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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ to ________
Commission file number 0-26376
ON TECHNOLOGY CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 04-3162846
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(State of incorporation) (IRS Employer Identification Number)
880 Winter Street, Building Four
Waltham, Massachusetts 02451
(781) 487-3300
http://www.on.com
(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
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. [ ]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the closing sale price of the Company's common stock on
March 6, 2000, as reported by the Nasdaq National Market:
$190,636,590
Indicate the number of outstanding shares of each issuer's classes of common
stock as of March 6, 2000: Common Stock, par value $0.01 per share: 14,253,203
Form 10-K
DOCUMENTS INCORPORATED BY REFERENCE Reference
---------
(1) Definitive Proxy Statement for Annual Meeting for Part III
Shareholders Scheduled for April 28, 2000
(2) Definitive Proxy Statement for Special Meeting of Part III
Shareholders Scheduled for April 28, 2000
(3) Registration Statement No. 33-92562 on Form S-1, Part IV
as amended
(4) Registration Statement No. 333-95333 on Form S-3, Part IV
as amended
THIS DOCUMENT CONTAINS 51 PAGES.
THE EXHIBIT INDEX IS ON PAGE 47.
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PART I
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ITEM 1
BUSINESS
THE COMPANY
The Company's current business consists of two product categories: Client
Management products, including CCM, and MeetingMaker. CCM is marketed directly
to corporations with very large local or wide area networks, using
enterprise-oriented direct sales and support teams.
The Company was founded in 1985 and entered the communications software
market in 1990, believing that the rapid proliferation of new client operating
systems (Windows, DOS, Macintosh and OS/2, among others) would create
heterogeneous networks of various types and generations of personal computers
running the latest as well as older operating systems. The Company believed that
these heterogeneous networks would create a demand for communications software
products that run on leading edge as well as on less advanced hardware
platforms. The Company began shipping e-mail products in 1990, and in 1993
expanded its product line to group scheduling software with the acquisition of
substantially all of the assets of ON Technology, Inc. The Company entered the
software metering business by obtaining the exclusive worldwide rights to
SofTrack in December 1993. The Company expanded its e-mail offerings with the
acquisition of Davinci Systems Corporation in 1994. In August of 1995, the
Company completed an initial public offering of 2,360,000 shares of its Common
Stock resulting in net proceeds of $31,647,000. In the first quarter of 1996,
the Company entered the firewall software and anti-virus software business
through the acquisitions of neTrend Corporation and Leprechaun Software
International, Ltd., respectively and purchased the LAN software business from
Technocom plc. The Company began shipping ON Guard, the Company's firewall
software product, and Macro Virus Track, the Company's anti-virus software
product, during the second quarter of 1996. In January 1997, the Company entered
into the Internet usage monitoring and CCM businesses through two acquisitions.
On July 29, 1997, the Board adopted a restructuring plan whereby new
customer acquitions for the Company's Groupware, Network Management and Security
products were de-emphasized and those businesses began to be operated with the
objective of providing the cash flow required to support the CCM Business. On
October 29, 1997, the Company implemented additional restructuring measures,
including the closing or reducing of some foreign offices, while building up the
CCM software development group in Starnberg, Germany. At about the same time,
management identified a buyer for the Company's Network Management and Security
products, as well as its Free Trial Marketingsystem. The Company had offered the
buyer, Elron Software, Inc. ("Elron"), the Groupware products (then consisting
of Notework and DaVinci e-mail and Meeting Maker group scheduling) in addition
to the other assets; however, Elron did not express an interest in the Groupware
products. On October 29, 19997, an agreement was reached with Elron for the sale
of the Company's Network Management and Security product. This sale was
consummated following the affirmative vote of the Company's stockholders on
February 11, 1998.
In October 1998, the Board decided to discontinue the email products as of
December 31, 1998, but continue to service the customer base with support until
the end of 1999.
On January 6, 2000, the Company announced that it would seek shareholder
approval to sell its Meeting Maker product line along with related marketing
systems and organization (the "Assets") to Meeting Maker, Inc. In addition, on
January 6, 2000, the Company entered into a management agreement with Meeting
Maker, Inc., pursuant to which Meeting Maker, Inc. agreed to manage the Assets
for its benefit and at its risk and expense and to pay all salaries and other
employee related expenses with respect to the Assets and transferred employees.
BUSINESS OF THE COMPANY FOLLOWING THE MEETING MAKER TRANSACTION
The Company believes that the CCM Business offers opportunities for
long-term growth because CCM currently has technological advantages over the
products offered by the Company's principle competitors. The Company believes
2
that success in the CCM Business requires both superior technology and the
financial, marketing and human resources to provide the technology and related
services globally. Certain competitors of the Company have these necessary
resources, but the Company believes that their client management products do not
offer all of the technological advantages of CCM. Unlike most of the products
offered by the Company's competitors, CCM enables network administrators to
install operating system software as well as application software. To build upon
its technological base, the Company needs to develop its global resources,
either on its own or through strategic relationships with companies with
established global capabilities. Currently, the Company believes that there is
no company offering both global capabilities and the technological advances
offered by CCM.
CLIENT MANAGEMENT PRODUCTS
In many organizations, Information Technology ("IT") is increasingly viewed
as a strategic resource rather than simply as 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 (or risk being
outsourced). For example, reducing PC downtime is a major concern for many
organizations because downtime can quickly result in lost revenues or lost
customers due to the unavailability of mission-critical applications. The
dynamics of the current business and technology environment are also placing
significant demand on IT, such as the need to provide Internet or intranet-based
access to data, and to upgrade end-user PCs to high-end systems such as Windows
NT in order to provide end-users with more advanced functionality, security and
performance.
Traditionally, IT tasks such as PC software installation, configuration and
troubleshooting have been handled in a manual, hands-on manner. In many
organizations, this typically involves sending a technician with a CD-ROM drive
to a remote location, such as the manufacturing floor or the trading floor. In
addition, detailed information about end-user PC configurations -- such as
individualized parameters (e.g., username/password, IP address, default font),
list 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 in case of
hardware failure, user misconfiguration, or the addition of new software
packages.
CCM is an advanced and scalable software system for managing desktop PCs in
enterprise networks. CCM provides total desktop control from a central
administrative workstation, virtually eliminating the need to dispatch
technicians to implement common IT operations at the end-user desktop. For
example, CCM can remotely install operating system software, update client
application software, or reconfigure PC parameters such as IP addresses or
default screen resolution.
CCM is a scalable system that allows IT organizations to automate
repetitive and error-prone tasks and manage them on entire groups of PCs
simultaneously. Key benefits of CCM include significantly reduced Total Cost of
Ownership (TCO), enhanced quality of service for IT organizations, and the
ability to rapidly implement strategic enterprise-wide technology initiatives.
The target market for CCM is large organizations with greater than 200 PCs.
CCM is primarily sold and supported via a direct sales organization in the
United States, Germany, the United Kingdom and Scandinavia. In addition, the
Company is currently exploring partnerships with local resellers and systems
integrators outside of these areas, including France and Australia.
CCM's capabilities include:
o REMOTE INSTALLATION OF OPERATING SYSTEMS AND APPLICATIONS: CCM's
advanced Pre-OS Agent takes control of the PC regardless of its state,
allowing the system to reformat the disk and install operating systems
under central control -- even when the PC's hard disk is blank, has
been corrupted or misconfigured, or when the operating system or
network operating system ("NOS") is not operational. CCM can also be
used to implement enterprise-wide operating system
3
upgrades from Windows 3.x or OS/2 to Windows 95 or NT, or NT to Windows
2000, for example. In addition, CCM can be used to install application
software packages such as Office 2000, Lotus Notes, Netscape Navigator,
or Year 2000-compliant client-side versions of SAP R/3 Peoplesoft or
Oracle, for example.
o NATIVE INSTALL TECHNOLOGY: CCM installs software by remotely executing
standard vendor installation procedures on the target PC. This approach
is highly reliable because vendor procedures typically adapt in real
time to specific PC hardware and software configurations. In addition,
CCM's installation technology uses a parametric approach that makes it
extremely easy to create customized installations for individual users
or groups of uses, simply by modifying a parameter table used to drive
the installation process from the administrative console. In
comparison, traditional "snapshot" software installation approaches are
unreliable and difficult to customize because they blindly copy bulk
images or binary files to the target PC, based on an idealized hardware
and software configuration and particular set of installation choices.
o REMOTE CONFIGURATION OF DESKTOP PARAMETERS: CCM's Intelligent Desktop
Agents can remotely configure parameters such as IP or gateway
addresses, default printers, or application options such as default
fonts and URL home pages. In addition, these parameters are stored on
the central CCM server, so that they can be quickly reloaded in case of
failure or misconfiguration.
o SCALABLE ARCHITECTURE: CCM offers powerful grouping capabilities that
allow IT organizations to administer groups of PCs as single
administrative objects. For example, PCs can belong to one or multiple
groups based on hardware manufacturer, physical location, or functional
organization. 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.
o ENTERPRISE-CLASS ROBUSTNESS AND EASE-OF-USE: CCM offers a number of
capabilities for robust operation in enterprise environments, including
and- and post-installation dependency checking and detailed logging to
support automatic restart in case of network or power outages. An
intuitive Windows-based graphical user interface is used for
administering and monitoring the status of client management tasks, and
administering client configuration information.
o SUPPORT FOR INDUSTRY STANDARDS AND HETEROGENEOUS ENVIRONMENTS: CCM
supports standard servers (Sun Solaris, Microsoft Windows NT Server),
standard clients (DOS, Windows 3.x, Windows95, Windows NT Workstation,
Windows 2000) and standard networks (IP protocol, Ethernet
connectivity). The Company monitors evolving desktop management
standards closely and intends to support them when appropriate.
o OPEN ARCHITECTURE: CCM is based on an open architecture that allows
customers and partners to create customized software installation and
configuration procedures using the Command Line Interface, API or ON
Command Developers Studio.
MEETINGMAKER
MEETINGMAKER is a client/server, cross-platform network scheduling
application that automates the process of proposing meetings, coordinating
agendas, and securing meeting locations with the necessary equipment. Through
its cross-platform architecture, MeetingMaker can be run on Windows (Windows
3.1/95/NT), Macintosh, PowerMac, Unix, and OS/2 workstations -- or seamlessly on
any combination of these platforms in an integrated environment. MeetingMaker
supports networks running either TCP/IP, IPX, AppleTalk, NetBIOS -- or any
combination of these protocols. Large enterprise installations can use the
Windows NT or Unix server options to support thousands of users; workgroups
typically use a Windows, Macintosh or NetWare server platform. Using IP,
organizations can easily connect MeetingMaker servers around the world via the
Internet. With support for SMTP and MAPI,
4
MeetingMaker can easily send meeting notices to colleagues, customers, business
partners and vendors through many e-mail packages. Mobile users can use
MeetingMaker with their portable devices.
SALES AND MARKETING
Beginning late in 1996, the Company began its Enterprise Sales program.
This 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 direct sales and
support offices in Waltham, Massachusetts; New York, New York; Washington, D.C.;
Atlanta, Georgia; Chicago, Illinois; San Jose, California; London, England;
Berlin, Germany; Hamburg, Germany; Dusseldorf, Germany; and Munich, Germany.
The Company has a limited number of original equipment manufacturer ("OEM")
arrangements. Total revenue derived through these arrangements, however, is not
significant. The Company also attends trade shows and publishes quarterly
newsletters which are mailed to existing and prospective customers.
CUSTOMERS
The Company markets its products primarily to large and medium-size
corporate, government and institutional customers. Currently, only two customers
account for more than 10% of the Company's net revenue. For the twelve months
ended December 31, 1998, one customer accounted for $3.5 million, or 18% of net
revenue from the Company's current products. For the twelve months ended
December 31, 1999, two customers accounted for $7.6 million, or 24.5% of net
revenue. It is possible that the Company's change in marketing strategy will
result in other customers accounting for more than 10% of the Company's net
revenues.
CUSTOMER SUPPORT
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. On-site training is also available
on a case-by-case basis.
RESEARCH AND DEVELOPMENT
The Company's product development organization, currently consisting of 46
employees and additional full-time and part-time contract programmers, is
responsible for developing new products, adapting acquired products to fit the
ON product strategy and enhancing existing products. Generally, the Company's
contract programmers do not work exclusively for the Company. In addition, the
development organization provides free trial expiration technology, registration
technology and installation technology to third party developers who are
building products for license to ON.
A key element of the Company's research and development strategy is to make
its products available on platforms that are important to its customers. The
Company is currently extending some of its products to support OS/2, Windows 95,
Windows NT and two dialects of UNIX.
During product tests, ON dedicates staff from the support and sales
department to monitor alpha and beta sites and solicit detailed reports on
usability and errors occurring in customer environments. Many quality assurance
personnel have been recruited from the technical support department because they
are able to test products with greater awareness of the issues which might
confuse customers.
The Company's research and development expenses were approximately
$12,461,000, $9,044,000 and $9,952,000 for the fiscal years December 31, 1999,
1998 and 1997, respectively, in each case excluding charges for purchased
incomplete research and development projects. The Company's practice to date has
been to expense all software development costs as incurred.
5
COMPETITION
The market for the Company's products is highly competitive, and the
Company expects competition to increase in the future. The Company believes that
the principal competitive factors affecting the market for its products include
performance, functionality, quality, customer support, breadth of product line,
speed of product delivery, frequency of upgrades and updates, brand name
recognition, company reputation, adherence to industry standards, integration
with third-party solutions and price. Certain of the criteria upon which the
performance and quality of the Company's software compete include speed of
response, ease of use, interoperability with other software systems and
simplicity of administration.
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. 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 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 communications and network management software to
further enhance operating systems and to replace successfully any obsolete
products, the Company's business, condition (financial or otherwise), prospects
and results of operations would be materially and adversely affected.
The market for our products is highly competitive and diverse. The
technology for enterprise desktop management software 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:
o large and established companies such as Microsoft, Computer Associates
and IBM/Tivoli which offer client management capabilities as part of
their systems, network or desktop management systems
o software companies and others who provide application suites such as
Intel and Network Associates, whose products include client management
applications
o information technology and systems management companies such as IBM,
Computer Associates International, and Hewlett-Packard Company
o the internal information technology departments of those companies with
infrastructure management needs.
In addition, Microsoft has announced the Zero Administration Initiative for
Windows ("ZAW"), which includes a set of technologies that address some of the
same client management issues as CCM. Microsoft has described components of ZAW
as being available for the Windows 2000 operating system, as well as the
Microsoft Systems Management Server.
Some of our current and many of our potential competitors have much greater
financial, technical, marketing, and other resources than the Company has. 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 reater 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, operating results, and
financial condition.
6
OPERATIONS
The Company designs most of its product, marketing and sales materials
through the use of contracted services. Product orders for the Company's
Groupware products are fulfilled under contract with outside fulfillment
agencies. The balance of other sales and support calls are handled directly by
the Company.
EMPLOYEES
From December 31, 1998 to December 31, 1999, the number of Company
employees decreased from 185 to 157, primarily due to the reduction of the
number of employees supporting the Groupware products. 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's headquarters, located in Waltham, Massachusetts currently
occupies approximately (i) 24,496 square feet under a lease expiring June 30,
2002. The Company's Raleigh, North Carolina offices occupy approximately 6,900
square feet under a lease expiring February 28, 2002. This property has been
subleased to the American Diabetes Foundation. The Company's Starnberg, Germany
offices occupy 10,174 square feet pursuant to a lease expiring July 31, 2002.
The Company believes that the facilities currently leased by it are suitable and
adequate for the current operations of the Company. The Company utilizes
approximately 90% of its leased space.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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, 1999.
7
PART II
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ITEM 5
MARKET FOR THE 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
high and low closing sales prices for the common stock, all as reported by
Nasdaq.
HIGH LOW
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YEAR ENDED DECEMBER 31, 1999
First Quarter $2.9690 $1.3280
Second Quarter 2.4380 1.3125
Third Quarter 5.6562 1.9370
Fourth Quarter 13.8750 4.7500
YEAR ENDED DECEMBER 31, 1998
First Quarter 2.1250 1.1825
Second Quarter 4.5000 2.1250
Third Quarter 3.9375 1.8125
Fourth Quarter 2.0000 1.0313
YEAR ENDED DECEMBER 31, 1997
First Quarter 6.2500 3.5000
Second Quarter 4.2500 2.5000
Third Quarter 4.3750 2.5625
Fourth Quarter 3.7500 1.1563
As of March 6, 2000 there were approximately 5,700 stockholders of record 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. The Company's bank line of credit does
not contain any restrictions on the payment of dividends, unless the payment of
such dividends would result in a default thereunder.
8
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.
YEARS ENDED DECEMBER 31,
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1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Net product revenue $ 43,381 $ 50,165 $ 36,630 $ 15,089 $ 23,427
Other revenue 740 1,627 4,652 4,921 7,450
-------- -------- -------- -------- --------
Total revenue 44,121 51,792 41,282 20,010 30,877
-------- -------- -------- -------- --------
Operating expenses:
Cost of product revenue 8,199 11,951 9,315 3,890 5,431
Sales and marketing 20,984 24,176 22,172 10,715 13,396
Research and development 7,014 9,456 12,461 9,044 9,952
General and administrative 3,184 4,407 5,501 3,412 4,466
Charge for purchased incomplete research
and development -- 13,285 15,898 -- --
Charge for restructuring -- 5,415 10,940 -- --
Gain on sale of assets -- -- -- (6,518) --
-------- -------- -------- -------- --------
Income (loss) from operations 4,740 (16,898) (35,005) (533) (2,368)
Interest income (expense), net 554 1,134 233 325 153
Other income -- -- -- 20 216
-------- -------- -------- -------- --------
Income (loss) before provision for taxes 5,294 (15,764) (34,772) (1,999)
(188)
Provision for income taxes (1,622) (97) -- (27) --
-------- -------- -------- -------- --------
Net income (loss) $ 3,672 $(15,861) $(34,772) $ (215) $ (1,999)
======== ======== ======== ======== ========
Basic earnings (loss) per share $ 0.52 $ (1.46) $ (2.88) $ (0.02) $ (0.16)
======== ======== ======== ======== ========
Diluted earnings (loss) per share $ 0.40 $ (1.46) $ (2.88) $ (0.02) $ (0.16)
======== ======== ======== ======== ========
Basic weighted average shares outstanding 6,314 10,854 12,079 12,281 12,526
======== ======== ======== ======== ========
Diluted weighted average shares outstanding 9,087 10,854 12,079 12,281 12,526
======== ======== ======== ======== ========
DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(Dollars in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $33,338 $20,774 $ 6,679 $ 8,001 $16,941
Working capital 35,562 25,347 3,803 4,686 15,144
Total assets 50,173 44,142 17,382 14,669 26,788
Long-term obligations, less current portion 1,506 510 10 -- --
Redeemable convertible preferred stock -- -- -- -- --
Total stockholders' equity (deficit) 40,306 33,493 6,996 7,141 16,970
9
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
ON Technology Corporation and Subsidiaries (the "Company") is engaged in
the development, marketing, sales support, and distribution of Groupware and
Client Management software.
In 1997, the Company acquired all of the stock of csd Software GmbH, a
German developer and marketer of enterprise desktop management software, and
acquired the stock of Purview Technologies Inc., a development stage company
engaged in Internet usage monitoring software development.
On October 29, 1997, the Company announced that it would seek shareholder
approval to sell its Network Management and Network Security Business along with
related marketing systems and organization (the "Assets") to Elron Software Inc.
("Elron"), a wholly owned subsidiary of Elron Electronics Industries (the "Elron
Transaction"). In addition, on October 29, 1997, the Company entered into a
management agreement with Elron (the "Management Agreement"), pursuant to which
Elron agreed to manage the Assets for its benefit and at its risk and expense
and to pay all salaries and other employee related expenses with respect to the
Assets and transferred employees. As a result of the Management Agreement, the
associated revenues and costs of the Assets have been excluded from the
statement of operations since October 30, 1997. On February 11, 1998, the
Company consummated the Elron Transaction.
On December 30, 1999, the Company announced that it had completed a $12
million private placement of common stock and warrants to two institutional
investors. Each investor purchased 514,837 shares of common stock and received
warrants to purchase 257,419 shares of common stock at $15.15 per share. The
investors also received warrants to purchase additional shares of common stock
upon certain events.
On January 6, 2000, the Company announced that it would seek shareholder
approval to sell its Meeting Maker product line along with related marketing
systems and organization (the "Assets") to Meeting Maker, Inc. In addition, on
January 6, 2000, the Company entered into a management agreement with Meeting
Maker, Inc., pursuant to which Meeting Maker, Inc. agreed to manage the Assets
for its benefit and at its risk and expense and to pay all salaries and other
employee related expenses with respect to the Assets and transferred employees.
Upon shareholder approval, the Company will record the transaction as a
discontinued operation under APB 30.
10
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,
-------------------------
1997 1998 1999
-------- -------- -------
Revenue:
Net product revenue 88.7% 75.4% 75.9%
Other revenue 11.3 24.6 24.1
-------- -------- -------
Total revenue 100.0 100.0 100.0
-------- -------- -------
Operating expenses:
Cost of product revenue 22.6 19.4 17.6
Sales and marketing 53.7 53.6 43.4
Research and development 30.2 45.2 32.2
General and administrative 13.3 17.1 14.5
Charge for purchased incomplete
research and development 38.5 --- ---
Charge for restructuring 26.5 --- ---
Gain on sale of assets --- (32.6) ---
-------- -------- -------
Loss from operations (84.8) (2.7) (7.7)
-------- -------- -------
Interest income, net 0.6 1.6 0.5
Other income --- 0.1 0.7
-------- -------- -------
Net loss before provision for income taxes (84.2) (1.0) (6.5)
-------- -------- -------
Provision for income taxes --- (0.1) ---
-------- -------- -------
Net loss (84.2)% (1.1)% (6.5)%
======== ======== =======
NET PRODUCT REVENUE. The Company's net product revenue is derived primarily from
the licensing of software products. Net product revenue for the year ended
December 31, 1997, also included revenue from catalog sales of third party
products and catalog advertising space. The Company sold advertising space in
its catalog for cash or received third party advertised product. Revenue from
catalog advertising space for cash sales was recognized the day the catalog was
mailed to customers. Revenue from third party advertised product received was
recognized as each item was sold. Revenue from catalog advertising sales that
was recognized upon sale of third party products for the year ended December 31,
1997 was $902 thousand. As a result of the Management Agreement and the
subsequent consummation of the Elron Transaction, the Company has not received
since October 30, 1997, and will no longer receive revenue, from catalog product
sales and catalog ad page space. Net product revenue decreased 59% from 1997 to
1998, due primarily to products de-emphasized as part of the strategic
reorganizations and restructurings undertaken in 1997 and the consumation of the
Elron Transaction. Net product revenue increased 55% from 1998 to 1999, due to
growth in the Comprehensive Client Management (CCM) business. Total desktop
management growth was partially offset by a decrease in the groupware continuing
business. The Company anticipates that net product revenue will decrease due to
the Proposed Transaction.
OTHER REVENUE. The Company's other revenue consists of maintenance revenue,
training and professional services. Other revenue increased by 5.8% from 1997 to
1998 and 51.4% from 1998 to 1999. These increases were primarily attributable to
an increase in revenue from maintenance agreements and professional services.
The small revenue increase from 1997 to 1998 is due primarily to products
de-emphasized as part of the strategic reorganizations and restructurings
undertaken in 1997 and the consumation of the Elron Transaction. The large
revenue increase from 1998 to 1999 is due to the growth of the CCM business. The
Company anticipates that other revenue will decrease due to the Proposed
Transaction.
COST OF PRODUCT REVENUE. Cost of product revenue consists primarily of expenses
associated with product documentation, production and fulfillment costs, and
royalty fees associated with products that are licensed from third party
developers. In addition, cost of product revenue included the cost of third
party products resold through the Company's catalog, the cost of producing the
catalog and amortization of purchased intangibles. As part of the reorganization
of its operations announced in July 1997, the Company ceased to market, sell,
develop and support the anti-virus business and decreased its emphasis on the
investment in new customer acquisitions for its Groupware and Network Management
and Security businesses. As a result, the product inventory related to the
discontinued product lines and de-emphasized products were subsequently
identified and
11
written-off, all of which is included in cost of product revenue in the amount
of $849 thousand. Cost of product revenue decreased as a percentage of total
revenue from 22.6% in 1997 to 19.4% in 1998. This decrease was primarily the
result of decreased product revenue and the products de-emphasized as part of
the strategic reorganizations and restructurings undertaken in 1997 and the
consummation of the Elron Transaction. As part of the reorganization of its
operations announced in July 1997, the Company has ceased to market, sell,
develop and support the anti-virus business and decreased its emphasis on the
investment in new customer acquisitions for its Groupware and Network Management
and Security businesses. Cost of product revenue decreased as a percentage of
total revenue from 19.4% in 1998 to 17.6% in 1999. The slight change is due to
efforts taken in 1997 as described above.
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 administering
the catalog operation, the costs of public relations, trade shows and
conferences, and the telephone and information technology costs associated with
sales activities. Sales and marketing expense stayed relatively flat as a
percentage of total revenue from 53.7% in 1997 to 53.5% in 1998. However, sales
and marketing expense decreased in absolute dollars by $11.5 million from 1997
to 1998. This decrease is primarily a result of the reorganization of its
operations announced in July 1997, the Company has ceased to market, sell,
develop and support the anti-virus business and its decreased emphasis on the
investment in new customer acquisitions for its Groupware and Network Management
and Security businesses. Sales and marketing expense decreased as a percentage
of total revenue from 53.5% in 1998 to 43.4% in 1999. However, sales and
maketing expense increased in absolute dollars by $2.7 million from 1998 to
1999. The increase in absolute dollars was a result of increased direct sales
efforts in the CCM business and increased commissions due to increased CCM
revenue.
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 providing technical support.
Research and development expenses increased as a percentage of total revenue
from 30.2% in 1997 to 45.2% in 1998. The increase is associated with the costs
of product development, enhancements and maintenance relating to the CCM product
acquired in the acquisition of csd Software GmbH. The Company plans to continue
to make significant investments in research and development related to the CCM
business. Research and development expenses decreased as a percentage of total
revenue from 45.2% in 1998 to 32.2% in 1999. However, research and development
expenses increased in absolute dollars by $0.9 million from 1998 to 1999. The
increase in absolute dollars was a result of increased efforts in the CCM
business.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense includes
executive compensation and the continued administrative expense associated with
the Company's foreign operations, executive support costs, accounting
operations, planning, investor relations, and business development operations.
General and administrative expense increased as a percentage of total revenue
from 13.3% in 1997 to 17.1% in 1998. The percentage increase to total revenue
was primarily the result of decreased product revenue as a result of the
consummation of the Elron Transaction and products de-emphasized in the July
1997 restructuring and reorganization of the Company's opertations. However,
general and administrative expense decreased in absolute dollars by $2,089 from
1997 to 1998. The decrease is a direct result of the restructuring and
reorganization of the Company's operations. General and administrative expense
decreased as a percentage of total revenue from 17.1% in 1998 to 14.5% in 1999.
However, general and administrative expenses increased in absolute dollars by
$1.0 million from 1998 to 1999. The increase is primarily due to higher investor
relations charges as well as costs associated with the investigation of a former
officer.
CHARGE FOR PURCHASED INCOMPLETE RESEARCH AND DEVELOPMENT. In connection with the
acquisitions of Purview Technologies, Inc. and csd Software GmbH in 1997, the
Company allocated an aggregate of $15.9 million of the respective purchase
prices to incomplete research and development projects. These costs were
expensed as of the acquisition dates and the allocations represent the estimated
fair values related to the incomplete projects determined by appraisals using
appropriate assumptions and valuation techniques. The development of these
projects had not yet reached technological feasibility and the technology had no
alternative future use. The technology acquired in these acquisitions has
required substantial additional development by the Company. The Purview
acquisition was completed in January 1997 and a commercially viable product was
shipped in September 1997. The product development investment in the Purview
technology made by the Company from the date of acquisition through September
1997 was $0.4 million. The csd acquisition was completed in January 1997 and the
acquired company continued to ship its existing technology. In August 1997, the
Company first shipped the CCM product based on the acquired technology and on a
Windows NT Advanced Server. The product development investment made by the
Company from the date of acquisition through August 1997 was approximately $1.5
million. CCM uses client/server architecture that was incomplete at the time of
the acquisition. CCM development continues and a version of the product with an
open API for
12
network management partners was shipped in the spring of 1998. The additional
product development investment required through the spring of 1998 was $3.2
million.
CHARGE FOR RESTRUCTURING. On July 29, 1997, the Company announced that it had
implemented a reorganization of its operations and a restructuring plan (the "97
Plan"). The 97 Plan included write-offs and write-downs of certain assets,
including accruing the costs related to a significant reduction in the
workforce, primarily in the technical support and sales and marketing
departments. In addition, the Company exited from the anti-virus business and
de-emphasized its investment in new customer acquisitions for the Company's
Groupware and Network Management and Security businesses. As a result of the 97
Plan, the Company recorded a restructuring charge of $4.5 million. Included in
the 97 Plan was an additional inventory write-down of $849 thousand which is
included in cost of product revenue in accordance with Emerging Issues Task
Force (EITF) 96-9, CLASSIFICATION OF INVENTORY MARKDOWNS AND OTHER COSTS
ASSOCIATED WITH A RESTRUCTURING.
On October 29, 1997, the Company announced it would refocus its
international sales organization to concentrate on the Desktop Management
Business and would close its offices in Sydney, Paris and London, while
strengthening its presence in Starnberg, Germany. As a result, the Company
recorded a restructuring charge related to the write-off and write-down of
certain assets, accruing the costs related to the reduction of its international
workforce (excluding csd Software GmbH) primarily in the technical support and
sales and marketing departments and accruing the associated costs with closing
its international locations (excluding csd Software GmbH). As a result, the
Company recorded a restructuring charge of $6.4 million.
GAIN ON SALE OF ASSETS. In connection with the Elron Transaction, the Company
received net proceeds of $8.8 million and incurred $550 thousand of direct
transaction costs. Pursuant to the Elron Transaction, the Company sold assets
that had a carrying value of $1.8 million, and recorded a gain of $6.5 million
during 1998.
INTEREST INCOME, NET. Interest income, net increased as a percent of total
revenue from 0.6% in 1997 to 1.6% in 1998. The increase is primarily a result of
the decline in revenue from 1997 to 1998 and an increased cash balance due to
the consummation of the Elron Transaction during the first quarter of 1998.
Interest income, net decreased as a percent of total revenue from 1.6% in 1998
to 0.5% in 1999. This decrease is due to a 54.3% increase in net revenue from
1998 to 1999 and lower cash levels during 1999.
OTHER INCOME. Other income in 1998 resulted from the gain on sale of equipment
sold during the year. Other income in 1999 resulted from an insurance claim.
INCOME TAXES. In the year ended December 31, 1997 and 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 Company recorded a book gain on the
Sale of Assets to Elron; however, for tax purposes the Company recognized an
ordinary loss on this transaction. The provision for 1998 represents additional
minimum taxes owed.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through private
and public placements of capital stock and the net proceeds received from the
Elron transaction. At December 31, 1997, 1998, and 1999 the Company had
available cash and cash equivalents of $6.7 million, $8.0 million, and $16.9
million, respectively, and working capital of $3.8 million, $4.7 million, and
$15.1 million, respectively. As of December 31, 1999, the Company has a $1.0
million letter of credit guarantee outstanding for a subsidiary against a line
of credit with a foreign bank and a $0.7 million letter of credit guarantee
outstanding securing our new facility lease.
Net cash used in operating activities for the years ended December 31,
1997, 1998 and 1999 was $5.3 million, $5.6 million, and $2.0 million,
respectively. In 1997, net cash used in operating activities consisted of a
$34.8 million loss from operations which was the result of a $15.9 million
charge for purchased incomplete research and development relating to the
acquisitions of Purview Technologies Inc and csd Software GmbH, a $5.0 million
charge for asset write-down related to restructuring charges, depreciation and
amortization of $3.4 million, and changes in assets and liabilities of $5.3
million. In 1998, net cash used in operating activities consisted mainly of a
net loss of $215 thousand combined with the gain on sale of assets of $6.5
million, which is offset by $1.6 million in depreciation and amortization, and
changes in assets and liabilities of $423 thousand. 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.
Net cash (used in) provided by investing activities for the years ended
December 31, 1997, 1998 and 1999 was ($8.6) million, $7.4 million, and $(1.1)
million, respectively. Direct costs in 1997 relate to the acquisition of csd
Software GmbH, and Purview Technologies Inc., of $5.8 million and $1.1 million,
respectively. The purchase of property and equipment in 1998 was offset by $8.3
million in proceeds from assets held for sale, net of transaction costs
pertaining to the Elron Transaction. The purchase of property and equipment in
1999 was $1.1 million.
Net cash (used in) provided by financing activities for the years ended
December 31, 1997, 1998 and 1999 was ($169) thousand, ($226) thousand, and $11.7
million, respectively. In 1997, this was a result of the exercise of stock
options of $28 thousand and the sale of stock under the Employee Stock Purchase
Plan of $73 thousand which were partially offset by the purchase of treasury
stock of $47 thousand and principal repayments of obligations under capital
leases of $223 thousand. In 1998, this was a result of the exercise of stock
options of $64 thousand, the sale of stock under the Employee Stock Purchase
Plan of $66 thousand and offset by the pricipal payments on obligations under
capital lease of $356 thousand. 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.
The Company believes that its existing cash balances, funds generated
from operations, and available borrowings under its line of credit will be
sufficient to finance the Company's operations through December 2000. In the
event the Company acquires one or more businesses or products, the Company's
capital requirements could increase substantially, and there can be no assurance
that additional capital will be available on terms acceptable to the Company, if
at all.
YEAR 2000 READINESS DISCLOSURE
As of the date of this filing, the Company has not incurred any
significant business disruptions as a result of year 2000 issues. However, while
no such occurrence has developed, year 2000 issues that may arise related key
suppliers and service providers may not become apparent immediately. The Company
has received assurances from key suppliers and service providers such as
financial institutions, our payroll service provider and our retirement plan
administrator as to their year 2000 readiness. The Company can provide no
assurance that we will not be adversely affected by these suppliers and service
providers due to noncompliance in the future.
14
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
THE SALE OF MEETINGMAKER WOULD ELIMINATE A HISTORICALLY SIGNIFICANT SOURCE OF
THE COMPANY'S CASH FLOW AND MAY RESULT IN CASH FLOW DEFICITS.
For the fiscal years ended December 31, 1998 and December 31, 1999,
respectively, MeetingMaker produced $7,530,000 and $7,361,000 in revenues,
$3,882,000 and $4,304,000 in operating profits, and significant cash flow. These
results positively impacted the Company's overall financial performance. In
addition, the cash flow generated by the MeetingMaker business was available to
support the activities of the CCM business which, historically, has been
unprofitable and had negative cash flow. For the fiscal years ended December 31,
1998 and December 31, 1999, respectively, the remaining businesses had operating
losses of $4,415,000 and $6,672,000, producing significant negative cash flow.
Management believes that, in the absence of substantial investment, for fiscal
2000 and thereafter MeetingMaker's operating profits and positive cash flow
would substantially diminish, if not disappear in their entirety. In contrast,
management believes that the CCM business will achieve operating profits and
positive cash flow at some time during fiscal 2000 and beyond. These
expectations form the basis of management's decision to divest the MeetingMaker
business. If these expectations turn out to be incorrect, especially insofar as
CCM is concerned, the Company may experience substantial cash flow deficits.
OUR CCM PRODUCT MARKETING STRATEGY DIFFERS FROM OUR PREVIOUS MARKETING STRATEGY
The target market for CCM is entirely different from the target market for
the Groupware products we had marketed and sold through our Free Trial Marketing
system prior to 1998. The target market for CCM consists primarily of large
corporations such as Deutsche Telekom, MCI Worldcom and AutoNation (all existing
CCM customers). CCM product sales per customer are generally in the range of
$20,000 to $500,000, as opposed to an average sale per customer for our
Groupware products of approximately $2,500. Sales of CCM products pose
significantly greater financial risks, and require greater up-front investments
in marketing, technical and financial resources, than sales of our historical
products. As a result, we have adopted a marketing strategy using a direct sales
force and in-field service organization. This strategy requires significant
investments in additional marketing and technical personnel, retraining of
existing personnel, ongoing product development and creation of an in-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 the CCM market.
For the twelve months ended December 31, 1998, one customer accounted for
$3.5 million, or 18% of net revenue from the Company's current products. For the
twelve months ended December 31, 1999, two customers accounted for $7.6 million,
or 24.5% of net revenue. It is possible that the Company's change in marketing
strategy will result in other customers accounting for more than 10% of the
Company's net revenues.
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 limited 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, operating
results, and financial condition.
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
15
offering similar or related functionality. In particular, we believe that a
market exists for integrated enterprise-wide infrastructure management
solutions. However, the existence of such a market is unproven. If such a market
does not fully develop, this could have a materially adverse effect on our
business, results of operations, and financial condition. 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, results of operations, and financial condition.
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, our position in
existing markets or other markets that we may enter can be eroded rapidly by
product advances. 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.
THE TECHNOLOGICAL REQUIREMENTS OF THE CCM PRODUCTS MAY PRESENT ADDITIONAL
CHALLENGES IN PRODUCT DEVELOPMENT WHICH, IF WE CANNOT MEET, MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS
The technological demands of the CCM products require a commitment of
significant ongoing financial, technical and personnel resources to product
development, training of service technicians and customer training. Because our
historical products were not as technologically sophisticated as CCM, we have
not to date made all of the required investment and have not proven that we can
develop and maintain the organization required to support such products. We
believe that our experience with CCM to date will provide a valuable base on
which to build the necessary financial, technical and personnel resources to
continue to sell, market, develop and support the CCM products. However, there
can be no assurance that we will be able to expand and develop our resources to
support CCM products.
CCM is typically larger and more complex than the products that we have
previously developed. Our ability to continue to enhance CCM 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.
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. If, for
technological or other reasons, we are unable to develop and introduce new and
improved products in a timely manner, our business, operating results, and
financial condition could be adversely affected.
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, operating results and financial condition
could be materially adversely affected.
IN THE FUTURE, INCLUSION OF FUNCTIONS PROVIDED BY CCM 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 CCM.
In
16
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 CCM software products to further enhance operating systems and to
successfully replace any obsolete products, our business, financial condition,
prospects and results of operations would be materially and adversely affected.
NEW PRODUCT INTRODUCTIONS AND THE ENHANCEMENT OF EXISTING PRODUCTS BY OUR
COMPETITORS COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS
The market for our products is highly competitive and diverse. The
technology for enterprise desktop management software 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.
We face competition from a number of sources, including:
o large and established companies such as Microsoft, Computer Associates
and IBM/Tivoli which offer client management capabilities as part of
their systems, network or desktop management systems;
o software companies and others who provide application suites such as
Intel and Network Associates, whose products include client management
applications;
o information technology and systems management companies such as IBM,
Computer Associates International, and Hewlett-Packard Company; and
o the internal information technology departments of those companies with
infrastructure management needs.
In addition, Microsoft has announced the Zero Administration Initiative for
Windows ("ZAW"), which includes a set of technologies that address some of the
same client management issues as CCM. Microsoft has described components of ZAW
as being available for the Windows 2000 operating system, as well as the
Microsoft Systems Management Server.
Some of our current and many of our potential competitors have much greater
financial, technical, marketing, and other resources than ON has. 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 we can. We may not
be able to compete successfully against current and future competitors. In
addition, competitive pressures faced by ON may materially adversely affect our
business, operating results, and financial condition.
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.
SYSTEM MANAGEMENT COMPANIES MAY ACQUIRE ENTERPRISE DESKTOP MANAGEMENT PROVIDERS
AND CLOSE THEIR SYSTEMS TO OUR PRODUCTS, WHICH COULD HURT OUR ABILITY TO SELL
OUR PRODUCTS
Our ability to sell our products depends in part on their compatibility
with and support by providers of system management products, including Tivoli,
Computer Associates, and Hewlett-Packard. Both Tivoli and Hewlett-Packard have
recently acquired providers of help desk software products. These providers of
system management products may decide to close their systems to competing
vendors like us. They may also decide to bundle their infrastructure management
and/or
17
help-desk software products with other products for enterprise licenses for
promotional purposes or as part of a long-term pricing strategy. If that were to
happen, our ability to sell our products could be adversely affected. Increased
competition may result from acquisitions of help desk and other infrastructure
management software vendors by system management companies. The results of
increased competition, including price reductions of our products, reduced gross
margins, and reduction of market share, could materially adversely affect our
business, operating results, and financial condition.
DUE TO THE TECHNOLOGICAL CHALLENGES ASSOCIATED WITH CCM, WE MAY NOT HAVE THE
FINANCIAL RESOURCES NECESSARY TO CONDUCT THE BUSINESS AS PRESENTLY CONTEMPLATED
Our product development, marketing and sales costs for the CCM products are
approximately $1,250,000 to $1,750,000 per month. We believe that we have enough
cash to fund these costs through December 31, 2000, whether or not we complete
the sale of the MeetingMaker product. 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 locate additional sources of financing, if and
when needed.
OUR INCREASING RELIANCE ON INTERNATIONAL REVENUE COULD ADVERSELY AFFECT OUR
OPERATING RESULTS
In and fiscal 1999, total revenue from international licenses (license
revenue from outside the United States) represented approximately 54% of our
total revenue. For the fiscal year 2000 and thereafter, we expect that
international revenue may constitute a significantly greater portion of our
total revenue. Accordingly, a greater 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 its 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 in Europe, 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, operating results, and financial condition 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 one
month forward-rate currency contracts. However, our hedging activities may not
adequately protect us against the risks associated with foreign currency
fluctuations.
On January 1, 1999, certain member states of the European Economic
Community, the EEC, fixed their respective currencies to a new currency, the
euro. On that date, the euro became a functional legal currency within these
countries. During the three years beginning on January 1, 1999, business in
these EEC member states will be conducted in both the existing national
currencies, such as the French franc or deutsche mark, and the euro. Companies
operating in or conducting business in EEC member states will need to ensure
that their financial and other software systems are capable of processing
transactions and properly handling the existing currencies, as well as the euro.
We are still assessing the impact that the euro will have on our internal
systems and our products. We will take corrective actions based on the results
of such assessment. We have not yet determined the costs related to this
problem. Issues related to the introduction of the euro may materially adversely
affect our business, operating results, and financial condition.
18
WE HAVE A HISTORY OF LOSSES, WE CANNOT PREDICT OUR FUTURE OPERATING RESULTS AND
WE CANNOT ASSURE OUR CONTINUED PROFITABILITY
Through December 31, 1999, we have recorded cumulative net losses of
approximately $57.7 million. In addition, our products and marketing strategy
have changed substantially since the mid-1990s. We have acquired or developed a
significant number of products in the last five years. As a result, prediction
of our future operating results is difficult, if not impossible. There can be no
assurance that we will become or remain profitable on a quarterly or annual
basis. In addition, we do not believe that the growth in revenues we have
experienced in recent years is necessarily indicative of future revenue growth
or future operating results.
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:
o our ability to develop, introduce and market new and enhanced versions
of our software on a timely basis;
o market demand for our software; the size, timing and contractual terms
of significant orders;
o the timing and significance of new software product announcements or
releases by ON or our competitors; changes in our pricing policies or
our competitors;
o changes in our business strategies; budgeting cycles of our potential
customers;
o changes in the mix of software products and services sold;
o reliance on indirect sales forces like systems integrators and
channels;
o changes in the mix of revenues attributable to domestic and
international sales; and
o the impact of acquisitions of competitors; seasonal trends; the
cancellations of licenses or maintenance agreements; product life
cycles; software defects and other product quality problems; and
personnel changes.
We have often recognized a substantial portion of our revenues in the last
month or weeks of a quarter. As a result, license revenues in any quarter are
substantially dependent on orders booked and shipped in the last month or weeks
of that quarter. Due to the foregoing factors, quarterly revenues 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 revenues in any given quarter can be adversely
affected as a result of such unpredictability. In the event of any downturn in
potential customers' businesses or the economy in general, planned purchases of
our products may be deferred or canceled, which could have a material adverse
effect on our business, operating results and financial condition.
OUR CONCENTRATION ON THE CCM BUSINESS REPRESENTS A NEW DIRECTION FOR OUR
BUSINESS AND PROBLEMS WITH THE IMPLEMENTATION OF THIS STRATEGY MAY ADVERSELY
AFFECT OUR BUSINESS
On January 3, 2000, we entered into an agreement to sell our Groupware
business to Meeting Maker, Inc. These actions were designed to focus us on CCM
and end our involvement with the Groupware business. We cannot be sure that our
new corporate strategy will be successfully implemented. Furthermore, we cannot
be sure that we will not engage in further reorganizations or restructurings in
the future.
19
OUR SALES CYCLE IS LONG AND UNPREDICTABLE, AND POTENTIAL DELAYS IN THE CYCLE
MAKE OUR REVENUES 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 which 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, operating results and financial
condition.
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 revenues 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 revenues comprise a significant percentage of our total
revenues, 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:
o difficulty in combining the technology, operations, or work force of
the acquired business;
o disruption of on-going businesses;
o difficulty in realizing the potential financial and strategic position
of ON through the successful integration of the acquired business;
o difficulty in maintaining uniform standards, controls, procedures, and
policies;
o possible impairment of relationships with employees and clients as a
result of any integration of new businesses and management personnel;
o difficulty in adding significant numbers of new employees, including
training, evaluation, and coordination of effort of all employees
towards our corporate mission;
o diversion of management attention;
o difficulty in obtaining preferred acquisition accounting treatment for
these types of transactions; likelihood that future acquisitions will
require purchase accounting resulting in increased intangible assets
and goodwill, substantial amortization of such assets and goodwill, and
a negative impact on reported earnings; and
o 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.
20
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR CCM BUSINESS IN RECENT PERIODS,
AND OUR ABILITY TO MANAGE THIS GROWTH AND ANY FUTURE GROWTH WILL AFFECT OUR
ABILITY TO ACHIEVE AND MAINTAIN PROFITABILITY
We have grown significantly in recent periods, with total CCM revenues
increasing from $8.6 million in fiscal 1997, to $11.3 million in fiscal 1998,
and to $23.5 million in fiscal 1999. If we achieve our 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. In particular, in connection with
acquisitions, we will be required to integrate additional personnel and to
augment or replace existing financial and management systems. Such integration
could disrupt our operations and could adversely affect our financial results.
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, operating
results, and financial condition.
OUR BUSINESS DEPENDS IN LARGE PART UPON THE PROTECTION OF OUR PROPRIETARY
TECHNOLOGY THE LOSS OF WHICH WOULD HAVE A MATERIAL ADVERSE AFFECT 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 these shrink-wrap licenses
are not signed by the licensee, many authorities believe that they may not be
enforceable under many state laws and the laws of many foreign jurisdictions. If
such licenses are not enforceable, the user would not be bound by the license
terms, including the terms which 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, financial condition, 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, MeetingMaker, CCM, ON Command CCM, Notework, DaVinci
Systems, ON Technology & Design, ON Location and Instant Update. We have filed
for the trademark "ON Command CCM" in the European Community, Canada and
Australia. 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, financial
condition, 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, financial
condition, prospects and results of operations. In addition, since we may
acquire or license a portion of the software included in our future 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 being acquired. 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, financial condition, 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
21
these items could have a material adverse effect on our business, condition,
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. Additionally, our competitors may independently develop similar or
superior technology. 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, operating results, and financial condition.
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 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, operating results, and financial condition.
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 any 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 product liability
claim could materially adversely affect our business, operating results, and
financial condition.
OUR SENIOR MANAGEMENT AND OTHER KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS, AND
IF THEY CHOOSE TO LEAVE ON, 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, few of our employees are bound by an employment or noncompetition
agreement. 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, operating results and financial
condition.
22
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, operating results, and
financial condition could be materially adversely affected.
FUTURE CHANGES IN THE FEDERAL IMMIGRATION LAWS COULD LIMIT OUR ABILITY TO
RECRUIT AND EMPLOY SKILLED TECHNICAL PROFESSIONALS FROM OTHER COUNTRIES, AND
THIS COULD ADVERSELY AFFECT OUR BUSINESS AND OPERATING RESULTS
To achieve our business objectives, we must be able to recruit and employ
skilled technical professionals from other countries. Any future shortage of
qualified technical personnel who are either United States citizens or otherwise
eligible to work in the United States could increase our reliance on foreign
professionals. Many technology companies have already begun to experience
shortages of such personnel. Any failure to attract and retain qualified
personnel as necessary could materially adversely affect our business and
operating results. Foreign computer professionals such as those employed by us
typically become eligible for employment in the United States by obtaining a
nonimmigrant visa. The number of nonimmigrant visas is limited by federal
immigration law. Currently, Congress is considering approving an increase in the
number of visas available. We cannot predict whether such legislation will
ultimately become law. We also cannot predict what effect any future changes in
the federal immigration laws will have on our business, operating results, or
financial condition.
BECAUSE ON'S OFFICERS AND DIRECTORS OWN A LARGE PORTION OF ON COMMON STOCK, THEY
MAY BE ABLE TO CONTROL MOST MATTERS REQUIRING STOCKHOLDER APPROVAL, AND THIS MAY
PREVENT OR DISCOURAGE POTENTIAL BIDS TO ACQUIRE ON
Based on shares outstanding as of March 6, 2000, ON's officers, directors,
and entities directly related to such individuals together beneficially own
approximately 10.14% of the outstanding shares of ON common stock. As a result,
ON's officers and directors may be able to control most matters requiring
stockholder approval, including the election of directors and the approval of
mergers, consolidations, and sales of all or substantially all of the assets of
ON. Such concentrated share ownership may prevent or discourage potential bids
to acquire ON unless the terms of acquisition are approved by such officers and
directors.
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 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 plans to issue any shares of
preferred stock.
23
ON is subject to the antitakeover 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
antitakeover provisions. ON has not "opted out" of the antitakeover 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:
o any shortfall in revenues or net income from revenues or net income
expected by securities analysts;
o announcements of new products by ON or our competitors;
o quarterly fluctuations in our financial results or the results of other
software companies, including those of our direct competitors;
o changes in analysts' estimates of our financial performance, the
financial performance of our competitors, or the financial performance
of software companies in general;
o general conditions in the software industry;
o changes in prices for our products or the products of our competitors;
o changes in our revenue growth rates or the growth rates of our
competitors;
o sales of large blocks of the ON common stock; and
o 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.
24
THE LOWER THE TRADING PRICE OF OUR STOCK, THE GREATER THE DILUTION WHICH
SHAREHOLDERS MAY EXPERIENCE AS A RESULT OF THE ISSUANCE OF WARRANTS TO CASTLE
CREEK TECHNOLOGY PARTNERS LLC AND MARSHALL CAPITAL MANAGEMENT INC.
The number of shares of Common Stock of the Company which must be issued
upon exercise of the Warrants issued to Castle Creek Technology Partners LLC and
Marshall Capital Management Inc. is tied to the fluctuating market price of the
Company's Common Stock:
o the lower the trading price of the Company's Common Stock on the
effective date of the registration statement filed by the Company on
Form S-3 (initially filed on January 25, 2000) and the lower the
average trading price for the fifteen trading days preceeding December
29, 2000, the greater the number of shares of Common Stock that must be
issued and the greater the dilution caused by these securities;
o the perceived risk of dilution may cause Castle Creek Technology
Partners LLC and Marshall Capital Management Inc. or other stockholders
to sell their shares, which would contribute to the downward movement
in stock price of the Common Stock; and
o the significant downward pressure on the trading price of the Common
Stock could encourage investors to engage in short sales, which would
further contribute to the downward spiraling price of the Common Stock.
THE ISSUANCE OF WARRANTS IN CONNECTION WITH THE PRIVATE PLACEMENT TRANSACTION ON
DECEMBER 29, 1999 MAY SUBJECT ON TO RISK OF DELISTING BY NASDAQ.
In late January 1999, NASDAQ released its guidance on "future priced
securities" and the necessity of ON to comply with NASDAQ's listing maintenance
requirements in issuing these securities. We believe that the issuance of the
warrants to Castle Creek Technology Partners LLC and Marshall Capital Management
Inc. in connection with the closing of the private placement transaction on
December 29, 1999 does not violate these criteria and that we are in compliance
with NASDAQ's listing maintenance criteria. However, in the event that NASDAQ
were to determine that the issuance of the warrants was in violation of the
NASDAQ listing maintenance requirement, or if we were otherwise unable to
continue to meet NASDAQ's listing maintenance requirements, NASDAQ may delist
the Company. Such delisting could have a material adverse effect on the price of
our common stock and the level of liquidity currently available to our
shareholders. We may not be able to satisfy these requirements on an ongoing
basis.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of December 31, 1999, the Company did not hold any market risk sensitive
instruments.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DOCUMENTS
The information required by this item is set forth at the end of this Form
10K.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 April 28, 2000.
ITEM 11. EXECUTIVE COMPENSATION
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 April 28, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 April 28, 2000.
ITEM 13. CERTAIN RELATIONSHIPS 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 April 28, 2000.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
Page
Number
------
Report of Independent Public Accountants.......................26
Consolidated Balance Sheets:...................................27
December 31, 1999 and 1998
Consolidated Statements of Operations:.........................28
Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity:...............29
Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows:.........................30
Years ended December 31, 1999, 1998 and 1997
Notes to the Consolidated Financial Statements.................32
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 47. 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: None were filed in the fourth quarter of 1999.
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1999 and 1998, 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, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ON Technology Corporation
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
---------------------------
Boston, Massachusetts
January 26, 2000
26
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
December 31,
-------------------------
1999 1998
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 16,941 $ 8,001
Accounts receivable, net of allowance
of $666 and $954, respectively 7,347 3,384
Inventories 92 74
Prepaid expenses and other current assets 582 755
-------- --------
Total current assets 24,962 12,214
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Computers and equipment 4,561 3,774
Furniture and fixtures 523 239
Equipment under capital leases -- 193
-------- --------
Less-Accumulated depreciation and amortization 3,442 2,370
-------- --------
1,642 1,836
-------- --------
Other assets and deposits 149 80
Purchased intangible assets, net of $1,999 and $1,539
of accumulated amortization, respectively 35 539
-------- --------
$ 26,788 $ 14,669
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,112 $ 4,409
Accrued expenses 1,655 1,257
Reserve for distributor inventories 120 120
Deferred revenue 3,931 1,742
-------- --------
Total current liabilities 9,818 7,528
-------- --------
Commitments (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, Authorized - 2,000,000 shares
Issued- none -- --
Common stock, $.01 par value - Authorized - 20,000,000 shares
Issued and outstanding - 13,848,164 shares and
12,376,095 shares, respectively 138 124
Additional paid-in capital 74,596 62,793
Accumulated deficit (57,694) (55,695)
Accumulated other comprehensive loss (23) (34)
Treasury stock (15,000 shares at cost) (47) (47)
-------- --------
Total stockholders' equity 16,970 7,141
-------- --------
$ 26,788 $ 14,669
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
27
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
For the Years Ended December 31,
Year ended December 31,
-------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
REVENUE:
Net product revenue $ 23,427 $ 15,089 $ 36,630
Other revenue 7,450 4,921 4,652
------------ ------------ ------------
TOTAL REVENUE 30,877 20,010 41,282
------------ ------------ ------------
OPERATING EXPENSES:
Cost of product revenue 5,431 3,890 9,315
Sales and marketing 13,396 10,715 22,172
Research and development 9,952 9,044 12,461
General and administrative 4,466 3,412 5,501
Charge for purchased incomplete research
And development -- -- 15,898
Charge for restructuring -- -- 10,940
Gain on Sale of Assets -- (6,518) --
------------ ------------ ------------
LOSS FROM OPERATIONS (2,368) (533) (35,005)
Interest expense (16) (71) (178)
Interest income 169 416 411
Other income 216 -- --
------------ ------------ ------------
LOSS BEFORE PROVISION
FOR INCOME TAXES (1,999) (188) (34,772)
Provision for income taxes -- (27) --
------------ ------------ ------------
NET LOSS $ (1,999) $ (215) $ (34,772)
============ ============ ============
Basic loss per share $ (0.16) $ (0.02) $ (2.88)
============ ============ ============
Diluted loss per share $ (0.16) $ (0.02) $ (2.88)
============ ============ ============
Basic weighted average shares outstanding 12,526,398 12,280,953 12,079,264
============ ============ ============
Diluted weighted average shares outstanding 12,526,398 12,280,953 12,079,264
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
28
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(In thousands)
Stockholder's Equity
-----------------------------------------------------------------
Common Stock
----------------
Number $.01 Additional
of Par Paid-in Deferred Accumulated Cumulative
Translation
shares value Capital Compensation Deficit Adjustment
----------------------------------------------------------------
Balance, December 31, 1996 11,008 $110 $55,637 $--- $(20,708) $88
Issuance of common stock in
connection with 1,150 12 6,535 --- --- ---
acquisitions
Sale of common stock under the
employee Stock 23 --- 73 --- --- ---
Purchase Plan
Exercise of common stock options 42 --- 28 --- --- ---
Deferred compensation related to
grants of common stock --- --- 392 (392) --- ---
options
Amortization of deferred
compensation related
to grants
of common stock options --- --- --- 163 --- ---
Purchase of treasury stock --- --- --- --- --- ---
Cumulative translation --- --- --- --- --- (123)
adjustment
Net loss --- --- --- --- (34,772) ---
Comprehensive loss --- --- --- --- --- ---
----------------------------------------------------------------
Balance, December 31, 1997 12,223 122 62,665 (35)
(229) (55,480)
Sale of common stock under the
employee Stock 58 1 65 --- --- ---
Purchase Plan
Exercise of common stock options 95 1 63 --- --- ---
Amortization of deferred
compensation related
to grants
of common stock options --- --- --- 229 --- ---
Cumulative translation --- --- --- --- --- 1
adjustment
Net loss --- --- --- --- (215) ---
Comprehensive loss --- --- --- --- --- ---
----------------------------------------------------------------
Balance, December 31, 1998 12,376 124 62,793 --- (55,695) (34)
Sale of common stock and
warrants,
net of $1,039 of 1,030 10 10,951 --- --- ---
issuance costs
Sale of common stock under the
employee Stock 122 1 142 --- --- ---
Purchase Plan
Exercise of common stock options 320 3 628 --- --- ---
Deferred compensation related to
grants of common stock --- --- 82 (82) --- ---
options
Amortization of deferred
compensation related
to grants
of common stock options --- --- --- 82 --- ---
Cumulative translation --- --- --- --- --- 11
adjustment
Net loss --- --- --- --- (1,999) ---
Comprehensive loss --- --- --- --- --- ---
----------------------------------------------------------------
Balance, December 31, 1999 13,848 $138 $74,596 $--- $(57,694) $(23)
================================================================
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(In thousands)(continued)
Stockholder's Equity
-----------------------------------------------
Treasury Stock
--------------------
Number
of Comprehensive
shares Cost Total Loss
-------------------------------- --------------
Balance, December 31, 1996 (258) $(1,634) $33,493
Issuance of common stock in
connection with 258 1,634 8,181
acquisitions
Sale of common stock under the
employee Stock --- --- 73
Purchase Plan
Exercise of common stock options --- --- 28
Deferred compensation related to
grants of common stock --- --- ----
options
Amortization of deferred
compensation related
to grants
of common stock options --- --- 163
Purchase of treasury stock (15) (47) (47)
Cumulative translation --- --- (123) (123)
adjustment
Net loss --- --- (34,772) (34,772)
Comprehensive loss --- --- --- (34,895)
-------------------------------- ==============
Balance, December 31, 1997 (15) (47) 6,996
Sale of common stock under the
employee Stock --- --- 66
Purchase Plan
Exercise of common stock options --- --- 64
Amortization of deferred
compensation related
to grants
of common stock options --- --- 229
Cumulative translation --- --- 1 1
adjustment
Net loss --- --- (215) (215)
Comprehensive loss --- --- --- (214)
-------------------------------- ==============
Balance, December 31, 1998 (15) (47) 7,141
Sale of common stock and
warrants,
net of $1,039 of --- --- 10,961
issuance costs
Sale of common stock under the
employee Stock --- --- 143
Purchase Plan
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 --- --- 11 11
adjustment
Net loss --- --- (1,999) (1,999)
Comprehensive loss --- --- --- $ (1,988)
-------------------------------- ==============
Balance, December 31, 1999 (15) $(47) $16,970
================================
29
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,999) $ (215) $(34,772)
Adjustments to reconcile net loss
to net cash used in operating activities
Charge for purchased incomplete research and development -- -- 15,898
Asset write-down related to restructuring charge -- -- 4,975
Gain on sale of assets -- (6,518) --
Depreciation and amortization 1,726 1,580 3,384
Change in direct marketing costs -- -- 31
Amortization of deferred compensation 82 229 163
Change in net deferred income taxes -- -- 1,543
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (3,946) (443) 7,240
Inventories (18) 191 1,001
Prepaid expenses and other current assets 181 1,744 (827)
Accounts payable (633) (323) (1,402)
Accrued expenses 399 (2,460) 345
Reserve for distributor inventories -- (96) 12
Deferred revenue 2,189 735 (2,858)
-------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES (2,019) (5,576) (5,267)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in other assets and deposits (24) 1 5
Purchase of property and equipment, net (1,072) (878) (1,728)
Purchase of Purview Technologies, Inc, net of cash acquired -- -- (1,121)
Purchase of csd Software GmbH, net of cash acquired -- -- (5,781)
Proceeds from assets held for sale, net of transaction costs -- 8,273 --
-------- -------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,096) 7,396 (8,625)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock and
Warrants 10,961 -- --
Exercise of stock options 631 64 28
Sale of stock under the Employee Stock Purchase Plan 143 66 73
Purchase of treasury stock -- -- (47)
Principal repayments on obligations under capital lease (10) (356) (223)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 11,725 (226) (169)
-------- -------- --------
Effect of exchange rates on cash and cash equivalents 330 (272) (34)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,940 1,322 (14,095)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,001 6,679 20,774
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 16,941 $ 8,001 $ 6,679
======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
30
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(CONTINUED)
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Acquisition of Purview Technologies, Inc.
Fair value of assets acquired $ -- $ -- $ 2,379
Fair value of stock issued -- -- (1,139)
Liabilities assumed -- -- (107)
Cash acquired -- -- (12)
-------- -------- --------
Cash paid for acquisition and direct costs
net of cash acquired $ -- $ -- $ 1,121
======== ======== ========
Acquisition of csd Software GmbH
Fair value of assets acquired $ -- $ -- $ 17,949
Fair value of stock issued -- -- (7,042)
Liabilities assumed -- -- (5,100)
Cash acquired -- -- (26)
-------- -------- --------
Cash paid for acquisition and direct costs
net of cash acquired $ -- $ -- $ 5,781
======== ======== ========
Cash paid for-
Interest $ 16 $ 71 $ 178
======== ======== ========
Income taxes $ -- $ 37 $ 1,181
======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
31
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ON Technology Corporation and Subsidiaries (the "Company") is engaged in
the development, marketing, sales support, and distribution of software for
local area networks.
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
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
MANAGEMENT ESTIMATES AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenues and expense during the
reporting period. Actual results could differ from those estimates.
The Company is subject to a number of risks and uncertainties similar to
those of other companies of the same size within the software industry, change
in marketing strategy, competition, rapid technological changes, continued
financing, achieving profitability and dependence on key individuals.
REVENUE RECOGNITION
Revenue from software product sales is recognized upon shipment of the
product to customers where the Company has no significant vendor obligations in
accordance with American Institute of Certified Public Accountants Statement of
Position 97-2. During the year ended December 31, 1997, the Company sold
advertising space in its catalog for cash or received third party advertising
product. Revenue for catalog advertising space for cash is recognized the day
the catalog is mailed to customers. Revenue for third party advertised product
received is recognized as each item is sold. During the years ended December 31,
1999 and 1998, the Company did not earn revenue from sales of catalog
advertising space due to the sale of its catalog business to Elron Software,
Inc. (Elron) a wholly-owned subsidiary of Elron Electronics Industries (see Note
12). The deferred revenue balance at December 31, 1999 and 1998 relates
primarily to revenue on software maintenance contracts, which is recognized
ratably as it is earned. The reserve for distributor inventories balance at
December 31, 1999 and 1998 relates to sales to distributors for which the
Company has accrued its estimate of future distributor returns when the product
was shipped.
CASH AND CASH EQUIVALENTS
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES. The Company has classified its cash equivalents as held-to-maturity
and recorded them at amortized cost, which approximates market value. The
Company considers all highly liquid cash investments with maturities of three
months or less at the date of acquisition to be cash equivalents. Cash
equivalents consisted of commercial paper and money market funds at December 31,
1999 and 1998.
32
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of an estimate of the fair value of certain financial
instruments. The Company's financial instruments consist of cash equivalents and
accounts receivable. The estimated fair value of these financial instruments
approximates their carrying value at December 31, 1999 and 1998. The estimated
fair values have been determined through information obtained from market
sources and management estimates.
DIRECT MARKETING COSTS
As part of the sale of assets (see Note 12), the Company no longer
capitalized any direct marketing costs. For the year ended December 31, 1997,
the Company recorded $5,891 of direct marketing expense for costs capitalized in
accordance with the American Institute of Certified Public Accountants' (AICPA)
Statement of Position 93-7, REPORTING ON ADVERTISING COSTS.
DEPRECIATION
The Company provides for depreciation 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..................................... 3-7 Years
Furniture and fixtures...................................... 5-7 Years
Equipment under capital leases.............................. Life of lease
IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for its long-lived assets in accordance with SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF. At each balance sheet date, 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. Based on its most recent analysis, the Company
believes that no impairment of long-lived assets exists at December 31, 1999.
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 1999, 1998
and 1997 are insignificant and accordingly have been charged to research and
development. The Company has recorded charges for purchased incomplete research
and development related to the acquisitions discussed in Note 2. In each case,
the Company determined that technological feasibility of the in-process
purchased technology acquired had not been established and that the technology
had no alternative future use.
33
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOREIGN CURRENCY TRANSLATION
The Company translates the assets and liabilities of its foreign
subsidiaries at the exchange rates in effect at fiscal year-end in accordance
with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. Revenues and expenses are
translated using exchange rates in effect during each period.
POSTRETIREMENT BENEFITS
The Company has no obligations for postretirement benefits.
CONCENTRATION OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet concentrations
of credit. The Company's financial instruments that subject the Company to
credit risk consist of cash and cash equivalents and accounts receivable. The
Company maintains the majority of cash balances with two financial institutions.
The Company's accounts receivable credit risk is not concentrated within any
geographic area. During the year ended December 31, 1999, two customers
accounted for $7.6 million of desktop management revenue (see Note 11) or 24.5%
of consolidated revenues. During the year ended December 31, 1998, one customer
accounted for $3.5 million of desktop management revenue (see Note 11) or 18% of
consolidated revenues. During the year ended December 31, 1997, no single
customer accounted for greater than 10% of revenues or represented a signifcant
credit issue to the Company.
LOSS PER SHARE
The Company calculates loss per share in accordance with SFAS 128, EARNINGS
PER. 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 since the effect of stock options
would be anti-dilutive.
Anti-dilutive securities which consist of stock options and warrants, that
were not included in diluted loss per share were 1,093,250, 1,764,968 and
1,935,628 for the years ended December 31, 1999, 1998 and 1997, respectively.
COMPREHENSIVE LOSS
The Company adopted SFAS 130, "REPORTING COMPREHENSIVE INCOME",
effective January 1, 1998 and has disclosed comprehensive loss for all periods
presented in the accompanying consolidated statements of stockholder's equity
and comprehensive loss. SFAS 130 establishes standards for reporting and display
of comprehensive income (loss) and its financial statements. The Company's only
item of other comprehensive loss relates to cumulative translation adjustment,
and is presented separately on the balance sheet as required.
34
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NEW ACCOUNTING STANDARDS
In June 1999, Financial Accounting Standards Board ("FASB") issued SFAS No.
137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF
THE EFFECTIVE DATE of FASB Statement No. 133, which defers the effective date of
SFAS No. 133 to all fiscal years beginning after June 15, 2000. SFAS No. 133
ACCOUNTING FOR DERIVATIVE INSTRUMENTS ANd HEDGING ACTIVITIES, issued June 1998,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Company does not expect adoption of this
statement to have significant impact on its consolidated financial position or
results of operations.
(2) ACQUISITIONS
ACQUISITION OF PURVIEW TECHNOLOGIES, INC.
On January 24, 1997, the Company acquired all of the capital stock of
Purview Technologies, Inc., a company engaged in Internet access monitoring and
management software. The aggregate purchase price of $2,379 was allocated based
on the fair market value of the tangible and intangible assets acquired as
follows:
Current Assets................................................. $ 51
Purchased intangible assets, including acquired technology..... 210
Purchased incomplete research and development.................. 2,118
---------
$ 2,379
=========
As consideration, the Company paid $1,000 in cash and issued 205,251 shares
of common stock with a fair market value of $5.55 per share, assumed $107 in
liabilities, and incurred $133 in direct acquisition costs. This transaction was
accounted for as a purchase and accordingly, the results since January 24, 1997,
are included in the accompanying condensed consolidated financial statements
(see Note 12).
ACQUISITION OF CSD SOFTWARE GMBH (CSD)
On January 28, 1997, Wilma 96 Vermogensverwaltungs GmbH ("Wilma GmbH") a
wholly-owned subsidiary of the Company purchased all of the capital stock of
csd, a German corporation engaged in the development of PC desktop software
management tool products. The aggregate purchase price of $15,048 was allocated
based on the fair market value of the tangible and intangible assets acquired as
follows:
Purchased intangible assets, including acquired technology..... $ 1,268
Purchased incomplete research and development.................. 13,780
---------
$ 15,048
=========
As consideration, the Company paid $5,000 in cash and issued 1,253,854
shares of common stock of the Company with a fair value of $5.62, assumed $5,100
in liabilities, and incurred $734 in direct acquisition costs. This transaction
was accounted for as a purchase, and accordingly; the results since January 28,
1997, are included in the accompanying condensed consolidated financial
statements.
35
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
For all acquisitions in 1997, intangible assets are being amortized on a
straight-line basis over the estimated useful life not to exceed three years.
The portion of the purchase price allocated to incomplete research and
development projects that had not yet reached technological feasibility and did
not have any future alternative use was expensed as purchased incomplete
research and development as of the acquisition dates. The amounts allocated to
incomplete research and development projects represent the estimated fair value
related to these projects determined by an independent appraisal. Proven
valuation procedures and techniques were utilized in determining the fair value
of the purchased intangible assets. To bring these projects to technological
feasibility, high risk development and testing issues needed to be resolved
which required substantial additional effort and testing.
The Purview acquisition was completed in January 1997 and a commercially
viable product was shipped in September 1997. The product development investment
in the Purview technology made by the Company from the date of acquisition
through September 1997 was approximately $0.4 million. The csd acquisition was
completed in January 1997 and the acquired company continued to ship its
existing technology. In August 1997, the Company first shipped the CCM product
based on the acquired technology and on Windows NT Advanced Server. The product
development investment made by the Company from the date of acquisition through
August 1997 was approximately $1.5 million. CCM uses client/server architecture
that was incomplete at the time of the acquisition. CCM development continued
and a version of the product with an open API for network management partners
was shipped in the spring of 1998. The additional product development investment
required through the spring of 1998 was approximately $3.2 million.
(3) CHARGE FOR RESTRUCTURING.
On July 29, 1997, the Company announced that it had implemented a
reorganization of its operations and a restructuring plan (the "97 Plan"). The
97 Plan included write-offs and write-downs of certain assets, including
accruing the costs related to a 68 employee reduction in the workforce, of which
59 were in the technical support and sales and marketing departments. In
addition, the Company has exited from the anti-virus business and de-emphasized
its investment in new customer acquisitions for the Company's groupware, network
management and security businesses. As a result of the 97 Plan the Company
recorded a restructuring charge of $4,530. Included in the 97 Plan was an
additional inventory write-down of $849 which is included in cost of product
revenue in accordance with Emerging Issue Task Force 96-9.
The following are the significant components of the $4,530 charge for
restructuring:
Restructure Non-Cash Cash To Be
Charge Portion Disbursed Paid
------ ------- --------- ----
Employee severence, benefits and related costs $1,980 $ 350 $1,630 $ --
Write-off and write-down of assets to net
realizable value excluding inventory 1,346 1,346 -- --
Provision for costs in closing facilities 1,204 -- 1,108 96
------ ------ ------ ------
$4,530 $1,696 $2,738 $ 96
====== ====== ====== ======
The Company anticipates the remaining cash payments to be made over the life of
the facility lease which ends in 2001.
36
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On October 29, 1997, the Company announced that it would seek shareholder
approval to sell its Network Management and Network Security Business along with
related marketing systems and organization to Elron (see Note 12). Concurrently,
the Company announced that it would refocus its international sales organization
to concentrate on the Client Management Business and would close its offices in
Sydney, Paris and London, while strengthening its presence in Starnberg,
Germany. As a result, the Company recorded a restructuring charge related to the
write-off and write-down of certain assets, accruing the costs related to the 19
employee reduction of its international workforce (excluding csd) of which 9
were in the technical support and sales and marketing departments and accruing
the associated costs with closing its international locations (excluding csd).
The following are the significant components of the $6,410 charge for
restructuring:
Restructure Non-Cash Cash
Charge Portion Disbursed
------ ------ ------
Employee severence, benefits and related costs $ 762 $ -- $ 762
Write-off and write-down of assets to net
realizable value 3,600 3,280 320
Provision for costs in closing facilities 2,048 1,798 250
------ ------ ------
$6,410 $5,078 $1,332
====== ====== ======
(4) 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 basis of assets and liabilities, as
measured by the enacted tax rates assumed to be in effect when these differences
reverse. In the year ended December 31, 1999 and 1997, the Company incurred a
significant operating loss for both book and tax purposes and as a result no tax
provision was recorded. The Company recorded a book gain on the Sale of Assets
to Elron; however, for tax purposes the Company recognized an ordinary loss on
this transaction. The provision for 1998 represents additional minimum taxes
owed.
The components of domestic and foreign income (loss) before the provision for
income taxes are as follows:
1999 1998 1997
---------- ---------- ----------
Domestic $ (4,161) $ 941 $ (27,644)
Foreign 2,162 (1,129) (7,128)
---------- ---------- ----------
$ (1,999) $ (188) $ (34,772)
========== ========== ==========
37
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The components of the provision for income taxes are as follows:
1999 1998 1997
------- ------- -------
Current
Federal $ -- $ (27) $ (409)
State -- -- (72)
Foreign -- -- --
------- ------- -------
-- (27) (481)
Deferred
Federal -- -- (496)
State -- -- (87)
Foreign -- -- 1,064
------- ------- -------
-- -- 481
------- ------- -------
$ -- $ (27) $ --
======= ======= =======
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:
1999 1998
------------ ------------
Deferred tax asset ---
Purchased intangibles $ 3,819 $ 4,714
Other temporary differences 1,375 1,617
Net operating loss and tax credit carry-forwards 9,730 7,711
------------ ------------
14,924 14,042
Valuation allowance (14,924) (14,042)
------------ ------------
$ -- $ --
============ ============
The Company has placed a full valuation allowance against its net deferred
tax asset since the Company believes it is "more likely than not" that it will
not be able to utilize its deferred tax asset.
As of December 31, 1999, the Company has available Federal net operating
loss carry-forwards of $16,016. These carry-forwards expire through 2019 and are
subject to review and possible adjustment by the Internal Revenue Service. The
Tax Reform Act of 1997 contains provisions that may limit the amount of net
operating loss and credit carry-forwards 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.
A reconciliation of the federal statutory rate to the Company's effective tax
rate is as follows:
1999 1998 1997
--------- --------- ---------
Federal statutory rate (34.0%) (34.0%) (34.0%)
State taxes, net of federal benefit (6.2%) (6.2%) (6.2%)
Increase in valuation allowance 40.2% 54.6% 40.2%
--------- --------- ---------
Effective tax rate --- 14.4% ---
38
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(5) LINE OF CREDIT
As of December 31, 1999, the Company has a $1.0 million letter of credit
guarantee outstanding for a subsidiary against a line of credit with a foreign
bank and a $0.7 million letter of credit guarantee outstanding securing our new
facility lease. The Company has an unused and available line of credit of $5.0
million with a commercial bank. The Company can borrow under this line of credit
up to the greater of $5.0 million or the sum of 80% of qualified domestic
accounts receivable. Advances pursuant to the line of credit are secured by
liens granted on the Company's accounts receivable. At December 31, 1999 and
1998, the Company did not have an outstanding balance under the line of credit
agreement.
(6) COMMITMENTS
LEASES
The Company conducts its operations in leased facilities under operating
leases expiring at various times through 2003.
The approximate minimum annual lease payments under the operating leases are as
follows:
OPERATING
LEASES
-------------
2000................................................ $ 1,187
2001................................................ 1,058
2002................................................ 737
2003................................................ 33
-------------
$ 3,015
=============
Total rental expense included in the accompanying consolidated statements
of operations for the years ended December 31, 1999, 1998 and 1997 was $1,290,
$1,547 and $1,954, respectively.
ROYALTIES
The Company had entered into several software license agreements. These
agreements provided the Company with exclusive worldwide licenses to distribute
certain software products. The Company was required to pay royalties on all
related sales, subject to certain royalty targets to maintain exclusive
distribution rights to that software product. As a result of the software
products sold to Elron (see Note 12), the Company has no minimum royalty
requirement to maintain exclusive distribution rights as of December 31, 1999.
Total royalty expense included in the accompanying consolidated statements of
operations for the years ended December 31, 1999, 1998 and 1997 was $413, $252
and $1,412, respectively.
(7) STOCKHOLDERS' EQUITY
COMMON STOCK
The Company has 20,000,000 authorized shares of common stock $.01 par
value, of which 13,848,164 shares were issued at December 31, 1999.
39
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PREFERRED STOCK
The Company has 2,000,000 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, 1999.
Private Placement
In December 1999, the Company completed a $12,000 private placement of
common stock and warrants to two institutional investors. Each investor
purchased 514,837 shares of common stock and received warrants to purchase
257,419 shares of common stock at $15.15 per share exercisable for five years
upon issuance. In addition, the investors received warrants to purchase
additional shares of common stock upon certain events, as defined.
(8) STOCK OPTION PLANS
In July 1992, the Company adopted the 1992 Employee and Consultant Stock
Option Plan (the Plan). Pursuant to the Plan, the Company may grant to employees
and consultants of the Company statutory and nonstatutory stock options to
purchase up to 3,800,000 shares of common stock as amended.
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.
Stock option activity for the option plans was as follows:
NUMBER WGHT AVG
OF EXERCISE PRICE
SHARES PER SHARE
Outstanding, December 31, 1996....... 1,022,906 $ 7.57
Granted.......................... 2,124,689 2.39
Exercised........................ (41,537) 0.67
Terminated....................... (1,170,430) 6.49
------------- --------------
Outstanding, December 31, 1997....... 1,935,628 2.66
Granted.......................... 971,036 2.19
Exercised........................ (95,035) 0.67
Terminated....................... (521,399) 3.23
------------- --------------
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
============= ==============
Exercisable, December 31, 1999....... 539,587 $ 2.64
============= ==============
Exercisable, December 31, 1998....... 660,834 $ 2.90
============= ==============
Exercisable, December 31, 1997....... 219,274 $ 5.24
============= ==============
40
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table presents weighted average price and remaining contractual
life information about significant option groups outstanding and exercisable at
December 31, 1999.
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Wght Avg
Remaining Wght Avg Wght Avg
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
- ---------------------------------- -------------- -------------- ------------ ------------- ------------
$ 0.01 - $ 0.01 33,231 7.20 $ 0.01 33,231 $ 0.01
0.50 - 1.53 149,664 8.25 1.39 35,729 1.39
1.63 - 3.13 1,455,929 8.33 2.12 385,128 2.27
3.31 - 5.63 139,688 8.40 3.38 57,999 3.43
11.50 - 15.00 194,500 9.53 8.88 27,500 10.87
-------------- -------------
1,973,012 539,587
============== =============
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 ACCOUNTING FOR STOCK BASED COMPENSATION, which requires the measurement of
the fair value of stock options or warrants to be included in the statement of
operations or disclosed in the notes to the financial statements. The Company
has determined that it will continue to account for stock-based compensation for
employees under APB No. 25 and elect the disclosure-only alternative under SFAS
No. 123 for options granted after January 1, 1995 using the Black-Scholes option
pricing model prescribed by SFAS No. 123. The weighted average assumptions used
are as follows:
1999 1998 1997
-------- -------- --------
Risk-free interest rate...... 5.78% 5.28% 7.00%
Expected dividend yield...... --- --- ---
Expected lives............... 7 7 7
Expected volatility.......... 131% 128% 111%
Had compensation cost for these plans been determinnsistent with SFAS
No. 123, the Company's net loss and basic and diluted net loss per share would
have been reduced to the following pro forma amounts:
1999 1998 1997
------------- ------------- --------------
Net Loss As Reported $ (1,999) $ (215) $ (34,772)
Pro Forma (3,224) (1,400) (36,270)
Basic Net Loss Per Share As Reported (0.16) (0.02) (2.88)
Pro Forma (0.26) (0.11) (3.00)
Diluted Net Loss Per Share As Reported (0.16) (0.02) (2.88)
Pro Forma (0.26) (0.11) (3.00)
Because the method prescibed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The Company recorded $392 of deferred compensation during the year ended
December 31, 1997. The deferred compensation represented the excess of the fair
market value of the Company's common stock over the exercise price of certain
options on the date of the grant. Deferred compensation has been amortized to
compensation expense over the vesting period of each employee's stock option.
41
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
During the year ended December 31, 1999 the Company granted options to
certain nonemployees and recorded $82 of compensation expense in accordance with
SFAS No. 123. The Company will record additional compensation expense during the
year ended December 31, 2000.
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.
(9) 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 1999, 1998
or 1997.
(10) ACCRUED EXPENSES
Accrued expenses consisted of the following:
1999 1998
-------------- --------------
Payroll and payroll related ....... $ 1,183 $ 784
Restructuring...................... 96 145
Other ............................. 376 328
-------------- --------------
$ 1,655 $ 1,257
============== ==============
(11) SEGMENT REPORTING
During 1999 and 1998, the Company has two reportable segments: Desktop
Management and Groupware Continuing. Management has organized the segments based
on differences in products and services because each segment requires different
technology and marketing strategies. The Desktop Management segment constitutes
the ON Command CCM product line, which develops, markets and supports enterprise
desktop management products. The Groupware Continuing segment develops, markets
and supports real-time group scheduling products. The other segment during 1997
include products that were either de-emphasized as part of prior restructurings
or products that were included in the sale of assets to Elron.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates segment
performance based on gross margin from operations and does not capture segment
net income (loss) or segment assets.
42
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table illustrates segment operating data.
Desktop Groupware
Management Continuing Other Total
---------- ---------- ----- -----
1999
Product Revenue $17,996 $ 5,431 $ -- $23,427
Other Revenue 5,524 1,926 -- 7,450
------- ------- ------- -------
Total Revenue 23,520 7,357 -- 30,877
Cost of Sales 4,787 644 -- 5,431
------- ------- ------- -------
Gross Margin 18,733 6,713 -- 25,446
1998
Product Revenue 8,176 6,913 -- 15,089
Other Revenue 3,124 1,797 -- 4,921
------- ------- ------- -------
Total Revenue 11,300 8,710 -- 20,010
Cost of Sales 3,093 797 -- 3,890
------- ------- ------- -------
Gross Margin 8,207 7,913 -- 16,120
1997
Product Revenue 6,378 12,137 18,115 36,630
Other Revenue 2,253 1,145 1,254 4,652
------- ------- ------- -------
Total Revenue 8,631 13,282 19,369 41,282
Cost of Sales 2,201 1,030 6,084 9,315
------- ------- ------- -------
Gross Margin $ 6,430 $12,252 $13,285 $31,967
The following table represents geographic information:
North
America Europe Other Elimination Total
------- ------ ----- ----------- -----
1999
Sales to unaffiliated customers $ 14,036 $ 16,834 $ 7 $ -- $ 30,877
Transfers between geographic areas 1,110 -- -- (1,110) --
-------- -------- -------- -------- --------
Total Sales 15,146 16,834 7 (1,110) 30,877
Identifiable assets 56,685 9,153 2 (39,052) 26,788
1998
Sales to unaffiliated customers 10,335 9,670 5 -- 20,010
Transfers between geographic areas 20 -- -- (20) --
-------- -------- -------- -------- --------
Total Sales 10,355 9,670 5 (20) 20,010
Identifiable assets 32,662 6,005 2 (24,000) 14,669
1997
Sales to unaffiliated customers 26,930 13,679 673 -- 41,282
Transfers between geographic areas 3,847 -- -- (3,847) --
-------- -------- -------- -------- --------
Total Sales 30,777 13,679 673 (3,847) 41,282
Identifiable assets $ 34,440 $ 4,122 $ 4 $(21,184) $ 17,382
Transfers between geographic areas are accounted for equivalent to an arm's
length basis.
43
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(12) GAIN ON SALE OF ASSETS
On October 29, 1997 the Company entered into a management agreement
with Elron, pursuant to which Elron shall manage certain assets as defined in
the purchase and sale agreement (collectively the Proposed Assets) for its
benefit and at its risk and expense and shall pay all salaries and other
employee related expenses with respect to the Proposed Assets and approximate
100 transferred employees. As a result of the management agreement the
associated revenues and costs of the Proposed Assets have been excluded from the
statement of operations since October 30, 1997. As of December 31, 1997 assets
held for sale, net; represent the net book value of the Proposed Assets as of
October 29, 1997. On February 11, 1998, the Company received shareholder
approval to sell to Elron the Proposed Assets. Upon sale the Company received
$8,273 of proceeds net of transaction costs and recorded a gain of $6,518.
Unaudited pro forma operating results for the Company, assuming the sale of
assets occurred on January 1, 1997 is as follows:
December 31,
1997
---------------
(Unaudited)
Net sales $ 23,454
Net loss $ (40,233)
Basic and diluted net loss per share $ (3.33)
Shares used in computing profoma basic and diluted net loss per share 12,079,264
For purposes of the pro forma operating results, the associated revenues
and costs of the Proposed Assets have been excluded from the Statement of
Operations for 1997. The associated gain on the sale of assets has not been
included in accordance with the Securities and Exchange Commission regulations
on non-recurring charges.
(13) SCHEDULES OF VALUATION RESERVES
A summary of the reserve for doubtful accounts is as follows:
BALANCE, BALANCE,
BEGINNING OF CHARGED TO OTHER ADDITIONS END
YEAR EXPENSE TO ALLOWANCE WRITE-OFFS OF YEAR
Year ended December 31, 1997 $1,191 $35 $1,801 (1) $52 $2,975
Year ended December 31, 1998 2,975 85 --- 2,106 (2) 954
Year ended December 31, 1999 954 738 --- 1,026 666
(1) Includes $301 of additions arising through the acquisition of csd Software
GmbH and $1,500 of restructuring related reserve.
(2) Includes $1,500 of restructuring related write-offs.
44
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A summary of accrued restructuring is as follows:
BALANCE, BALANCE,
BEGINNING OF CHARGED TO NON CASH CASH END
YEAR EXPENSE WRITE-OFFS EXPENDITURES OF YEAR
Year ended December 31, 1997 $--- $10,940 $(6,774) $(1,941) $2,225
Year ended December 31, 1998 2,225 --- --- (2,080) 145
Year ended December 31, 1999 145 --- --- 49 96
(14) SUBSEQUENT EVENT
On January 6, 2000, the Company announced that it would seek shareholder
approval to sell its Meeting Maker product line along with related marketing
systems and organization (the Assets) to Meeting Maker, Inc. In addition, on
January 6, 2000, the Company entered into a management agreement with Meeting
Maker, Inc., pursuant to which Meeting Maker, Inc. agreed to manage the Assets
for its benefit and its risk and expense and to pay all salaries and other
employee related expenses with respect to the Assets and transferred employees.
Upon shareholder approval, the Company will record the transaction as a
discontinued operation under APB 30.
45
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ON TECHNOLOGY CORPORATION
/s/ Robert L. Doretti
----------------------------------
Date: March 28, 2000 Name: Robert L. Doretti
Title: President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated.
/s/Stephen J. Wietrecki
----------------------------------
Date: March 28, 2000 Name: Stephen J. Wietrecki
Title: Vice President of Finance
and Chief Financial Officer
/s/ William C. Hulley
----------------------------------
Date: March 28, 2000 Name: William C. Hulley
Title: Chairman and Director
/s/ Herman DeLatte
----------------------------------
Date: March 28, 2000 Name: Herman DeLatte
Title: Director
/s/ Gina Bornino Miller
----------------------------------
Date: March 28, 2000 Name: Gina Bornino-Miller
Title: Director
/s/ Robert P. Badavas
----------------------------------
Date: March 28, 2000 Name: Robert Bodavis
Title: Director
46
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).
47
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).
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
current 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.
10.22+ ON Technology Corporation Stock Purchase Warrant dated
December 29, 1999.
10.23+ ON Technology Corporation Stock Purchase Warrant (Reset) dated
December 29, 1999.
10.24+ Registration Rights Agreement by and among ON Technology
Corporation, Castle Creek Technology Partners LLC and Marshall
Capital Management Inc. dated December 29, 1999.
21.0. Subsidiaries of the registrant.
23.1. Consent of Arthur Andersen LLP.
27.0. Financial Data Schedule.
+ Previously filed
* Management contracts or compensatory plans or arrangments covering executive
officers or directors of ON Technology Corporation.
48