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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2000 Commission file number 0-26376
ON TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3162846
(State or incorporation) (IRS Employer Identification Number)
880 Winter Street, Building 4
Waltham, Massachusetts 02451
(781) 487-3300
(Address and telephone of principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $0.01
per share
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $12,112,188, as of March 8, 2001.
The number of shares of Common Stock, $0.01 par value, outstanding as of March
8, 2001 was 15,333,334.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report on Form 10-K, to the
extent not set forth herein, is incorporated by reference from specified
portions of the Registrant's definitive Proxy Statement for the 2001 Annual
Meeting of Stockholders scheduled for April 27, 2001.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's prospects are subject to certain uncertainties and risks. This
Annual Report on Form 10-K also contains certain forward-looking statements
within the meaning of the Federal Securities Laws. The Company's future results
may differ materially from its current results and actual results could differ
materially from those projected in the forward-looking statements as a result of
certain risk factors. READERS SHOULD PAY PARTICULAR ATTENTION TO THE
CONSIDERATIONS DESCRIBED IN THE SECTION OF THIS REPORT ENTITLED "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS." Readers should also
carefully review the risk factors described in the other documents the Company
files from time to time with the Securities and Exchange Commission.
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PART I
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ITEM 1. BUSINESS
THE COMPANY
ON Technology Corporation and its subsidiaries ("ON" or the "Company")
provide remote software management solutions for desktops, mobile PCs, handhelds
and servers. The Company's principal product, ON Command CCM(TM), or CCM, is
used by enterprise IT organizations and service providers to rapidly deliver
business-critical software over corporate networks. Our products are designed to
reduce operational costs while enhancing both IT productivity and end-user
satisfaction.
During 2000, the Company disposed of its last remaining ancillary
product line, Meeting Maker, an enterprise calendaring and scheduling
application. In connection with this disposition, the Company entered into a
license agreement with Meeting Maker, Inc. ("MMI"), which, among other things,
provided to MMI an exclusive worldwide license to market and distribute the
Meeting Maker product. Under the license agreement, the Company receives
quarterly royalty payments, subject to certain minimums, and MMI has a buyout
option after payment of the remaining minimums and an additional fee (see Note 2
to the consolidated financial statements included elsewhere in this Annual
Report for a more complete discussion of this transaction).
The Company was incorporated in Delaware in 1985. Its corporate
headquarters is located at 880 Winter Street, Waltham, Massachusetts 02451-1449.
The telephone number is 781-487-3300. The Company's European headquarters is
located at Enzianstrase 4, 82319 Starnberg, Germany. The telephone number is
49-81-51369-0.
INDUSTRY BACKGROUND
In many organizations, Information Technology ("IT") is increasingly
viewed as a strategic resource rather than simply a support function. At the
same time, IT organizations are under increasing pressure to support more PCs
with fewer resources as well as deliver a higher quality of service to
end-users. For example, reducing PC downtime is a major concern for many
organizations because downtime can quickly result in lost revenues or lost
customers due to the unavailability of business-critical applications such as
Customer Relationship Management (CRM) and Enterprise Resource Planning (ERP)
applications. The dynamics of the current business and technology environment
are also placing significant demands on IT, such as the need to efficiently
service a growing number of mobile users and remote offices, provide centralized
support for disparate organizations created via mergers and acquisitions, and
rapidly implement enterprise-wide initiatives such as Windows 2000 migrations
and upgrades to the latest versions of Lotus Notes or Microsoft Outlook, in
order to provide end-users with enhanced performance, security and usability.
2
Traditionally, IT tasks such as software installation, configuration
and troubleshooting have been handled in a costly and time-consuming manner. In
many organizations, this typically involves sending a technician with a CD-ROM
drive to a remote location, such as a regional call center or remote branch
office. In addition, detailed information about PC and server configurations --
such as network settings, lists of installed software and revisions, and
dependencies between installed software packages -- has traditionally been
managed in an ad hoc manner, making it difficult and time consuming to
troubleshoot and reconfigure PCs and servers in the event of hardware failure,
user misconfiguration, or the addition of new software applications.
THE ON SOLUTION
Our products are designed to reduce operational costs while enhancing
both IT productivity and end-user satisfaction. This is accomplished by
providing automated procedures for remotely executing software installation and
configuration procedures on multiple PCs and servers simultaneously, over
corporate networks. In addition, our products allow IT organizations to
efficiently manage remote locations and mobile users, track detailed
configuration information in management databases, and access management
information and functions via intuitive, point-and-click, graphical interfaces.
Our products are based on an open, scalable, standards-based, and extensible
architecture, providing maximum flexibility and ease-of-use.
ON Command CCM, our flagship product, is a best-of-breed solution
typically used to "push" software across enterprise LANs and WANs to hundreds or
thousands of users from centralized servers. A separate add-on module called ON
iCommand allows end-users to download and install applications from the
convenience of their Web browsers; this "self-service IT" or "end-user pull"
approach allows users to install optional software in a controlled manner
without requiring direct involvement by IT personnel.
ON Command CCM's key capabilities include:
o ADDRESSES ALL PHASES OF SOFTWARE MANAGEMENT IN SINGLE INTEGRATED
SYSTEM: ON Command CCM addresses all phases of software
management in a single integrated system, including installation
and configuration of both operating systems and applications,
ongoing updates such as anti-virus files and service packs, BIOS
flashes and hard drive formatting, and disaster recovery. For
example, CCM is used to install productivity applications such
as Office 2000, Lotus Notes, and Internet Explorer, as well as
business applications such as Siebel, SAP, and Oracle. CCM is
also used to implement enterprise-wide strategic initiatives
such as Windows 2000 migrations.
o LEVERAGES RELIABILITY OF MANUFACTURER-SUPPLIED INSTALLATION
PROGRAMS: CCM installs software by remotely executing standard
manufacturer-supplied and -supported installation procedures on
target PCs and servers. This approach is significantly more
reliable than traditional automated approaches because "native"
installation procedures typically adapt in real time to
installed hardware and software on target devices, as well as to
pre-existing network and server configurations. In comparison,
traditional "snapshot" approaches are usually less reliable
because they blindly copy identical sets of files and
configuration changes to all target devices, without leveraging
the flexibility and built-in intelligence of native installation
programs.
o SCALABLE ARCHITECTURE: CCM offers powerful grouping capabilities
that allow IT organizations to administer groups of PCs and
servers as single administrative objects. For example, PCs can
belong to one or multiple groups based on hardware manufacturer,
physical location, or functional organization. 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 automated synchronization of server contents across
LANs and WANs, and detailed logging to support automatic restart
in case of network or power outages. An intuitive Windows-based
graphical user interface is used for monitoring the status of
management tasks and administering configuration information.
CCM has been designed for rapid implementation, typically
measured in weeks or months, especially in comparison to
traditional enterprise frameworks, which typically require far
longer implementation cycles.
3
o SUPPORT FOR INDUSTRY STANDARDS AND HETEROGENEOUS ENVIRONMENTS:
CCM supports standard servers (Sun Solaris, Microsoft Windows NT
Server, Microsoft Windows 2000 Server), standard clients
(Windows 95/98, Windows NT, Windows 2000), standard networks (IP
protocol, Ethernet and token-ring connectivity), and
manageability standards such as Intel's Wired for Management
specification and the Microsoft Management Console (MMC)
framework. Handheld devices such as Palm Computing and PocketPC
devices are supported via the PC platforms to which they are
typically connected for synchronization.
o OPEN ARCHITECTURE: CCM provides a range of open and published
interfaces that allow customers and partners to add value via
customized procedures and integration with third-party products.
ADD-ON PRODUCTS
o ON COMMAND REMOTE is a remote control program for Help Desk
professionals and service providers. ON Command Remote allows
technicians to view remote screens and operate remote keyboards
without leaving their consoles, in order to remotely diagnose
problems and reconfigure devices. ON Command Remote is supplied
to ON Technology by Funk Software on an OEM basis.
o CENTENNIAL DISCOVERY is a network inventory program that tells
IT organizations which software assets they have, where they are
located, how they are configured, and when any changes are made
to them. Centennial Discovery is supplied to ON Technology by
Centennial UK Limited on a resale basis.
BUSINESS STRATEGY
The Company believes that the CCM product offers opportunities for
long-term growth because it currently has technological advantages over the
products offered by the Company's principal competitors. Our objective is to be
the leading provider of remote software management and delivery solutions. Key
elements of our strategy include:
o EXPAND DISTRIBUTION CHANNELS: We will continue to expand
relationships with indirect channels such as Management Service
Providers (MSPs), value-added resellers, and system integrators
who can provide value-added services and extend our distribution
reach into new markets and geographies. We will also continue to
focus on leveraging our existing relationship with Dell
Computer, which is currently a key reseller and joint marketing
partner for the Company.
o EXPAND PARTNERSHIPS WITH COMPLEMENTARY SOFTWARE SUPPLIERS: Our
best-of-breed solutions are valued by companies with
complementary products that require remote software management
in order to provide total solutions to their end-users. We will
nurture existing relationships and expand into new relationships
that provide increased market visibility, additional
lead-generation activities, and more complete integrated
solutions.
o FOCUS ON NEW HORIZONTAL AND VERTICAL MARKETS: We believe that
the industry-wide transition to Windows 2000 creates a
significant business opportunity for the Company, and we intend
to focus our marketing and development efforts on capitalizing
on this opportunity. We will also explore other key vertical and
horizontal markets in which our solutions are particularly well
suited.
o CONTINUE TO STRENGTHEN TECHNOLOGY LEADERSHIP AND EASE-OF-USE: We
will continue to strengthen our technology leadership position
by enhancing both enterprise product functionality and
ease-of-use.
SALES AND MARKETING
The Company's enterprise sales effort focuses on key accounts with
larger companies where the opportunity exists for volume sales and long-term,
repeat business. Through the enterprise sales program, the Company is building
relationships in which its knowledge of the customer's needs translates into
purchasing advantages and maximized support. Regular visits to the customer's
site provide the Company's sales representatives with valuable feedback for
technology development, future upgrades and service enhancements. The Company
has established direct sales and support offices in Waltham, Massachusetts; New
York, New York; McLean, Virginia; London, England; Berlin, Germany; Hamburg,
Germany; Dusseldorf, Germany; and Munich, Germany. Our direct sales organization
is complemented by an indirect sales channel that includes regional resellers as
well as system integrators such as Unisys, IBM Global Services, Siemens, and Sun
Microsystems GmbH.
4
CUSTOMERS
The Company markets its products primarily to large- and medium-size
corporate, government and institutional customers. During the year ended
December 31, 2000, two customers accounted for $6.3 million of On Command CCM
revenue or 24.0% of total revenues. During the year ended December 31, 1999, two
customers accounted for $7.4 million, or 24.0% of total revenue. During the year
ended December 31, 1998, one customer accounted for $3.5 million, or 17.5% of
total revenue.
CUSTOMER SUPPORT, TRAINING AND PROFESSIONAL SERVICES
The Company employs professional technical support staff in Starnberg,
Germany and Waltham, Massachusetts to support CCM customers via telephone
hotline, electronic mail and on-site visits. The Company also conducts training
classes, which are available either at the Company's headquarters or at the
customer's facility.
RESEARCH AND DEVELOPMENT
Our research and development organization is responsible for the
design, development, release and ongoing maintenance and support of our
products. The organization currently includes approximately 84 employees with 48
employees in software development, quality assurance, documentation, and project
management functions and another 36 responsible for providing customer
consulting, training and product support. When appropriate, we also utilize
third parties to expand the capacity and technical expertise of our internal
research and development personnel, as well as license selected third-party
technologies, which we believe shortens time to market without compromising our
competitive position.
In addition to maintaining our products, this department is responsible
for the enhancement of product functionality as well as identifying
complementary products as well as innovative new ideas for future products.
The Company's research and development expenses for its current
products were approximately $9,811,000, $8,697,000 and $7,455,000 for the fiscal
years December 31, 2000, 1999 and 1998, respectively. The Company's practice to
date has been to expense all software development costs as incurred.
COMPETITION
The market for the Company's products is highly competitive, and the
Company expects competition to continue to increase in the future. The Company
believes that the principal competitive factors affecting the market for its
products include brand name recognition, company reputation, performance,
functionality, ease-of-use, breadth of product line, quality, customer support,
adherence to industry standards, integration with third-party solutions and
price.
As is the case in many segments of the software industry, the Company
may encounter increasing price competition in the future. This could reduce
average selling prices and, therefore, profit margins. Competitive pressures
could result not only in sustained price reductions but also in a decline in
sales volume, which could adversely affect the Company's business, condition
(financial or otherwise), prospects and results of operations. There can be no
assurance that the Company will continue to compete effectively against existing
and potential competitors in its markets, many of whom have substantially
greater financial, technical, marketing and support resources and name
recognition than the Company.
The widespread inclusion of the functionality of the Company's products
as standard features of Microsoft operating systems software could render the
Company's products obsolete and unmarketable, particularly if the quality of
such functionality were comparable to that of the Company's products. If the
Company were unable to develop new functionality or unique applications for its
technology to replace successfully any obsolete products, the Company's
business, condition (financial or otherwise), prospects and results of
operations would be materially and adversely affected.
The market for our products is highly competitive and diverse. The
technology for remote software management products can change rapidly. New
products are frequently introduced and existing products are continually
enhanced. Competitors vary in size and in the scope and breadth of the products
and services offered.
5
The Company has faced competition from a number of sources, including:
o Large and established companies such as Microsoft, Computer
Associates International and IBM/Tivoli which offer remote
software delivery and management capabilities as part of their
systems management, or network management frameworks.
o Software companies and others who provide software management
utilities and suites such as Symantec, Intel, and Altiris.
o Hardware suppliers such as IBM, Hewlett-Packard, and Compaq that
offer or bundle software management capabilities in conjunction
with their hardware offerings.
o The internal information technology departments of those
companies with infrastructure management needs.
In addition, Microsoft has bundled new management capabilities in its
Windows 2000 operating system that, in conjunction with its Systems Management
Server (SMS) framework, directly compete with capabilities provided by ON
Command CCM. Even if customers or potential customers find the functionality
provided with Microsoft's operating system software to be more limited than that
of our software management products, they might elect to accept more limited
functionality in lieu of purchasing additional software. Competition resulting
from this type of bundling could lead to price reductions for our products,
which would reduce our margins and correspondingly affect our business,
quarterly and annual operating results and financial condition.
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
greater resources to the development, promotion, and sale of their products than
the Company can. The Company may not be able to compete successfully against
current and future competitors. In addition, competitive pressures faced by the
Company may materially adversely affect the Company's business, operating
results, and financial condition.
OPERATIONS
The Company designs most of its product, marketing and sales materials
through the use of contracted services. Product orders for the Company's Desktop
Management products are fulfilled directly by the Company. Sales and support
calls are also handled directly by the Company.
EMPLOYEES
From December 31, 1999 to December 31, 2000, the number of Company
employees and full-time contract laborers increased from 157 to 181, primarily
due to the expansion of the company's global sales force. 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.
6
ITEM 2. PROPERTIES
The Company leases office space in the following locations:
APPROX # EXPIRATION
LOCATION PRIMARY USE OF SQ. FEET OF LEASE
- ------------------------ --------------------- ----------- ----------
WALTHAM, MA US HEADQUARTERS 34,930 12/31/02
STARNBERG, GERMANY EUROPEAN HEADQUARTERS 14,174 7/31/02
RALEIGH, NC SUBLEASED 6,840 2/28/02
MCLEAN, VA SALES OFFICE 180 11/30/01
NEW YORK, NY SALES OFFICE 125 5/31/01
BUCKINGHAMSHIRE, ENGLAND SALES OFFICE 270 4/30/01
The Company also subleases several other locations for use as sales
offices on a short-term, renewable basis. In Waltham, Massachusetts,
approximately 5,763 square feet of space of the Company's total leased space is
subleased to a third party until December 30, 2002. The entire leased space in
Raleigh, North Carolina has been subleased to a third party for the remainder of
the lease term. The Company believes its facilities are adequate for its current
needs and that adequate facilities for expansion, if required, are available.
ITEM 3. LEGAL PROCEEDINGS
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, 2000.
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 bid prices for the common stock, all as reported by
Nasdaq.
HIGH LOW
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YEAR ENDED DECEMBER 31, 2000
First Quarter $ 15.8750 $ 9.2500
Second Quarter 9.8750 2.7500
Third Quarter 3.2500 2.0630
Fourth Quarter 2.5000 0.4220
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
As of March 8, 2001 there were approximately 5,000 stockholders of record of the
Company's stock.
7
DIVIDEND POLICY
The Company has not declared or paid cash dividends on its common stock
since 1992 when it converted from an S Corporation to a C Corporation. The
Company currently intends to retain any earnings for use in developing and
growing its business, and does not anticipate paying any cash dividends on its
common stock in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On December 30, 1999, in a private placement under the Securities Act
of 1933, as amended, and pursuant to the terms and conditions of the Securities
Purchase Agreement by and among ON, Castle Creek Technology Partners LLC and
Marshall Capital Management Inc., ON sold 1,029,674 shares of common stock (the
"Investors Shares") to Castle Creek Technology Partners LLC and Marshall Capital
Management Inc. (the "Investors") for an aggregate purchase price of $12,000,000
(the "Original Investors Transaction"). These shares represented approximately
7.4% of the then-total outstanding shares of ON common stock. In connection with
the private placement, the Investors were each issued warrants to purchase an
aggregate of 514,838 shares of common stock, which warrants were subject to
increase based on the 15 day average closing bid price of ON's common stock for
the period ended December 29, 2000 (the "Initial Warrants"). In addition, the
Investors were issued warrants to purchase additional shares of common stock,
which warrants were exercisable only under specific circumstances (the
"Additional Warrants," and together with the Initial Warrants, the "Original
Investor Warrants"). The Additional Warrants have expired by their terms.
On December 18, 2000, the Company entered into exchange agreements with
each of the Investors pursuant to which each Investor has exchanged its Initial
Warrant for a new warrant exercisable for 1,400,000 shares of common stock (each
a "New Warrant" and, collectively, the "New Warrants") and a promissory note in
the principal amount of $500,000 (each a "Note" and, collectively, the "Notes").
Each New Warrant has an exercise price of $0.01 per share, which is
subject to proportionate adjustment in the event of a stock split, stock
dividend or similar event, and to weighted-average adjustment in the event of
certain issuances of securities by the Company at an offering price below the
then current market price of such security. Each New Warrant expires after 5:00
p.m., Eastern Time on December 29, 2004. As of March 8, 2001, Castle Creek has
exercised a total of 356,284 warrants to purchase the Company's common stock
through a cashless exercise for a net 350,597 shares of the Company's common
stock and Marshall Capital has exercised a total of 349,563 warrants to purchase
the Company's common stock through a cashless exercise for a net 343,897 shares
of the Company's common stock.
The principal amount of each Note is due and payable on December 31,
2001, unless a registration statement covering all the shares of the Company's
common stock that are entitled to be registered under the Exchange Agreements is
effective for not less than 20 trading days during the period beginning November
15, 2001 and ending December 31, 2001 (the "Measurement Period") and the average
closing price of the Company's common stock for the last 20 trading days during
the Measurement Period when such registration statement is effective exceeds
$3.00 per share (as adjusted to reflect any stock splits, reverse stock splits,
stock dividends or similar events). Interest is payable on the Notes only after
a default at the rate of 9% per year.
All required registration statements have been filed and are currently
effective.
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.
Revenue information in the selected consolidated financial data shown
below has been restated to emphasize the Company's current operations. The
Company's core business products, acquired in 1997, are shown by category for
the indicated periods. Revenue - MMI related to groupware revenues on the
Company's Meeting Maker product prior to its license to MMI on June 30, 2000.
Revenues from product lines in the network management, security and scheduling
areas that were either sold to Elron Software Inc. in 1998 (the "Elron
Transaction") or discontinued for Y2K concerns, have been grouped in other along
with MMI license revenue received by the Company in 2000.
No attempt has been made to allocate operating expenses in the same
manner as revenue because the Company's personnel worked on multiple projects
across project lines and the Company believes any such allocation of
expenditures would not be meaningful.
The selected consolidated financial data below may not be comparible
for all periods presented due to the facts discussed above
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1997 1998 1999 2000
----------------------------------------------------------------
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Net CCM and related products $ -- $ 6,378 $ 8,176 $ 17,993 $ 16,073
CCM related service and maintenance -- 2,253 3,124 5,524 6,633
Meeting Maker, Inc. (MMI) 12,987 9,934 7,530 7,360 3,405
Other 38,805 22,717 1,180 -- 236
-------- -------- -------- -------- --------
Total revenue 51,792 41,282 20,010 30,877 26,347
-------- -------- -------- -------- --------
Operating expenses:
Cost of product and service revenue 11,951 9,315 3,890 5,431 4,431
Sales and marketing 24,176 22,172 10,715 13,396 13,390
Research and development 9,456 12,461 9,044 9,952 10,691
General and administrative 4,407 5,501 3,412 4,466 6,894
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) -- --
-------- -------- -------- -------- --------
Loss from operations (16,898) (35,005) (533) (2,368) (9,059)
Interest income, net 1,134 233 325 153 498
Other income -- -- 20 216 716
-------- -------- -------- -------- --------
Loss before allocation to Meeting Maker,
Inc. and provision for taxes (15,764) (34,772) (188) (1,999) (7,845)
Allocation to Meeting Maker, Inc. -- -- -- -- (1,171)
Provision for income taxes (97) -- (27) -- (420)
-------- -------- -------- -------- --------
Net loss $(15,861) $(34,772) $ (215) $ (1,999) $ (9,436)
======== ======== ======== ======== ========
Basic loss per share $ (1.46) $ (2.88) $ (0.02) $ (0.16) $ (0.67)
======== ======== ======== ======== ========
Diluted loss per share $ (1.46) $ (2.88) $ (0.02) $ (0.16) $ (0.67)
======== ======== ======== ======== ========
Basic weighted average shares outstanding 10,854 12,079 12,281 12,526 14,141
======== ======== ======== ======== ========
Diluted weighted average shares outstanding 10,854 12,079 12,281 12,526 14,141
======== ======== ======== ======== ========
9
DECEMBER 31,
----------------------------------------------------------------
1996 1997 1998 1999 2000
----------------------------------------------------------------
(Dollars in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 20,774 $ 6,679 $ 8,001 $ 16,941 $ 9,437
Restricted cash -- -- -- -- 1,069
Working capital 25,347 3,803 4,686 15,144 6,434
Total assets 44,142 17,382 14,669 26,788 18,371
Long-term obligations 510 10 -- -- 1,222
Total stockholders' equity 33,493 6,996 7,141 16,970 6,902
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
ON Technology Corporation and its subsidiaries ("ON" or the "Company")
provide remote software management solutions for desktops, mobile PCs, handhelds
and servers. The Company's principal product, ON Command CCM(TM), or CCM, is
used by enterprise IT organizations and service providers to rapidly deliver
business-critical software over corporate networks. Our products are designed to
reduce operational costs while enhancing both IT productivity and end-user
satisfaction.
As described in Item 5 of this 10-K under the caption "Sales of
Unregistered Securities", on December 30, 1999, the Company closed a $12 million
private placement of common stock and warrants to two institutional investors,
and on December 18, 2000, the Company and such investors entered into exchange
agreements relating to the exchange of certain of the warrants issued to such
investors in 1999 for new warrants and promissory notes.
On January 3, 2000, the Company signed an asset purchase agreement with
a newly organized privately-held company named Meeting Maker, Inc. (MMI) to sell
the Company's Groupware business (Meeting Maker) subject to the approval of the
Company's stockholders. In connection with the asset purchase agreement, the
Company entered into a management agreement, also dated January 3, 2000, in
which the Company transferred effective control of the Groupware business
(Meeting Maker) to MMI. ON had no risk of ownership related to the operating
results from the Groupware business since January 3, 2000 and has allocated 100%
of the net income (loss) to MMI for the period January 3, 2000 to June 30, 2000.
The Company did not receive the required number of shareholder votes to approve
the Meeting Maker transaction.
As a result, the Company entered into a license agreement with MMI
effective as of June 30, 2000 which, among other things, terminated the
previously negotiated sale arrangement and provided for the grant of an
exclusive worldwide license to market and distribute the Meeting Maker product
(including a license to the underlying source code and object code). The Company
receives quarterly royalty payments, subject to certain minimums, from MMI in
connection with the exclusive license. At any time during the license period,
MMI has the ability to exercise a buyout option for the remaining minimum
payments plus an additional fee. The Company is recognizing the royalty fees as
earned ($236,000 during the year ended December 31, 2000) in other revenue.
Additionally, the license agreement provided for the sale of certain
assets and the assumption of certain liabilities related to the Meeting Maker
business. As a result, the Company recognized a gain of $458,000, net of related
transaction costs, in the quarter ended September 30, 2000, which is reported in
other income.
10
The Company recognizes revenue in accordance with the American
Institute of Certified Public Accountants' (AICPA) Statement of Position (SOP)
No. 97-2, SOFTWARE REVENUE RECOGNITION. Software license revenue consists
principally of revenue earned under perpetual software license agreements and is
generally recognized upon shipment of the software if collection of the
resulting receivable is probable, the fee is fixed or determinable, and
vendor-specific objective evidence exists for all undelivered elements to allow
allocation of the total fee to all delivered and undelivered elements of the
arrangement. Revenues under such arrangements, which may include multiple
software products and services sold together, are allocated to each element
based on the residual method in accordance with SOP No.98-9, SOFTWARE REVENUE
RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. Under the residual method,
the fair value of the undelivered elements is deferred and subsequently
recognized when earned. The Company has established sufficient vendor specific
objective evidence for professional services, training and maintenance and
support services. Accordingly, software license revenue is recognized under the
residual method in arrangements in which software is licensed with professional
services, training and maintenance and support services.
Service revenues from time and expense contracts and consulting and
training revenue are recognized as the related services are performed.
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,
--------------------------------
1998 1999 2000
------ ------ ------
Revenue:
Net CCM and related products 40.9% 58.3% 61.0%
CCM related service and maintenance 15.6 17.9 25.2
Meeting Maker, Inc. (MMI) 37.6 23.8 12.9
Other 5.9 -- 0.9
------ ------ ------
Total revenue 100.0 100.0 100.0
------ ------ ------
Operating expenses:
Cost of CCM and related
product and service revenue 16.7 15.5 16.5
Cost of MMI revenue 2.7 2.1 0.3
Sales and marketing 46.6 38.7 46.8
Research and development 37.3 28.2 37.2
General and administrative 17.2 14.5 25.4
MMI operating expenses 14.8 8.7 8.2
Gain on sale of assets (32.6) -- --
------ ------ ------
Loss from operations (2.7) (7.7) (34.4)
------ ------ ------
Interest income, net 1.7 0.5 1.9
Other income, net -- 0.7 2.7
------ ------ ------
Net loss before allocation to MMI and
provision for income taxes (1.0) (6.5) (29.8)
------ ------ ------
Allocation to MMI -- -- (4.4)
Loss before provision for income taxes (1.0) (6.5) (25.4)
Provision for income taxes (0.1) -- (1.6)
------ ------ ------
Net loss (1.1)% (6.5)% (35.8)%
====== ====== ======
NET CCM AND RELATED PRODUCTS. The Company's net CCM and related products revenue
is derived primarily from the licensing of software products. This revenue
increased $9.8 million or 120% from 1998 to 1999, due to growth in the
Comprehensive Client Management (CCM) business. Net CCM and related products
revenue decreased $1.9 million or 11% from 1999 to 2000, due to a decrease in
the CCM related business during the first six months of 2000.
11
CCM RELATED SERVICE AND MAINTENANCE. The Company's CCM related service and
maintenance revenue consists of maintenance revenue, training and professional
services. This revenue increased by $2.4 million or 77% from 1998 to 1999 and
$1.1 million or 20% from 1999 to 2000. For 1999, the increase was attributable
to an 88% increase in professional services and training revenues and an
increase of 62% in maintenance revenues. For 2000, the increase was primarily
due to the growth in the number of maintenance agreements.
MEETING MAKER, INC. (MMI). The Company's MMI revenue consists of product,
maintenance, training and professional services revenue associated with the
Meeting Maker product. MMI revenue decreased by $170 thousand or 2% from 1998 to
1999 and $4.0 million or 54% from 1999 to 2000. The slight decrease from 1998 to
1999 was primarily attributable to the product line being scaled back through
reduced sales, marketing and development efforts. The large revenue decrease
from 1999 to 2000 is a direct result of the license of the Meeting Maker
business to MMI. Revenue - MMI for 2000 consisted of revenue achieved during the
first six months of the year under a management agreement entered into between
the Company and MMI. The Company does not anticipate any additional MMI revenue
due to the exclusive license of the Meeting Maker product to MMI.
OTHER. For 1998, other revenue consisted of other groupware product lines that
were discontinued by the Company, as they were not Y2K compliant. In 2000, the
Company's other revenue consists of a royalty associated with the licensing of
the Company's Meeting Maker technology to Meeting Maker, Inc. (MMI). Total
revenue earned for the year ended December 31, 2000 was $236 thousand covering
the last six months of 2000.
COST OF CCM AND RELATED PRODUCT AND SERVICE REVENUE. Cost of CCM and related
product and service revenue consists primarily of expenses associated with
product documentation, production and fulfillment costs, direct consulting and
training costs, and royalty and license fees associated with products that are
licensed from third party developers. In addition, cost of CCM and related
product and service revenue included the amortization of purchased intangibles.
Cost of CCM and related product and service revenue as a percentage of total
revenues (excluding MMI revenues) decreased from 27% in 1998 to 20% in 1999 to
19% in 2000. The large decrease from 1998 is the result of the Company
outsourcing its distribution and fulfillment operations in 1998, but since 1999,
due to a reduced product line, the Company had brought these operations
in-house.
COST OF MMI REVENUE. Cost of MMI revenue consists primarily of expenses
associated with product documentation, production and fulfillment costs
associated with the Meeting Maker product. Cost of MMI revenue remained
relatively flat as a percentage of Revenue - MMI from 7% in 1998 to 9% in 1999.
Cost of MMI revenue decreased as a percentage of Revenue - MMI from 9% in 1999
to 2% in 2000. The significant decrease from 1999 to 2000 was due to the
management and exclusive license agreements entered into between the Company and
MMI. The Company does not anticipate any additional cost of MMI revenue in the
future as the technology has been exclusively licensed to MMI.
SALES AND MARKETING EXPENSE. Sales and marketing expense primarily consists of
compensation paid to sales and marketing personnel, the costs of direct mail and
telemarketing campaigns, and the costs of product trials requested by potential
customers. Sales and marketing expense also includes the costs of public
relations, trade shows, conferences, travel, and the telephone and information
technology costs associated with sales activities. Sales and marketing expense
increased $2.7 million and declined as a percentage of total revenues (exclusive
of MMI revenues) from 75% in 1998 to 51% in 1999. This was due to the growth of
the CCM business in 1999. In 2000, sales and marketing expense increased $348
thousand over 1999, and increased slightly as a percentage of total revenue
(exclusive of MMI revenues), from 51% in 1999 to 54% in 2000. Marketing
expenditures remained flat in 2000 while sales expenses increased due to the
hiring of 15 additional sales people during the year, both in the US and abroad.
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 indirect technical
support, training and consulting. Related expenses also include certain
information technology costs. Research and development expenses increased $1.2
million from 1998 to 1999. This resulted from an incremental headcount of six
employees and other related costs of growing the CCM business. Research and
development expenses increased $1.1 million from 1999 to 2000. This increase was
a primarily a result of increased consulting costs of $745 thousand and an
incremental headcount of two employees, all of whose efforts were to enhance the
CCM business.
12
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 approximately $1.0 million from
1998 to 1999. The increase was primarily the result of increased professional
fees and corporation filing fees of approximately $850 thousand. General and
administrative expense increased by $2.2 million from 1999 to 2000. The increase
was primarily due to a $1.8 million increase in the Company's bad debt reserves.
GAIN ON SALE OF ASSETS. In connection with the sale of certain assets of the
Company to Elron Software Inc. in 1998 (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 the first quarter of 1998.
INTEREST INCOME, NET. Interest income, net decreased approximately $192 thousand
from 1998 to 1999. This decrease was due to an overall decreased average cash
balance resulting from negative operating cash flows (private placement funds
were not received until late December 1999). Interest income, net increased
approximately $345 thousand from 1999 to 2000. This increase was due to higher
cash balances resulting from the aforementioned private placement of $12 million
in December 1999.
OTHER INCOME. Other income in 1999 resulted from an insurance claim. Other
income in 2000 consisted primarily of a non-cash gain resulting from net impact
of valuation adjustments from the warrants and promissory notes issued to the
aforementioned two private institutional investors, as well as, the net gain
resulting from the MMI transaction of $458.
INCOME TAXES. The provision for 1998 represents alternative minimum taxes owed.
In 1999, the Company incurred a significant U.S. 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.
During 1999, the Company recorded a book gain on the Elron Transaction; however,
for tax purposes the Company recognized an ordinary loss on this transaction.
The provision for 2000 primarily represents income taxes from operating income
resulting in the Company's international operations.
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, 1998, 1999, and 2000 the Company had
available cash and cash equivalents of $8.0 million, $16.9 million, and $9.4
million, respectively, and working capital of $4.7 million, $15.1 million, and
$6.4 million, respectively. As of December 31, 2000, the Company had restricted
cash of $1.1 million securing the Company's Waltham, Massachusetts facility
lease.
Net cash used in operating activities for the years ended December 31,
1998, 1999 and 2000 was $5.6 million, $2.0 million, and $7.2 million,
respectively. 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 $652 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. In 2000, net cash used in operating activities consisted mainly of a
combined net increase in the Company's operating assets and liabilities of $1.8
million and a net loss of $9.4 million. This loss was reduced by $720 thousand
in depreciation and amortization as well as deferred compensation expense of
$614 thousand and increased by the non-cash gains of $458 and $548 resulting
from the MMI transaction and the revaluation of the Company's warrant liability
in accordance with EITF 00-19, respectively.
Net cash (used in) provided by investing activities for the years ended
December 31, 1998, 1999 and 2000 was $7.4 million, $(1.1) million, and $(1,828)
thousand, 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. In 2000, this use was primarily a result of
the $1.1 million restricted cash agreement securing the Company's Waltham,
Massachusetts' facility lease and the purchase of property and equipment of $803
thousand, which was then slightly offset by a reduction in deposits.
13
Net cash (used in) provided by financing activities for the years ended
December 31, 1998, 1999 and 2000 was ($226) thousand, $11.7 million, and $808
thousand, respectively. 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 principal payments on obligations under
capital leases 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. In 2000, this was the result of the exercise of
stock options of $678 thousand and the sale of stock under the Employee Stock
Purchase Plan of $130 thousand.
THE COMPANY BELIEVES THAT ITS EXISTING CASH BALANCES AND EXPECTED FUNDS
GENERATED FROM OPERATIONS WILL BE SUFFICIENT TO FINANCE THE COMPANY'S
OPERATIONS THROUGH DECEMBER 31, 2001.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of the Federal Securities Laws. In addition, from time to
time, management may make forward-looking statements in press releases, in other
public discussions and in other documents that we file with the Securities and
Exchange Commission (including those documents incorporated by reference into
this Form 10-K). The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for these statements. For this purpose, a forward-looking
statement is any statement that is not a statement of historical fact. You can
identify forward-looking statements by the words "may," "believes,"
"anticipates," "plans," "expects," "estimates" and similar expressions. Our
forward-looking statements are based on currently available information and
management's expectations of future results but necessarily involve certain
assumptions. We caution readers that our assumptions involve substantial risks
and uncertainties. Consequently, any forward-looking statement could turn out to
be wrong. Many factors could cause actual results to differ materially from our
expectations. Below we describe some of the important factors that could affect
our revenues or results of operations.
THE COMPANY IS CURRENTLY EXPERIENCING CASH FLOW DEFICITS AND MAY CONTINUE TO
EXPERIENCE CASH FLOW DEFICITS IN THE FORESEEABLE FUTURE.
For the fiscal year ended December 31, 2000, ON had operating losses of
approximately $9.0 million, producing significant negative cash flow.
Management's 2001 operating plan forecasts that the Company will continue to
experience operating losses and negative cash flows at least through the later
half of 2001. Based on these assumptions, Management believes its has sufficient
cash to fund its operations for 2001. If the Company is unable to attain
forecasted revenue levels and Management is further unable to curtail expenses,
the Company would have to seek external equity or debt financing to continue its
operations. There can be no assurance that we will be able to secure such
external financing.
OUR MARKETING REQUIRES SIGNIFICANT INVESTMENTS
Sales of products require significant up-front investments in
marketing, technical and financial resources. We have adopted a marketing
strategy using a direct sales force and in-field service organization. This
strategy requires significant investments in 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 our target market.
A SIGNIFICANT PORTION OF OUR REVENUES DERIVES FROM A RELATIVELY SMALL NUMBER OF
CUSTOMERS
For the twelve months ended December 31, 1998, one customer accounted
for $3.5 million, or 17.5% of total revenue from ON's current products. For the
twelve months ended December 31, 1999, two customers accounted for $7.4 million,
or 24.0% of total revenue. For the twelve months ended December 31, 2000, two
customers accounted for $6.3 million, or 24.0% of total revenue. It is possible
that in the future other customers will account for more than 10% of ON's total
revenues.
14
WE WILL NEED TO EXPAND OUR DISTRIBUTION CHANNELS IN ORDER TO DEVELOP OUR
BUSINESS AND INCREASE REVENUE
We sell our products through our direct sales force and a number of
distributors, and we provide maintenance and support services through our
technical and customer support staff. We plan to continue to invest large
amounts of resources in our direct sales force, particularly in North America.
In addition, we are developing additional sales and marketing channels through
value added resellers, system integrators, original equipment manufacturers and
other channel partners. We may not be able to attract channel partners that will
be able to market our products effectively, or that will be qualified to provide
timely and cost-effective customer support and service. If we establish
distribution through such indirect channels, our agreements with channel
partners may not be exclusive. As a result, such channel partners may also carry
competing product lines. If we do not establish and maintain such distribution
relationships, this could materially adversely affect our business, 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 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 OUR PRODUCTS MAY PRESENT CHALLENGES IN PRODUCT
DEVELOPMENT WHICH, IF WE CANNOT MEET, MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS
The technological demands of our current 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 our current
products, 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 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 our products.
However, there can be no assurance that we will be able to expand and develop
our resources to support our products.
Our current products are typically larger and more complex than the
products that we have previously developed. Our ability to continue to enhance
our current products to meet customer and market requirements will depend
substantially on our ability to effectively manage this development effort, to
attract and retain the required development personnel in Waltham, Massachusetts
and Starnberg, Germany and to coordinate and manage geographically remote
development efforts.
15
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 OUR PRODUCTS IN SYSTEM
SOFTWARE AND APPLICATION SUITES MAY AFFECT OUR COMPETITIVE POSITION
In the future, vendors of operating system software and applications
sold for a single price (generally referred to as application suites) may
continue to enhance their products to include functions that are currently
provided by our products. In addition, some vendors may bundle these products in
their existing application suites at no additional charge. The widespread
inclusion of the functions provided by our products as standard features of
operating system software could render our products obsolete and unmarketable
particularly if the quality of such functions were comparable to the functions
offered by our products. Furthermore, even if the software functions provided as
standard features by operating systems are more limited than those of our
products, there is no assurance that a significant number of customers would not
elect to accept such functions instead of purchasing additional software. If we
were unable to develop new software products to further enhance operating
systems and to successfully replace any obsolete products, our business,
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 the Company's products is highly competitive, and the
Company expects competition to continue to increase in the future. The Company
believes that the principal competitive factors affecting the market for its
products include brand name recognition, company reputation, performance,
functionality, ease-of-use, breadth of product line, quality, customer support,
adherence to industry standards, integration with third-party solutions and
price.
As is the case in many segments of the software industry, the Company
may encounter increasing price competition in the future. This could reduce
average selling prices and, therefore, profit margins. Competitive pressures
could result not only in sustained price reductions but also in a decline in
sales volume, which could adversely affect the Company's business, condition
(financial or otherwise), prospects and results of operations. There can be no
assurance that the Company will continue to compete effectively against existing
and potential competitors in its markets, many of whom have substantially
greater financial, technical, marketing and support resources and name
recognition than the Company.
The widespread inclusion of the functionality of the Company's products
as standard features of Microsoft operating systems software could render the
Company's products obsolete and unmarketable, particularly if the quality of
such functionality were comparable to that of the Company's products. If the
Company were unable to develop new functionality or unique applications for its
technology to replace successfully any obsolete products, the Company's
business, condition (financial or otherwise), prospects and results of
operations would be materially and adversely affected.
The market for our products is highly competitive and diverse. The
technology for remote software management products can change rapidly. New
products are frequently introduced and existing products are continually
enhanced. Competitors vary in size and in the scope and breadth of the products
and services offered.
16
The Company has faced competition from a number of sources, including:
o Large and established companies such as Microsoft, Computer
Associates International and IBM/Tivoli which offer remote
software delivery and management capabilities as part of their
systems management, or network management frameworks.
o Software companies and others who provide software management
utilities and suites such as Symantec, Intel, and Altiris.
o Hardware suppliers such as IBM, Hewlett-Packard, and Compaq that
offer or bundle software management capabilities in conjunction
with their hardware offerings.
o The internal information technology departments of those
companies with infrastructure management needs.
In addition, Microsoft has bundled new management capabilities in its
Windows 2000 operating system that, in conjunction with its Systems Management
Server (SMS) framework, directly compete with capabilities provided by ON
Command CCM. Even if the functionality provided with Microsoft's operating
system software were more limited than that of our software management products,
customers or potential customers might elect to accept more limited
functionality in lieu of purchasing additional software. Competition resulting
from this type of bundling could lead to price reductions for our products,
which would reduce our margins and correspondingly affect our business,
quarterly and annual operating results and financial condition.
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
greater resources to the development, promotion, and sale of their products than
the Company can. The Company may not be able to compete successfully against
current and future competitors. In addition, competitive pressures faced by the
Company may materially adversely affect the Company's business, 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.
DUE TO THE TECHNOLOGICAL CHALLENGES ASSOCIATED WITH OUR CURRENT PRODUCTS, WE MAY
NOT HAVE THE FINANCIAL RESOURCES NECESSARY TO CONDUCT THE BUSINESS AS PRESENTLY
CONTEMPLATED
Based on 2001 forecasts, our product development, marketing and sales
costs for our current products are approximately $1,750,000 to $2,000,000 per
month. Based on our existing cash and forecasted revenue, we believe that we
have enough cash to fund these costs through 2001. 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.
17
OUR INCREASING RELIANCE ON INTERNATIONAL REVENUE COULD ADVERSELY AFFECT OUR
OPERATING RESULTS
In fiscal 1998 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, total revenue
from international licenses represented approximately 32% of our total revenue
and 53% of our net CCM and related products revenue. We expect that
international revenue will constitute a significant portion of our total revenue
in the future. Accordingly, a significant percentage of our total revenue may be
subject to the risks inherent in international sales, including the impact of
fluctuating exchange rates on demand for our products, longer payment cycles,
greater difficulty in protecting intellectual property, greater difficulty in
accounts receivable collection, unexpected changes in legal and regulatory
requirements, seasonality due to the slowdown of European business activity in
the third quarter and tariffs and other trade barriers. There can be no
assurance that these factors will not have a materially adverse effect on our
future international license revenue.
Our continued growth and profitability will require continued expansion
of our international operations, particularly 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. Issues
related to the introduction of the euro may materially adversely affect our
business, operating results, and financial condition.
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;
o 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;
18
o 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;
o the impact of acquisitions of competitors;
o seasonal trends;
o the cancellations of licenses or maintenance agreements;
o product life cycles, software defects and other product quality
problems; and
o 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 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 that we encounter in our selling activities. During
the sales cycle, we typically provide a significant level of education to
prospective customers regarding the use and benefits of our products. Any delay
in the sales cycle of a large license or a number of smaller licenses could have
a material adverse effect on our business, 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:
19
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.
OUR ABILITY TO MANAGE GROWTH WILL AFFECT OUR ABILITY TO ACHIEVE AND MAINTAIN
PROFITABILITY
Total CCM and related products revenues grew significantly from 1998 to
1999, increasing from $11.3 million to $23.5 million, respectively. In fiscal
2000 total CCM and related products revenues decreased slightly from 1999
levels, to $22.9 million. 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 the licensee does not sign
these shrink-wrap licenses, many authorities believe that they may not be
enforceable under many state laws and the laws of many foreign jurisdictions. If
such licenses are not enforceable, the user would not be bound by the license
terms, including the terms that seek to protect our proprietary technology. If
the printed shrink-wrap licenses prove to be unenforceable, this may have a
material adverse effect on our business, financial condition, prospects and
results of operations.
20
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, Meeting Maker, 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 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.
21
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.
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.
22
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.
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;
23
o changes in our revenue growth rates or the growth rates of our
competitors;
o sales of large blocks of 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.
THE SHARES OF COMMON STOCK ISSUED UPON EXERCISE OF CERTAIN WARRANTS WILL HAVE A
DILUTIVE EFFECT
On December 18, 2000, the Company entered into exchange agreements with
Castle Creek Technology Partners, LLC and Marshall Capital Management, Inc. (the
"investors") pursuant to which each investor has exchanged certain existing
warrants (the "initial 1999 warrants") for a new warrant exercisable for
1,400,000 shares of common stock (each a "new warrant" and, collectively, the
"new warrants") and a promissory note in the principal amount of $500,000. The
number of shares of ON's common stock issued or issuable upon exercise of the
new warrants (the "Warrant Shares") is fixed at 2,800,000 in the aggregate
(subject to adjustment for stock splits, stock dividends and similar events and
to weighted average antidilution adjustments in the case of certain below-market
securities issuances by ON); however, because the exercise price is $0.01 per
share (subject to adjustment for stock splits, stock dividends and similar
events and to weighted average antidilution adjustments in the case of certain
below-market securities issuances by ON), the issuance of the Warrant Shares has
(in the case of Warrant Shares already issued) or will have a dilutive effect on
the stockholders of ON. This effect is significantly less dilutive than the
dilution that would have resulted from the exercise of the Initial 1999
Warrants.
RISK OF DELISTING BY NASDAQ STOCK MARKET
Under rules adopted by the Nasdaq Stock Market, ON's common stock is
subject to possible delisting if the minimum bid price for ON common stock falls
below $1.00 for a period of 30 consecutive business days. Once notified of this
deficiency by the Nasdaq Stock Market, ON would have 90 days from the date of
the notification to achieve compliance with the minimum bid price standard.
Compliance can be achieved during this 90-day period if the minimum bid price
exceeds $1.00 for at least 10 consecutive business days. Delisting could have a
material adverse effect on the price of our common stock and on the level of
liquidity currently available to our shareholders.
WE WILL BE SUBJECT TO FINANCIAL PENALTIES IF THE SHARES ISSUED OR ISSUABLE UPON
EXERCISE OF THE NEW WARRANTS CANNOT BE RESOLD UNDER A REGISTRATION STATEMENT ON
FORM S-3
ON filed a registration statement on Form S-3 covering the resale of
the Warrant Shares, which registration statement has been declared effective by
the Securities and Exchange Commission. If such registration statement is not
available for resales of the Warrant Shares during the two-year period
commencing with its effective date for any reason outside of the control of the
Investors, ON must pay each of the Investors a penalty in an amount equal to
$7,500 for each day such registration statement is not effective.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign
currency fluctuations, stock price risk based on ON's future common stock price,
and investment changes.
INTEREST RATE RISK. The Company's exposure to market rate risk for
changes in interest rates relates primarily to the Company's cash equivalent
investments. The Company has not used derivative financial instruments. The
Company invests its excess cash in short-term floating rate instruments and
senior secured floating rate loan funds, which carry a degree of interest rate
risk. These instruments may produce less income than expected if interest rates
fall.
FOREIGN CURRENCY RISK. International revenues from the Company's
foreign subsidiaries and other foreign sources for the year ended December 31,
2000 were approximately 67% of total revenues. International sales are made
primarily from the Company's subsidiary in Germany and are denominated in the
local currency. Accordingly, the Company's German subsidiary uses the local
currency as its functional currency. The Company's international business is
subject to risk typical of an international business, including, but not limited
to, differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility. Accordingly, the Company's future results could be materially
adversely impacted by changes in these or other factors. The Company is exposed
to foreign currency exchange rate fluctuations as the financial results of its
foreign subsidiary are translated into U.S. dollars in consolidation. As
exchange rates vary, these results, when translated, may vary from expectations
and adversely impact overall profitability.
ON'S STOCK PRICE RISK. In accordance with EITF 00-19, the outstanding
warrants resulting from the Exchange Agreements, described in Item 5, have been
recorded at fair value at each exercise and reporting period date with any
changes in the fair value included in the results of operations. The Company
calculates the fair value of these warrants using the Black-Scholes option
pricing model, for which ON's stock price and volatility are factors.
The principal amount of the notes received by the Investors resulting
from the Exchange Agreements, as described in Item 5, is due and payable on
December 31, 2001, unless a registration statement covering all the shares of
the Company's common stock that are entitled to be registered under the Exchange
Agreements is effective for not less than 20 trading days during the period
beginning November 15, 2001 and ending December 31, 2001 (the "Measurement
Period") and the average closing price of the Company's common stock for the
last 20 trading days during the Measurement Period when such registration
statement is effective exceeds $3.00 per share (as adjusted to reflect any stock
splits, reverse stock splits, stock dividends or similar events).
INVESTMENT RISK. The Company may invest in the future in the equity
instruments of privately held companies for business and strategic purposes.
However, as of December 31, 2000, the Company holds no such material
investments. For these non-quoted investments, the Company's policy is to
regularly review the assumptions underlying the operating performance and cash
flow forecasts in assessing the carrying values. The Company identifies and
records impairment losses on long-lived assets when events or circumstances
indicate that such assets might be impaired.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DOCUMENTS
The information required by this item is set forth at the end of this
Annual Report on Form10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable
25
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required hereunder is incorporated by reference from
the Company's definitive Proxy Statement filed in connection with the Company's
Annual Meeting of Stockholders to be held on April 27, 2001.
ITEM 11. EXECUTIVE COMPENSATION
The information required hereunder is incorporated by reference from
the Company's definitive Proxy Statement filed in connection with the Company's
Annual Meeting of Stockholders to be held on April 27, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required hereunder is incorporated by reference from
the Company's definitive Proxy Statement filed in connection with the Company's
Annual Meeting of Stockholders to be held on April 27, 2001.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
The information required hereunder is incorporated by reference from
the Company's Proxy Statement filed in connection with the Company's Annual
Meeting of Stockholders to be held on April 27, 2001.
PART IV
-------
ITEM14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
Page
Number
------
Report of Independent Public Accountants 27
Consolidated Balance Sheets:
December 31, 2000 and 1999 28
Consolidated Statements of Operations:
Years ended December 31, 2000, 1999 and 1998 29
Consolidated Statements of Stockholders' Equity:
Years ended December 31, 2000, 1999 and 1998 30
Consolidated Statements of Cash Flows:
Years ended December 31, 2000, 1999 and 1998 31
Notes to the Consolidated Financial Statements 33
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 51. The Exhibits listed
in the accompanying Index of Exhibits are filed or incorporated by reference as
part of this report.
(b) Reports on Form 8-K: Report on Form 8-K filed by the Company on
December 21, 2000 regarding the Exchange Agreements with the Investors.
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Board of Directors and Stockholders of
ON Technology Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of ON
Technology Corporation (a Delaware corporation) and Subsidiaries as of December
31, 2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the ON Technology Corporation's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of ON Technology
Corporation and Subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
-----------------------
Boston, Massachusetts
January 26, 2001
27
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
December 31,
------------------------
2000 1999
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,437 $ 16,941
Restricted cash 1,069 --
Accounts receivable, net of allowance
of $2,177 and $666, respectively 5,561 7,347
Due from Meeting Maker, Inc. (MMI) (Note 2) 103 --
Prepaid expenses and other current assets 511 674
---------- ----------
Total current assets 16,681 24,962
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Computers and equipment 4,935 4,561
Furniture and fixtures 335 239
Leasehold improvements 528 284
---------- ----------
Less-Accumulated depreciation and amortization 4,213 3,442
---------- ----------
1,585 1,642
---------- ----------
Other assets and deposits 105 184
---------- ----------
$ 18,371 $ 26,788
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,705 $ 3,235
Accrued expenses 2,890 2,532
Notes payable (Note 6) 875 --
Reserve for distributor inventories -- 120
Deferred revenue - short term 3,777 3,931
---------- ----------
Total current liabilities 10,247 9,818
Warrant liability (Note 6) 987 --
Deferred revenue - long term 235 --
---------- ----------
Total liabilities 11,469 9,818
---------- ----------
Commitments (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, Authorized - 2,000,000 shares
Issued- none -- --
Common stock, $0.01 par value - Authorized -
30,000,000 shares
Issued and outstanding - 15,300,951 shares
and 13,848,164 shares, respectively 153 138
Additional paid-in capital 73,843 74,596
Deferred stock-based compensation (97) --
Accumulated deficit (67,130) (57,694)
Accumulated other comprehensive income (loss) 180 (23)
Treasury stock (15,000 shares at cost) (47) (47)
---------- ----------
Total stockholders' equity 6,902 16,970
---------- ----------
$ 18,371 $ 26,788
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
28
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
For the Years Ended December 31,
------------------------------------------
2000 1999 1998
---------- ---------- ----------
REVENUE:
Net CCM and related products $ 16,073 $ 17,993 $ 8,176
CCM and related service and maintenance 6,633 5,524 3,124
Meeting Maker, Inc. (MMI) 3,405 7,360 7,530
Other 236 -- 1,180
---------- ---------- ----------
TOTAL REVENUE 26,347 30,877 20,010
---------- ---------- ----------
OPERATING EXPENSES:
Cost of CCM and related product and service revenue 4,356 4,786 3,347
Cost of MMI revenue 75 645 543
Sales and marketing 12,324 11,976 9,318
Research and development 9,811 8,697 7,455
General and administrative 6,681 4,465 3,436
MMI operating expenses 2,159 2,676 2,962
Gain on sale of assets -- -- (6,518)
---------- ---------- ----------
LOSS FROM OPERATIONS (9,059) (2,368) (533)
Interest expense (7) (16) (71)
Interest income 505 169 416
Other income, net 716 216 --
---------- ---------- ----------
LOSS BEFORE ALLOCATION TO MMI AND
PROVISION FOR INCOME TAXES (7,845) (1,999) (188)
Allocation to MMI (Note 2) (1,171) -- --
---------- ---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES (9,016) (1,999) (188)
---------- ---------- ----------
Provision for income taxes (420) -- (27)
---------- ---------- ----------
NET LOSS $ (9,436) $ (1,999) $ (215)
========== ========== ==========
Basic loss per share $ (0.67) $ (0.16) $ (0.02)
========== ========== ==========
Diluted loss per share $ (0.67) $ (0.16) $ (0.02)
========== ========== ==========
Basic number of common weighted average shares
outstanding 14,140,742 12,526,398 12,280,953
========== ========== ==========
Diluted number of common weighted average shares
outstanding 14,140,742 12,526,398 12,280,953
========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
29
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Stockholder's Equity
-----------------------------------------------------------------------------------------------------------
Common Stock Treasury Stock
------------------- -------------------
Deferred Accumulated
Number $0.01 Additional Stock- Other Number
of Par Paid-in Based Accumulated Comprehensive of Comprehensive
shares value Capital Compensation Deficit Income(Loss) shares Cost Total Loss
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 1997 12,223 122 62,665 (229) (55,480) (35) (15) (47) 6,996
Sale of common stock
under the employee
Stock Purchase Plan 58 1 65 -- -- -- -- -- 66
Exercise of common
stock options 95 1 63 -- -- -- -- -- 64
Amortization of deferred
stock-based compensation
related to grants of
common stock options -- -- -- 229 -- -- -- -- 229
Cumulative translation
adjustment -- -- -- -- -- 1 -- -- 1 1
Net loss -- -- -- -- (215) -- -- -- (215) (215)
Comprehensive loss -- -- -- -- -- -- -- -- -- (214)
-------- -------- -------- -------- -------- -------- -------- -------- -------- ========
Balance,
December 31, 1998 12,376 124 62,793 -- (55,695) (34) (15) (47) 7,141
Sale of common stock
and warrants, net of
$1,039 of issuance
costs 1,030 10 10,951 -- -- -- -- -- 10,961
Sale of common stock
under the employee
Stock Purchase Plan 122 1 142 -- -- -- -- -- 143
Exercise of common
stock options 320 3 628 -- -- -- -- -- 631
Deferred stock-based
compensation related
to grants of common
stock options -- -- 82 (82) -- -- -- -- --
Amortization of deferred
stock-based compensation
related to grants of
common stock options -- -- -- 82 -- -- -- -- 82
Cumulative translation
adjustment -- -- -- -- -- 11 -- -- 11 11
Net loss -- -- -- -- (1,999) -- -- -- (1,999) (1,999)
Comprehensive loss -- -- -- -- -- -- -- -- -- $ (1,988)
-------- -------- -------- -------- -------- -------- -------- -------- -------- ========
Balance,
December 31, 1999 13,848 138 74,596 -- (57,694) (23) (15) (47) 16,970
Sale of common stock
under the Employee
Stock Purchase Plan 144 1 129 -- -- -- -- -- 130
Exercise of common
stock options 648 7 671 -- -- -- -- -- 678
Conversion of warrants
into note payable
(Note 5) -- -- (800) -- -- -- -- -- (800)
Issuance of common stock
warrants (Note 5) -- -- (1,910) -- -- -- -- -- (1,910)
Reclassification of
warrants to permanent
equity upon exercise -- -- 375 -- -- -- -- -- 375
Exercise of warrants
(Note 5) 661 7 (7) -- -- -- -- -- --
Deferred stock-based
compensation related
to grants of common
stock options -- -- 789 (789) -- -- -- -- --
Amortization of deferred
stock-based compensation
related to grants of
common stock options -- -- -- 692 -- -- -- -- 692
Cumulative translation
adjustment -- -- -- -- -- 203 -- -- 203 203
Net loss -- -- -- -- (9,436) -- -- -- (9,436) (9,436)
Comprehensive loss -- -- -- -- -- -- -- -- -- $ (9,233)
-------- -------- -------- -------- -------- -------- -------- -------- -------- ========
Balance,
December 31, 2000 15,301 $ 153 $ 73,843 $ (97) $(67,130) $ 180 (15) $ (47) $ 6,902
-------- -------- -------- -------- -------- -------- -------- -------- --------
30
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------- -------- --------
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,436) $ (1,999) $ (215)
Adjustments to reconcile net loss to
net cash used in operating activities
Gain on sale of assets (458) -- (6,518)
Depreciation and amortization 720 1,726 1,580
Amortization of deferred stock-based compensation 614 82 229
Revaluation of notes payable 75 -- --
Warrant liability revaluation (548) -- --
Changes in assets and liabilities:
Accounts receivable 1,525 (3,946) (443)
Prepaid expenses and other current assets 180 163 1,935
Accounts payable (1,048) (812) (323)
Accrued expenses 399 578 (2,460)
Reserve for distributor inventories (120) -- (96)
Due from MMI (103) -- --
Deferred revenue 970 2,189 735
-------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES (7,230) (2,019) (5,576)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in other assets and deposits 44 (24) 1
Purchase of property and equipment, net (803) (1,072) (878)
Restricted cash to secure facility lease (1,069) -- --
Proceeds from assets held for sale, net of transaction costs -- -- 8,273
-------- -------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,828) (1,096) 7,396
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock and
warrants to purchase common stock -- 10,961 --
Exercise of stock options 678 631 64
Sale of stock under the Employee Stock Purchase Plan 130 143 66
Principal repayments on obligations under capital lease -- (10) (356)
-------- -------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 808 11,725 (226)
-------- -------- --------
Effect of exchange rates on cash and cash equivalents 746 330 (272)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,504) 8,940 1,322
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 16,941 8,001 6,679
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,437 $ 16,941 $ 8,001
======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
31
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------- -------- --------
2000 1999 1998
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for-
Interest $ 7 $ 16 $ 71
======== ======== ========
Income taxes $ 8 $ -- $ 37
======== ======== ========
Non-Cash Investing and Financing Activities:
Exchange of warrants for notes payable $ 800 $ -- $ --
======== ======== ========
Issuance of warrants under Exchange Agreements
Initial valuation $ 1,910 $ -- $ --
Reclass of warrants to permanent equity
upon exercise (375)
-------- -------- --------
$ 1,535 $ -- $ --
======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
32
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) was
incorporated in Delaware in 1985.
The Company provides enterprise desktop management software for
heterogeneous enterprise networks that is open, scalable, and easy to use and
administer. The Company's principal product, ON COMMAND CCM(TM), or CCM, is
designed to address the enterprise desktop management requirements of large
organizations. This product is an advanced system for managing and controlling
PC software across corporate networks and the Internet. It also provides a
single, integrated system for managing desktops, mobile PCs, and handhelds from
one centralized server. CCM can be deployed across most major hardware platforms
and network operating systems and protocols.
The Company incurred net losses of approximately $9,436, $1,999 and
$215 during the years ended December 31, 2000, 1999 and 1998, respectively. The
Company has an accumulated deficit of $67,130 as of December 31, 2000. The
Company is subject to the risks and challenges similar to other technology-based
companies. These risks include, but are not limited to successful development
and marketing of products, the ability to obtain adequate financing to support
growth and future operations and competition from substitute products and larger
companies with greater financial, technical, management and marketing resources.
The accompanying consolidated financial statements reflect the
application of certain significant accounting policies as described below and
elsewhere in the notes to the consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of 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.
33
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American
Institute of Certified Public Accountants' (AICPA) Statement of Position (SOP)
No. 97-2, SOFTWARE REVENUE RECOGNITION. Software license revenue consists
principally of revenue earned under perpetual software license agreements and is
generally recognized upon shipment of the software if collection of the
resulting receivable is probable, the fee is fixed or determinable, and
vendor-specific objective evidence exists for all undelivered elements to allow
allocation of the total fee to all delivered and undelivered elements of the
arrangement. Revenues under such arrangements, which may include multiple
software products and services sold together, are allocated to each element
based on the residual method in accordance with SOP No.98-9, SOFTWARE REVENUE
RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. Under the residual method,
the fair value of the undelivered elements is deferred and subsequently
recognized when earned. The Company has established sufficient vendor specific
objective evidence for professional services, training and maintenance and
support services. Accordingly, software license revenue is recognized under the
residual method in arrangements in which software is licensed with professional
services, training and maintenance and support services.
Service revenues from time and expense contracts and consulting and
training revenue are recognized as the related services are performed.
Amounts billed in excess of revenue recognized related to services and
maintenance are reflected as deferred revenue in the accompanying consolidated
balance sheets.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash and investments with original
maturities of three months or less. Cash equivalents consist of money market and
mutual fund investments. Restricted cash represents the minimum cash balance
requirement that the Company has with its financial institution related to the
Company's $1,069 outstanding letter of credit guarantee securing the Company's
lease obligations on its Waltham, Massachusetts' facility.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES 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,
accounts receivable, accounts payable, letter of credit, notes payable and
warrant liability. The estimated fair value of these financial instruments
approximates their carrying value at December 31, 2000 and 1999. The estimated
fair values have been determined through information obtained from market
sources and management estimates.
34
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization by charges to
operations in amounts estimated to allocate the cost of the assets over their
estimated useful lives, using the straight-line method, as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -----------
Computers and equipment............................ 3-7 Years
Furniture and fixtures............................. 5-7 Years
Leasehold improvements............................. 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 occurrence of a certain triggering event or
change in circumstances, the Company evaluates the realizability of long-lived
assets based on profitability expectations, using the undiscounted cash flow
method, for each subsidiary having a material long-lived assets balance. If an
impairment is indicated, the related long-lived assets are written down to their
estimated fair value. Factors that management considers in performing this
evaluation include current operating results, trends and prospects, product
demand, competition and other economic factors, both domestic and international.
Based on its most recent analysis, the Company believes that no impairment of
long-lived assets exists at December 31, 2000.
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 2000, 1999
and, 1998 are insignificant and accordingly have been charged to research and
development.
FOREIGN CURRENCY TRANSLATION
The Company translates the assets and liabilities of its foreign
subsidiaries at the exchange rates in effect at the reporting date in accordance
with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. Revenues and expenses are
translated using exchange rates in effect during each period. The resultant
translation adjustment is reflected as a separate component of stockholders'
equity.
During the year ended December 31, 2000, the Company incurred a net
foreign exchange loss of $190 primarily resulting from intercompany loans to
foreign subsidiaries and U.S. dollar-denominated debt at a foreign subsidiary.
This amount is included in other income, net in the accompanying consolidated
statements of operations. As of December 31, 2000, the Company had not entered
into any foreign currency contracts to hedge this exposure.
35
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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. As of December 31, 2000 the Company has no significant
off-balance-sheet or concentrations of credit risk. 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. The Company recorded
revenues of greater than 10% of total revenues for the years ended December 31,
2000, 1999 and 1998 and had significant accounts receivable balances at December
31, 2000 and 1999 from the following customers:
2000
Accounts
Revenues Receivable
------------------------------------------------------------
Customer A 17.7% 12.1%
------------------------------------------------------------
Customer B ** 16.2%
------------------------------------------------------------
1999
Accounts
Revenues Receivable
------------------------------------------------------------
Customer A 14.2% *
------------------------------------------------------------
Customer B ** 18.7%
------------------------------------------------------------
1998
Revenues
------------------------------------------------------------
Customer A 17.5%
------------------------------------------------------------
Customer B **
------------------------------------------------------------
* - ACCOUNTS RECEIVABLE FROM THIS CUSTOMER WERE LESS THAN 10% OF THE
COMPANY'S TOTAL ACCOUNTS RECEIVABLE AT THE APPLICABLE PERIOD-END.
** - REVENUES DERIVED FROM THIS CUSTOMER WERE LESS THAN 10% OF THE
COMPANY'S TOTAL REVENUE FOR THE APPLICABLE YEAR.
36
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LOSS PER SHARE
The Company calculates loss per share in accordance with SFAS 128,
EARNINGS PER SHARE. Basic loss per share is calculated by dividing net loss by
the weighted average number of common shares outstanding for the period. Diluted
loss per share is the same as basic loss per share for all periods presented
since the effect of stock options and warrants would be anti-dilutive.
Anti-dilutive securities, which consist of stock options and warrants,
that were not included in diluted loss per share, were 1,825,833, 1,093,250 and
1,764,968 for the years ended December 31, 2000, 1999 and 1998, 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 disclosure in the 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.
STOCK-BASED COMPENSATION
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
measurement of the fair value of stock options or warrants granted to employees
to be included in the statement of operations or, alternatively, disclosed in
the notes to consolidated financial statements. The Company accounts for
stock-based compensation for employees under Accounting Principles Board Opinion
(APB) No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations and provides additional footnote disclosure as required under
SFAS No. 123. The Company records the fair market value of stock options and
warrants granted to non-employees in exchange for services in accordance with
Emerging Issues Task Force (EITF) Issue No. 96-18, ACCOUNTING FOR EQUITY
INSTRUMENTS THAT ARE ISSUED TO OTHER THAN TASK FORCE EMPLOYEES FOR ACQUIRING, OR
IN CONJUNCTION WITH SELLING, GOODS OR SERVICES, in the consolidated statement of
operations.
RECLASSIFICATIONS
Certain prior-year balances have been reclassified to conform to the
current-year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
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,
as amended by SFAS No. 138, 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.
37
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(2) DISPOSITION OF MEETING MAKER BUSINESS
On January 3, 2000, the Company signed an asset purchase agreement with
a newly organized privately held company named Meeting Maker, Inc. (MMI) to sell
the Company's Groupware business (Meeting Maker) subject to the approval of the
Company's stockholders and certain other conditions. In connection with the
asset purchase agreement, the Company entered into a management agreement, also
dated January 3, 2000, in which the Company transferred effective control of the
Groupware business (Meeting Maker) to MMI. ON had no risk of ownership related
to the operating results from the Groupware business since January 3, 2000 and
has included the results of operations of MMI and allocated 100% of the net
income (loss) to MMI for the period January 3, 2000 to June 30, 2000. The
Company did not receive the required number of shareholder votes to approve the
Meeting Maker transaction at the May 26, 2000 Special Meeting of Shareholders.
As a result, the Company entered into a license agreement with MMI
effective as of June 30, 2000, which, among other things, terminated the
previously negotiated sale arrangement and provided for the grant of an
exclusive worldwide license to market and distribute the Meeting Maker product
(including a license to the underlying source code and object code). The Company
receives quarterly royalty payments, subject to certain minimums, from MMI in
connection with the exclusive license. At any time during the license period,
MMI has the ability to exercise a buyout option for the remaining minimum
payments plus an additional fee. The Company is recognizing the royalty fees as
earned ($236 during the year ended December 31, 2000) in other revenue in the
accompanying consolidated statements of operations.
Additionally, the license agreement provided for the sale of certain
assets and the assumption of certain liabilities related to the Meeting Maker
business. As a result, the Company recognized a gain of $458, net of related
transaction costs, in the quarter ended September 30, 2000. This gain is
included in other income, net in the accompanying consolidated statements of
operations.
(3) INCOME TAXES
The Company provides for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. Under the liability method specified by SFAS No.
109, a deferred tax asset or liability is determined based on the difference
between the financial statement and tax basis of assets and liabilities, as
measured by the enacted tax rates in effect when these differences are expected
to reverse. In the year ended December 31, 2000, the Company's tax provision
primarily resulted from foreign income. For the year ended December 31, 1999,
the Company incurred a significant U.S. operating loss for both book and tax
purposes and as a result no tax provision was recorded. The provision for 1998
represents alternative minimum taxes owed.
The components of domestic and foreign income (loss) before the
provision for income taxes are as follows:
2000 1999 1998
---------- ---------- ----------
Domestic $ (12,655) $ (4,161) $ 941
Foreign 3,639 2,162 (1,129)
---------- ---------- ----------
$ (9,016) $ (1,999) $ (188)
========== ========== ==========
38
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The components of the provision for income taxes are as follows:
2000 1999 1998
-------- -------- --------
Current
Federal $ --- $ --- $ 27
State --- --- ---
Foreign 420 --- ---
-------- -------- --------
420 --- 27
Deferred
Federal --- --- ---
State --- --- ---
Foreign --- --- ---
-------- -------- --------
--- --- ---
-------- -------- --------
$ 420 $ --- $ 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:
2000 1999
--------- ---------
Deferred tax asset ---
Temporary differences $ 1,945 $ 1,375
Net operating loss and
tax credit carry-forwards 10,413 9,244
--------- ---------
12,358 10,619
Valuation allowance (12,358) (10,619)
--------- ---------
$ -- $ --
========= =========
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, 2000, the Company has available federal and foreign
net operating loss carry forwards of approximately $21,022 and $2,050,
respectively. These carry forwards expire through 2020 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:
2000 1999 1998
------ ------ ------
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 35.5% 40.2% 54.6%
------ ------ ------
Effective tax rate 4.7% -- 14.4%
39
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) LINE OF CREDIT AND LETTER OF CREDIT
As of December 31, 2000, the Company has a $1,069 letter of credit
guarantee outstanding securing its Waltham, Massachusetts leased facility. The
Company is required to maintain a cash balance of $1,069 as collateral for this
guarantee. This amount is shown as restricted cash as of December 31, 2000 in
the accompanying consolidated financial statements. At December 31, 2000, the
Company has no line of credit arrangement.
As of December 31, 1999, the Company had a $700 letter of credit
guarantee outstanding for a subsidiary against a line of credit with a foreign
bank and a $1,069 letter of credit guarantee outstanding securing our new
facility lease. The Company also had an unused and available line of credit of
$5,000 with a commercial bank. The Company was able to borrow under this line of
credit up to the greater of $5,000 or the sum of 80% of qualified domestic
accounts receivable. Advances pursuant to the line of credit were secured by
liens granted on the Company's accounts receivable. At December 31, 1999, the
Company did not have an outstanding balance under the line of credit agreement.
(5) COMMITMENTS
LEASES
The Company conducts its operations in leased facilities under
operating leases expiring at various times through 2003. Additionally, in 2000
the Company acquired certain furniture and fixtures as well as computer
equipment under certain operating leases. These leases also expire at various
times through 2003.
The approximate minimum annual lease payments under the operating
leases are as follows:
OPERATING
LEASES
---------
2001........................... $ 1,442
2002........................... 1,192
2003........................... 17
---------
Total (reduced by minimum
sublease rentals of $489) $ 2,651
=========
Total rental expense included in the accompanying consolidated
statements of operations for the years ended December 31, 2000, 1999 and 1998
was $1,415, $1,290 and $1,547, respectively. The rent expense in 2000 is net of
sublease income of $173. This sublease is coterminous with the Company's
Waltham, Massachusetts' facility lease, expiring in December 2002.
40
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ROYALTIES
The Company has entered into several software license agreements. These
agreements provide the Company with exclusive licenses to distribute certain
software products in several countries. The Company is required to pay royalties
on all related sales based on a percentage of the sale, subject to a floor. No
minimum royalties are payable unless a product is sold. In 1998, the Company had
exclusive worldwide licenses to distribute additional products, which products
required minimum royalty payments to maintain those distribution rights. As a
result of the software products sold to Elron (Note 11), the Company has no
minimum royalty requirement to maintain exclusive distribution rights as of
December 31, 2000. Total royalty expense included in the accompanying
consolidated statements of operations for the years ended December 31, 2000,
1999 and 1998 was $363, $413 and $252, respectively.
(6) STOCKHOLDERS' EQUITY
COMMON STOCK
The Company has 30,000,000 authorized shares of common stock $0.01 par
value, of which 15,300,951 shares were issued at December 31,2000.
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 31,2000.
Private Placement
On December 30, 1999, the Company closed a $12 million private
placement of common stock and warrants to two institutional investors. In total,
the investors purchased 1,029,674 shares of the Company's common stock at a
price of $11.65 per share and received warrants to purchase 514,838 shares of
the Company's common stock at an exercise price of $15.15 per share, which were
subject to adjustment as described below (the Initial Warrants). Each investor
also received warrants to purchase additional shares of common stock (the
Additional Warrants) exercisable solely upon the occurrence of certain events,
as defined. The Additional Warrants expired under the original terms.
Under the terms of the Initial Warrant agreements, the shares to be
issued under the warrant were adjusted based on a calculation using the fair
market value of the Company's common stock in December 2000. Based on the market
value of the Company's common stock during December 2000, the warrants would
have been adjusted such that the investors would have had warrants representing
in excess of 80% of the Company's common stock.
41
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
As a result of this, the Company entered into an Exchange Agreement
with the parties on December 18, 2000, under which the institutional investors
agreed to exchange the Initial Warrants for new warrants to purchase up to a
total of 2,800,000 shares of the Company's common stock for $0.01 per share and
for promissory notes from the Company totaling $1.0 million. The principal of
the notes, in addition to interest (payable at 9%) is due and payable on
December 31, 2001. The notes will be forgiven if the Company has an effective
registration statement for twenty days in the period of November 15, 2001
through December 31, 2001 and the average closing price for the shares of the
Company's common stock on the last 20 days during such period when the
registration statement is effective exceeds $3.00 per share. The Company has
recorded the notes payable issued as part of the exchange for the outstanding
warrants at fair value in the accompanying consolidated financial statements.
The Company recognized the corresponding increase in fair value of $75 as other
expense in the Company's consolidated statements of operations for the year
ended December 31, 2000.
In accordance with EITF Issue No.00-19, the Company has determined that
outstanding warrants as of December 31, 2000 to purchase 2,800,000 shares of the
Company's common stock should be designated as a liability. Accordingly, the
outstanding warrants have been recorded at fair value at each exercise and
reporting period date with any changes in the fair value included in the results
of operations. On December 18, 2000, the Company calculated the fair value of
these warrants, using the Black-Scholes option pricing model, at $1,910 and
recorded a corresponding liability. On December 22, 2000, the institutional
investors exercised a total of 672,069 warrants to purchase the Company's common
stock through a cashless exercise for a net 661,278 shares of the Company's
common stock. The Company recognized $548 related to a gain in the valuation of
the warrants, which is included in other income in the Company's consolidated
statement of operations for the year ended December 31, 2000.
As required by the Exchange Agreements, ON filed a registration
statement on Form S-3 covering the resale of the Warrant Shares, which
registration statement has been declared effective by the Securities and
Exchange Commission (SEC). If such registration statement is not available for
resales of the Warrant Shares during the two-year period commencing with its
effective date for any reason outside of the control of the Investors, ON must
pay each of Castle Creek and Marshall Capital a penalty in an amount equal to
$7.5 for each day such registration statement is not effective.
(7) STOCK OPTION PLANS
In July 1992, the Company adopted the 1992 Employee and Consultant
Stock Option Plan (the Plan). Pursuant to the Plan, as amended, the Company may
grant to employees and consultants of the Company statutory and non-statutory
stock options to purchase up to 5,400,000 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.
As of December 31, 2000, an additional 260,129 shares were available
under the Company's stock option plans for future grants.
42
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Stock option activity for the option plans was as follows:
NUMBER WEIGHTED AVERAGE
OF EXERCISE PRICE
SHARES PER SHARE
---------- ----------
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
Granted...................... 2,276,391 6.02
Exercised.................... (647,447) 1.05
Terminated................... (627,801) 3.26
---------- ----------
Outstanding, December 31, 2000....... 2,974,155 $ 5.53
========== ==========
Exercisable, December 31,2000....... 751,050 $ 3.18
========== ==========
Exercisable, December 31, 1999...... 539,587 $ 2.64
========== ==========
Exercisable, December 31, 1998...... 660,834 $ 2.90
========== ==========
The following table presents weighted average price and remaining contractual
life information about significant option groups outstanding and exercisable at
December 31, 2000.
Options Outstanding Options Exercisable
-------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
- ------------------ -------- -------- -------- -------- --------
$ 0.01 - $ 0.01 4,250 6.58 $ 0.01 4,250 $ 0.01
1.25 - 1.94 261,861 7.85 1.62 151,632 1.62
1.97 - 2.94 995,791 7.50 2.35 362,382 2.28
3.13 - 4.63 738,569 8.84 3.70 167,749 3.45
4.75 - 6.31 21,837 8.70 6.27 7,024 6.17
10.56 - 15.00 951,847 9.03 11.34 58,013 11.93
--------- -------- -------- --------- --------
2,974,155 8.36 $ 5.52 751,050 $ 3.18
========= ======== ======== ========= ========
43
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table presents the weighted average fair value of the
options at the date of grant for all options granted during the year and the
assumptions used in the calculation:
2000 1999 1998
------ ------ ------
Risk-free interest rate................ 6.20% 5.78% 5.28%
Expected dividend yield................ -- -- --
Expected lives......................... 7 7 7
Expected volatility.................... 145% 131% 128%
Weighted average fair value
per share of grant.................. $5.99 $3.10 $1.84
Had compensation cost for these plans been determined consistent with
SFAS No. 123, the Company's net loss and basic and diluted net loss per share
would have been further reduced to the following pro forma amounts:
2000 1999 1998
--------- --------- ---------
Net Loss As Reported $ (9,436) $ (1,999) $ (215)
Pro Forma (13,048) (3,224) (1,400)
Basic Net Loss Per Share As Reported (0.67) (0.16) (0.02)
Pro Forma (0.92) (0.26) (0.11)
Diluted Net Loss Per Share As Reported (0.67) (0.16) (0.02)
Pro Forma (0.92) (0.26) (0.11)
On December 28, 2000, the Company granted to an officer immediately
vested options to purchase 300,000 shares of the Company's common stock at an
exercise price of $0.10 per share. On December 28, 2000, the Company advanced
the officer $30 to cover the exercise price, which was repaid in February 2001.
Additionally, the officer entered into a stock restriction agreement under which
the officer is subject to the certain restrictions that lapse through February
2004 regarding the resale of the common stock issued upon exercise of the stock
options to the Company, as defined. The advance is included in prepaids and
other current assets as of December 31, 2000 in the accompanying consolidated
balance sheets. The excess of the fair market value of the Company's common
stock over the exercise price of the options on the date of the grant, totaling
$97, has been classified as deferred stock-based compensation and included as a
component of stockholders' equity in the accompanying consolidated financial
statements.
In February 1, 2000, the Company granted 125,000 options to purchase
the Company's common stock to an outside consultant that vest ratably on a
monthly basis over a one-year period through February 1, 2001. During the year
ended December 31, 2000, the Company recorded $284 of compensation expense
related to this option grant.
On October 21, 1999, the Company granted 100,000 options to purchase
the Company's common stock to outside consultants that vest ratably on a
quarterly basis through October 21, 2000. During the year ended December 31,
1999, the Company recorded $82 of compensation expense related to these option
grants. During the year ended December 31, 2000, the Company recorded an
additional $156 of compensation expense related to these option grants.
44
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
EMPLOYEE STOCK PURCHASE PLAN
On May 18, 1995, the Company adopted the 1995 Employee Stock Purchase
Plan pursuant to which up to 1,000,000 shares of common stock may be issued. The
plan consists of semiannual offerings commencing on the first day the Company's
common stock was publicly traded and each subsequent offering commencing on
January 1 and July 1 of each year. The maximum number of shares of common stock
that may be purchased by an employee is determined on the first day of each
offering period, as defined. The price at which the shares are purchased is the
lower of 85% of the closing price on the first or last day of the offering
period. As of December 31, 2000, an additional 644,000 shares were available
under the plan for future purchase. During 2000, 1999 and 1998, the Company
issued 144,000, 122,000 and 58,000 shares, respectively, under the Plan.
(8) 401 (K) PLAN
In 1994, the Company established a plan under Section 401(k) of the
Internal Revenue Code (the 401(k) Plan) covering all eligible employees, as
defined. Participants in the 401(k) Plan may not contribute more than the lesser
of specified statutory amount or 15% of his or her pretax total compensation.
The 401(k) Plan permits, but does not require, additional contributions to the
401(k) Plan by the Company. The Company made no contributions during 2000, 1999
and 1998.
(9) ACCRUED EXPENSES
Accrued expenses consisted of the following:
2000 1999
---------- ----------
Payroll and payroll related ... $ 1,251 $ 1,289
Taxes payable.................. 837 732
Other ......................... 802 511
---------- ----------
$ 2,890 $ 2,532
========== ==========
45
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(10) SEGMENT REPORTING
Prior to June 30, 2000, the Company had two reportable segments:
Desktop Management and Groupware. Management had organized the segments based on
differences in products and services because each segment required different
technology and marketing strategies. The Desktop Management segment included the
ON Command CCM product line, which developed, marketed and supported enterprise
desktop management products. The Groupware segment developed, marketed and
supported real-time group scheduling products. Since June 30, 2000, information
with respect to the Groupware segment is not included in the accompanying
consolidated statements of operations (see Note 2 for a discussion of the
disposition of the Groupware business).
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluated segment
performance based on gross margin from operations and did not capture segment
net income (loss) or segment assets.
The following table illustrates segment operating data:
Desktop
Management Groupware Total
-------- --------- --------
2000
Net CCM and related products $ 16,073 $ -- $ 16,073
CCM and related service and maintenance 6,633 -- 6,633
Other 236 -- 236
Revenue - MMI -- 3,405 3,405
-------- -------- --------
Total revenue 22,942 3,405 26,347
Cost of revenue 4,356 75 4,431
-------- -------- --------
Gross margin 18,586 3,330 21,916
1999
Net CCM and related products $ 17,993 $ -- $ 17,993
CCM and related service and maintenance 5,524 -- 5,524
Other -- -- --
Revenue - MMI -- 7,360 7,360
-------- -------- --------
Total revenue 23,517 7,360 30,877
Cost of sales 4,786 645 5,431
-------- -------- --------
Gross margin 18,731 6,715 25,446
1998
Net CCM and related products $ 8,176 $ -- $ 8,176
CCM and related service and maintenance 3,124 -- 3,124
Other -- 1,180 1,180
Revenue - MMI -- 7,530 7,530
-------- -------- --------
Total revenue 11,300 8,710 20,010
Cost of revenue 3,347 543 3,890
-------- -------- --------
Gross margin 7,953 8,167 16,120
46
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table represents geographic information:
North
America Europe Other Elimination Total
-------- -------- -------- -------- --------
2000
Revenue from unaffiliated customers $ 9,286 $ 17,061 $ -- $ -- $ 26,347
Transfers between geographic areas
-- 612 -- (612) --
-------- -------- -------- -------- --------
Total Sales 9,286 17,673 -- (612) 26,347
Identifiable assets 23,361 13,751 2 (18,743) 18,371
1999
Revenue from 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
Revenue from 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
Transfers between geographic areas are accounted for equivalent to an arm's-
length basis.
(11) ELRON TRANSACTION
On February 11, 1998, the Company received shareholder approval to sell
and sold certain assets to Elron Software, Inc. Upon sale the Company received
$8,273 of proceeds, net of transaction costs, and recorded a gain on sale of
$6,518.
47
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(12) SCHEDULES OF VALUATION RESERVES
A summary of the reserve for doubtful accounts is as follows:
BALANCE,
BEGINNING CHARGED BALANCE,
OF TO END
YEAR EXPENSE WRITE-OFFS OTHER OF YEAR
------ ------ ------ ------ ------
Year ended December 31, 1998 $2,975 $ 85 $2,106(1) $ 954
Year ended December 31, 1999 $ 954 $ 38 $1,026 $ 666
Year ended December 31, 2000 $ 666 $1,788 $ 397 $ 120(2) $2,177
(1) Includes $1,500 of restructuring related write-offs.
(2) Relates to the reclassification of reserve for distributor inventories from
current liabilities.
A summary of accrued restructuring is as follows:
BALANCE,
BEGINNING CHARGED BALANCE,
OF TO NON-CASH CASH END
YEAR EXPENSE WRITE-OFFS EXPENDITURES OF YEAR
------ ------ ------ -------- ------
Year ended December 31, 1998 $2,225 $ -- $ -- $(2,080) $ 145
Year ended December 31, 1999 $ 145 $ -- $ -- $ (49) $ 96
Year ended December 31, 2000 $ 96 $ -- $ -- $ (51) $ 45
48
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(13) SELECTED QUARTERLY INFORMATION (UNAUDITED)
2000 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Net CCM and related product revenue $ 2,669 $ 3,057 $ 5,320 $ 5,027
CCM and related service and maintenance revenue 1,440 1,641 1,652 1,900
Revenue--MMI 1,609 1,796 -- --
Other revenue -- -- 118 118
Cost of CCM and related product and service revenue 862 886 1,308 1,300
Cost of product revenue--MMI 34 41 -- --
MMI operating expenses 935 1,224 -- --
Loss from operations (2,665) (2,689) (1,314) (2,391)
Allocation to MMI (640) (531) -- --
Net loss (3,125) (3,094) (755) (2,462)
Loss per share--Basic $ (0.22) $ (0.22) $ (0.05) $ (0.17)
Loss per share--Diluted $ (0.22) $ (0.22) $ (0.05) $ (0.17)
1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Net CCM and related product revenue $ 4,518 $ 3,908 $ 4,475 $ 5,092
CCM and related service and maintenance revenue 858 1,441 1,628 1,597
Revenue--MMI 1,474 2,050 2,181 1,655
Other revenue -- -- -- --
Cost of CCM and related product and service revenue 890 1,133 1,935 828
Cost of product revenue--MMI 200 151 143 151
MMI operating expenses 789 672 564 651
(Loss) income from operations (979) (1,217) (300) 128
Allocation to MMI -- -- -- --
Net (loss) income (741) (1,132) (281) 155
Loss income per share--Basic $ (0.06) $ (0.09) $ (0.02) $ 0.01
Loss income per share--Diluted $ (0.06) $ (0.09) $ (0.02) $ 0.01
49
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 27, 2001 Name: Robert L. Doretti
Title: Chairman, 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 and the dates indicated.
/s/Steven R. Wasserman
----------------------
Date: March 27, 2001 Name: Steven R. Wasserman
Title: Vice President of Finance
and Chief Financial Officer
/s/ John Cassarini
----------------------
Date: March 27, 2001 Name: John Cassarini
Title: Director
/s/ Gina Bornino Miller
-----------------------
Date: March 27, 2001 Name: Gina Bornino-Miller
Title: Director
/s/ Robert P. Badavas
-----------------------
Date: March 27, 2001 Name: Robert P. Badavas
Title: Director
50
INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit No. Exhibit Title Pages
- ----------- ------------- -----
3.1.+ Fourth Amended and Restated Certificate of Incorporation of ON
Technology Corporation, incorporated by reference to exhibit 3.1
to the Company's Registration Statement on Form S-1 (Reg. No.
33-92562).
3.2.+ Amended and Restated By-Laws of ON Technology Corporation,
incorporated by reference to exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-92562).
10.1.*+ 1992 Employee and Consultant Stock Option Plan, as amended.
10.2.*+ 1995 Directors Stock Option Plan, incorporated by reference to
exhibit 10.2 to the Company's Registration Statement on Form S-1
(Reg. No. 33-92562).
10.3.*+ 1995 Employee Stock Purchase Plan, as amended.
10.4.+ Second Restated Registration Rights Agreement dated June 1, 1994
by and among ON Technology Corporation and the holders of its
Series A, B and C Convertible Preferred Stock and First Amendment
thereto dated January 12, 1995, incorporated by reference to
exhibit 10.4 to the Company's Registration Statement on Form S-1
(Reg. No. 33-92562).
10.5.*+ Employment Agreement dated May 18, 1995 by and between ON
Technology Corporation and Christopher A. Risley, incorporated by
reference to exhibit 10.5 to the Company's Registration Statement
on Form S-1 (Reg. No. 33-92562).
10.6.*+ Employment Agreement dated May 18, 1995 by and between ON
Technology Corporation and John A. Rizzi, incorporated by
reference to exhibit 10.6 to the Company's Registration Statement
on Form S-1 (Reg. No. 33-92562).
10.7.*+ Employment Agreement dated May 18, 1995 by and between ON
Technology Corporation and Loren K. Platzman, incorporated by
reference to exhibit 10.7 to the Company's Registration Statement
on Form S-1 (Reg. No. 33-92562).
10.9.*+ Employment Agreement dated May 18, 1995 by and between ON
Technology Corporation and John M. Bogdan, incorporated by
reference to exhibit 10.9 to the Company's Registration Statement
on Form S-1 (Reg. No. 33-92562).
10.10.*+ Employment Agreement dated May 18, 1995 by and between ON
Technology Corporation and James A. Batson, incorporated by
reference to exhibit 10.10 to the Company's Registration Statement
on Form S-1 (Reg. No. 33-92562).
10.11.*+ Form of Indemnity Agreement by and between ON Technology and its
directors and executive offices, incorporated by reference to
exhibit 10.11 to the Company's Registration Statement on Form S-1
(Reg. No. 33-92562).
10.12.+ Lease dated July 9, 1993 by and between ON Technology Corporation
and Boston Properties, incorporated by reference to exhibit 10.12
to the Company's Registration Statement on Form S-1 (Reg. No.
33-92562).
10.13.+ Sublease dated October 7, 1994 by and between On Technology
Corporation and RSTAR Corporation, incorporated by reference to
exhibit 10.13 to the Company's Registration Statement on Form S-1
(Reg. No. 33-92562).
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).
51
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, incorporated by
reference to the exhibits to the company's current Report on Form
8-K as filed on January 3, 2000
10.22+ ON Technology Corporation Stock Purchase Warrant dated December
29, 1999, incorporated by reference to the exhibits to the
Company's current Report on Form 8-K as filed on January 3, 2000.
10.23+ ON Technology Corporation Stock Purchase Warrant (Reset) dated
December 29, 1999 incorporated by reference to the exhibits to the
Company's current Report on Form 8-K as filed on January 3, 2000..
10.24+ Registration Rights Agreement by and among ON Technology
Corporation, Castle Creek LLC and Marshall Capital Management Inc.
dated December 29, 1999, incorporated by reference to the exhibits
to the Company's current Report on Form 8-K as filed on January 3,
2000.
10.25+ Exchange Agreement by and between ON Technology Corporation and
Castle Creek Technology Partners LLC dated December 18, 2000,
incorporated by reference to the exhibits to the Company's current
Report on Form 8-K as filed on December 21, 2000.
10.26+ Exchange Agreement by and between ON Technology Corporation and
Marshall Capital Management, Inc. dated December 18, 2000,
incorporated by reference to the exhibits to the Company's current
Report on Form 8-K as filed on December 21, 2000.
10.27+ ON Technology Corporation Common Stock Purchase Warrant dated
December 18, 2000 issued to Castle Creek Technology Partners LLC,
incorporated by reference to the exhibits to the Company's current
Report on Form 8-K as filed on December 21, 2000.
10.28+ ON Technology Corporation Common Stock Purchase Warrant dated
December 18, 2000 issued to Marshall Capital Management, Inc,
incorporated by reference to the exhibits to the Company's current
Report on Form 8-K as filed on December 21, 2000.
52
10.29+ Promissory Note in the principal amount of $500,000 issued by ON
Technology Corporation to Castle Creek Technology Partners LLC,
incorporated by reference to the exhibits to the Company's current
Report on Form 8-K as filed on December 21, 2000.
10.30+ Promissory Note in the principal amount of $500,000 issued by ON
Technology Corporation to Marshall Capital Management, Inc,
incorporated by reference to the exhibits to the Company's current
Report on Form 8-K as filed on December 21, 2000.
10.31+ Mutual General Release between ON Technology Corporation and
Castle Creek Technology Partners LLC, incorporated by reference to
the exhibits to the Company's current Report on Form 8-K as filed
on December 21, 2000.
10.32+ Mutual General Release between ON Technology Corporation and
Marshall Capital Management, Inc, incorporated by reference to the
exhibits to the Company's current Report on Form 8-K as filed on
December 21, 2000.
10.33> * Stock Restriction Agreement between ON Technology Corporation
and Robert L. Doretti, incorporated herein
10.34> * Consulting Agreement between ON Technology Corporation and
Robert L. Doretti, incorporated herein
21.0. Subsidiaries of the registrant.
23.1. Consent of Arthur Andersen LLP.
+ Previously filed
* Management contracts or compensatory plans or arrangements covering executive
officers or directors of ON Technology Corporation.
> Agreement filed with this report
53