across enterprise Local Area Networks ("LANs") and Wide Area Networks ("WANs")
to hundreds or thousands of users from centralized servers. A separate add-on
module called ON iCommand allows end-users to download and install applications
from the convenience of their Web browsers; this "self-service IT" or "end-user
pull" approach allows users to install optional software in a controlled manner
without requiring direct involvement by IT personnel.
ON Command CCM's key capabilities include:
. Addresses All Phases of Software Management in a Single Integrated
System: ON Command CCM addresses all phases of software management in a
single integrated system, including initial system provisioning,
installation and configuration of both operating systems and
applications, ongoing updates such as Microsoft security fixes and
content such as price list files, and PC disaster recovery. For example,
CCM can be used to install productivity applications such as Office 2000
or XP, Lotus Notes and Internet Explorer, as well as business
applications such as Siebel, SAP, and Oracle. CCM is also used to reduce
the time and cost required to implement enterprise-wide strategic
initiatives such as Windows 2000 and Windows XP migrations.
. Leverages Reliability of Manufacturer-Supplied Installation
Programs: CCM installs software by remotely executing standard
manufacturer-supplied and supported installation procedures on target PCs
and servers. This approach is significantly more reliable than
traditional automated approaches because "native" installation procedures
typically adapt in real time to installed hardware and software on target
devices, as well as to pre-existing network and server configurations. In
comparison, traditional "snapshot" approaches are usually less reliable
because they blindly copy identical sets of files and configuration
changes to all target devices, without leveraging the flexibility and
built-in intelligence of native installation programs. At the same time,
CCM is an open system that supports all common application packaging
mechanisms including Microsoft standards such as Microsoft Installer
(MSI) as well as third-party solutions, allowing customers to leverage
their existing investments in application packaging and training.
. Scalable Architecture: CCM offers powerful grouping capabilities that
allow IT organizations to administer groups of PCs and servers as single
administrative objects. For example, PCs can belong to one or multiple
groups based on hardware manufacturer, physical location, or functional
organization. CCM can also leverage group and policy information
contained in industry-standard directory services such as Microsoft
Active Directory Services (ADS), Novell Directory Services (NDS), and
Lightweight Directory Access Protocol (LDAP). Network scalability is also
supported by CCM's ability to perform job scheduling and bandwidth
management to minimize network load, and by its use of IP as the
underlying protocol for optimum efficiency.
. Enterprise-Class Robustness and Ease-of-Use: CCM offers a number of
capabilities for robust operation in enterprise environments, including
automated synchronization of server contents across LANs and WANs, and
detailed logging to support automatic restart in case of network or power
outages. An intuitive Windows-based graphical user interface is used for
monitoring the status of management tasks and administering configuration
information.
3
. Rapid Return on Investment (ROI): CCM has been designed for rapid
implementation typically measured in weeks or months, especially in
comparison to traditional enterprise frameworks, which typically require
far longer implementation cycles. This approach results in rapid
return-on-investment (ROI) and immediate tactical benefits while at the
same time yielding long-term strategic benefits for our customers.
. Support for Industry Standards and Heterogeneous Environments: CCM
supports standard servers (Sun Solaris, HP-UX, Microsoft Windows NT
Server, Microsoft Windows 2000 Server and Advanced Server), standard
clients (Windows 95/98, Windows NT, Windows 2000, and Windows XP),
standard networks (IP protocol, Ethernet and token-ring connectivity),
and manageability standards such as Intel's Wired for Management
specification and the Microsoft Management Console (MMC) framework.
Handheld devices such as Palm Computing and PocketPC devices are
supported via the PC platforms to which they are typically connected for
synchronization.
. Open Architecture: CCM provides a range of open and published interfaces
that allow customers and partners to add value via customized procedures
and integration with third-party products. These interfaces include Open
Database Connectivity (ODBC) and Java Database Connectivity (JDBC) as
well as Java programming interfaces.
ADD-ON PRODUCTS
. ON Command Remote is a remote control program for Help Desk professionals
and service providers. ON Command Remote allows technicians to view
remote screens and operate remote keyboards, without leaving their
consoles, in order to remotely diagnose problems and reconfigure devices.
ON Command Remote is supplied to ON Technology by Funk Software, Inc. on
an OEM basis.
. Centennial Discovery is a network inventory program that identifies which
software assets are present, where they are located, how they are
configured, and when any changes are made to them. Centennial Discovery
is supplied to ON Technology by Centennial UK Limited on a resale basis.
BUSINESS STRATEGY
The Company believes that the CCM product offers opportunities for long-term
growth because there is a real and growing need for our solutions and our
product currently has technological advantages over the products offered by the
Company's principal competitors. Our objective is to be the leading provider of
enterprise infrastructure management solutions that address the problems faced
by IT organizations responsible for managing PC's, servers and related devices
such as handhelds. Key elements of our strategy include:
. Grow Distribution Channels: We will continue to expand our direct sales
distribution channel as well as relationships with indirect channels such
as value-added resellers, system integrators, and complementary software
suppliers that can provide value-added services and extend our
distribution reach into new markets and geographies.
. Focus on New Horizontal and Vertical Markets: We believe that the
industry-wide transition to Windows 2000 and Windows XP creates a
significant business opportunity for the Company, and we intend to focus
our marketing and development efforts on capitalizing on this
opportunity. We will also explore other key vertical and horizontal
markets in which our solutions are particularly well suited, such as the
retail and financial services markets.
. Continue to Strengthen Technology Leadership and Ease-of-Use: We will
continue to strengthen our technology leadership position by enhancing
enterprise product functionality, ease-of-use, and support for industry
standards.
4
SALES AND MARKETING
The Company's enterprise sales effort focuses on key accounts with larger
companies where the opportunity exists for volume sales and long-term, repeat
business. Through the enterprise sales program, the Company is building
relationships in which its knowledge of the customer's needs translates into
purchasing advantages and maximized support. Regular visits to the customer's
site provide the Company's sales representatives with valuable feedback for
technology development, future upgrades and service enhancements. The Company
has established US direct sales and support offices in Waltham, Massachusetts;
and additionally has a presence in New York, California, Arizona, Georgia,
Illinois, Texas, and Virginia. International direct sales and support offices
are located in London, England; Berlin, Germany; Hamburg, Germany; Ratingen
(outside Dusseldorf), Germany; Munich, Germany; Vienna, Austria; Amersfoort,
Holland; and Winterthur, Switzerland. Our direct sales organization is
complemented by an indirect sales channel that includes regional resellers as
well as system integrators such as Dell, Unisys, IBM Global Services, Siemens,
and Sun Microsystems GmbH.
CUSTOMERS
The Company markets its products primarily to large and medium-size
corporate, government and institutional customers. For the twelve months ended
December 31, 2001, 2000 and 1999, two customers accounted for $4.3 million
(17.8%), $6.3 million (24.0%), and $7.4 million (24.0%) of total revenue,
respectively.
Revenue from direct and indirect license sales for the year ended December
31, 2001, accounted for 74% and 26%, respectively, of total license revenue,
and revenue from North America and from the rest of the world accounted for 26%
and 74%, respectively of total revenue.
CUSTOMER SUPPORT, TRAINING AND PROFESSIONAL SERVICES
The Company employs professional technical support staff in Starnberg,
Germany and Waltham, Massachusetts to support CCM customers via telephone
hotline, electronic mail, and on-site visits. Customer's who subscribe to our
maintenance program have access to our technical support staff and are entitled
to receive software updates, on a when-and-if available basis. The Company also
conducts training classes to facilitate the implementation and administration
of its products, which are available either at the Company's offices or at a
customer's site.
RESEARCH AND DEVELOPMENT
Our research and development organization is responsible for the design,
development, release and ongoing maintenance and support of our products. The
organization currently includes 70 employees with 37 employees in software
development, quality assurance, documentation, and project management functions
and another 33 responsible for providing customer consulting, training and
product support. When appropriate, we also utilize third parties to expand the
capacity and technical expertise of our internal research and development
personnel, as well as license selected third-party technologies, which we
believe shortens the time to market without compromising our competitive
position.
In addition to maintaining our products, this department is responsible for
the enhancement of product functionality, identifying complementary products as
well as innovative new ideas for future products.
The Company's research and development expenses were approximately $8.0
million, $9.8 million, and $8.7 million for the fiscal years December 31, 2001,
2000, and 1999, respectively. The Company's practice is to expense all software
development costs as incurred. We anticipate that we will continue to commit
substantial resources to research and development.
5
COMPETITION
The market for the Company's products is highly competitive, and the Company
expects competition to continue to increase in the future. The Company believes
that the principal competitive factors affecting the market for its products
include brand name recognition, company reputation, performance, functionality,
ease-of-use, breadth of product line, quality, customer support, adherence to
industry standards, integration with third-party solutions and price.
As is the case in many segments of the software industry, the Company may
encounter increasing price competition in the future. This could reduce average
selling prices and, therefore, profit margins. Competitive pressures could
result not only in sustained price reductions but also in a decline in sales
volume, which could adversely affect the Company's business, condition
(financial or otherwise), prospects and results of operations and cash flows.
There can be no assurance that the Company will continue to compete effectively
against existing and potential competitors in its markets, many of whom have
substantially greater financial, technical, marketing and support resources and
name recognition than the Company.
The widespread inclusion of the functionality of the Company's products as
standard features of Microsoft operating systems software could render the
Company's products obsolete and unmarketable, particularly if the quality of
such functionality were comparable to that of the Company's products. If the
Company were unable to develop new functionality or unique applications for its
technology to replace successfully any obsolete products, the Company's
business, condition (financial or otherwise), prospects and results of
operations and cash flows would be materially and adversely affected.
The market for our products is highly competitive and diverse. The
technology for remote software management products can change rapidly. New
products are frequently introduced and existing products are continually
enhanced. Competitors vary in size and in the scope and breadth of the products
and services offered.
The Company has faced competition from a number of sources, including:
. Large and established companies such as Microsoft, Computer Associates
International and IBM/Tivoli that offer limited remote software delivery
and management capabilities as part of their systems management, or
network management frameworks.
. Software companies like Novidigm and Marimba as well as others that
provide software management utilities and low-priced suites such as
Symantec, Intel, and Altiris.
. Hardware suppliers such as IBM, Hewlett-Packard, and Compaq that offer or
bundle software management capabilities in conjunction with their
hardware offerings.
. The internal information technology departments of those companies with
infrastructure management needs.
In addition, Microsoft has bundled new management capabilities in its
Windows 2000 and Windows XP operating system that, in conjunction with its
Systems Management Server (SMS) framework, directly compete with capabilities
provided by ON Command CCM. Even if customers or potential customers find the
functionality provided with Microsoft's operating system software to be more
limited than that of our software management products, they may elect to accept
more limited functionality in lieu of purchasing additional software.
Competition resulting from this type of bundling could lead to price reductions
for our products, which would reduce our margins and correspondingly affect our
business, quarterly and annual operating results and cash flows and financial
condition.
Some of our current and many of our potential competitors have much greater
financial, technical, marketing, and other resources than we have. As a result,
they may be able to respond more quickly to new or emerging technologies and
changes in customer needs. They may also be able to devote greater resources to
the
6
development, promotion, and sale of their products than the Company can. The
Company may not be able to compete successfully against current and future
competitors. In addition, competitive pressures faced by the Company may
materially adversely affect the Company's business, operating results and cash
flows, and financial condition.
OPERATIONS
The Company designs most of its product, marketing and sales materials
through the use of contracted services. Product orders are fulfilled directly
by the Company. Sales and support calls are also handled directly by the
Company.
EMPLOYEES
At December 31, 2001, the Company had 162 employees and full-time contract
laborers. Competition for qualified management and technical personnel is
intense in the software industry. The Company's continued success will depend
in part on its ability to attract and retain qualified personnel. None of the
Company's employees is represented by a labor union and the Company believes
that its employee relations are good.
Item 2. Properties
The Company leases office space in the following locations:
Expiration
Location Primary Use Approx. # of Sq. Feet of Lease
- -------- --------------------- --------------------- ----------
Waltham, MA US Headquarters 34,930 12/31/02
Starnberg, Germany European Headquarters 16,174 7/31/05
Raleigh, NC Subleased 6,840 2/28/02
Buckinghamshire, England Sales office 270 4/30/02
The Company also subleases several other locations for use as sales offices
on a short-term, renewable basis. In Waltham, Massachusetts, approximately
7,174 square feet of space of the Company's total leased space is subleased to
a third party until December 30, 2002. The entire leased space in Raleigh,
North Carolina had been subleased to a third party through the lease's
termination. The Company believes its facilities are adequate for its current
needs and that adequate facilities for expansion, if required, are available.
Item 3. Legal Proceedings
From time to time, the Company may be a party to litigation and claims
incident to the ordinary course of its business. As of the date of this Form
10-K, except as discussed below, there is no litigation pending against the
Company that would have a material adverse effect on the Company's results of
operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2001.
7
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
The Company's common stock is traded on the Nasdaq National Market under the
symbol ONTC. The following table sets forth, for the period indicated, the
closing sale prices for the common stock, all as reported by Nasdaq.
High Low
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Year Ended December 31, 2001
First Quarter............... $ 1.7188 $0.7500
Second Quarter.............. 1.0800 0.7188
Third Quarter............... 0.9400 0.4700
Fourth Quarter.............. 3.5900 0.7000
Year Ended December 31, 2000
First Quarter............... 15.8750 9.2500
Second Quarter.............. 9.8750 2.7500
Third Quarter............... 3.2500 2.0630
Fourth Quarter.............. 2.5000 0.4220
As of March 13, 2002 there were approximately 5,500 beneficial holders of
the Company's stock.
Dividend Policy
The Company has not declared or paid cash dividends on its common stock
since 1992 when it converted from an S Corporation to a C Corporation. The
Company currently intends to retain any earnings for use in developing and
growing its business, and does not anticipate paying any cash dividends on its
common stock in the foreseeable future.
Recent Sales of Unregistered Securities
On October 25, 2001, the Company closed a private placement of $5 million of
common stock with four inter-related institutional investors. The Company
issued 6,024,096 shares of common stock to the investors at a purchase price of
$0.83 per share based on the prior market close. Under the terms of the
purchase agreement, the investors have the right to appoint one member of the
Company's Board of Directors and the Company must use commercially reasonable
efforts to take all actions reasonably required to register under the
Securities Exchange Act of 1933, as amended (the "Securities Act"), the shares
of common stock acquired by the investors. The Company intends to use the
proceeds of the sale for sales expansion, marketing programs to improve product
branding, and accelerating research and development efforts. The shares sold in
the private placement were registered under the Securities Act on February 5,
2002.
On December 30, 1999, in a private placement under the Securities Act and
pursuant to the terms and conditions of the Securities Purchase Agreement by
and among ON, Castle Creek Technology Partners LLC and Marshall Capital
Management Inc., ON sold 1,029,674 shares of common stock to Castle Creek
Technology Partners LLC and Marshall Capital Management Inc. (the "Investors")
for an aggregate purchase price of $12 million. In connection with the private
placement, the Investors were each issued warrants to purchase an aggregate of
514,838 shares of common stock, which warrants were subject to increase based
on the 15 day average closing bid price of ON's common stock for the period
ended December 29, 2000 (the "Initial Warrants"). In addition, the Investors
were issued warrants to purchase additional shares of common stock, which
warrants were exercisable only under specific circumstances (the "Additional
Warrants,"). The Additional Warrants have expired by their terms.
8
On December 18, 2000, the Company entered into exchange agreements with each
of the Investors pursuant to which each Investor exchanged its Initial Warrant
for a new warrant exercisable for 1,400,000 shares of common stock (each a "New
Warrant" and, collectively, the "New Warrants") and a contingent promissory
note in the principal amount of $500 thousand (each a "Note" and, collectively,
the "Notes").
Each New Warrant had an exercise price of $0.01 per share, which is subject
to proportionate adjustment in the event of a stock split, stock dividend or
similar event, and to weighted-average adjustment in the event of certain
issuances of securities by the Company at an offering price below the
then-current market price of such security. Each New Warrant expires after 5:00
p.m., Eastern Time on December 29, 2004. In 2001 the Company was notified by
Marshall Capital that it had sold its rights under the warrants and its
promissory note to Castle Creek. As of March 8, 2002, a warrant to purchase a
total of 550,437 shares of the Company's common stock remained outstanding.
The principal amount of each Note was due and payable on December 31, 2001,
unless a registration statement covering all the shares of the Company's common
stock that are entitled to be registered under the Exchange Agreements was
effective for not less than 20 trading days during the period beginning
November 15, 2001 and ending December 31, 2001 (the "Measurement Period") and
the average closing price of the Company's common stock for the last 20 trading
days during the Measurement Period when such registration statement was
effective exceeded $3.00 per share (as adjusted to reflect any stock splits,
reverse stock splits, stock dividends or similar events). Interest was payable
on the Notes only after a default at the rate of 9% per year. As of December
31, 2001, the Company met the above criteria and the Notes were cancelled.
All required registration statements have been filed and are currently
effective.
Item 6. Selected Consolidated Financial Data
The following table sets forth selected financial data derived from the
Consolidated Financial Statements of the Company. The Consolidated Financial
Statements have been audited by Arthur Andersen LLP, independent public
accountants. The data should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto and with Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Revenue information in the selected consolidated financial data shown below
has been reclassified to enable a reader to identify revenue of the Company's
current operations. The Company's core business products, acquired in 1997, are
shown by category for the indicated periods. Revenue--MMI related to groupware
revenue on the Company's Meeting Maker product prior to its license to MMI on
June 30, 2000. Revenue from product lines in the network management, security
and scheduling areas that were either sold to Elron Software Inc. in 1998 (the
"Elron Transaction") or discontinued for Y2K concerns, have been grouped in
other along with MMI license revenue received by the Company in 2000 and 2001.
9
No attempt has been made to allocate operating expenses in the same manner
as revenue because the Company's personnel worked on multiple projects across
project lines and the Company believes any such allocation of expenditures
would not be meaningful.
The selected consolidated financial data below may not be comparable for all
of the periods presented due to the facts discussed above.
Years Ended December 31,
--------------------------------------------
1997 1998 1999 2000 2001
-------- ------- ------- ------- -------
(In thousands, except per share data)
Consolidated Statement of Operations Data:
Revenue:
Net CCM and related products................ $ 6,378 $ 8,176 $17,993 $16,073 $15,188
CCM and related service and maintenance..... 2,253 3,124 5,524 6,633 8,462
Meeting Maker, Inc. (MMI)................... 9,934 7,530 7,360 3,405 --
Other....................................... 22,717 1,180 -- 236 568
-------- ------- ------- ------- -------
Total revenue.............................. 41,282 20,010 30,877 26,347 24,218
Cost of product and service revenue......... 9,315 3,890 5,431 4,431 4,256
-------- ------- ------- ------- -------
Gross Profit............................... 31,967 16,120 25,446 21,916 19,962
-------- ------- ------- ------- -------
Operating expenses:
Sales and marketing........................ 22,172 10,715 13,396 13,390 12,248
Research and development................... 12,461 9,044 9,953 10,691 8,019
General and administrative................. 5,501 3,412 4,465 6,894 4,690
Charge for purchased incomplete research
and development.......................... 15,898 -- -- -- --
Charge for restructuring................... 10,940 -- -- -- --
Gain on sale of assets..................... -- (6,518) -- -- --
-------- ------- ------- ------- -------
Loss from operations........................ (35,005) (533) (2,368) (9,059) (4,995)
Interest income, net........................ 233 325 153 498 171
Other income (loss)......................... -- 20 216 716 (745)
-------- ------- ------- ------- -------
Loss before allocation to Meeting Maker, Inc
and provision for taxes................... (34,772) (188) (1,999) (7,845) (5,569)
Allocation to Meeting Maker, Inc............ -- -- -- (1,171) --
Provision for income taxes.................. -- (27) -- (420) (76)
-------- ------- ------- ------- -------
Net loss.................................... $(34,772) $ (215) $(1,999) $(9,436) $(5,645)
======== ======= ======= ======= =======
Basic loss per share........................ $ (2.88) $ (0.02) $ (0.16) $ (0.67) $ (0.34)
======== ======= ======= ======= =======
Diluted loss per share...................... $ (2.88) $ (0.02) $ (0.16) $ (0.67) $ (0.34)
======== ======= ======= ======= =======
Basic weighted average shares outstanding... 12,079 12,281 12,526 14,141 16,365
======== ======= ======= ======= =======
Diluted weighted average shares outstanding. 12,079 12,281 12,526 14,141 16,365
======== ======= ======= ======= =======
10
December 31,
---------------------------------------
1997 1998 1999 2000 2001
------- ------- ------- ------- -------
(Amounts in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents...... $ 6,679 $ 8,001 $16,941 $ 9,437 $ 9,767
Restricted cash................ -- -- -- 1,069 1,069
Working capital................ 3,803 4,686 15,144 6,434 6,715
Total assets................... 17,382 14,669 26,788 18,371 20,116
Long-term obligations.......... 10 -- -- 1,222 --
Total stockholders' equity..... 6,996 7,141 16,970 6,902 8,582
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
ON Technology Corporation and its subsidiaries ("ON" or the "Company")
provide remote software management solutions for desktops, mobile PCs,
handhelds and servers. The Company's principal product, ON Command CCM(TM), or
CCM, is used by enterprise IT organizations and service providers to rapidly
deliver business-critical software over corporate networks. Our products are
designed to reduce operational costs while enhancing both IT productivity and
end-user satisfaction.
In June 2000, the Company entered into a license agreement with Meeting
Maker, Inc. ("MMI"), which, among other things, provided for the grant of an
exclusive worldwide license to market and distribute the Company's Groupware
business (Meeting Maker) (including a license to the underlying source code and
object code). Under the agreement, MMI paid the Company quarterly royalty
payments, subject to certain minimums. On June 29, 2001, MMI exercised its
buyout option for the remaining minimum payments plus an additional fee. As a
result of the buyout, there will be no future payments under this agreement.
The Company has recognized all royalty fees as earned ($568 thousand and $236
thousand for the years ended December 31, 2001 and 2000, respectively) in other
revenue in the accompanying consolidated statements of operations.
The Company's discussion and analysis of its financial condition and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to revenue and bad debt reserve levels,
income taxes and contingencies and litigation. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Our significant accounting policies are described in Note 1 to the
consolidated financial statements included in Item 14 of this Form 10-K. The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants' (AICPA) Statement of Position (SOP) No. 97-2,
Software Revenue Recognition. Software license revenue principally consists of
revenue earned under perpetual software license agreements and is generally
recognized upon shipment of the software if collection of the resulting
receivable is probable, the fee is fixed or determinable, and vendor-specific
objective evidence exists for all undelivered elements to allow allocation of
the total fee to all delivered and undelivered elements of the arrangement.
Revenue under such arrangements,
11
which may include multiple software products and services sold together, are
allocated to each element based on the residual method in accordance with SOP
98-9, Software Revenue Recognition, with Respect to Certain Transactions. Under
the residual method, the fair value of the undelivered elements is deferred and
subsequently recognized when earned. The Company has established sufficient
vendor specific objective evidence of fair value for professional services,
training and maintenance and support services, based on the price charged when
these elements are sold separately. Accordingly, software license revenue is
recognized under the residual method in arrangements in which software is
licensed with professional services, training and maintenance and support
services.
The Company also sells products to resellers. There is generally no
contractual right of return nor has the Company in practice historically
permitted returns notwithstanding the contractual arrangement. The Company
typically does not ship products to resellers until an end user is identified,
at which point the Company recognizes revenue under the arrangement. The
Company provides for returns based on historical experience.
Service revenue from time and expense contracts and consulting and training
revenue are generally recognized when the related services are performed.
Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. The estimated allowance for uncollectible amounts
is based primarily on historical write-off experience and management's
evaluation of the customers in the receivable portfolio. While management
believes the allowance is adequate, if financial condition of the Company's
customers were to deteriorate, resulting in impairment of their ability to make
payments, additional allowances may be required.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements
the Company is required to estimate our income taxes in each of the
jurisdictions in which it operates. This process involves the Company
estimating its actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets, which are included
within our consolidated balance sheet. The Company must then assess the
likelihood that its deferred tax assets will be recovered from future taxable
income and if the Company does not believe it meets the "more likely than not"
threshold, it must establish a valuation allowance. To the extent the Company
establishes a valuation allowance or increases this allowance in a period, the
Company must include an expense within the tax provision in the consolidated
statement of operations.
Significant management judgment is required in determining the Company's
provision for income taxes, its deferred tax assets and liabilities and any
valuation allowance recorded against its net deferred tax assets. The Company
has recorded a valuation allowance of $22.3 million as of December 31, 2001,
due to uncertainties related to its ability to utilize some of its deferred tax
assets, primarily consisting of certain net operating losses carryforwards,
before they expire. The valuation allowance is based on its estimates of
taxable income by jurisdiction in which the Company operates and the period
over which its deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or the Company adjusts these
estimates in future periods, the Company may need to establish an additional
valuation allowance, which could materially impact its financial position and
results of operations.
The net deferred tax asset as of December 31, 2001 was $866 thousand, net of
the aforementioned valuation allowance of $22.3 million.
12
Results of Operations
The following table sets forth, for the years indicated, certain financial
data as percentages of the Company's total revenue:
Years Ended December 31,
----------------------
1999 2000 2001
----- ----- -----
Revenue:
Net CCM and related products................... 58.3% 61.0% 62.7%
CCM related service and maintenance............ 17.9 25.2 34.9
Meeting Maker, Inc. (MMI)...................... 23.8 12.9 --
Other.......................................... -- 0.9 2.4
----- ----- -----
Total revenue.............................. 100.0 100.0 100.0
----- ----- -----
Cost of CCM and related products revenue....... 12.5 13.1 13.1
Cost of CCM and related service and maintenance
revenue...................................... 3.0 3.4 4.5
Cost of MMI revenue............................ 2.1 0.3 --
----- ----- -----
Gross Margin................................... 82.4 83.2 82.4
----- ----- -----
Operating expenses:.............................
Sales and marketing............................ 38.7 46.8 50.6
Research and development....................... 28.2 37.2 33.1
General and administrative..................... 14.5 25.4 19.3
MMI operating expenses......................... 8.7 8.2 --
----- ----- -----
Loss from operations............................ (7.7) (34.4) (20.6)
----- ----- -----
Interest income, net............................ 0.5 1.9 0.7
Other income (loss), net........................ 0.7 2.7 (3.1)
----- ----- -----
Net loss before allocation to MMI and
provision for income taxes.................... (6.5) (29.8) (23.0)
----- ----- -----
Allocation to MMI............................... -- (4.4) --
----- ----- -----
Loss before provision for income taxes.......... (6.5) (25.4) (23.0)
Provision for income taxes...................... -- (1.6) 0.3
----- ----- -----
Net loss........................................ (6.5)% (35.8)% (23.3)%
===== ===== =====
Net CCM and Related Products. The Company's net CCM and related products
revenue is derived primarily from the licensing of software products. Net CCM
and related products revenue decreased $1.9 million or 11% from 1999 to 2000,
due to a decrease in the CCM related business during the first six months of
2000. Net CCM and related product revenue decreased $885 thousand or 6% from
2000 to 2001 due principally to a decrease of approximately $1.2 million in low
margin, pass-through hardware sales. CCM software license revenue also declined
$520 thousand or 5% over 2000 due to a decrease in overall per seat license
fees resulting from an increase in enterprise-size deals in the US during 2001.
These decreases were partially offset by an $850 thousand increase in
complimentary third party product license revenue.
CCM Related Service and Maintenance. The Company's CCM related service and
maintenance revenue consists of maintenance, training and professional
services. This revenue increased $1.1 million or 20% from 1999 to 2000. For
2001, this revenue increased $1.8 million over 2000. For 2000, the increase was
primarily due to a $1.1 million increase in fees related to the growth in the
number of maintenance agreements. For 2001, maintenance revenue increased $1.5
million over 2000 due, in part, to the 197 thousand new license seats sold.
13
Consulting revenue increased $1.3 million due, in part, to the increased demand
in the US. This increase was largely offset by a $1 million decrease in
training revenue over the prior year as 2000 had significant training revenue
from Europe's largest enterprise customer.
Meeting Maker, Inc. (MMI). The Company's MMI revenue consisted of product,
maintenance, training, and professional services revenue associated with the
Meeting Maker product. MMI revenue decreased $4.0 million or 54% from 1999 to
2000. This large revenue decrease is a direct result of the license of the
Meeting Maker business to MMI. Revenue--MMI for 2000 consisted of revenue
achieved during the first six months of the year under a management agreement
entered into between the Company and MMI. The Company does not anticipate any
additional MMI revenue.
Other. In 2000 and 2001, the Company's other revenue consists of a license
fee associated with the licensing of the Company's Meeting Maker technology to
Meeting Maker, Inc. (MMI). The increase in revenue in 2001 over 2000 results
from MMI's exercise of the buyout option under the licensing agreement. The
Company does not anticipate any additional revenue from the Meeting Maker
product line.
Cost of CCM and Related Product Revenue. Cost of CCM and related product
revenue consists primarily of expenses associated with product documentation,
production and fulfillment costs, costs of European hardware sales and royalty
and license fees associated with products that are licensed from third party
developers. In addition, cost of CCM and related product revenue included the
amortization of purchased intangibles. Cost of CCM and related product revenue,
as a percentage of like revenue, was 21.4% in 1999, 21.5% in 2000, and 20.9% in
2001. In 2000, cost of CCM and related product revenue decreased by $387
thousand, principally due to decreased amortization costs of $424 thousand. In
2001, cost of CCM and related product revenue decreased by $290 thousand over
2000. A decrease in hardware sales resulted in lower costs of $1.1 million,
which offset increased third party costs of approximately $1.0 million due to
higher sales of third party software. Additional savings of $195 thousand were
realized due to the Company reducing fulfillment costs due to personnel
reductions in early 2001.
Cost of CCM and Related Service and Maintenance Revenue. Cost of CCM and
related service and maintenance revenue consists primarily of expenses
associated with direct consulting and training costs as well as costs of the
Company's help desk. Cost of CCM and related service and maintenance revenue as
a percentage of like revenue decreased from approximately 17.0% in 1999 to
13.5% in 2000 to 12.8% 2001. Costs for 1999 reflected additional hirings and
the establishment of infrastructure put in place to support the increased
utilization in both Europe and North America due to the revenue growth
discussed above. These costs were better brought in line with revenue
expectations in 2000 resulting in improved margins. Margins were further
improved in 2001 due to increased utilization and revenue generation in the US
in the latter half of the year
Cost of MMI revenue. Cost of MMI revenue consisted primarily of expenses
associated with product documentation, production and fulfillment costs
associated with the Meeting Maker product. Cost of MMI revenue decreased as a
percentage of Revenue--MMI from 9% in 1999 to 2% in 2000. The significant
decrease from 1999 to 2000 was due to the management and exclusive license
agreements entered into between the Company and MMI. In 2001, MMI exercised its
buyout option under the license agreement. The Company does not anticipate any
additional cost of MMI revenue in the future.
Sales and Marketing Expense. Sales and marketing expense primarily consists
of compensation paid to sales and marketing personnel, the costs of direct mail
and telemarketing campaigns, and the costs of product trials requested by
potential customers. Sales and marketing expense also includes the costs of
public relations, trade shows, conferences, travel, and the telephone and
information technology costs associated with sales activities. In 2000, sales
and marketing expense increased $348 thousand over 1999, and increased slightly
as a percentage of total revenue (exclusive of MMI and Other revenue), from 51%
in 1999 to 54% in 2000. Marketing expenditures remained flat in 2000 while
sales expenses increased $388 thousand primarily due to the hiring of 15
additional sales people during the year, both in the US and Europe. In 2001,
sales and marketing expense
14
decreased $76 thousand over 2000 and represented 52% of total revenue
(exclusive of MMI and Other revenue). Marketing expenditures decreased $730
thousand overall due to a decrease in consulting expenses of $470 thousand and
personnel and other payroll related decreases of $325 thousand. These
reductions were partially offset by an increase in promotional spending of $155
thousand, primarily as a result of the launch of the Site Manager product.
Sales expenses during 2001 increased $660 thousand due to increased salaries of
$232 thousand and increased sales consultants of $344 thousand, principally
related to the full year impact in 2001 of the 15 new sales positions added in
2000 as well as telesales costs of $192 thousand associated with the Site
Manager product.
Research and Development Expense. Research and development expense includes
costs associated with the development of new products, the enhancement of
existing products, and costs associated with the development of new training
and help desk programs. Related expenses also include certain information
technology costs. Research and development expenses increased $1.1 million from
1999 to 2000. This increase was a primarily a result of increased consulting
costs of $745 thousand and an incremental headcount of two employees, all of
whose efforts were to enhance the CCM business. In 2001, research and
development expenses decreased $1.8 million from 2000 levels. This decrease was
due to a reduction in outside consulting costs of $1.5 million and reduced
travel costs of $160 thousand as the Company completed various projects in 2000
as well as improved efficiencies and cost controls.
General and Administrative Expense. General and administrative expense
includes executive compensation and the continued administrative expense
associated with the Company's public filings, foreign operations, executive
support costs, accounting operations, planning, investor relations, and
business development activities. General and administrative expense increased
by $2.2 million from 1999 to 2000. The increase was primarily due to a $1.8
million increase in the Company's overall accounts receivable reserves
primarily related to a $1.3 million bad debt provision for one major customer
who was experiencing financial difficulties. In 2001, general and
administrative costs decreased by $2.0 million compared to 2000. This decrease
was principally attributed to a decrease in sales return and bad debt charges
of $1.7 due primarily to the charge attributable to one major customer in 2000.
Additionally, a decrease in non-cash compensation of $620 thousand and lower
recruiting costs of $190 thousand were offset by $500 thousand in due diligence
costs during 2001 incurred in response to two unsolicited acquisition inquiries.
Interest Income, Net. Interest income, net increased approximately $345
thousand from 1999 to 2000. This increase was due to higher cash balances
resulting from a $12 million private placement in December 1999. In 2001,
interest income, net decreased by approximately $325 thousand from 2000 due
both to lower average cash balances, resulting from $4.6 million in cash to
fund operations and capital expenses, and a decrease in investment yields
during 2001. The Company did not receive proceeds from its 2001 private
placement until late October 2001.
Other Income (Loss), Net. Other income (loss) in 1999 resulted from an
insurance claim. Other income (loss) in 2000 consisted primarily of a non-cash
gain resulting from net impact of valuation adjustments of $473 thousand from
the warrants and promissory notes issued to two private institutional investors
associated with the December 1999 financing, as well as, the net gain resulting
from the MMI transaction of $458 thousand. The principal amount of other income
(loss) in 2001 relates to non-cash foreign exchange expense of $649 thousand,
which is primarily due to intercompany loans to foreign subsidiaries. The
remaining amounts consisted of a net non-cash charge of $109 thousand resulting
from valuation adjustments to the warrant liability (expense of $984 thousand)
and the contingent promissory notes (income of $875 thousand). These valuation
adjustments will not continue in the future due to both the forgiveness of the
contingent notes as a result of the Company fulfilling certain defined
obligations with respect to its stock performance and the warrant Exchange
Agreements being amended to remove the provisions granting the warrant holders
rights that rank higher than those of common shareholders in June of 2001,
which permits the warrants to be treated as equity instruments for future
periods.
15
Income Taxes. In 1999, the Company incurred a significant operating loss
for both book and tax purposes and gave benefit to refundable income taxes,
which offset certain foreign tax provisions, and as a result no tax provision
was recorded. The provision for 2000 and 2001 primarily represents income taxes
due on operating income in the Company's international operations in Germany
and Switzerland.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through private and
public placements of capital stock and the sale of certain product lines. At
December 31, 1999, 2000, and 2001 the Company had available cash and cash
equivalents of $16.9 million $9.4 million, and $9.8 million, respectively, and
working capital of, $15.1 million, $6.4 million, and $6.7 million,
respectively. As of December 31, 2001, the Company also had restricted cash of
$1.1 million securing the Company's Waltham, Massachusetts facility lease.
Net cash used in operating activities for the years ended December 31, 1999,
2000, and 2001 was $2.0 million, $7.2 million, and $4.3 million, respectively.
In 1999, net cash used in operating activities consisted mainly of a net loss
of $2.0 million and an increase in accounts receivable of $3.9 million, which
is offset by $1.7 million in depreciation and amortization, and an increase of
$2.2 million in deferred revenue. In 2000, net cash used in operating
activities consisted mainly of a combined net increase in the Company's
operating assets and liabilities of $1.8 million and a net loss of $9.4
million. This loss was reduced by $720 thousand in depreciation and
amortization as well as deferred compensation expense of $614 thousand and
increased by the non-cash gains of $458 thousand and $548 thousand resulting
from the MMI transaction and the revaluation of the Company's warrant liability
in accordance with EITF 00-19, respectively. In 2001, net cash used in
operating activities consisted mainly of a net loss of $5.6 million reduced by
depreciation and amortization of $935 thousand, non-cash charges associated
with re-valuation of intercompany loans to foreign subsidiaries of $587
thousand and revaluation of both the Company's warrant liability, prior to its
reclassification to equity as a result of the amended Exchange Agreements, and
it notes payable of $109 thousand net. This was further impacted by a $228
thousand net decrease in operating assets and liabilities.
Net cash used in investing activities for the years ended December 31, 1999,
2000, and 2001 was $1.1 million, $1.8 million, and $560 thousand, respectively.
The purchase of property and equipment in 1999 was $1.1 million. In 2000, this
use was primarily a result of the $1.1 million restricted cash agreement
securing the Company's Waltham, Massachusetts facility lease and the purchase
of property and equipment of $803 thousand, which was then partially offset by
a reduction in deposits. For 2001, the use of cash was due to $278 thousand in
computer and equipment purchases and $279 thousand in other assets relating to
the long-term license of certain third party software.
Net cash provided by financing activities for the years ended December 31,
1999, 2000, and 2001 was $11.7 million, $808 thousand, and $4.9 million,
respectively. In 1999, this was a result of the $11.0 million of net proceeds
from the sale of common stock and warrants, the exercise of stock options of
$631 thousand and the sale of stock under the Employee Stock Purchase Plan of
$143 thousand. In 2000, this was the result of the exercise of stock options of
$678 thousand and the sale of stock under the Employee Stock Purchase Plan of
$130 thousand. The increase in 2001 was due principally to $4.9 million in net
proceeds from the Company's private placement of common stock in October 2001.
For the three months ended December 31, 2001, absent the private placement,
the Company generated approximately $800 thousand of negative cash flows. For
the year ended December 31, 2001, the Company experienced negative cash flows
of approximately $4.5 million, absent the October 2001 private placement.
The Company conducts its operations in leased facilities under operating
leases expiring at various times through 2005. Additionally, the Company has
acquired certain furniture and fixtures as well as computer equipment under
certain operating leases. These leases also expire at various times through
2003.
16
The approximate minimum annual lease payments under the operating leases are
as follows:
Operating
Leases
---------
2002............................................... $1,108
2003............................................... 260
2004............................................... 240
2005............................................... 140
------
Total (reduced by minimum sublease rentals of $256) $1,748
======
The Company believes that its available cash resources, including cash and
cash equivalents and cash it expects to generate from sales of products, will
be sufficient to finance presently anticipated operating results and working
capital expenditure requirements at least through December 31, 2002. The future
liquidity of the Company is, however, dependent on a number of factors,
including but not limited to, the Company's ability to reach forecasted sales
targets and to maintain current expense levels. There can be no assurance that
the Company will not require additional capital resources during this period of
time. If the Company does require additional capital resources beyond the
financing just completed, it may seek to sell equity or debt securities, secure
a bank line of credit, or consider strategic alliances. The sale of equity or
equity related securities could result in additional dilution to stockholders.
There can be no assurance that additional financing, in any form, will be
available at all or, if available, will be on terms acceptable to the Company.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Accounting for
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that all business combinations initiated after June 30,
2001, be accounted for using the purchase method of accounting. SFAS No. 142
discusses how intangible assets that are acquired should be accounted for in
financial statements upon their acquisition. In addition, under SFAS No. 142,
goodwill and other indefinite lived intangible assets are no longer amortized
but are reviewed annually (or more frequently if impairment indicators arise)
for impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives (but with
no maximum life). As of December 31, 2001, all of the Company's intangible
assets and goodwill associated with acquisitions were fully amortized. As a
result, the adoption of SFAS No. 142 on January 1, 2002, had no current impact
on the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long Lived Assets, which is effective for the Company on January
1, 2002. SFAS No. 144 addresses accounting and reporting for the impairment or
disposal of long-lived assets, except goodwill, that are either held and used
or disposed of through sale or other means.
In November 2001, the Emerging Issues Task Force (EITF) issued Topic No.
D-103 (Topic D-103) relating to the accounting for reimbursements received for
out-of-pocket expenses. In accordance with Topic D-103, reimbursements received
for out-of-pocket expenses incurred should be characterized as revenue in the
statement of operations. The Company has historically accounted for
reimbursements received for out-of-pocket expenses incurred as a reduction to
the cost of CCM and related service and maintenance revenue in the consolidated
17
statements of operations to offset costs incurred. The Company will adopt Topic
D-103 in financial reporting periods beginning after December 31, 2001 and
comparative financial statements for prior periods will be reclassified to
comply with this guidance.
The Company does not expect the adoption of SFAS No. 144 and Topic D-103 to
have a material impact on its financial position, results of operations and
cash flows.
For additional information concerning risks associated with the Company's
liquidity and capital resources see "Certain Factors That May Affect Future
Results".
18
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the Federal Securities Laws. In addition, from time to time,
management may make forward-looking statements in press releases, in other
public discussions and in other documents that we file with the Securities and
Exchange Commission (including those documents incorporated by reference into
this Form 10-K). The Private Securities Litigation Reform Act of 1995 provides
a "safe harbor" for these statements. For this purpose, a forward-looking
statement is any statement that is not a statement of historical fact. You can
identify forward-looking statements by the words "may," "believes,"
"anticipates," "plans," "expects," "estimates" and similar expressions. Our
forward-looking statements are based on currently available information and
management's expectations of future results but necessarily involve certain
assumptions. We caution readers that our assumptions involve substantial risks
and uncertainties. Consequently, any forward-looking statement could turn out
to be wrong. Many factors could cause actual results to differ materially from
our expectations. Below we describe some of the important factors that could
affect our revenue or results of operations.
WE HAVE EXPERIENCED CASH FLOW DEFICITS IN THE PAST AND MAY EXPERIENCE CASH FLOW
DEFICITS IN THE FUTURE.
For the fiscal year ended December 31, 2001, we had operating losses of
approximately $5.0 million, producing significant negative cash flow.
Management's 2002 operating plan forecasts that the Company will be
operationally profitable for the year. Based upon these assumptions, management
believes the Company has sufficient cash to fund its operations during 2002. If
the Company is unable to attain forecasted revenue levels and management is
unsuccessful in controlling expenses, the Company may have to seek additional
external equity or debt financing to continue its operations. There can be no
assurance that we will be able to secure such external financing.
OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF GENERAL
ECONOMIC AND BUSINESS CONDITIONS.
Our business is subject to the effects of general economic and business
conditions. ON's operating results have been adversely affected by recent
unfavorable economic conditions and reduced information technology spending. In
addition, the recent terrorist attacks have added (or exacerbated) general
economic, political and other uncertainties. If economic and market conditions
do not improve and these uncertainties continue to exist, ON's business,
condition (financial or otherwise), prospects and results of operations could
continue to be adversely affected.
OUR MARKETING REQUIRES SIGNIFICANT INVESTMENTS
Sales of products require significant up-front investments in marketing,
technical and financial resources. We have adopted a sales and marketing
strategy using a direct sales force and in-house field service organization.
This strategy requires significant investments in identifying and hiring
qualified sales and technical personnel, ongoing product development, and
expansion of an in-house field service organization. We have developed valuable
marketing and service experience and expertise in Europe and, recently, in the
United States. However, there can be no assurance that we will be able to
continue to expand and apply such experience and expertise to our target market.
WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUE FROM A RELATIVELY SMALL NUMBER
OF CUSTOMERS
For the twelve months ended December 31, 2001, 2000 and 1999, two customers
accounted for $4.3 million (17.8%), $6.3 million (24.0%), and $7.4 million
(24.0%) of total revenue, respectively. It is possible that in the future other
customers will account for more than 10% of ON's total revenue. The loss of
significant customers could have a materially adverse effect on our business,
condition (financial or otherwise), prospects and results of operations.
19
WE WILL NEED TO EXPAND OUR DISTRIBUTION CHANNELS IN ORDER TO DEVELOP OUR
BUSINESS AND INCREASE REVENUE
We sell our products through our direct sales force and a number of
distributors, and we provide maintenance and support services through our
technical and customer support staff. We plan to continue to invest large
amounts of resources in our direct sales force, particularly in North America.
In addition, we are developing additional sales and marketing channels through
value added resellers, system integrators, original equipment manufacturers and
other channel partners. We may not be able to attract channel partners that
will be able to market our products effectively, or that will be qualified to
provide timely and cost-effective customer support and service. If we establish
distribution through such indirect channels, our agreements with channel
partners may not be exclusive. As a result, such channel partners may also
carry competing product lines. If we do not establish and maintain such
distribution relationships, this could materially adversely affect our
business, condition (financial or otherwise), prospects and results of
operations.
IF THE MARKET FOR OUR ENTERPRISE DESKTOP MANAGEMENT SOFTWARE SOLUTIONS DOES NOT
CONTINUE TO DEVELOP AS WE ANTICIPATE, OUR ABILITY TO GROW OUR BUSINESS AND SELL
OUR PRODUCTS WILL BE ADVERSELY AFFECTED
In recent years, the market for enterprise software solutions has been
characterized by rapid technological change, frequent new product announcements
and introductions and evolving industry standards. In response to advances in
technology, customer requirements have become increasingly complex, resulting
in industry consolidation of product lines offering similar or related
functionality. In particular, we believe that a market exists for integrated
enterprise-wide infrastructure management solutions. If such a market does not
fully develop, this could have a materially adverse effect on our business,
condition (financial or otherwise), prospects and results of operations.
Regardless of the development of a market for integrated infrastructure
management solutions, factors adversely affecting the pricing of, demand for,
or market acceptance of our enterprise desktop management applications could
have a material adverse effect on our business, condition (financial or
otherwise), prospects and results of operations.
IF WE DO NOT RESPOND ADEQUATELY TO OUR INDUSTRY'S EVOLVING TECHNOLOGY
STANDARDS, OR DO NOT CONTINUE TO MEET THE SOPHISTICATED NEEDS OF OUR CUSTOMERS,
SALES OF OUR PRODUCTS MAY DECLINE
As a result of rapid technological change in our industry, product advances
can quickly erode our position in existing markets or other markets that we may
enter. The life cycles of our products are difficult to estimate. Our growth
and future financial performance depend in part upon our ability to improve
existing products and develop and introduce new products that keep pace with
technological advances, meet changing customer needs and respond to competitive
products. Our product development efforts will continue to require substantial
investments. We may not have sufficient resources to make the necessary
investments.
We have experienced product development delays in the past and may
experience delays in the future. Difficulties in product development could
delay or prevent the successful introduction or marketing of new or improved
products. Any such new or improved products may not achieve market acceptance.
Our current or future products may not conform to industry requirements. Our
ability to continue to enhance our current products to meet customer and market
requirements will depend substantially on our ability to effectively manage
this development effort, to attract and retain the required development
personnel in Waltham, Massachusetts and Starnberg, Germany and to coordinate
and manage geographically remote development efforts. If, for technological or
other reasons, we are unable to develop and introduce new and improved products
in a timely manner, our business, condition (financial or otherwise), prospects
and results of operations could be adversely affected.
20
ERRORS IN OUR PRODUCTS COULD RESULT IN SIGNIFICANT COSTS TO US AND COULD IMPAIR
OUR ABILITY TO SELL OUR PRODUCTS
Because our software products are complex, these products may contain errors
that could be detected at any point in a product's life cycle. In the past, we
have discovered software errors in certain of our products and have experienced
delays in shipment of our products during the period required to correct these
errors. Despite testing by ON and by current and potential customers, errors in
our products may be found in the future. Detection of such errors may result
in, among other things, loss of, or delay in, market acceptance and sales of
our products, diversion of development resources, injury to our reputation or
increased service and warranty costs. If any of these results were to occur,
our business, condition (financial or otherwise), prospects and results of
operations could be materially adversely affected.
IN THE FUTURE, INCLUSION OF FUNCTIONS PROVIDED BY OUR PRODUCTS IN SYSTEM
SOFTWARE AND APPLICATION SUITES MAY AFFECT OUR COMPETITIVE POSITION
In the future, vendors of operating system software and applications sold
for a single price (generally referred to as application suites) may continue
to enhance their products to include functions that are currently provided by
our products. In addition, some vendors may bundle these products in their
existing application suites at no additional charge. The widespread inclusion
of the functions provided by our products as standard features of operating
system software could render our products obsolete and unmarketable
particularly if the quality of such functions were comparable to the functions
offered by our products. Furthermore, even if the software functions provided
as standard features by operating systems are more limited than those of our
products, there is no assurance that a significant number of customers would
not elect to accept such functions instead of purchasing additional software.
If we were unable to develop new software products to further enhance operating
systems and to successfully replace any obsolete products, our business,
condition (financial or otherwise), prospects and results of operations could
be materially adversely affected.
THE INTENSE COMPETITION IN THE MARKET FOR OUR PRODUCTS COULD ADVERSELY AFFECT
OUR ABILITY TO SELL OUR PRODUCTS
The market for our products is highly competitive, and we expect competition
to continue to increase in the future. We believe that the principal
competitive factors affecting the market for its products include brand name
recognition, company reputation, performance, functionality, ease-of-use,
breadth of product line, quality, customer support, adherence to industry
standards, integration with third-party solutions and price.
As is the case in many segments of the software industry, we may encounter
increasing price competition in the future. This could reduce average selling
prices and, therefore, profit margins. Competitive pressures could result not
only in sustained price reductions but also in a decline in sales volume, which
could adversely affect our business, condition (financial or otherwise),
prospects and results of operations. There can be no assurance that we will
continue to compete effectively against existing and potential competitors in
our markets, many of whom have substantially greater financial, technical,
marketing and support resources and name recognition than we have.
The widespread inclusion of the functionality of our products as standard
features of Microsoft operating systems software could render our products
obsolete and unmarketable, particularly if the quality of such functionality
were comparable to that our products. If we were unable to develop new
functionality or unique applications for our technology to successfully replace
any obsolete products, our business, condition (financial or otherwise),
prospects and results of operations could be materially adversely affected.
The market for our products is highly competitive and diverse. The
technology for remote software management products can change rapidly. New
products are frequently introduced and existing products are continually
enhanced. Competitors vary in size and in the scope and breadth of the products
and services offered. The Company has faced competition from a number of
sources, including:
. Large and established companies such as Microsoft, Computer Associates
International and IBM/Tivoli which offer remote software delivery and
management capabilities as part of their systems management, or network
management frameworks;
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. Software companies like Novidigm and Marimba and others who provide software
management utilities and suites such as Symantec, Intel, and Altiris;
. Hardware suppliers such as IBM, Hewlett-Packard, and Compaq that offer or
bundle software management capabilities in conjunction with their hardware
offerings; and
. The internal information technology departments of those companies with
infrastructure management needs.
In addition, Microsoft has bundled new management capabilities in its
Windows 2000 and XP operating systems that, in conjunction with its Systems
Management Server (SMS) framework, directly compete with capabilities provided
by ON Command CCM. Even if the functionality provided with Microsoft's
operating system software were more limited than that of our software
management products, customers or potential customers might elect to accept
more limited functionality in lieu of purchasing additional software.
Competition resulting from this type of bundling could lead to price reductions
for our products, which would reduce our margins and correspondingly affect our
business, condition (financial or otherwise), prospects and results of
operations.
Some of our current and many of our potential competitors have much greater
financial, technical, marketing, and other resources than we have. As a result,
they may be able to respond more quickly to new or emerging technologies and
changes in customer needs. They may also be able to devote greater resources to
the development, promotion, and sale of their products than the Company can.
The Company may not be able to compete successfully against current and future
competitors. In addition, competitive pressures faced by the Company may
materially adversely affect the Company's business, condition (financial or
otherwise), prospects and results of operations.
NEW COMPETITORS AND ALLIANCES AMONG EXISTING COMPETITORS COULD IMPAIR OUR
ABILITY TO RETAIN AND EXPAND OUR MARKET SHARE
Because competitors can easily penetrate the software market, we anticipate
additional competition from other established and new companies as the market
for enterprise desktop management applications develops. In addition, current
and potential competitors have established or may in the future establish
cooperative relationships among themselves or with third parties. Large
software companies may acquire or establish alliances with our smaller
competitors. We expect that the software industry will continue to consolidate.
It is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share.
DUE TO THE TECHNOLOGICAL CHALLENGES ASSOCIATED WITH OUR CURRENT PRODUCTS, WE
MAY NOT HAVE THE FINANCIAL RESOURCES NECESSARY TO CONDUCT THE BUSINESS AS
PRESENTLY CONTEMPLATED
Based on management's 2002 forecasts, product development, marketing and
sales costs for our current products are approximately $1.75 million per month.
Based on our existing cash and forecasted revenue, we believe that we have
enough cash to fund these costs through 2002. There can be no assurance that
our estimate of the marketing, sales and product development costs of the CCM
products is correct, or that these costs will not exceed our available
financial resources, or that we will be able to locate additional sources of
financing, if and when needed.
OUR INCREASING RELIANCE ON INTERNATIONAL REVENUE COULD ADVERSELY AFFECT OUR
OPERATING RESULTS
For the fiscal year 2001, total revenue from international licenses (license
revenue from outside the United States) represented approximately 36% of our
total revenue and 58% of our net CCM and related products revenue. For the
fiscal year 2000, total revenue from international licenses represented
approximately 32% of our total revenue and 53% of our net CCM and related
products revenue. In fiscal 1999, total revenue from
22
international licenses represented approximately 54% of our total revenue. For
fiscal years 2001, 2000, and 1999, total international revenues from the
Company's foreign subsidiaries and other foreign sources was 74%, 67% and 51%
of total revenues, respectively. We expect that international revenue will
continue to constitute a significant portion of our total revenue in the
future. Accordingly, a significant percentage of our total revenue may be
subject to the risks inherent in international sales, including the impact of
fluctuating exchange rates on demand for our products, longer payment cycles,
greater difficulty in protecting intellectual property, greater difficulty in
accounts receivable collection, unexpected changes in legal and regulatory
requirements, seasonality due to the slowdown of European business activity in
the third quarter and tariffs and other trade barriers. There can be no
assurance that these factors will not have a materially adverse effect on our
future international license revenue.
Our continued growth and profitability will require continued expansion of
our international operations, particularly with continued expansion in Europe
and initial inroads into Latin America and the Pacific Rim. Accordingly, we
intend to expand our current international operations and enter additional
international markets. Such expansion will require significant management
attention and financial resources. We have only limited experience in
developing local-language versions of our products and marketing and
distributing our products internationally. We may not be able to successfully
translate, market, sell and deliver our products internationally. If we are
unable to expand our international operations successfully and in a timely
manner, our business, condition (financial or otherwise), prospects and results
of operations could be adversely affected.
AS OUR EXPANDING INTERNATIONAL OPERATIONS IN EUROPE AND ELSEWHERE ARE
INCREASINGLY CONDUCTED IN CURRENCIES OTHER THAN THE U.S. DOLLAR, FLUCTUATIONS
IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN CURRENCY EXCHANGE LOSSES
A large portion of our business is conducted in foreign currencies.
Fluctuations in the value of foreign currencies relative to the U.S. dollar
have caused and will continue to cause currency transaction gains and losses.
We cannot predict the effect of exchange rate fluctuations upon future
operating results. We may experience currency losses in the future. We may
implement a foreign exchange hedging program, consisting principally of
purchases of forward-rate currency contracts. However, if undertaken, our
hedging activities may not adequately protect us against the risks associated
with foreign currency fluctuations.
FUTURE FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS DUE TO A NUMBER OF
FACTORS, MANY OF WHICH ARE BEYOND OUR CONTROL, COULD ADVERSELY AFFECT OUR STOCK
PRICE
Our quarterly operating results have varied significantly in the past and
may vary significantly in the future depending upon a number of factors, many
of which are beyond our control. These factors include, among others:
. our ability to develop, introduce and market new and enhanced versions of
our software on a timely basis;
. market demand for our software;
. the size, timing and contractual terms of significant orders;
. the timing and significance of new software product announcements or
releases by ON or our competitors;
. changes in our pricing policies or our competitors;
23
. changes in our business strategies;
. budgeting cycles of our potential customers;
. changes in the mix of software products and services sold;
. reliance on indirect sales forces;
. changes in the mix of revenues attributable to domestic and international
sales and the related rates of exchange;
. the impact of acquisitions of competitors;
. seasonal trends;
. the cancellations of maintenance agreements;
. product life cycles, software defects and other product quality problems;
and
. personnel changes.
We have often recognized a substantial portion of our revenue in the last
month or weeks of a quarter. As a result, license revenue in any quarter is
substantially dependent on orders booked and shipped in the last month or weeks
of that quarter. Due to the foregoing factors, quarterly revenue and operating
results are not predictable with any significant degree of accuracy. In
particular, the timing of revenue recognition can be affected by many factors,
including the timing of contract execution and delivery. The timing between
initial customer contact and fulfillment of criteria for revenue recognition
can be lengthy and unpredictable, and revenue in any given quarter can be
adversely affected as a result of such unpredictability.
OUR SALES CYCLE IS LONG AND UNPREDICTABLE, AND POTENTIAL DELAYS IN THE CYCLE
MAKE OUR REVENUE SUSCEPTIBLE TO FLUCTUATIONS
The licensing of our software generally requires us to engage in a sales
cycle that typically takes approximately four to nine months to complete. The
length of the sales cycle may vary depending on a number of factors over which
we may have little or no control, including the size of the transaction and the
level of competition that we encounter in our selling activities. During the
sales cycle, we typically provide a significant level of education to
prospective customers regarding the use and benefits of our products. Any delay
in the sales cycle of a large license or a number of smaller licenses could
have a material adverse effect on our business, condition (financial or
otherwise), prospects and results of operations.
SEASONAL TRENDS IN SALES OF OUR SOFTWARE PRODUCTS MAY AFFECT OUR QUARTERLY
OPERATING RESULTS
Our business has experienced and is expected to continue to experience
seasonality. Our revenue and operating results in our December quarter
typically benefit from purchase decisions made by the large concentration of
customers with calendar year-end budgeting requirements, and from the efforts
of our sales force to meet fiscal year-end sales quotas. In addition, we are
currently attempting to expand our presence in international markets, including
Europe. International revenue comprises a significant percentage of our total
revenue, and we may experience additional variability in demand associated with
seasonal buying patterns in such foreign markets.
FUTURE ACQUISITIONS PRESENT RISKS WHICH COULD ADVERSELY AFFECT OUR BUSINESS
In the future, ON may make acquisitions of, or large investments in, other
businesses that offer products, services, and technologies that further our
goal of providing enterprise desktop management software solutions to
businesses or which complement our current business. Any future acquisitions or
investments that we may complete present risks commonly encountered with these
types of transactions. The following are examples of such risks:
. difficulty in combining the technology, operations, or work force of the
acquired business;
. disruption of on-going businesses;
24
. difficulty in realizing the potential financial and strategic position of ON
through the successful integration of the acquired business;
. difficulty in maintaining uniform standards, controls, procedures, and
policies;
. possible impairment of relationships with employees and clients as a result
of any integration of new businesses and management personnel;
. difficulty in adding significant numbers of new employees, including
training, evaluation, and coordination of effort of all employees towards
our corporate mission;
. diversion of management attention; and
. potential dilutive effect on earnings.
The risks described above, either individually or in the aggregate, could
materially adversely affect our business, operating results, and financial
condition. Future acquisitions, if any, could provide for consideration to be
paid in cash, shares of ON common stock, or a combination of cash and ON common
stock.
OUR ABILITY TO MANAGE GROWTH WILL AFFECT OUR ABILITY TO ACHIEVE AND MAINTAIN
PROFITABILITY
Over the last 5 years, total CCM and related revenue has increased
significantly from $11.3 million in fiscal 1998 to $23.7 million in fiscal
2001. If we achieve our future growth plans, such growth may burden our
operating and financial systems. This burden will require large amounts of
senior management attention and will require the use of other ON resources. Our
ability to compete effectively and to manage future growth (and our future
operating results) will depend in part on our ability to implement and expand
operational, customer support, and financial control systems and to expand,
train, and manage our employees. We may not be able to augment or improve
existing systems and controls or implement new systems and controls in response
to future growth, if any. Any failure to do so could materially adversely
affect our business, condition (financial or otherwise), prospects and results
of operations.
OUR BUSINESS DEPENDS IN LARGE PART UPON THE PROTECTION OF OUR PROPRIETARY
TECHNOLOGY, THE LOSS OF WHICH WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS
Our success is heavily dependent upon our proprietary software technology.
We rely on a combination of contractual rights, trademarks, trade secrets and
copyright to establish and protect our proprietary rights in software.
We use a printed "shrink-wrap" license for users of our products distributed
through traditional distribution channels in order to protect our copyrights
and trade secrets in those products. Since the licensee does not sign these
shrink-wrap licenses, many authorities believe that they may not be enforceable
under many state laws and the laws of many foreign jurisdictions. If such
licenses were not enforceable, the user would not be bound by the license
terms, including the terms that seek to protect our proprietary technology. If
the printed shrink-wrap licenses prove to be unenforceable, this may have a
material adverse effect on our business, condition (financial or otherwise),
prospects and results of operations.
The laws of some foreign countries either do not protect our proprietary
rights or offer only limited protection for those rights. Furthermore, in
countries with a high incidence of software piracy, we may experience a higher
rate of piracy of our products.
We have obtained registrations in the United States for the following
trademarks: ON Technology, CCM, ON Command, and ON Command CCM. We have only
obtained registration for the trademark ON Command
25
CCM in the European Union and Australia and for ON Technology and ON Command in
Canada. As a result, we may not be able to prevent a third party from using our
trademarks in many foreign jurisdictions. We have not to date registered any of
our copyrights.
There can be no assurance that the steps taken by ON to protect our
proprietary software technology will be adequate. Lesser sensitivity by
corporate, government or institutional users to avoiding infringement of
propriety rights could have a material adverse effect on our business,
condition (financial or otherwise), prospects and results of operations.
There has been substantial litigation in the software industry involving
intellectual property rights of technology companies. We have not been involved
in any such litigation. Although we do not believe that we are infringing the
intellectual property rights of others, any involvement in this type of
litigation may have a material adverse effect on our business, condition
(financial or otherwise), prospects and results of operations. In addition,
since we currently license, or may in the future license or acquire a portion
of the software included in our products from third parties, our exposure to
infringement actions may increase because we must rely upon these third parties
for information as to the origin and ownership of any software. We generally
obtain representations as to the origin and ownership of such acquired or
licensed software and we generally obtain indemnification to cover any breach
of such representations. However, there can be no assurance that these
representations are accurate or that such indemnification will provide us with
adequate compensation for a breach of these representations. In the future, we
may need to initiate litigation to enforce and protect trade secrets and other
intellectual property rights owned by us. We may also be subject to litigation
to defend against claimed infringement of the rights of others or to determine
the scope and validity of the proprietary rights of others. This litigation
could be costly and cause diversion of management's attention, either of which
could have a material adverse effect on our business, condition (financial or
otherwise), prospects and results of operations. Adverse rulings or findings in
such litigation could result in the loss of our proprietary rights, subject us
to significant liabilities, require us to seek licenses from third parties or
prevent us from manufacturing or selling our products. Any one of these items
could have a material adverse effect on our business, condition (financial or
otherwise), prospects and results of operations. Furthermore, there can be no
assurance that any necessary licenses will be available to us on reasonable
terms, or at all.
IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE ABLE
TO USE OUR TECHNOLOGY OR TRADEMARKS AND THIS COULD WEAKEN OUR COMPETITIVE
POSITION, REDUCE OUR REVENUE AND INCREASE COSTS
We rely primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. Such laws provide only limited protection. Despite
precautions that we take, it may be possible for unauthorized third parties to
copy aspects of our current or future products or to obtain and use information
that we regard as proprietary. In particular, we may provide our licensees with
access to our data model and other proprietary information underlying our
licensed applications. Such means of protecting our proprietary rights may not
be adequate. Policing unauthorized use of software is difficult and, while we
do not expect software piracy to be a persistent problem, some foreign laws do
not protect our proprietary rights to the same extent as United States laws.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. Litigation could result in substantial costs
and diversion of resources, and could materially adversely affect our business,
condition (financial or otherwise), prospects and results of operations.
THIRD PARTIES COULD ASSERT, FOR COMPETITIVE OR OTHER REASONS, THAT OUR PRODUCTS
INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS, AND SUCH CLAIMS COULD INJURE OUR
REPUTATION, CONSUME TIME AND MONEY, AND ADVERSELY AFFECT OUR ABILITY TO SELL
OUR PRODUCTS
While we are not aware that any of our software product offerings infringe
the proprietary rights of third parties, third parties may claim infringement
with respect to our current or future products. We expect that
26
software product developers will increasingly be subject to infringement claims
as the number of products and competitors in the software industry grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty
or licensing agreements. Royalty or licensing agreements may not be available
on acceptable terms, or at all. As a result, infringement claims could have a
material adverse effect on our business, condition (financial or otherwise),
prospects and results of operations.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT
COSTS TO US
Our license agreements with our customers typically contain provisions
designed to limit exposure to potential product liability claims. Such
limitation of liability provisions may, however, not be effective under the
laws of certain jurisdictions. Although we have not experienced material
product liability claims to date, the sale and support of our products entails
the risk of such claims. We may be subject to such claims in the future. A
material product liability claim could materially adversely affect our
business, condition (financial or otherwise), prospects and results of
operations.
OUR SENIOR MANAGEMENT AND OTHER KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS, AND
IF THEY CHOOSE TO LEAVE, IT COULD HARM OUR BUSINESS
Our success will depend to a significant extent on the continued service of
our senior management and certain other key employees, including selected
sales, consulting, technical and marketing personnel. While our employees are
required to sign standard agreements concerning confidentiality and ownership
of inventions and many of our employees are bound by an employment or
non-competition agreement, enforcing these agreements may be difficult and
costly, particularly with respect to provisions concerning non-competition. In
addition, we do not generally maintain key man life insurance on any employee.
The loss of the services of one or more of our executive officers or key
employees or the decision of one or more such officers or employees to join a
competitor or otherwise compete directly or indirectly with us could have a
material adverse effect on our business, condition (financial or otherwise),
prospects and results of operations.
WE WILL NEED TO RECRUIT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL TO
SUCCESSFULLY GROW OUR BUSINESS
Our future success will likely depend in large part on our ability to
attract and retain additional highly skilled technical, sales, management and
marketing personnel. Competition for such personnel in the computer software
industry is intense, and in the past we have experienced difficulty in
recruiting qualified personnel. New employees generally require substantial
training in the use of our products. We may not succeed in attracting and
retaining such personnel. If we do not, our business, condition (financial or
otherwise), prospects and results of operations could be materially adversely
affected.
PROVISIONS IN OUR CHARTER DOCUMENTS AND IN DELAWARE LAW MAY DISCOURAGE
POTENTIAL ACQUISITION BIDS FOR ON AND PREVENT CHANGES IN OUR MANAGEMENT WHICH
OUR STOCKHOLDERS FAVOR
Certain provisions of ON's charter documents eliminate the right of
stockholders to act by written consent without a meeting and specify certain
procedures for nominating directors and submitting proposals for consideration
at stockholder meetings. Such provisions are intended to increase the
likelihood of continuity and stability in the composition of the ON board of
directors and in the policies set by the board. These provisions also
discourage certain types of transactions, which may involve an actual or
threatened change of control transaction. These provisions are designed to
reduce the vulnerability of ON to an unsolicited acquisition proposal. As a
result, these provisions could discourage potential acquisition proposals and
could delay or prevent a change in control transaction. These provisions are
also intended to discourage certain tactics that may be used in proxy fights.
However, they could have the effect of discouraging others from making tender
offers
27
for ON's shares. As a result, these provisions may prevent the market price of
ON common stock from reflecting the effects of actual or rumored takeover
attempts. These provisions may also prevent changes in the management of ON.
ON's board of directors has the authority to issue up to 2,000,000 shares of
preferred stock in one or more series. The board of directors can fix the
price, rights, preferences, privileges, and restrictions of such preferred
stock without any further vote or action by ON's stockholders. The issuance of
preferred stock allows ON to have flexibility in connection with possible
acquisitions and other corporate purposes. However, the issuance of shares of
preferred stock may delay or prevent a change in control transaction without
further action by the ON stockholders. As a result, the market price of the ON
common stock and the voting and other rights of the holders of ON common stock
may be adversely affected. The issuance of preferred stock may result in the
loss of voting control to others. ON has no current plan to issue any shares of
preferred stock.
ON is subject to the anti-takeover provisions of the Delaware General
Corporation Law, which regulates corporate acquisitions. The Delaware law
prevents certain Delaware corporations, including ON, from engaging, under
certain circumstances, in a "business combination" with any "interested
stockholder" for three years following the date that such stockholder became an
interested stockholder. For purposes of Delaware law, a "business combination"
includes, among other things, a merger or consolidation involving ON and the
interested stockholder and the sale of more than 10% of ON's assets. In
general, Delaware law defines an "interested stockholder" as any entity or
person beneficially owning 15% or more of the outstanding voting stock of a
company and any entity or person affiliated with or controlling, or controlled
by such entity or person. Under Delaware law, a Delaware corporation may "opt
out" of the anti-takeover provisions. ON has not "opted out" of the
anti-takeover provisions of Delaware law.
OUR STOCK WILL LIKELY BE SUBJECT TO SUBSTANTIAL PRICE AND VOLUME FLUCTUATIONS
WHICH MAY PREVENT STOCKHOLDERS FROM RESELLING THEIR SHARES AT OR ABOVE THE
PRICE AT WHICH THEY PURCHASED THEIR SHARES
In the past, the market price of our common stock has varied greatly and the
volume of our common stock traded has fluctuated greatly as well. We expect
such fluctuation to continue. The fluctuation results from a number of factors
including:
. any shortfall in revenue or income as compared to revenue or income
projected by management or expected by investors and securities analysts;
. announcements of new products by ON or our competitors;
. quarterly fluctuations in our financial results or the results of other
software companies, including those of our direct competitors;
. changes in analysts' estimates of our financial performance, the financial
performance of our competitors, or the financial performance of software
companies in general;
. general conditions in the software industry;
. changes in prices for our products or the products of our competitors;
. changes in our revenue growth rates or the growth rates of our competitors;
. sales of large blocks of ON common stock; and
. conditions in the financial markets in general.
In addition, the stock market may from time to time experience extreme price
and volume fluctuations. Many technology companies, in particular, have
experienced such fluctuations. Often, such fluctuations have been unrelated to
the operating performance of the specific companies. The market price of our
common stock may experience significant fluctuations in the future.
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THE SHARES OF COMMON STOCK ISSUED UPON EXERCISE OF CERTAIN WARRANTS WILL HAVE A
DILUTIVE EFFECT
In 2000, we entered into exchange agreements with two institutional
investors. (the "Investors") pursuant to which the Investors exchanged certain
existing warrants for new warrants exercisable for an aggregate of 2,800,000
shares of common stock and promissory notes in the aggregate principal amount
of $1 million (which were cancelled on December 31, 2001). The number of shares
of ON's common stock issued or issuable upon exercise of the new warrants (the
"Warrant Shares") was fixed at 2,800,000 in the aggregate (subject to
adjustment for stock splits, stock dividends and similar events and to weighted
average antidilution adjustments in the case of certain below-market securities
issuances by ON); however, because the exercise price is $0.01 per share
(subject to adjustment for stock splits, stock dividends and similar events and
to weighted average antidilution adjustments in the case of certain
below-market securities issuances by ON), the issuance of the Warrant Shares
has (in the case of Warrant Shares already issued) or will have a dilutive
effect on the stockholders of ON. As of March 13, 2002, 2,249,563 Warrant
Shares had been issued and 550,437 Warrant Shares remained issuable.
RISK OF DELISTING BY NASDAQ STOCK MARKET
Under rules adopted by the Nasdaq Stock Market, ON's common stock is subject
to possible delisting if, among other things, the minimum bid price for the
Company's common stock falls below $1.00 for a period of 30 consecutive
business days or if the Company's net tangible assets fall below $4 million.
Under rule changes adopted in 2001, effective November 1, 2002, Nasdaq will
eliminate the net tangible asset test and require that issuers maintain minimum
stockholders equity of $10 million. An issuer failing to meet the minimum
stockholders equity requirement can avoid delisting if it satisfies an
alternative-listing standard that imposes, among other things, a minimum bid
price requirement of $3.00.
If ON's stockholders equity at November 1, 2002 is below $10 million, ON
will be subject to possible delisting unless it takes action to increase its
stockholders equity (such as by issuing securities in an equity financing) or
it satisfies an alternative listing standard. As of December 31, 2001, ON's
stockholders equity was $8.6 million. Delisting could have a material adverse
effect on the price of ON's common stock and on the level of liquidity
currently available to the Company's shareholders.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to the impact of interest rate changes, foreign
currency fluctuations, and investment changes.
Interest Rate Risk. The Company's exposure to market rate risk for changes
in interest rates relates primarily to the Company's cash equivalent
investments (original maturities of 90 days or less). The Company has not used
derivative financial instruments. The Company invests its excess cash in
short-term floating rate instruments and senior secured floating rate loan
funds, which carry a degree of interest rate risk. These instruments may
produce less income than expected if interest rates fall.
Foreign Currency Risk. International revenue from the Company's foreign
subsidiaries and other foreign sources for the year ended December 31, 2001
were approximately 74% of total revenue. International sales are made primarily
from the Company's subsidiary in Germany and are denominated in the local
currency. Accordingly, the Company's German subsidiary uses the local currency
as its functional currency. The Company's international business is subject to
risk typical of an international business, including, but not limited to,
differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility. Accordingly, the Company's future results could be materially
adversely impacted by changes in these or other factors. The Company is exposed
to foreign currency exchange rate fluctuations as the financial results of its
foreign subsidiary are translated into U.S. dollars in consolidation. As
exchange rates vary, these results, when translated, may vary from expectations
and adversely impact overall profitability.
29
Investment Risk. The Company may invest in the future in the equity
instruments of privately held companies for business and strategic purposes.
However, as of December 31, 2001, the Company holds no such material
investments. For these non-quoted investments, the Company's policy is to
regularly review the assumptions underlying the operating performance and cash
flow forecasts in assessing the carrying values. The Company identifies and
records impairment losses on long-lived assets when events or circumstances
indicate that such assets might be impaired.
Item 8. Financial Statements and Supplementary Documents
The Company's consolidated financial statements are listed in the Index to
Consolidated Financial Statements filed in item 14(a)(i) as part of this Form
10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
30
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required hereunder is incorporated by reference from the
Company's definitive Proxy Statement filed in connection with the Company's
Annual Meeting of Stockholders to be held on May 16, 2002.
Item 11. Executive Compensation
The information required hereunder is incorporated by reference from the
Company's definitive Proxy Statement under the caption "Executive Compensation
and Other Matters" filed in connection with the Company's Annual Meeting of
Stockholders to be held on May 16, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required hereunder is incorporated by reference from the
Company's definitive Proxy Statement under the caption " Security Ownership of
Principal Shareholders and Management" filed in connection with the Company's
Annual Meeting of Stockholders to be held on May 16, 2002.
Item 13. Certain Relationship and Related Transactions
The information required hereunder is incorporated by reference from the
Company's Proxy Statement filed in connection with the Company's Annual Meeting
of Stockholders to be held on May 16, 2002.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) (1) Consolidated Financial Statements:
Page
Number
------
Report of Independent Public Accountants............................... 32
Consolidated Balance Sheets:
December 31, 2001 and 2000.......................................... 33
Consolidated Statements of Operations:
Years ended December 31, 2001, 2000 and 1999........................ 34
Consolidated Statements of Stockholders' Equity and Comprehensive Loss:
Years ended December 31, 2001, 2000 and 1999........................ 35
Consolidated Statements of Cash Flows:
Years ended December 31, 2001, 2000 and 1999........................ 36
Notes to the Consolidated Financial Statements......................... 38
Other schedules are omitted because the conditions required for filing do
not exist or the required information is included in the financial statements
or notes thereto.
(a) (3) Exhibits: See Index to Exhibits on page 56. The Exhibits listed in
the accompanying Index of Exhibits are filed or incorporated by reference as
part of this report.
(b) Reports on Form 8-K: Report on Form 8-K filed by the Company on
November 2, 2001 regarding the $5 million private placement.
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
ON Technology Corporation and subsidiaries:
We have audited the accompanying consolidated balance sheets of ON
Technology Corporation (a Delaware corporation) and subsidiaries as of December
31, 2001 and 2000, and the related consolidated statements of operations,
stockholders' equity and comprehensive loss and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of ON Technology Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits 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 ON Technology Corporation
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 28, 2002
32
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per-share data)
December 31,
------------------
2001 2000
-------- --------
Assets
Current Assets:
Cash and cash equivalents..................................................... $ 9,767 $ 9,437
Restricted cash............................................................... 1,069 1,069
Accounts receivable, net of allowance
of $1,070 and $2,177, respectively.......................................... 5,964 5,561
Prepaid expenses and other current assets..................................... 1,016 614
Deferred tax asset--current................................................... 433 --
-------- --------
Total current assets....................................................... 18,249 16,681
-------- --------
Property and Equipment, at cost:
Computers and equipment....................................................... 5,157 4,935
Furniture and fixtures........................................................ 248 335
Leasehold improvements........................................................ 528 528
-------- --------
5,933 5,798
-------- --------
Less--Accumulated depreciation and amortization............................... 4,927 4,213
-------- --------
1,006 1,585
-------- --------
Deferred tax asset--long term................................................. 433 --
Other assets and deposits..................................................... 428 105
-------- --------
$ 20,116 $ 18,371
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable.............................................................. $ 2,435 $ 2,705
Accrued expenses (Note 9)..................................................... 4,345 2,890
Notes payable (Note 6)........................................................ -- 875
Deferred revenue--current..................................................... 4,754 3,777
-------- --------
Total current liabilities.................................................. 11,534 10,247
Warrant liability (Note 6).................................................... -- 987
Deferred revenue--long term................................................... -- 235
-------- --------
Total liabilities.......................................................... 11,534 11,469
-------- --------
Commitments and Contingencies (Note 5)
Stockholders' Equity:
Preferred stock, Authorized--2,000,000 shares Issued and outstanding--none.... -- --
Common stock, $0.01 par value--Authorized--30,000,000 shares
Issued and outstanding--22,581,533 shares and 15,300,951 shares, respectively 226 153
Additional paid-in capital.................................................... 80,768 73,843
Deferred stock-based compensation............................................. (126) (97)
Accumulated deficit........................................................... (72,775) (67,130)
Accumulated other comprehensive income........................................ 536 180
Treasury stock (15,000 shares at cost)........................................ (47) (47)
-------- --------
Total stockholders' equity................................................. 8,582 6,902
-------- --------
$ 20,116 $ 18,371
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
33
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share and per-share data)
For the Years Ended December 31,
-------------------------------------
2001 2000 1999
----------- ----------- -----------
Revenue:
Net CCM and related products....................... $ 15,188 $ 16,073 $ 17,993
CCM and related service and maintenance............ 8,462 6,633 5,524
Meeting Maker, Inc. (MMI).......................... -- 3,405 7,360
Other.............................................. 568 236 --
----------- ----------- -----------
Total revenue................................... 24,218 26,347 30,877
----------- ----------- -----------
Cost of Revenue:
Cost of CCM and related product revenue............ 3,172 3,462 3,849
Cost of CCM and related service and
maintenance revenue.............................. 1,084 894 937
Cost of MMI revenue................................ -- 75 645
----------- ----------- -----------
Gross Profit.................................... 19,962 21,916 25,446
Operating expenses:
Sales and marketing................................ 12,248 12,324 11,976
Research and development........................... 8,019 9,811 8,697
General and administrative......................... 4,690 6,681 4,465
MMI operating expenses............................. -- 2,159 2,676
----------- ----------- -----------
Loss from operations............................ (4,995) (9,059) (2,368)
Interest expense................................... (4) (7) (16)
Interest income.................................... 175 505 169
Other income (loss), net........................... (745) 716 216
----------- ----------- -----------
Loss before allocation to MMI and provision for
income taxes.................................. (5,569) (7,845) (1,999)
Allocation to MMI (Note 2)......................... -- (1,171) --
----------- ----------- -----------
Loss before provision for income taxes.......... (5,569) (9,016) (1,999)
Provision for income taxes......................... (76) (420) --
----------- ----------- -----------
Net loss........................................ $ (5,645) $ (9,436) $ (1,999)
=========== =========== ===========
Basic and diluted net loss per share.............. $ (0.34) $ (0.67) $ (0.16)
=========== =========== ===========
Basic and diluted number of common outstanding
weighted average shares outstanding............. 16,365,286 14,140,742 12,526,398
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
34
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(amounts in thousands)
Stockholder's Equity
---------------------------------------------------------------------------
Common Treasury
Stock Stock
------------ Accumulated -----------
Number $0.01 Additional Deferred Other Number
of Par Paid-in Stock-Based Accumulated Comprehensive of
Shares Value Capital Compensation Deficit Income (Loss) Shares Cost
------ ----- ---------- ------------ ----------- ------------- ------ ----
Balance, December 31, 1998.......................... 12,376 $124 $62,793 -- $(55,695) $(34) (15) $(47)
Sale of common stock and warrants, net of
$1,039 of issuance costs........................... 1,030 10 10,951 -- -- -- -- --
Sale of common stock under the
Employee Stock Purchase Plan....................... 122 1 142 -- -- -- -- --
Exercise of common stock options.................... 320 3 628 -- -- -- -- --
Deferred compensation related to
grants of common stock options..................... -- -- 82 $ (82) -- -- -- --
Amortization of deferred compensation related to
grants of common stock options..................... -- -- -- 82 -- -- -- --
Cumulative translation adjustment................... -- -- -- -- -- 11 -- --
Net loss............................................ -- -- -- -- (1,999) -- -- --
Comprehensive loss.................................. -- -- -- -- -- -- -- --
------ ---- ------- ----- -------- ---- --- ----
Balance, December 31, 1999.......................... 13,848 138 74,596 -- (57,694) (23) (15) (47)
Sale of common stock under the
Employee Stock Purchase Plan....................... 144 1 129 -- -- -- -- --
Exercise of common stock options.................... 648 7 671 -- -- -- -- --
Conversion of warrants into note payable (Note 6)... -- -- (800) -- -- -- -- --
Issuance of common stock warrants (Note 6).......... -- -- (1,910) -- -- -- -- --
Reclassification of warrants to equity upon exercise
(Note 6)........................................... -- -- 375 -- -- -- -- --
Exercise of warrants (Note 6)....................... 661 7 (7) -- -- -- -- --
Deferred compensation related to
grants of common stock options..................... -- -- 789 (789) -- -- -- --
Amortization of deferred compensation related to
grants of common stock options..................... -- -- -- 692 -- -- -- --
Cumulative translation adjustment................... -- -- -- -- -- 203 -- --
Net loss............................................ -- -- -- -- (9,436) -- -- --
Comprehensive loss.................................. -- -- -- -- -- -- -- --
------ ---- ------- ----- -------- ---- --- ----
Balance, December 31, 2000.......................... 15,301 153 73,843 (97) (67,130) 180 (15) (47)
Private placement of common stock, net of $137 in
issuance costs (Note 6)............................ 6,024 60 4,803 -- -- -- -- --
Sale of common stock under the Employee
Stock Purchase Plan................................ 68 1 42 -- -- -- -- --
Exercise of warrants (Note 6)....................... 1,177 12 -- -- -- -- -- --
Exercise of common stock options.................... 12 -- 9 -- -- -- -- --
Reclassification of warrants to equity
upon exercise (Note 6)............................. -- -- 37 -- -- -- -- --
Reclassification of warrants to equity upon
amendment to warrant agreement (Note 6)............ -- -- 1,934 -- -- -- -- --
Deferred compensation related to grants of
common stock options............................... -- -- 100 (100) -- -- -- --
Amortization of deferred compensation related
to common stock options............................ -- -- -- 71 -- -- -- --
Cumulative translation adjustment................... -- -- -- -- -- 356 -- --
Net loss............................................ -- -- -- -- (5,645) -- -- --
Comprehensiveness loss.............................. -- -- -- -- -- -- -- --
------ ---- ------- ----- -------- ---- --- ----
Balance, December 31, 2001.......................... 22,582 $226 $80,768 $(126) $(72,775) $536 (15) $(47)
====== ==== ======= ===== ======== ==== === ====
Comprehensive
Total Loss
------- -------------
Balance, December 31, 1998.......................... $ 7,141
Sale of common stock and warrants, net of
$1,039 of issuance costs........................... 10,961
Sale of common stock under the
Employee Stock Purchase Plan....................... 143
Exercise of common stock options.................... 631
Deferred compensation related to
grants of common stock options..................... --
Amortization of deferred compensation related to
grants of common stock options..................... 82
Cumulative translation adjustment................... 11 $ 11
Net loss............................................ (1,999) (1,999)
-------
Comprehensive loss.................................. -- $(1,988)
------- =======
Balance, December 31, 1999.......................... 16,970
Sale of common stock under the
Employee Stock Purchase Plan....................... 130
Exercise of common stock options.................... 678
Conversion of warrants into note payable (Note 6)... (800)
Issuance of common stock warrants (Note 6).......... (1,910)
Reclassification of warrants to equity upon exercise
(Note 6)........................................... 375
Exercise of warrants (Note 6)....................... --
Deferred compensation related to
grants of common stock options..................... --
Amortization of deferred compensation related to
grants of common stock options..................... 692
Cumulative translation adjustment................... 203 $ 203
Net loss............................................ (9,436) (9,436)
-------
Comprehensive loss.................................. -- $(9,233)
------- =======
Balance, December 31, 2000.......................... 6,902
Private placement of common stock, net of $137 in
issuance costs (Note 6)............................ 4,863
Sale of common stock under the Employee
Stock Purchase Plan................................ 43
Exercise of warrants (Note 6)....................... 12
Exercise of common stock options.................... 9
Reclassification of warrants to equity
upon exercise (Note 6)............................. 37
Reclassification of warrants to equity upon
amendment to warrant agreement (Note 6)............ 1,934
Deferred compensation related to grants of
common stock options............................... --
Amortization of deferred compensation related
to common stock options............................ 71
Cumulative translation adjustment................... 356 $ 356
Net loss............................................ (5,645) (5,645)
-------
Comprehensiveness loss.............................. -- $(5,289)
------- =======
Balance, December 31, 2001.......................... $ 8,582
=======
The accompanying notes are an integral part of these consolidated financial
statements
35
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Years ended December 31,
-------------------------
2001 2000 1999
------- ------- -------
Cash Flows from Operating Activities:
Net loss................................................ $(5,645) $(9,436) $(1,999)
Adjustments to reconcile net loss
to net cash used in operating activities
Deferred tax asset...................................... (866) -- --
Non-cash charges associated with the revaluation of
intercompany loans to foreign subsidiaries (Note 1)... 587 190 --
Depreciation and amortization........................... 936 720 1,726
Revaluation of notes payable (Note 6)................... (875) 75 --
Warrant liability revaluation (Note 6).................. 984 (548) --
Amortization of deferred stock-based compensation....... 71 614 82
Gain on sale of assets.................................. -- (458) --
Changes in assets and liabilities:
Accounts receivable................................... (424) 1,525 (3,946)
Prepaid expenses and other current assets............. (523) 77 163
Accounts payable...................................... (226) (1,048) (812)
Accrued expenses...................................... 1,505 399 578
Reserve for distributor inventories................... -- (120) --
Deferred revenue...................................... 762 970 2,189
------- ------- -------
Net cash used in operating activities............... (3,714) (7,040) (2,019)
------- ------- -------
Cash Flows from Investing Activities:
Decrease (increase) in other assets and deposits........ (279) 44 (24)
Purchase of property and equipment, net................. (278) (803) (1,072)
Restricted cash to secure facility lease................ -- (1,069) --
------- ------- -------
Net cash used in investing activities............... (557) (1,828) (1,096)
------- ------- -------
Cash Flows from Financing Activities:
Net proceeds from sale of common stock and
warrants to purchase common stock..................... 4,863 -- 10,961
Exercise of warrants.................................... 12 -- --
Exercise of common stock options........................ 9 678 631
Sale of stock under the Employee Stock Purchase Plan.... 43 130 143
Principal repayments on obligations under capital lease. -- -- (10)
------- ------- -------
Net cash provided by financing activities........... 4,927 808 11,725
------- ------- -------
Effect of exchange rates on cash and cash equivalents... (326) 556 330
------- ------- -------
Net Increase (Decrease) in Cash and Cash Equivalents..... 330 (7,504) 8,940
Cash and Cash Equivalents, beginning of year............. 9,437 16,941 8,001
------- ------- -------
Cash and Cash Equivalents, end of year................... $ 9,767 $ 9,437 $16,941
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
36
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(amounts in thousands)
Years ended December 31,
------------------------
2001 2000 1999
------- ------ ----
Supplemental Disclosure of Cash Flow Information:
Cash Paid For:
Interest........................................ $ 4 $ 7 $16
======= ====== ===
Income taxes.................................... $ 5 $ 8 $--
======= ====== ===
Non-Cash Investing and Financing Activities:
Exchange of warrants for notes payable.......... $ -- $ 800 $--
======= ====== ===
Issuance of warrants under Exchange Agreement
Initial valuation............................. $ -- $1,910 $--
Reclass of warrants to equity upon exercise... (37) (375) --
Reclass of warrants to equity upon
amendment of warrant agreements............. (1,934) -- --
------- ------ ---
$(1,971) $1,535 $--
======= ====== ===
The accompanying notes are an integral part of these consolidated financial
statements.
37
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per-share data)
(1) Operations and Significant Accounting Policies
ON Technology Corporation was incorporated in Delaware in 1985.
ON Technology Corporation and its subsidiaries ("ON" or the "Company")
provide remote software management solutions for desktops, mobile PCs,
handhelds, servers, retail Point-of-Sale (POS) devices, and banking
workstations. The Company's principal product, ON Command CCM(TM), or CCM, is
used by enterprise IT organizations and service providers to remotely manage
and rapidly deliver business-critical software over corporate networks. The
Company's products are designed to reduce operational costs while enhancing
both IT and end-user productivity.
The Company incurred net losses of approximately $5,645, $9,436 and $1,999
during the years ended December 31, 2001, 2000 and 1999, respectively. The
Company has an accumulated deficit of $72,775 as of December 31, 2001. The
Company is subject to the risks and challenges similar to other
technology-based companies. These risks include, but are not limited to,
successful development and marketing of products, the ability to obtain
adequate financing to support growth and future operations and competition from
substitute products and larger companies with greater financial, technical,
management and marketing resources.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described below and elsewhere in
the notes to the consolidated financial statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
ON Technology Corporation and its wholly owned subsidiaries: ON Technology U.K.
Limited, a corporation organized under the laws of England; Wilma 96
Vermogensverwaltungs, a German GmbH; ON Technology Geschaftsfuhrungs GmbH; and
ON Technology France SRL. All significant intercompany transactions and
balances have been eliminated in consolidation.
Management Estimates and Uncertainties
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amount 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
expense during the reporting period. Actual results could differ from those
estimates. The Company's more significant estimates relate to the establishment
of accounts receivable reserves and the provision for income taxes and related
tax balance sheet accounts.
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants' (AICPA) Statement of Position (SOP) No. 97-2,
Software Revenue Recognition. Software license revenue principally consists of
revenue earned under perpetual software license agreements and is generally
recognized upon shipment of the software if collection of the resulting
receivable is probable, the fee is fixed or determinable, and vendor-specific
objective evidence exists for all undelivered elements to allow allocation of
the total fee to all delivered and undelivered elements of the arrangement.
Revenue under such arrangements, which may include multiple software products
and services sold together, are allocated to each element based on the residual
method in accordance with SOP No. 98-9, Software Revenue Recognition, with
Respect to Certain Transactions. Under the residual method, the fair value of
the undelivered elements is deferred and subsequently recognized when earned.
The Company has established sufficient vendor specific objective evidence of
fair value for professional services, training and maintenance and support
services, based on the price charged when these elements were sold separately.
Accordingly, software license revenue is recognized under the residual method
in arrangements in which software is licensed with professional services,
training and maintenance and support services.
38
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except share and per-share data)
The Company also sells products to resellers. There is generally no
contractual right of return nor has the Company in practice historically
permitted returns notwithstanding the contractual arrangement. The Company
typically does not ship products to resellers until an end user is identified,
at which point the Company recognizes revenue under the arrangement. The
Company provides for returns based on historical experience.
The Company provides for an allowance for accounts receivable amounts that
may become uncollectible in the future. The estimated allowance for
uncollectible amounts is based primarily on historical write-off experience and
management's evaluation of the customers in the receivable portfolio. While
management believes the allowance is adequate, if financial condition of the
Company's customers were to deteriorate, resulting in impairment of their
ability to make payments, additional allowances may be required.
Service revenue from time and expense contracts and consulting and training
revenue are generally recognized as the related services are performed.
Amounts billed in excess of revenue recognized related to services and
maintenance are reflected as deferred revenue in the accompanying consolidated
balance sheets.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash and investments with original
maturities of 90 days or less. Cash equivalents consist principally of money
market investments. Restricted cash represents the minimum cash balance
requirement that the Company has with its financial institution related to the
Company's $1,069 outstanding letter of credit guarantee securing the Company's
lease obligations on its Waltham, Massachusetts' facility, which expires on
December 31, 2002.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash equivalents, accounts
receivable, accounts payable, letter of credit, notes payable and warrant
liability. The estimated fair values of these financial instruments approximate
their carrying values at December 31, 2001 and 2000. The estimated fair values
have been determined through information obtained from market sources and
management estimates.
Depreciation and Amortization
The Company provides for depreciation and amortization by charges to
operations in amounts estimated to allocate the cost of the assets over their
estimated useful lives, using the straight-line method, as follows:
Estimated
Asset Classification Useful Life
-------------------- -------------
Computers and equipment 1-4 Years
Furniture and fixtures. 4-5 Years
Leasehold improvements. Life of lease
39
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except share and per-share data)
Impairment of Long-Lived Assets
The Company accounts for its long-lived assets in accordance with Statement
of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of. At each
occurrence of a triggering event or change in circumstances, the Company
evaluates the realizability of long-lived assets based on profitability
expectations, using the undiscounted cash flow method, for each subsidiary
having a material long-lived assets balance. If an impairment is indicated, the
related long-lived assets are written down to their estimated fair value.
Factors that management considers in performing this evaluation include current
operating results, trends and prospects, product demand, competition and other
economic factors, both domestic and international. Based on its most recent
analysis, the Company believes that no impairment of long-lived assets exists
at December 31, 2001.
Software Development Costs
Costs incurred in the development of computer software to be sold have been
expensed as research and development costs in the accompanying consolidated
statements of operations, in accordance with SFAS No. 86, Accounting for the
Costs of Computer Software to Be Sold, Leased or Otherwise Marketed. The costs
incurred subsequent to the attainment of technological feasibility in 2001,
2000 and 1999 are insignificant and accordingly have been charged to research
and development expense.
Foreign Currency Translation
The functional currencies of the Company's foreign subsidiaries are their
respective local currencies. The Company translates the assets and liabilities
of its foreign subsidiaries at the exchange rates in effect at the reporting
date in accordance with SFAS No. 52, Foreign Currency Translation, while
stockholders' equity (deficit) is translated at historical rates. Statement of
operations and cash flow amounts are translated using average exchange rates in
effect during each period. The resultant translation adjustment is reflected as
a change to accumulated other comprehensive loss.
During the years ended December 31, 2001, 2000 and 1999, the Company
incurred a net foreign exchange loss of $649, $196 and $16, respectively,
primarily resulting from revaluing intercompany loans to foreign subsidiaries
and U.S. dollar-denominated debt at a foreign subsidiary. This amount is
included in other income (loss), net in the accompanying consolidated
statements of operations. As of December 31, 2001, the Company had not entered
into any foreign currency contracts to hedge this exposure.
Off-Balance-Sheet and Concentration of Credit Risk
The Company's financial instruments that subject the Company to credit risk
concentration consist of cash equivalents and accounts receivable. The Company
has no significant off-balance-sheet risk such as foreign exchange contracts,
option contracts or other foreign hedging arrangements. The Company maintains
the majority of cash balances with two highly rated financial institutions. The
Company's accounts receivable credit risk is not concentrated within any
geographic area. The Company recorded revenue of greater than 10% of total
40
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except share and per-share data)
revenue for the years ended December 31, 2001, 2000 and 1999 and had
significant accounts receivable balances at December 31, 2001 and 2000, from
the following customers:
2001
-----------------
Accounts
Revenue Receivable
------- ----------
Customer A 13.1% *
Customer B ** *
Customer C ** 11.2%
2000
-----------------
Accounts
Revenue Receivable
------- ----------
Customer A 17.7% 12.1%
Customer B ** 16.2%
Customer C ** *
1999
-------
Revenue
-------
Customer A 14.2%
Customer B **
Customer C **
-
* Accounts receivable from this customer were less than 10% of the
Company's total accounts receivable at the applicable period-end.
** Revenue derived from this customer were less than 10% of the
Company's total revenue for the applicable year.
Loss per Share
The Company calculates loss per share in accordance with SFAS No. 128,
Earnings Per Share. Basic loss per share is calculated by dividing net loss by
the weighted average number of common shares outstanding for the period.
Diluted loss per share is the same as basic loss per share for all periods
presented since the effect of stock options and warrants would be anti-dilutive.
Anti-dilutive securities, which consist of stock options and warrants, that
were not included in diluted loss per share, were 5,588,136, 1,825,833, and
1,093,250 for the years ended December 31, 2001, 2000 and 1999, respectively.
Comprehensive Loss
The Company has disclosed comprehensive loss for all periods presented in
the accompanying consolidated statements of stockholder's equity and
comprehensive loss. The Company's only item of other comprehensive loss relates
to cumulative translation adjustment, and is presented separately on the
balance sheet as required.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
measurement of the fair value of stock options or warrants granted to employees
to be included in the statement of operations or, alternatively, disclosed in
the notes to consolidated financial statements. The Company accounts for
stock-based
41
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except share and per-share data)
compensation for employees under Accounting Principles Board Opinion (APB) No.
25, Accounting for Stock Issued to Employees, and related interpretations, and
provides additional footnote disclosure as required under SFAS No. 123. The
Company records the fair market value of stock options and warrants granted to
non-employees in exchange for services in accordance with Emerging Issues Task
Force (EITF) Issue No. 96-18, Accounting for Equity Instruments that Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services, in the consolidated statement of operations.
Accounting for Derivative Instruments
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, which establishes a
new model for accounting for derivatives and hedging activities. It requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure these instruments at fair value.
The adoption of SFAS No. 133, as amended, did not have any material impact on
the Company's financial position or results of operations.
Reclassifications
Certain prior-year balances have been reclassified to conform to
current-year presentations.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Accounting for Business Combinations, and SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 141 requires that all business combinations
initiated after June 30, 2001, be accounted for using the purchase method of
accounting. SFAS No. 142 discusses how intangible assets that are acquired
should be accounted for in financial statements upon their acquisition. In
addition, under SFAS No. 142, goodwill and other indefinite lived intangible
assets are no longer amortized but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets that
are not deemed to have an indefinite life will continue to be amortized over
their useful lives (but with no maximum life). As of December 31, 2001, all of
the Company's intangible assets and goodwill associated with acquisitions were
fully amortized. As a result, the adoption of SFAS No. 142 on January 1, 2002,
had no current impact on the Company's financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which is effective for the Company on January
1, 2002. SFAS No. 144 addresses accounting and reporting for the impairment or
disposal of long-lived assets, except goodwill, that are either held and used
or disposed of through sale or other means.
In November 2001, the EITF issued Topic No. D-103 (Topic D-103) relating to
the accounting for reimbursements received for out-of-pocket expenses. In
accordance with Topic D-103, reimbursements received for out-of-pocket expenses
incurred should be characterized as revenue in the statement of operations. The
Company has historically accounted for reimbursements received for
out-of-pocket expenses incurred as a reduction to the cost of CCM and related
service and maintenance revenue in the consolidated statements of operations to
offset costs incurred. The Company will adopt Topic D-103 in financial
reporting periods beginning after December 31, 2001 and comparative financial
statements for prior periods will be reclassified to comply with this guidance.
The Company does not expect the adoption of SFAS No. 144 and Topic D-103 to
have a material impact on its financial position, results of operations and
cash flows.
42
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except share and per-share data)
(2) Disposition of Meeting Maker Business
On January 3, 2000, the Company signed an asset purchase agreement with a
newly organized privately held company named Meeting Maker, Inc. (MMI) to sell
the Company's Groupware business (Meeting Maker) subject to the approval of the
Company's stockholders and certain other conditions. In connection with the
asset purchase agreement, the Company entered into a management agreement, also
dated January 3, 2000, in which the Company transferred operating control of
the Groupware business (Meeting Maker) to MMI. ON had no risk of ownership
related to the operating results from the Groupware business since January 3,
2000 and has included the results of operations of MMI and allocated 100% of
the net income (loss) to MMI for the period January 3, 2000 to June 30, 2000.
The Company did not receive the required number of shareholder votes to approve
the Meeting Maker transaction at the May 26, 2000 Special Meeting of
Shareholders.
As a result, the Company entered into a license agreement with MMI effective
as of June 30, 2000, which, among other things, terminated the previously
negotiated sale arrangement and provided for the grant of an exclusive
worldwide license to market and distribute the Meeting Maker product (including
a license to the underlying source code and object code). The Company received
quarterly royalty payments, subject to certain minimums, from MMI in connection
with the exclusive license. All fees were recognized as earned. On June 29,
2001, MMI exercised its buyout option for the remaining minimum payments plus
an additional fee. As a result of the buyout, there will be no future payments
under this agreement. The Company has recognized the royalty fees as earned
($568 and $236 for the years ended December 31, 2001 and 2000, respectively) in
other revenue in the accompanying consolidated statements of operations.
Additionally, the license agreement provided for the sale of certain assets
and the assumption of certain liabilities related to the Meeting Maker
business. As a result, the Company recognized a gain of $458, net of related
transaction costs, in the quarter ended September 30, 2000. This gain was
included in other income (loss), net in the accompanying consolidated statement
of operations
(3) Income Taxes
The Company provides for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under the liability method specified by SFAS No.
109, a deferred tax asset or liability is determined based on the difference
between the financial statement and tax bases of assets and liabilities, as
measured by the enacted tax rates in effect when these differences are expected
to reverse. In the years ended December 31, 2001 and 2000, the Company's tax
provision primarily resulted from foreign income. For the year ended December
31, 1999, the Company incurred a significant operating loss for tax purposes
and, as a result, no tax provision was recorded.
The components of domestic and foreign income (loss) before the provision
for income taxes are as follows:
2001 2000 1999
------- -------- -------
Domestic $(9,249) $(12,655) $(4,161)
Foreign. 3,680 3,639 2,162
------- -------- -------
$(5,569) $ (9,016) $(1,999)
======= ======== =======
43
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except share and per-share data)
The components of the provision for income taxes are as follows:
2001 2000 1999
----- ---- ----
Current
Federal. $ -- $ -- $ --
State... -- -- --
Foreign. 942 420 --
----- ---- ----
942 420 --
Deferred
Federal. -- -- --
State... -- -- --
Foreign. (866) -- --
----- ---- ----
-- -- --
----- ---- ----
$ 76 $420 $ --
===== ==== ====
The Company provides deferred income taxes for temporary differences between
assets and liabilities recognized for financial reporting and income tax
purposes. The income tax effects of these temporary differences are as follows:
2001 2000
-------- --------
Depreciation.................... $ 684 $ 483
Reserves and accruals........... 610 1,180
Intangible assets............... 2,171 2,588
Other........................... (56) (24)
Net operating loss carryforwards 19,735 15,551
-------- --------
23,144 19,778
Less: Valuation allowance....... (22,278) (19,778)
-------- --------
Net deferred tax asset.......... $ 866 $ --
======== ========
The Company has recorded a valuation allowance of $22,278 as of December 31,
2001, due to uncertainties related to its ability to utilize some of its
deferred tax assets, primarily consisting of certain net operating losses
carried forward, before they expire. The valuation allowance is based on its
estimates of taxable income by jurisdiction in which the Company operates and
the period over which its deferred tax assets will be recoverable. The Company
believes that it is more likely than not that the remaining net deferred tax
asset will be realized as it relates to certain tax benefits of the Company's
foreign subsidiary, which as of December 31, 2001 has now demonstrated a
current strong earnings history.
As of December 31, 2001, the Company has available federal and foreign net
operating loss carryforwards of approximately $42,933 and $8,988, respectively.
These carryforwards expire through 2021 and are subject to review and possible
adjustment by the Internal Revenue Service and other local taxing authorities.
The Tax Reform Act of 1997 contains provisions that may limit the amount of net
operating loss and credit carryforwards that the Company may utilize in any one
year in the event of certain cumulative changes in ownership over a three-year
period in excess of 50%, as defined.
44
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except share and per-share data)
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
2001 2000 1999
----- ----- -----
Federal statutory rate............. (34.0%) (34.0%) (34.0%)
State taxes, net of federal benefit (6.2%) (6.2%) (6.2%)
Foreign taxes...................... 0.6% 5.4% --
Permanent and other items.......... (1.1%) -- --
Increase in valuation allowance.... 42.1% 30.1% 40.2%
----- ----- -----
Effective tax rate................. 1.4% 4.7% --
===== ===== =====
(4) Letter of Credit
As of December 31, 2001 and 2000, the Company has a $1,069 letter of credit
guarantee outstanding securing its Waltham, Massachusetts leased facility,
which expires in 2002. The Company is required to maintain a cash balance of
$1,069 as collateral for this guarantee. This amount is shown as restricted
cash as of December 31, 2001 and 2001 in the accompanying consolidated
financial statements. At December 31, 2001 and 2000, the Company had no line of
credit arrangement.
(5) Commitments and Contingencies
Leases
The Company conducts its operations in leased facilities under operating
leases expiring at various times through 2005. Additionally, the Company has
acquired certain furniture and fixtures as well as computer equipment under
certain operating leases. These leases also expire at various times through
2003.
The approximate minimum annual lease payments under the operating leases are
as follows:
Operating
Leases
---------
2002............................................... $1,108
2003............................................... 260
2004............................................... 240
2005............................................... 140
------
Total (reduced by minimum sublease rentals of $256) $1,748
======
Total rental expense included in the accompanying consolidated statements of
operations for the years ended December 31, 2001, 2000, and 1999, was $1,651,
$1,415, and $1,290, respectively. The rent expense in 2001 and 2000 is net of
sublease income of $234 and $173, respectively. This sublease is coterminous
with the Company's Waltham, Massachusetts' facility lease, expiring in December
2002.
45
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except share and per-share data)
Royalties
The Company has entered into several software license agreements. Some
agreements provide the Company with exclusive licenses to distribute certain
software products in several countries. The Company is required to pay
royalties on all related sales based on a percentage of the sale, subject to a
floor. For these agreements, no minimum royalties are payable unless a product
is sold. The Company has another agreement to incorporate third party
technology in its product. This agreement requires payment of approximately
$692 in four equal installments of $173 for unlimited use of the technology in
our product for a period of approximately three years. The remaining obligation
as of December 31, 2001 was approximately $519. The Company is amortizing the
total cost of this royalty over the life of the agreement. Total royalty
expense included in the accompanying consolidated statements of operations for
the years ended December 31, 2001, 2000, and 1999 was $712, $363, and $413,
respectively.
Litigation
From time to time, the Company is a party to routine litigation and
proceedings in the ordinary course of business. The Company is not aware of any
current or pending litigation to which the Company is or may be a party that
the Company believes could materially adversely affect the Company's financial
statements.
(6) Stockholders' Equity
Common Stock
The Company has 30,000,000 authorized shares of common stock, $0.01 par
value, of which 22,581,533 shares were issued at December 31, 2001.
Preferred Stock
The Company has 2,000,000 authorized shares of preferred stock, which may be
issued from time to time in one or more series. The Company's Board of
Directors has authority to issue the shares of preferred stock in one or more
series, to establish the number of shares to be included in each series and to
fix the designation, powers, preferences and rights of the shares of each
series and the qualifications, limitations or restrictions thereof, without any
further vote or action by the stockholders. The issuance of preferred stock
could decrease the amount of earnings and assets available for distribution to
holders of common stock, and may have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has not issued any
shares of preferred stock as of December 31, 2001.
Private Placement
On October 25, 2001, the Company closed a private placement of $5,000 of
common stock with four inter-related institutional investors. The Company
issued the investors 6,024,096 shares of common stock at a purchase price of
$0.83 per share based on the prior market close. Under the terms of the
purchase agreement, the investors have the right to appoint one member of the
Company's Board of Directors and the Company must use commercially reasonable
efforts to take all actions reasonably required to register under the
Securities Exchange Act of 1933 the shares of common stock acquired by the
investors. The use of proceeds will be for sales expansion, marketing programs
to improve product branding, and accelerating research and development efforts.
46
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except share and per-share data)
On December 30, 1999, the Company closed a $12,000 private placement of
common stock and warrants to two institutional investors. In total, the
investors purchased 1,029,674 shares of the Company's common stock at a price
of $11.65 per share and received warrants to purchase 514,838 shares of the
Company's common stock at an exercise price of $15.15 per share, which were
subject to adjustment as described below (the Initial Warrants). Each investor
also received warrants to purchase additional shares of common stock (the
Additional Warrants) exercisable solely upon the occurrence of certain events,
as defined. The Additional Warrants expired under the original terms.
Under the terms of the Initial Warrant agreements, the shares to be issued
under the warrant were adjusted based on a calculation using the fair market
value of the Company's common stock in December 2000. Based on the market value
of the Company's common stock during December 2000, the warrants would have
been adjusted such that the investors would have had warrants representing in
excess of 80% of the Company's common stock.
As a result of this, the Company entered into an Exchange Agreement with the
parties on December 18, 2000, under which the institutional investors agreed to
exchange the Initial Warrants for new warrants to purchase up to a total of
2,800,000 shares of the Company's common stock for $0.01 per share and for
contingent promissory notes from the Company totaling $1,000. The warrants to
purchase common stock had a contractual life of approximately four years,
expiring December 31, 2004. The principal of the notes, subject to certain
conditions, in addition to interest (payable at 9%) was due and payable on
December 31, 2001. As the Company maintained an effective registration
statement and the average closing price for shares of the Company's common
stock on the last 20 days of the year exceeded $3.00 per share, the notes were
cancelled. The Company had recorded the notes payable issued as part of the
exchange for the outstanding warrants at fair value in the accompanying
consolidated financial statements. The Company recognized the corresponding
change in fair value of income of $875 and an expense of $75 as other expense
in the Company's consolidated statements of operations for the years ended
December 31, 2001 and 2000, respectively.
In accordance with EITF Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, the
Company had determined that these outstanding warrants to purchase 2,800,000
shares of the Company's common stock should be designated as a liability as a
result of warrant holders having rights that rank higher than common
stockholders. As required by the Exchange Agreements, ON filed a registration
statement on Form S-3 covering the resale of the Warrant Shares, which
registration statement had been declared effective by the Securities and
Exchange Commission (SEC). If such registration statement were not available
for resales of the Warrant Shares during the two-year period commencing with
its effective date for any reason outside of the control of the Investors, ON
would have had to pay each institutional investor a penalty in an amount equal
to $7.5 for each day such registration statement is not effective. Accordingly,
the outstanding warrants were recorded at fair value, as determined by the
Black-Scholes Option Pricing model, at each exercise and reporting period date
with any changes in the fair value included in the results of operations. On
December 18, 2000, the Company calculated the fair value of these warrants,
using the Black-Scholes option pricing model, at $1,910 and recorded a
corresponding liability. On December 22, 2000, the warrant holders exercised
approximately 672,000 warrants. On December 31, 2000, the warrants were
revalued again using the Black-Scholes pricing methodology. The Company
recognized $548 related to a gain in the valuation of the warrants, which is
included in other income (loss) in the Company's consolidated statements of
operations for the year ended December 31, 2000.
On June 28, 2001, the Company entered into amendments to the Exchange
Agreements with both institutional investors which, among other things, deleted
the covenants requiring the Company to maintain the effectiveness of
registration statements on Form S-3 covering the resale of the New Warrant
Shares and replaced such covenants with covenants requiring the Company to use
best efforts to take all actions reasonably required
47
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except share and per-share data)
to maintain the effectiveness of such registration statement(s) and deleted all
financial penalties for failure to maintain the effectiveness of such
registration statement(s). As a result of the amendment to the Exchange
Agreements, the warrants meet the criteria of equity instruments in accordance
with EITF Issue No. 00-19. Therefore, on June 28, 2001, the amounts classified
as a liability of $1,934 were reclassified to additional paid-in capital in the
Company's accompanying condensed consolidated balance sheets. Prior to these
amendments, the Company had calculated the fair value of the warrants, using
the Black-Scholes Option Pricing model, and had recorded a net increase in fair
value during the year ended December 31, 2001 of $984 as a charge to other
income (loss), net in the accompanying consolidated statement of operations.
The average assumptions used in the above calculations were:
---------------------------------------------------
Term Approximately 4 years
---------------------------------------------------
Volatility Approximately 143%
---------------------------------------------------
Dividend Yield 0%
---------------------------------------------------
Risk Free Interest Rate Approximately 6.00%
---------------------------------------------------
Additional Warrants
On January 31, 2000, the Company granted 25,000 warrants to a consultant as
partial payment for recruiting services rendered. These warrants were fully
vested at the grant date and had an exercise price of $11.25. The warrants
expire on January 31, 2003. As this was for services rendered, the Company
recorded $210 of compensation expense relating to these warrants in 2000.
(7) Stock Option Plans
In July 1992, the Company adopted the 1992 Employee and Consultant Stock
Option Plan (the Plan). Pursuant to the Plan, as amended, the Company may grant
to employees and consultants of the Company statutory and non-statutory stock
options to purchase up to 7,000,000 shares of common stock as amended.
Typically employee grants are made at market and vest over a four-year term.
Options expire ten years from the date of grant. Consultants may receive
options with shorter vesting periods or below market exercise prices.
The Company's 1995 Directors Stock Option Plan (the "Director's Plan") was
adopted on May 18, 1995 and provides for the granting of options to purchase up
to 200,000 shares of common stock to directors who are not employees of the
Company.
As of December 31, 2001, an additional 1,804,983 shares were available under
the Company's stock option plans for future grants.
48
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except share and per-share data)
Stock option activity for the option plans was as follows:
Weighted
Average
Number of Exercise Price
Shares Per Share
--------- --------------
Outstanding, December 31, 1998 2,290,230 $2.45
Granted.................... 879,000 3.28
Exercised.................. (320,373) 1.97
Terminated................. (875,845) 2.71
--------- -----
Outstanding, December 31, 1999 1,973,012 2.78
Granted.................... 2,276,391 6.02
Exercised.................. (647,447) 1.05
Terminated................. (627,801) 3.26
--------- -----
Outstanding, December 31, 2000 2,974,155 5.53
Granted.................... 1,269,750 1.26
Exercised.................. (11,500) 0.82
Terminated................. (866,827) 3.08
--------- -----
Outstanding, December 31, 2001 3,365,578 $4.56
========= =====
Exercisable, December 31, 2001 1,117,979 $4.53
========= =====
Exercisable, December 31, 2000 751,050 $3.18
========= =====
Exercisable, December 31, 1999 539,587 $2.64
========= =====
The following table presents weighted average price and remaining
contractual life information about significant option groups outstanding and
exercisable at December 31, 2001.
Options Outstanding Options Exercisable
--------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
- ----------------- ----------- ------------ -------------- ----------- --------------
$ 0.75 -- $ 1.25 386,325 9.23 $ 0.85 49,687 $ 1.09
1.44 -- 2.00 957,226 8.17 1.52 240,311 1.68
2.06 -- 2.94 563,689 7.68 2.45 280,648 2.44
3.13 -- 3.81 550,491 7.79 3.68 288,760 3.57
6.31 -- 6.31 14,000 7.78 6.31 5,562 6.31
10.56 -- 12.00 893,847 8.08 11.27 253,011 11.28
--------- ---- ------ --------- ------
3,365,578 8.12 $ 4.56 1,117,979 $ 4.53
========= ==== ====== ========= ======
49
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except share and per-share data)
The following table presents the weighted average fair value of the options
at the date of grant for all options granted during the year and the
assumptions used in the calculation:
2001 2000 1999
----- ----- -----
Risk-free interest rate....................... 4.88% 6.20% 5.78%
Dividend yield................................ -- -- --
Expected lives................................ 7 7 7
Volatility.................................... 136% 145% 131%
Weighted average fair value per share of grant $1.17 $5.99 $3.10
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net loss and basic and diluted net loss per share would
have been further reduced to the following pro forma amounts:
2001 2000 1999
------- -------- -------
Net Loss............................ As Reported $(5,645) $ (9,436) $(1,999)
Pro Forma $(8,304) $(13,048) $(3,224)
Basic and Diluted Net Loss Per Share As Reported $ (0.34) $ (0.67) $ (0.16)
Pro Forma $ (0.51) $ (0.92) $ (0.26)
On October 21, 1999, the Company granted to three individual consultants
stock options to purchase a total of 100,000 shares of the Company's common
stock. These grants vested ratably on a quarterly basis over a one-year period,
which corresponded to the contractual life of the consulting relationship. In
accordance with SFAS No. 123 and EITF Issue No. 96-18, the Company calculated
the fair value of these options, at the date of grant, and, additionally,
re-measured the compensation expense at each interim reporting period date
during the vesting period, using the Black-Scholes option pricing model, with
average assumptions of approximately 127% for volatility, 0% for the dividend
yield and a risk-free interest rate of approximately 5.9% at the date of grant.
The Company recognized compensation expense of $82 and $156 during the years
ended December 31, 1999 and 2000, respectively.
On February 1, 2000, the Company granted to a consultant a stock option to
purchase a total of 125,000 shares of the Company's common stock. This option
vested ratably on a monthly basis over a one-year period, which corresponded to
the contractual life of the consulting relationship. In accordance with SFAS
No. 123 and EITF Issue No. 96-18, the Company calculated fair value of these
options, at the date of grant, and, additionally, re-measured the compensation
expense at each interim reporting period date during the vesting period, using
the Black-Scholes option pricing model, with average assumptions of
approximately 130% for volatility, 0% for the dividend yield and a risk-free
interest rate of approximately 6.2% at the date of grant. The Company
recognized compensation expense of $284 and $1 during the years ended December
31, 2000 and 2001, respectively.
On December 28, 2000, the Company granted to an officer fully vested options
to purchase 300,000 shares of the Company's common stock at an exercise price
of $0.10 per share. On December 28, 2000, the Company advanced the officer $30
to cover the exercise price, which was repaid in February 2001. Additionally,
the officer entered into a stock restriction agreement under which the officer
is subject to the certain restrictions that lapse through February 2004,
regarding the resale of the common stock issued upon exercise of the stock
options to the Company, as defined. The advance is included in prepaids and
other current assets as of December 31, 2000, in the accompanying consolidated
balance sheets. The excess of the fair market value of the Company's common
stock over the exercise price of the options on the date of the grant, totaling
$97, had been classified as deferred
50
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except share and per-share data)
stock-based compensation and included as a component of stockholders' equity in
the accompanying consolidated financial statements. The Company recognized
compensation expense of $32 during the year ended December 31, 2001.
On January 29, 2001, the Company granted to a consultant stock options to
purchase a total of 35,000 shares of the Company's common stock. This option
vested ratably over a six-month period, which conformed to the initial term of
the contractual life of the consulting relationship. In accordance with SFAS
No. 123 and EITF Issue No. 96-18, the Company calculated fair value of these
options, at the date of grant, and, additionally, re-measured the compensation
expense at each interim reporting period date during the vesting period, using
the Black-Scholes option pricing model, with average assumptions of
approximately 145% for volatility, 0% for the dividend yield and a risk-free
interest rate of approximately 4% at the date of grant. The Company recognized
compensation expense of $15 during the year ended December 31 2001.
The Company also recorded other compensation charges of $24 and $20 for
employee arrangements for the years ended December 31, 2001 and 2000,
respectively.
Additionally, in 2000, the Company recorded $22 in compensation cost offset
against the Meeting Maker gain as a result of accelerating the vesting period
for employees affected by the licensing of the product line to Meeting Maker,
Inc.
Employee Stock Purchase Plan
On May 18, 1995, the Company adopted the 1995 Employee Stock Purchase Plan
pursuant to which up to 1,000,000 shares of common stock may be issued. The
plan consists of semiannual offerings commencing on the first day the Company's
common stock was publicly traded and each subsequent offering commencing on
January 1 and July 1 of each year. The maximum number of shares of common stock
that may be purchased by an employee is determined on the first day of each
offering period, as defined. The price at which the shares are purchased is the
lower of 85% of the closing price on the first or last day of the offering
period. As of December 31, 2001, an additional 576,000 shares were available
under the plan for future purchase. During 2001, 2000, and 1999, the Company
issued 68,000, 144,000, and 122,000, respectively, under the plan.
(8) 401(k) Plan
In 1994, the Company established a plan under Section 401(k) of the Internal
Revenue Code (the 401(k) Plan) covering all eligible employees, as defined.
Participants in the 401(k) Plan may not contribute more than the lesser of
specified statutory amount or 15% of his or her pretax total compensation. The
401(k) Plan permits, but does not require, additional contributions to the
401(k) Plan by the Company. The Company made no contributions during 2001,
2000, and 1999.
(9) Accrued Expenses
Accrued expenses consisted of the following:
2001 2000
------ ------
Payroll and payroll related $1,842 $1,251
Taxes payable.............. 1,692 837
Other...................... 811 802
------ ------
$4,345 $2,890
====== ======
51
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except share and per-share data)
(10) Segment Reporting
The Company operated as one segment for 2001. Prior to June 30, 2000, the
Company had two reportable segments: Desktop Management and Groupware.
Management had organized the segments based on differences in products and
services because each segment required different technology and marketing
strategies. The Desktop Management segment included the ON Command CCM product
line, which developed, marketed and supported enterprise desktop management
products. The Groupware segment developed, marketed and supported real-time
group scheduling products. Since June 30, 2000, information with respect to the
Groupware segment is not included in the accompanying consolidated statements
of operations (see Note 2 for a discussion of the disposition of the Groupware
business).
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluated segment
performance based on gross margin from operations and did not capture segment
net income (loss) or segment assets.
The following table illustrates segment-operating data for prior years:
Desktop
Management Groupware Total
---------- --------- -------
2000
Net CCM and related products........... $16,073 $ -- $16,073
CCM and related service and maintenance 6,633 -- 6,633
Other.................................. 236 -- 236
Revenue--MMI........................... -- 3,405 3,405
------- ------ -------
Total revenue.......................... 22,942 3,405 26,347
Cost of revenue........................ 4,356 75 4,431
------- ------ -------
Gross margin........................... 18,586 3,330 21,916
1999
Net CCM and related products........... $17,993 $ -- $17,993
CCM and related service and maintenance 5,524 -- 5,524
Other.................................. -- -- --
Revenue--MMI........................... -- 7,360 7,360
------- ------ -------
Total revenue.......................... 23,517 7,360 30,877
Cost of revenue........................ 4,786 645 5,431
------- ------ -------
Gross margin........................... 18,731 6,715 25,446
52
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except share and per-share data)
The following table represents geographic information:
United
United Kingdom
States Germany and Other Elimination Total
------- ------- --------- ----------- -------
2001
Revenue from unaffiliated customers $ 6,952 $16,303 $ 963 $ -- $24,218
Transfers between geographic areas. -- 587 -- (587) --
------- ------- ------ -------- -------
Total Revenue...................... 6,952 16,890 963 (587) 24,218
Identifiable assets................ 20,334 12,196 3,174 (15,588) 20,116
2000
Revenue from unaffiliated customers $ 9,286 $16,588 $ 473 $ -- $26,347
Transfers between geographic areas. -- 612 -- (612) --
------- ------- ------ -------- -------
Total Revenue...................... 9,286 17,200 473 (612) 26,347
Identifiable assets................ 23,361 11,960 1,793 (18,743) 18,371
1999
Revenue from unaffiliated customers $14,036 $16,695 $ 146 $ -- $30,877
Transfers between geographic areas. 1,110 -- -- (1,110) --
------- ------- ------ -------- -------
Total Revenue...................... 15,146 16,695 146 (1,110) 30,877
Identifiable assets................ 56,685 7,807 1,348 (39,052) 26,788
Transfers between geographic areas are made on terms equivalent to an
arms-length transaction.
(11) Schedules of Valuation Reserves
A summary of the accounts receivable reserves is as follows:
Balance, Balance,
Beginning Charged to End of
of Year Operations Write-offs Other Year
--------- ---------- ---------- ----- --------
Year ended December 31, 1999 $ 954 $ 38 $1,026 $ -- $ 666
Year ended December 31, 2000 $ 666 $1,788 $ 397 $120(1) $2,177
Year ended December 31, 2001 $2,177 $ 40 $1,147(2) $ -- $1,070
- --------
(1) Relates to the reclassification of reserve for distributor inventories from
current liabilities.
(2) Relates primarily to the write-off of one major customer that was fully
reserved in 2000.
A summary of accrued restructuring is as follows:
Balance, Balance,
Beginning Charged to Non-Cash Cash End of
of Year Expense Write-offs Expenditures Year
--------- ---------- ---------- ------------ --------
Year ended December 31, 1999 $145 $-- $-- $(49) $96
Year ended December 31, 2000 $ 96 $-- $-- $(51) $45
Year ended December 31, 2001 $ 45 $-- $-- $(34) $11
53
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except share and per-share data)
(12) Selected Quarterly Information (unaudited)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
2001 ------- ------- ------- -------
Net CCM and related product revenue.................... $ 3,134 $ 3,450 $ 3,545 $ 5,059
CCM and related service and maintenance revenue........ 1,985 1,847 2,164 2,466
Other revenue.......................................... 118 450 -- --
Cost of CCM and related product revenue................ 482 861 655 1,174
Cost of CCM and related service and maintenance revenue 282 277 265 260
Gross Profit........................................... 4,473 4,609 4,789 6,091
Income (loss) from operations.......................... (2,005) (1,248) (1,970) 228
Allocation to MMI...................................... -- -- -- --
Net Income (loss)...................................... (3,708) (1,366) (1,694) 1,123
Net income (loss) per share--Basic..................... $ (0.24) $ (0.09) $ (0.11) $ 0.06
Net income (loss) per share--Diluted................... $ (0.24) $ (0.09) $ (0.11) $ 0.05
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
2000 ------- ------- ------- -------
Net CCM and related product revenue.................... $ 2,669 $ 3,057 $ 5,320 $ 5,027
CCM and related service and maintenance revenue........ 1,440 1,641 1,652 1,900
Revenue--MMI........................................... 1,609 1,796 -- --
Other revenue.......................................... -- -- 118 118
Cost of CCM and related product revenue................ 678 649 1,092 1,043
Cost of CCM and related service and maintenance revenue 184 237 216 257
Cost of revenue--MMI................................... 34 41 -- --
Gross Profit........................................... 4,822 5,567 5,782 5,745
MMI operating expenses................................. 935 1,224 -- --
Loss from operations................................... (2,665) (2,689) (1,314) (2,391)
Allocation to MMI...................................... (640) (531) -- --
Net loss............................................... (3,125) (3,094) (755) (2,462)
Net loss per share--Basic and Diluted.................. $ (0.22) $ (0.22) $ (0.05) $ (0.17)
54
Index to Exhibits
Exhibit No. Exhibit Title
- ----------- -------------
3.1.+ Fourth Amended and Restated Certificate of Incorporation of ON Technology Corporation,
incorporated by reference to exhibit 3.1 to the Company's Registration Statement on Form S-1
(Reg. No. 33-92562).
3.2.+ Amended and Restated By-Laws of ON Technology Corporation, incorporated by reference to
exhibit 3.2 to the Company's Registration Statement on Form S-1 (Reg. No. 33-92562).
10.1.*+ 1992 Employee and Consultant Stock Option Plan, as amended.
10.2.*+ 1995 Directors Stock Option Plan, incorporated by reference to exhibit 10.2 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-92562).
10.3.*+ 1995 Employee Stock Purchase Plan, as amended.
10.4.+ Second Restated Registration Rights Agreement dated June 1, 1994 by and among ON
Technology Corporation and the holders of its Series A, B and C Convertible Preferred Stock
and First Amendment thereto dated January 12, 1995, incorporated by reference to exhibit 10.4
to the Company's Registration Statement on Form S-1 (Reg. No. 33-92562).
10.5.*+ Employment Agreement dated May 18, 1995 by and between ON Technology Corporation and
Christopher A. Risley, incorporated by reference to exhibit 10.5 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-92562).
10.6.*+ Employment Agreement dated May 18, 1995 by and between ON Technology Corporation and
John A. Rizzi, incorporated by reference to exhibit 10.6 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-92562).
10.7.*+ Employment Agreement dated May 18, 1995 by and between ON Technology Corporation and
Loren K. Platzman, incorporated by reference to exhibit 10.7 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-92562).
10.9.*+ Employment Agreement dated May 18, 1995 by and between ON Technology Corporation and
John M. Bogdan, incorporated by reference to exhibit 10.9 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-92562).
10.10.*+ Employment Agreement dated May 18, 1995 by and between ON Technology Corporation and
James A. Batson, incorporated by reference to exhibit 10.10 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-92562).
10.11.*+ Form of Indemnity Agreement by and between ON Technology and its directors and executive
offices, incorporated by reference to exhibit 10.11 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-92562).
10.12.+ Lease dated July 9, 1993 by and between ON Technology Corporation and Boston Properties,
incorporated by reference to exhibit 10.12 to the Company's Registration Statement on Form
S-1 (Reg. No. 33-92562).
10.13.+ Sublease dated October 7, 1994 by and between On Technology Corporation and RSTAR
Corporation, incorporated by reference to exhibit 10.13 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-92562).
Exhibit No. Exhibit Title
- ----------- -------------
10.14.+ Lease entered into in August 1994 by and between ON Technology Corporation and Perimeter
Park West, incorporated by reference to exhibit 10.14 to the Company's Registration Statement
on Form S-1 (Reg. No. 33-92562).
10.15.+ Letter Agreement dated January 20, 1994 between Fleet Bank of Massachusetts, N.A. and ON
Technology Corporation, as amended by Loan Modification Agreement dated as of May 31,
1994, Second Loan Modification Agreement dated January 11, 1995 and Third Loan
Modification Agreement dated May 18, 1995, incorporated by reference to exhibit 10.15 to the
Company's Registration Statement on Form S-1 (Reg. No. 33-92562).
10.16.+ Software License Agreement among ON Technology Corporation and e.g. Software, Inc. dated
July 1, 1994, incorporated by reference to exhibit 10.16 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-92562).
10.17.+ Software License Agreement among ON Technology Corporation, Integrity Software, Inc. and
Integrity Software, Ltd. dated December 20, 1993, incorporated by reference to exhibit 10.17 to
the Company's Registration Statement on Form S-1 (Reg. No. 33-92562).
10.18+ Agreement by and between Database America Information Systems, Inc. and ON Technology
Corporation dated July 6, 1995, incorporated by reference to exhibit 10.18 to Amendment No. 1
to the Company's Registration Statement on Form S-1 (Reg. No. 33-92562).
10.19.*+ Directors and officers liability insurance policies issued by SteadFast Insurance Company and
Evanston Insurance Company incorporated by reference to exhibit 10.1 to the Company's
Quarterly report on Form 10-Q for the quarter ended September 30, 1995.
10.20.+ Asset Purchase Agreement by and between ON Technology Corporation and Elron Software, Inc.
dated October 29, 1997, incorporated by reference to the exhibit to the Company's Report on
Form 8-K as filed on January 9, 1998.
10.21+ Securities Purchase Agreement by and among ON Technology Corporation, Castle Creek
Technology Partners LLC and Marshall Capital Management Inc. dated December 29, 1999,
incorporated by reference to the exhibits to the company's Report on Form 8-K as filed on
January 3, 2000.
10.22+ ON Technology Corporation Stock Purchase Warrant dated December 29, 1999, incorporated by
reference to the exhibits to the Company's Report on Form 8-K as filed on January 3, 2000.
10.23+ ON Technology Corporation Stock Purchase Warrant (Reset) dated December 29, 1999
incorporated by reference to the exhibits to the Company's Report on Form 8-K as filed on
January 3, 2000.
10.24+ Registration Rights Agreement by and among ON Technology Corporation, Castle Creek LLC and
Marshall Capital Management Inc. dated December 29, 1999, incorporated by reference to the
exhibits to the Company's Report on Form 8-K as filed on January 3, 2000.
10.25+ Exchange Agreement by and between ON Technology Corporation and Castle Creek Technology
Partners LLC dated December 18, 2000, incorporated by reference to the exhibits to the
Company's Report on Form 8-K as filed on December 21, 2000.
Exhibit No. Exhibit Title
- ----------- -------------
10.26+ Exchange Agreement by and between ON Technology Corporation and Marshall Capital
Management, Inc. dated December 18, 2000, incorporated by reference to the exhibits to the
Company's Report on Form 8-K as filed on December 21, 2000.
10.27+ ON Technology Corporation Common Stock Purchase Warrant dated December 18, 2000 issued
to Castle Creek Technology Partners LLC, incorporated by reference to the exhibits to the
Company's Report on Form 8-K as filed on December 21, 2000.
10.28+ ON Technology Corporation Common Stock Purchase Warrant dated December 18, 2000 issued
to Marshall Capital Management, Inc, incorporated by reference to the exhibits to the
Company's Report on Form 8-K as filed on December 21, 2000.
10.29+ Promissory Note in the principal amount of $500,000 issued by ON Technology Corporation to
Castle Creek Technology Partners LLC, incorporated by reference to the exhibits to the
Company's Report on Form 8-K as filed on December 21, 2000.
10.30+ Promissory Note in the principal amount of $500,000 issued by ON Technology Corporation to
Marshall Capital Management, Inc, incorporated by reference to the exhibits to the Company's
Report on Form 8-K as filed on December 21, 2000.
10.31+ Mutual General Release between ON Technology Corporation and Castle Creek Technology
Partners LLC, incorporated by reference to the exhibits to the Company's Report on Form 8-K
as filed on December 21, 2000.
10.32+ Mutual General Release between ON Technology Corporation and Marshall Capital Management,
Inc, incorporated by reference to the exhibits to the Company's Report on Form 8-K as filed on
December 21, 2000.
10.33+* Stock Restriction Agreement between ON Technology Corporation and Robert L. Doretti,
incorporated by reference to exhibit 10.33 to the Company's Annual report on Form 10-K for
the year ended December 31, 2000
10.34+* Consulting Agreement between ON Technology Corporation and Robert L. Doretti, incorporated
by reference to exhibit 10.34 to the Company's Annual report on Form 10-K for the year ended
December 31, 2000
10.35+ Amendment to Exchange Agreement, Securities Purchase Agreement and Registration Rights
Agreement between On Technology Corporation and Marshall Capital Management, Inc.,
Company, incorporated by reference to exhibit 10.1 to the Company's Quarterly report on Form
10-Q for the quarter ended June 30, 2001.
10.36+ Amendment to Exchange Agreement, Securities Purchase Agreement and Registration
Rights Agreement between On Technology Corporation and Castle Creek Technology Partners,
LLC, Company, incorporated by reference to exhibit 10.1 to the Company's Quarterly report on
Form 10-Q for the quarter ended June 30, 2001.
10.37+ Purchase agreement by and among ON Technology Corporation, Special Situations Fund III, L.P.,
Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund, L.P., and Special
Situations Technology Fund, L.P., dated October 24, 2001, incorporated by reference to exhibit
99.1 to the Company's current Report on Form 8-K, filed with the Securities and Exchange
commission on November 2, 2001
10.38+ Registration Rights Agreement by and among ON Technology Corporation, Special Situations
Fund III, L.P., Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund,
L.P., and Special Situations Technology Fund, L.P dated October 24, 2001, incorporated by
reference to exhibit 99.2 to the Company's current Report on Form 8-K, filed with the
Securities and Exchange commission on November 2, 2001.
Exhibit No. Exhibit Title
- ----------- -------------
10.39+ Amended and Restated By-laws of ON Technology Corporation, incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Reg. No. 33-92562)
10.40+* 1995 Directors Stock Option Plan, as amended, incorporated by reference to exhibit 4.1 to the
Form S-8 filed on January 11, 2002
10.41+ Stockholders Voting Agreement by and among ON Technology Corporation, Special Situations
Fund III, L.P., Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund,
L.P., and Special Situations Technology Fund, L.P, effective as of November 28, 2001,
incorporated by reference to exhibit 4.5 to the Company's Company's Registration Statement
on Form S-1/, filed with the Securities and Exchange commission on January 28, 2002.
10.42*(greater than) Change of Control Agreement between ON Technology Corporation and Steven R. Wasserman.
10.43*(greater than) Engagement Agreement between ON Technology Corporation and Harald Faulhaber
21.0 Subsidiaries of the registrant.
23.1 Consent of Arthur Andersen LLP.
99.1 Letter to Commission Pursuant to Temporary Note 3T
+ Previously filed
* Management contracts or compensatory plans or arrangements covering executive
officers or directors of ON Technology Corporation.
(greater than) Agreement filed with this report