<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended 30 September 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ to ________
Commission file number 0-26376
ON TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3162846
(State of incorporation) (IRS Employer Identification Number)
One Cambridge Center
Cambridge Massachusetts 02142
(617) 374-1400
(Address and telephone of principal executive offices)
___________
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, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO _____
-----
10,804,841 shares of the registrant's Common stock, $0.01 par value, were
outstanding as of October 31, 1996.
THIS DOCUMENT CONTAINS 22 PAGES.
----
THE EXHIBIT INDEX IS ON PAGE 20.
1
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ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
FORM 10-Q, September 30, 1996
CONTENTS
<TABLE>
<CAPTION>
Item Number Page
- ----------- ----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Balance sheets:
September 30, 1996 and December 31, 1995 3
Statements of operations:
Three and nine months ended September 30, 1996 and 1995 4
Statements of cash flows:
Nine months ended September 30, 1996 and 1995 5
Notes to condensed consolidated financial statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-17
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Default Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBIT INDEX 20
</TABLE>
2
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ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 23,004 $ 33,338
Accounts receivable, net of allowance
for doubtful accounts and sales
returns of $ 2,786 and $605, respectively 6,908 6,377
Inventories, net 1,556 2,834
Prepaid expenses and other current assets 1,192 1,374
-------------- ---------------
Total current assets 32,660 43,923
-------------- ---------------
Property and equipment, at cost:
Computers and equipment 5,355 2,173
Equipment acquired under capital leases 3,895 3,804
Furniture and fixtures 239 133
-------------- --------------
Less - Accumulated depreciation 3,777 2,069
-------------- --------------
5,712 4,041
-------------- --------------
Direct marketing costs 1,050 1,554
Other assets and deposits 98 127
Purchased intangibles, net of $1,084
and $993 of accumulated amortization,
respectively 1,771 528
-------------- --------------
$ 41,291 $ 50,173
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease
obligations $ 1,104 $ 1,143
Accounts payable 3,719 3,392
Accrued expenses 1,940 2,265
Accrued restructuring costs 904 ---
Reserve for distributor inventories 400 934
Deferred revenue 808 627
-------------- --------------
Total current liabilities 8,875 8,361
-------------- --------------
Capital lease obligations, net of
current portion 754 1,506
-------------- --------------
Stockholders' Equity:
Common stock, $.01 par value -
Authorized - 20,000,000 shares
Issued and outstanding - 10,849,330
shares and 10,180,024 shares,
respectively 110 102
Additional paid in capital 55,328 45,051
Accumulated deficit (22,392) (4,493)
Accumulated deficit of S corporation (354) (354)
Less treasury stock, at cost - 156,867
shares and 0 shares, respectively (1,030) ---
-------------- --------------
Total stockholders' equity 31,662 40,306
-------------- --------------
$ 41,291 $ 50,173
============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
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ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenue:
- --------
<S> <C> <C> <C> <C>
Net product revenue $ 12,248 $ 11,331 $ 36,619 $ 30,327
Other revenue 389 168 1,153 508
---------- ----------- ------------ ------------
Total revenue 12,637 11,499 37,772 30,835
---------- ----------- ------------ ------------
Operating expenses:
- -------------------
Cost of product revenue 4,423 2,093 9,713 5,787
Sales and marketing 6,172 5,440 18,222 14,749
Research and development 2,493 1,774 6,775 5,080
General and administrative 1,102 798 3,190 2,261
Charge for purchased research
and development --- --- 13,285 ---
Charge for restructuring 5,415 --- 5,415 ---
---------- ----------- ------------ ------------
(Loss) income from operations (6,968) 1,394 (18,828) 2,958
---------- ----------- ------------ ------------
Interest income, net 259 214 884 150
---------- ----------- ------------ ------------
(Loss) income before provision
(benefit) for income taxes (6,709) 1,608 (17,944) 3,108
---------- ----------- ------------ ------------
Provision (benefit) for income taxes (483) 492 (44) 952
---------- ----------- ------------ ------------
Net (loss) income $ (6,226) $ 1,116 $ ( 17,900) $ 2,156
========== =========== ============ ============
Net (loss) income per share $ (.57) $ .12 $ (1.65) $ .25
========== =========== ============ ============
Shares used in per share calculation 10,980,103 9,540,424 10,875,798 8,590,016
========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1996 1995
---- ----
<S> <C> <C>
Cash Flows from Operating Activities
Net (Loss) Income $ (17,900) $ 2,156
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating activities
Charge for purchased research and development 13,285 ---
Non cash portion of restructuring charge 2,829 ---
Depreciation and amortization 2,489 1,236
Increase in direct marketing costs (970) (1,356)
Changes in assets and liabilities:
Accounts receivable (482) (1,070)
Inventories 1,279 (1,174)
Prepaid expenses and other current assets (582) (692)
Accounts payable 72 964
Accrued expenses (470) 811
Reserve for distributor inventories (534) (4)
Reserve for restructuring 904 ---
Deferred revenue 64 139
-------------- ------------
Net cash (used in) provided by operating activities (16) 1,010
-------------- ------------
Cash Flows From Investing Activities
Escrow receivable --- 625
Change in other assets and deposits 30 3
Purchase of property and equipment, net (3,660) (703)
Purchase of neTrend Corporation (2,260) ---
Purchase of Leprechaun Software International, Ltd, net of cash acquired (786) ---
Purchase of Technocom plc (1,963) ---
-------------- ------------
Net cash used in investing activities (8,639) (75)
-------------- ------------
Cash Flows From Financing Activities
Exercise of stock options 138 89
Stock purchase through ESPP 93 ---
Purchase of treasury stock (1,030) ---
Principal repayments on obligation under capital lease (882) (581)
Net proceeds from issuance of common stock --- 31,647
-------------- ------------
Net cash (used in) provided by financing activities (1,681) 31,155
-------------- ------------
Effect of exchange rate on cash and cash equivalents 2 ---
Net (decrease) increase in cash and cash equivalents (10,334) 32,090
Cash and cash equivalents, beginning of period 33,338 2,798
-------------- ------------
Cash and cash equivalents, end of period $ 23,004 $ 34,888
============== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for -
Interest $ 179 $ 186
============== ============
Income taxes $ 1,270 $ 395
============== ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q, September 30, 1996
(dollars in thousands, except per share amount)
(unaudited)
1. Interim Financial Statements
----------------------------
The accompanying consolidated financial statements have been presented
by ON Technology Corporation (together with its consolidated subsidiaries, the
"Company") without audit (except for the balance sheet information as of
December 31, 1995) in accordance with generally accepted accounting principles
for interim financial statements and with the instructions to Form-10Q and
Regulation S-X pertaining to interim financial statements. Accordingly, these
interim financial statements do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. The financial statements reflect all adjustments and accruals which
management considers necessary for a fair presentation of financial position as
of September 30, 1996 and September 30, 1995, and results of operations for the
three and nine months ended September 30, 1996 and September 30, 1995. The
results for the interim periods presented are not necessarily indicative of
results to be expected for any future period. The financial statements should
be read in conjunction with the audited financial statements and the notes
thereto included in the Company's Form 10-K.
2. Net (Loss) Income Per Common and Common Equivalent Share
---------------------------------------------------------
Net (loss) income per common and common equivalent share is computed
using the weighted average number of common and common equivalent shares
outstanding during each period in accordance with the treasury stock method.
The weighted average number of common shares assumes that all series of
redeemable convertible preferred stock previously issued and outstanding in 1995
had been converted to common stock as of the original issuance date.
3. Direct Marketing Costs
----------------------
The Company sells its products through various channels, including
free trial direct marketing. The Company incurs substantial costs in advance of
a free trial campaign, including the rental of mailing lists, postage and
printing. In 1994, the Company began capitalizing such costs in accordance with
the American Institute of Certified Public Accountants' (AICPA) Statement of
Position 93-7, Reporting on Advertising Costs. The Company amortizes such costs
over a three month period, which approximates the period of expected revenues.
The Company has recorded approximately $1,050 and $1,554 of capitalized direct
marketing costs in the accompanying condensed consolidated balance sheets at
September 30, 1996 and December 31, 1995, respectively.
4. Restructuring and Inventory Write-offs
--------------------------------------
On August 6, 1996, the Company announced that it had implemented a
reorganization of its operations and a restructuring plan (the "Plan"). The
Plan included write-offs and writedowns of certain assets, including accruing
the costs related to a significant reduction in the Company's work force,
primarily in the technical support and sales and marketing departments, and the
de-emphasis of certain product lines, resulting in a one time charge of $7,441.
Included in the Plan was an inventory writedown of $2,026 which is not included
in the statement of operations under the caption "Charge for restructuring,"
rather it is presented in accordance with EITF-96-9 under the caption "The
Writedowns of Inventory Associated with a Restructuring" and is included in the
cost of product revenue.
The following are the significant components of the $5,415 charge for
restructuring:
<TABLE>
<S> <C>
Employee severance, benefits and related costs $1,193
Write-off and writedown of assets to net realizable value excluding inventory 3,277
Provision for lease loss and related costs in closing facility 945
------
$5,415
======
</TABLE>
6
<PAGE>
The employee severance, benefits and related costs includes the costs
associated with the involuntary termination of approximately 100 employees which
was approved as part of the Plan, and communicated to the affected employees on
the day the restructuring was announced, August 6, 1996. All employee service
required to earn or qualify for the benefits accrued for had been rendered at
August 6, 1996.
The writedown of assets to net realizable value includes the write-off
of certain assets for which there is no future economic benefit to the Company.
These costs include approximately $140 of equipment at the facility being
closed, $1,473 to write-off capitalized direct marketing costs, $764 of prepaid
expenses consisting of prepaid license fees, royalties and trade show costs,
$540 of customer deductions and concessions and $360 in the write-off of
purchased intangibles related to product lines for which the Company announced
its plan to cease active pursuit of new customers and to no longer provide
technical support to existing customers.
The facility and lease loss accrual of $945 consists of costs related
to the planned shutdown of the Company's current facility in Morrisville, NC,
including the net book value of remaining leasehold improvements of $112.
The total cash impact of the restructuring is $2,586, of which
$1,682 was paid by September 30, 1996. The Company anticipates the balance of
the restructuring costs will be paid over the next year.
7
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition and Results of
Operations
FORM 10-Q, September 30, 1996
(unaudited)
OVERVIEW
The Company develops, markets and supports communication and network
management software, including client/server tools for group scheduling, e-mail,
software metering, server auditing, anti-virus and firewall technology.
The Company does not provide forecasts of the future financial
performance of the Company. However, from time to time, information provided by
the Company or statements made by its employees may contain forward-looking
statements. In particular, statements contained in this Form 10-Q that are not
historical statements (including, but not limited to, statements concerning
estimates of future revenues, operating expense levels and such operating
expense levels relative to the Company's total revenues) constitute forward-
looking statements under the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as percentages of the Company's total revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Net product revenue 96.9% 98.5% 96.9% 98.4%
Other revenue 3.1% 1.5% 3.1% 1.6%
-------------------------- -----------------------------
Total revenue 100% 100.0% 100% 100.0%
-------------------------- -----------------------------
Operating expenses:
Cost of product revenue 35.0% 18.2% 25.7% 18.8%
Sales and marketing 48.8% 47.3% 48.2% 47.8%
Research and development 19.7% 15.4% 17.9% 16.5%
General and administrative 8.7% 6.9% 8.4% 7.3%
Charge for purchased R&D 0.0% 0.0% 35.2% 0.0%
Charge for restructuring 42.9% 0.0% 14.3% 0.0%
-------------------------- -----------------------------
(Loss) Income from operations (55.1%) 12.2% (49.7%) 9.6%
-------------------------- -----------------------------
Interest income (expense), net 2.0% 1.9% 2.3% .5%
-------------------------- -----------------------------
Net (loss) income before provision for
income taxes (53.1%) 14.1% (47.4%) 10.1%
-------------------------- -----------------------------
Provision (benefit) for income taxes (3.8%) 4.3% (.1%) 3.1%
-------------------------- -----------------------------
Net (loss) income (49.3%) 9.8% (47.3%) 7.0%
========================== =============================
</TABLE>
PRODUCT REVENUE. The Company's net product revenue is derived primarily
from licensing of software products. Net product revenue also includes revenue
from catalog sales of third party products and catalog advertising space. The
Company sells advertising space in its catalog for cash or receives third party
advertised product. Revenue for catalog advertising space for cash sales is
recognized the day the catalog is mailed to customers. Revenue for third party
advertised product received is recognized as each item is sold. For the three
months ended September 30, net product revenue increased $.9 million (8.1%) from
1995 to 1996. For the nine months ended September 30, net product revenue
increased $6.3 million (20.7%) from 1995 to 1996. Both increases were primarily
the result of the licensing of communications and network management software to
new customers and to customers upgrading existing licenses.
OTHER REVENUE. The Company's other revenue consists of rentals of portions
of the Company's customer lists, royalties received in connection with licensing
the Company's software to third parties and maintenance revenue. For the three
months ended September 30, other revenue increased $.2 million (131.5%) from
8
<PAGE>
1995 to 1996. For the nine months ended September 30, other revenue increased
$.6 million (127.0%) from 1995 to 1996. This increase was primarily due to an
increase in revenue generated from maintenance agreements.
COST OF PRODUCT REVENUE. Cost of product revenue primarily consists of
expenses associated with product documentation, production and fulfillment costs
and royalty fees associated with internally developed products as well as
products that are licensed from third party developers. In addition, cost of
product revenue includes the cost of third party products resold through the
Company's catalog, the cost of producing the catalog and amortization of
purchased intangibles. For the three months ended September 30, cost of product
revenue increased $2.3 million (111.3%) from 1995 to 1996. For the nine months
ended September 30, cost of product revenue increased $3.9 million (67.8%) from
1995 to 1996. This increase was primarily due to a $.6 million inventory write
down relating to acquisitions, a $2.0 million inventory write down relating to
the restructuring, and an increase in product sales from 1995 to 1996. As part
of the Company's announced restructuring plan and reorganization of its
operations, the Company has decreased its emphasis on the e-mail business and
certain catalog products and has ceased to market, sell, develop, and support
other product lines. As a result, the product inventory relating to the de-
emphasized products, including certain catalog products, and ceased product
lines were subsequently identified and written off, all of which is included in
cost of product revenue in the amount of $2.0 million. The product sales related
increase was consistent as a percentage of total revenue from 1995 to 1996.
SALES AND MARKETING EXPENSE. Sales and marketing expense primarily consists
of compensation and benefits paid to sales and marketing personnel and the costs
of direct mail and telemarketing campaigns including the costs of product trials
requested by potential customers. Sales and marketing expense also includes the
costs of administering the catalog operation, the costs of public relations,
trade shows and conferences, and the telephone and information technology costs
associated with sales activities. For the three months ended September 30,
sales and marketing expenses increased $.7 million (13.5%) from 1995 to 1996.
For the nine months ended September 30, sales and marketing expenses increased
$3.5 million (23.5%) from 1995 to 1996. These increases, however, were
approximately the same as a percent of total revenue from 1995 to 1996. The
increases for both periods were primarily the result of additional sales
personnel required to support the growth in the customer base, the costs
associated with our marketing efforts of existing products, the beginning of ON
Technology UK Ltd's marketing programs in Europe, and the launch of our new
firewall product. The Company anticipates that sales and marketing expense will
continue to increase in absolute dollars as the Company continues to expand
direct marketing efforts, but that sales and marketing expense will remain
consistent or decrease as a percentage of total revenue.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense includes
costs associated with the development of new products, the enhancement of
existing products, and the provision of technical support. For the three months
ended September 30, research and development expense increased by $.7 million
(40.5%) from 1995 to 1996. For the nine months ended September 30, research and
development expense increased by $1.7 million (33.4%) from 1995 to 1996. The
increase in absolute dollars was primarily related to the increase in the size
of the product portfolio, the associated costs of product development,
enhancements and maintenance, and the additional costs associated with our
acquisition of neTrend, Inc. and Leprechaun Software International, Inc. in the
first quarter of 1996. The Company plans to continue to make significant
investments in research and development.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
includes executive compensation, executive support costs, accounting operations,
planning, and business development operations. For the three months ended
September 30, general and administrative expense increased $.3 million (38.1%)
from 1995 to 1996. For the nine months ended September 30, general and
administrative expense increased $.9 million (41.1%) from 1995 to 1996. The
increase in absolute dollars reflects personnel growth and associated costs in
general support areas including costs associated with our acquisition of the LAN
software business from Technocom plc in the first quarter of 1996, resulting in
a newly formed ON Technology UK Ltd, and the related expenses of administering
that office. This increase is offset by greater efficiency in core
administrative operations.
CHARGE FOR PURCHASED RESEARCH AND DEVELOPMENT. In connection with the
acquisitions of neTrend Corporation, Leprechaun Software International, Ltd. and
the LAN Software business from Technocom plc during the three months ended March
31, 1996 and for the nine months ended September 30, the Company allocated an
aggregate of $13.3 million of the respective purchase prices to incomplete
research and development projects. Accordingly, these costs were expensed as of
the acquisition dates. This allocation represents the estimated fair value
related to the incomplete projects as determined by an independent appraisal.
The development of these projects had not yet reached technological feasibility
and the technology had no alternative future use. The technology acquired in
these acquisitions has required, and will require, substantial additional
development by the Company.
9
<PAGE>
CHARGE FOR RESTRUCTURING. On August 6, 1996, the Company announced
that it had implemented a reorganization of its operations and a restructuring
plan (the "Plan"). The Plan included write-offs and writedowns of certain
assets, including accruing the costs related to a significant reduction in the
Company's work force, primarily in the technical support and sales and marketing
departments, and the de-emphasis of certain product lines, resulting in a one
time charge of $7.4 million. Included in the Plan was an inventory writedown of
$2.0 million which is not included in the statement of operations under the
caption "Charge for restructuring," rather it is presented in accordance with
EITF-96-9 under the caption "The Writedowns of Inventory Associated with a
Restructuring" and is included in the cost of product revenue.
The following are the significant components of the $5.4 charge for
restructuring:
<TABLE>
<S> <C>
Employee severance, benefits and related costs $1.2
Write-off and writedown of assets to net realizable value excluding inventory 3.3
Provision for lease loss and related costs in closing facility .9
----
$5.4
====
</TABLE>
The employee severance, benefits and related costs includes the costs
associated with the involuntary termination of approximately 100 employees which
was approved as part of the Plan, and communicated to the affected employees on
the day the restructuring was announced, August 6, 1996. All employee service
required to earn or qualify for the benefits accrued for had been rendered at
August 6, 1996.
The writedown of assets to net realizable value includes the write-off
of certain assets for which there is no future economic benefit to the Company.
These costs include approximately $140 of equipment at the facility being
closed, $1.5 million to write-off capitalized direct marketing costs, $.8
million of prepaid expenses consisting of prepaid license fees, royalties and
trade show costs, $.5 million of customer deductions and concessions and $.4
million in the write-off of purchased intangibles related to product lines for
which the Company announced its plan to cease active pursuit of new customers
and to no longer provide technical support to existing customers.
The facility and lease loss accrual of $.9 million consists of costs
related to the planned shutdown of the Company's current facility in
Morrisville, NC, including the net book value of remaining leasehold
improvements of $112.
INTEREST INCOME (EXPENSE). Interest income (expense) consists
primarily of interest expense associated with equipment leases and interest
income earned on cash and cash equivalents. For the three months ended
September 30, interest income increased $45 thousand from 1995 to 1996. For
the nine months ended September 30, interest income increased $.7 million from
1995 to 1996. Both increases were the result of interest earned from proceeds
received from the initial public offering of common stock in August of 1995.
INCOME TAXES. The tax provision for the three months and nine months
ended September 30, 1996 and 1995, respectively, was calculated based upon the
Company's expected 1996 and 1995 effective tax rates of 11.7 % and 30.6%,
respectively, giving benefit to available net operating loss carryforwards and
research and development credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through cash flow
from operations and public and private placements of capital stock. At
September 30, 1995 and September 30, 1996, the Company had available cash and
cash equivalents of $34.9 million and $23.0 million, respectively. On April 1,
1996, the Company acquired a new line of credit with a commercial bank for $10.0
million that allows the Company to borrow up to the lesser of $10.0 million or
the sum of 80% of qualified accounts receivable and 40% of qualified foreign
accounts receivable. Borrowings bear interest at the bank's prime rate. The
line expires April 1, 1998. Advances pursuant to the line of credit are secured
by liens granted on the Company's accounts receivables. At September 30, 1996,
the Company did not have an outstanding balance under the line of credit
agreement.
10
<PAGE>
Net cash provided by (used in) operating activities for the nine months ended
September 30, 1995 and September 30, 1996 was $1.0 million and $(16) thousand,
respectively. For the nine months ended September 30, 1995, net cash provided
by operating activities consisted primarily of net income of $2.2 million, a
$1.2 million increase in depreciation and amortization, and a $1.0 million
increase in accounts payable. This was partially offset by a increase in
inventories of $1.2 million and increase in accounts receivable of $1.0 million.
For the nine months ended September 30, 1996, net cash used in operating
activities consisted primarily of a $13.3 million charge for purchased research
and development, $2.8 million in the non cash portion of the charge for
restructuring, a $2.5 million increase in depreciation and amortization, and an
$1.3 million decrease in inventories, partially off-set by a net loss of $(17.9)
million.
Net cash used in investing activities for the nine months ended September 30,
1995 and September 30, 1996 was $75 thousand and $8.6 million, respectively.
For the nine months ended September 30, 1995, net cash used in investing
activities consisted of escrow receivable of $.6 million, offset by the increase
in purchase of property and equipment of $.7 million. For the nine months ended
September 30, 1996, net cash used in investing activities consisted of
acquisition related direct costs and the cash portion of the purchase price
associated with the acquisitions of neTrend Corporation, Leprechaun Software
International, Ltd, and Technocom plc of $2.3 million, $.8 million and $2.0
million, respectively. In addition, there were property and equipment purchases
of $3.7 million.
Net cash provided by (used in) financing activities for the nine months ended
September 30, 1995 and September 30, 1996 was $31.2 million and $(1.7) million,
respectively. For the nine months ended September 30, 1995, net cash provided
by financing activities consisted of $31.6 million in net proceeds from the
issuance of common stock from the initial public offering in August of 1995.
For the nine months ended September 30, 1996, net cash used in financing
activities consisted primarily of the stock repurchase of $1.0 million,
principal repayments on obligations under capital leases of $.9 million, offset
by exercise of stock options of $.1 million.
The Company believes that its existing cash balances, funds generated from
operations, and available borrowings under its line of credit will be sufficient
to finance the Company's operations for the next 12 months. In the event the
Company acquires one or more businesses or products, the Company's capital
requirements could increase substantially, and there can be no assurance that
additional capital will be available on terms acceptable to the Company, if at
all.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The risk factors discussed below, among other factors (including the accuracy of
the Company's internal estimates of revenue and operating expense levels), may
cause the Company's actual results to differ materially from the results stated
in the forward-looking statements contained in this Form 10-Q. The following
discussion of the Company's risk factors should be read in conjunction with the
Company's financial statements and related notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's licensing activity and results of operations can fluctuate
significantly on a quarterly basis. Causes of such fluctuations may include,
among other factors the volume and timing of new and repeat orders, the
introduction or announcement of new products or product enhancements by ON or
third parties, failure to ship trials, changes in response rates to the
Company's mailings and telemarketing programs, interruption in the Company's
overnight delivery, telephone or internal networks and databases, work
stoppages, changes in product prices, changes in operating expenses, changes in
product mix, increase in international sales as a percentage of total revenue,
seasonality, trends in the computer industry, unavailability of product,
potential software viruses and perceived threats thereof, customer order
deferrals, general economic conditions, extraordinary events such as
acquisitions or litigation and the occurrence of unexpected events. While to
date, the Company has not experienced any significant failure to ship trials,
work stoppages or unavailability of products, there can be no assurance any of
such events will not occur in the future. The occurrence of any such event
could have a material adverse effect on the Company's business, financial
condition or results of operations. Because of the nature of its distribution
methods, the Company has virtually no backlog and generally cannot predict when
users will license products. Historically, repeat orders have accounted for a
significant portion of the Company's total revenue; however, there
11
<PAGE>
can be no assurance that the Company will be able to sustain current repeat
order rates in the future. Furthermore, since the Company's cost of total
revenue is relatively low and its operating expenses are relatively fixed, any
revenue shortfall in a quarter will result in a substantially similar shortfall
in net income. In addition, significant quarterly fluctuations in licensing
activity will cause significant fluctuations in the Company's cash flows and the
cash and cash equivalents, accounts receivable and deferred revenue accounts on
the Company's balance sheet.
The Company's business has experienced and is expected to continue to
experience seasonality, due in part to customer buying patterns. In recent
years, the Company generally has had greater demand for its products in the
fourth quarter and has had weaker demand for its products during the first
quarter. These fluctuations are caused primarily by customer budgeting and
purchasing patterns. The Company believes this pattern will continue.
The Company believes that period-to-period comparisons of its financial
results should not be relied upon as an indication of future performance.
RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE
The communications and network management software markets are
characterized by rapid technological developments, changes in customer
requirements, evolving industry standards and frequent new product
introductions. The Company's future success will depend, in part, upon its
ability to enhance its existing applications, develop and introduce new products
that take advantage of technological advances, and respond promptly to new
customer requirements and evolving industry standards. While the Company
believes that it currently offers a broad product line in the communications and
network management software markets, these markets are continuing to evolve and
customer requirements are continuing to change. In response to these changes
the Company believes that it will need to continue to expand its product
offerings. The Company has identified a number of enhancements to its existing
products offerings which it believes are important to its continued success in
the communications and network management software markets, including products
for Windows 95 and Windows NT and Internet-enabling products. There can be no
assurance that the Company will be successful in developing and marketing, on a
timely basis, enhancements to its existing products or new products, or that its
new products will adequately address the changing needs of the marketplace.
Failure by the Company in any of these areas could materially and adversely
affect the Company's business, financial condition or results of operations. In
addition, from time to time the Company or its competitors may announce new
products with capabilities or technologies that could have a potential to
replace or shorten the life cycles of the Company's existing products or render
such products obsolete. There can be no assurance that announcements by the
Company or its competitors of new products will not cause customers to defer
purchasing the Company's existing products. In addition, there can be no
assurance that future changes in DOS, Windows, NetWare or other popular
operating systems would not result in incompatibility with the Company's
products. The Company's failure to introduce new products on a timely basis
that are compatible with operating systems and environments preferred by desktop
computer users would have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITIVE RISKS
The market for the Company's products is highly competitive, and the
Company expects competition to increase in the future. The Company believes
that the principal competitive factors affecting the market for its products
include performance, functionality, ease of use, ease of installation, quality,
customer support, breadth of product line, speed of product delivery, frequency
of upgrades and updates, brand name recognition, company reputation and price.
Certain of the criteria upon which the performance and quality of the Company's
communications and network management software compete include speed of
response, ease of use, ease of installation, interoperability with other
messaging systems and simplicity of administration. The Company believes
12
<PAGE>
that it generally competes favorably with respect to each of these factors;
however, there can be no assurance that the Company will be able to continue to
compete successfully against current and future competitors. Certain of the
Company's competitors have been in the market longer than the Company, and other
competitors are larger and may have greater name recognition than the Company.
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, financial condition
or results of operations. There can be no assurance that the Company will
continue to compete effectively against existing and potential competitors in
the communications and network management software markets, many of whom have
substantially greater financial, technical, marketing and support resources and
name recognition than the Company. In addition, there can be no assurance that
software vendors who currently use traditional distribution methods will not
in the future decide to compete more directly with the Company by utilizing free
trial marketing. See "--Risks Associated with Free Trial Marketing."
Both the communications software market and the network management software
market are highly fragmented, with products offered by many vendors. The
Company's products compete with offerings from software, shareware and freeware
developers. Shareware is software that is made available electronically on
bulletin board systems. Shareware users are encouraged to evaluate the software
for a short period of time and then either cease using it or pay a license fee.
In the group scheduling market, the Company also competes with personal
information manager products ("PIMs") that have been enhanced to include some
group scheduling features. Certain competitors have in the past bundled
communications and network management software with their operating system
products or software application suite offerings and have publicly announced, or
the Company believes are likely to provide, such bundles with future offerings.
There can be no assurance that the Company can continue to compete effectively
against communications software which is included free with the operating
system, as these bundled products are improved in the future. In addition, the
trend toward enterprise-wide communications software solutions may result in a
consolidation of the communications software market around a smaller number of
vendors who are able to provide all of the necessary software and support
capabilities.
Historically, the Company's international revenue has been generated
primarily through independent distributors in Europe, Australia, Israel, South
Africa and South America, certain of which are bound by contracts with the
Company but which generally do not represent the Company exclusively. The
competitive environment for communications software tools internationally is
similar to that in North America. The Company has only recently begun to
compete in Asian markets, which have significantly lagged behind North America
and Europe in their adoption of LAN technology. There can be no assurance that
the Company will be able to continue to compete successfully in international
markets.
The widespread inclusion of the functionality of the Company's products as
standard features of operating systems software could render the Company's
products obsolete and unmarketable, particularly if the quality of such
functionality were comparable to that of the Company's products. If the Company
were unable to develop new communications and network management software to
further enhance operating systems and to replace successfully any obsolete
products, the Company's business, financial condition and results of operations
would be materially and adversely affected.
RISKS ASSOCIATED WITH PRODUCT DEVELOPMENT
The Company has in the past experienced delays in software development, and
there can be no assurance that it will not experience further delays in
connection with its current or future product development activities. The
Company puts all of its products through alpha and beta test cycles and makes
significant efforts to debug all products before commercial release. The
Company makes well-marked alpha and beta versions of its software available for
evaluation and testing and solicits and responds to input from evaluators.
However, there can be no assurance that the Company's products will not contain
undetected errors or version compatibility issues, particularly when first
introduced or when new versions are released, resulting in loss of or delay in
market acceptance. Delays and difficulties associated with new product
introductions or product enhancements could have a material adverse effect on
the Company's business, financial condition or results of operations.
In addition to developing new products, the Company's internal development
staff is focused on developing upgrades and updates to existing products and
modifying, enhancing and completing any acquired products and incomplete
projects. Future enhancements may, among other things, include additional
functionality, respond to user problems or address issues of compatibility with
changing operating systems and environments.
13
<PAGE>
The Company believes that the ability to provide these enhancements to users
frequently and at a low cost is key to its success. Failure to release such
enhancements on a timely basis could have a material adverse effect on the
Company's business, financial condition or results of operation. There can be no
assurance that the Company will be successful in these efforts.
The Company licenses SofTrack from a third party. The license expires
December 1999. If the Company believes that this licensed product continues to
be valuable after the expiration of the initial license term, it will seek to
extend the term of the license. There can be no assurance that the Company will
be able to extend the term of the expiring license, or that the economic
arrangements for such extensions would be comparable to the arrangements in
effect during the initial license term.
RISKS OF INCLUSION OF COMMUNICATIONS SOFTWARE AND NETWORK MANAGEMENT SOFTWARE IN
SYSTEM SOFTWARE AND APPLICATION SUITES
In the future, vendors of operating system software and groups of
applications sold for a single price (generally referred to as application
suites) may continue to enhance their products to include certain functions that
are currently provided most often by communications and network management
software. These vendors may also bundle these products in their application
suites at no additional charge. The widespread inclusion of the functions
provided by the Company's products as standard features of operating system
software could, particularly if the quality of such functions were comparable to
that of the Company's products, render the Company's products obsolete and
unmarketable. Furthermore, even if the communications and network management
software functions provided as standard features by operating systems are more
limited than that of the Company's products, there is no assurance that a
significant number of customers would not elect to accept such functions in lieu
of purchasing additional software. If the Company were unable to develop new
communications software and network management software products to further
enhance operating systems and to replace successfully any obsolete products, the
Company's business, financial condition and results of operations would be
materially and adversely affected.
DEPENDENCE ON EMERGENCE OF NETWORK MANAGEMENT SOFTWARE
The market for the Company's network management software is new and
evolving, and its growth depends upon the broader market acceptance of network
management software. In addition, there are a number of potential approaches to
the market, including incorporating network management software into network
operating systems. Therefore, even if network management software products gain
broader market acceptance, there can be no assurance that the Company's products
will be chosen by organizations which acquire network management software.
Moreover, a change in the licensing policies of Microsoft or other software
vendors which changes the basis on which concurrent users are measured or priced
could adversely effect the Company's network management software products.
Furthermore, to the extent that the network management software market does
develop, the Company expects that competition will increase. See "- Competitive
Risks," and "-- Risks of Inclusion of Communications Software and Network
Management Software in System Software and Application Suites."
RISKS ASSOCIATED WITH FREE TRIAL MARKETING
The Company provides its customers with 30-day free trials of all of the
Company's principal products ("Free Trial Marketing"). The trials are full
featured versions of the product that are internally designed to cease operation
in 30 days. The Company uses Free Trial Marketing as its primary sales channel.
The Company depends on direct mail, trade shows and telemarketing to find
prospects and install trials. This model represents a significant departure
from marketing strategies relying on a direct sales force, exclusive distributor
relationships and magazine space advertising. While to date this marketing
strategy has successfully resulted in the licensing of the Company's products by
corporate, government and institutional users, given the relatively unproven
nature of this form of marketing, there can be no assurance that this strategy
will continue to be effective in the future for either current or new products.
The failure of this strategy to continue to effectively generate license revenue
would have a material adverse effect on the Company's business, financial
condition and results of operations. While the Company has experienced
significant growth over the past years, the Company's distribution strategy may
make its products less attractive to customers who prefer to purchase through
traditional channels and, as a result, may have the effect of limiting the
Company's potential market. In addition, as mailings are mailed repeatedly to
the same customers,
14
<PAGE>
responsiveness to particular offers and products declines. There can be no
assurance that the Company will be able to sustain current response rates to its
mailings in the future. In addition, there can be no assurance that the Company
can continue to create sufficient attractive offers and to introduce interesting
products at a rate sufficient to support the Company's growth plan or even
current revenue. The Company's growth depends both on its ability to select
names from rented lists and to grow its "house list." The availability and
relevance of rentable names to the Company's products are not certain. In
addition, since the ability of the Company to grow its house list is dependent
on the supply of rentable names, house list growth cannot be assured.
The Company depends on the distribution of Free Trial Marketing disks to
accomplish much of its marketing. If some of the Company's Free Trial Marketing
disks were to become infected with a computer virus, they would cause
difficulties for prospects and could damage the Company's reputation. The
Company does extensive testing for viruses. The Company's use of outside
fulfillment contractors increases the risk that a virus could be shipped
undetected on disks bearing the Company's label. There can be no assurance that
ON would be able to collect adequate compensation from such fulfillment
contractors if such a virus infected disks bearing the Company's label.
The Company fulfills orders received directly from customers through a
third-party fulfillment contractor, which warehouses the Company's products and
ships them directly to ON's customers. The Company also maintains a private use
prospects list at a bonded third-party database firm containing over 4,000,000
unduplicated names. In the event that either the customer fulfillment
contractor or the private use database firm experience a substantial business
interruption, whether through business failure or interruption or some natural
calamity, or the Company's relationship with either of such parties is
terminated for any reason, the Company's ability to continue to mail free trial
offers to prospective customers and to fulfill orders placed by customers would
be adversely affected.
In both the domestic and international markets, increases in postal rates
(including modifications in the classification of mail) or telephone rates, or
changes in postage or telephone regulations which prohibit unsolicited direct
mail or unsolicited telephone calls, could significantly impact the economics of
the Company's Free Trial Marketing strategy. In addition, it is possible that
other software vendors could adopt all or parts of the Company's strategy and
compete more directly or effectively with the Company.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
The Company may in the future undertake additional acquisitions that could
present challenges to the Company's management, such as integrating and
incorporating new operations, product lines, technologies and personnel. If the
Company's management is unable to manage these challenges, the Company's
business, financial condition or results of operations could be materially
adversely affected. Any acquisition, depending on its size, could result in
significant dilution to the Company's stockholders. Furthermore, there can be no
assurance that any acquired products will gain acceptance in the Company's
markets.
RISKS OF INDIRECT CHANNELS OF DISTRIBUTION
The Company markets its products through distributors and resellers in
addition to its Free Trial Marketing strategy. These distributors and resellers
also sell other products that are complementary to, or compete with, those of
ON. There can be no assurance that these distributors and resellers will not
give greater priority to products of other suppliers. They have no long-term
obligation to purchase products from the Company. Since the Company's
agreements with its distributors provide for a right of return, revenue
recognized upon sales to distributors is subject to a reserve for returns.
Although management believes that the current reserve balance is adequate to
cover this exposure, there can be no assurance that any future period reserves
for returns will be adequate. In addition, the Company may be unaware of the
nature and scope of the representations made to customers by these distributors
and resellers. For example, they could make representations to customers about
the Company's current and future products which are inaccurate or incomplete.
This could result in the products not meeting the customers' expectations or
requirements. Although the Company's agreements with its distributors generally
provide the Company with recourse against unauthorized action taken by the
distributors, there can be no assurance that the Company could recover adequate
compensation to cover the damage caused by an inaccurate representation. See "-
Risks Associated with International Revenue."
15
<PAGE>
RISKS ASSOCIATED WITH PROTECTION OF PROPRIETARY TECHNOLOGY
The Company's success is heavily dependent upon its proprietary software
technology. The Company relies on a combination of contractual rights,
trademarks, trade secrets and copyrights to establish and protect its
proprietary rights in its software. The Company has not to date registered any
of its copyrights. The Company has obtained registrations in the United States
for the following trademarks: ON Technology, Notework, Meeting Maker, ON
Technology & Design, ON Location, Instant Update and Da Vinci Systems. The
Company uses a printed "shrink-wrap" license for users of its products
distributed through traditional distribution channels in order to protect its
copyrights and trade secrets in those products. Since these shrink-wrap
licenses are not signed by the licensee, many authorities believe that they may
not be enforceable under many state laws and the laws of many foreign
jurisdictions. If such licenses are not enforceable, the user would not be
bound by the terms thereof, including the terms which seek to protect the
Company's proprietary technology. There can be no assurance that the Company's
proprietary technology will be protected by the use of the printed shrink-wrap
licenses. If the printed shrink-wrap licenses prove to be unenforceable, this
may have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, the laws of some foreign countries either do not protect the
Company's proprietary rights or offer only limited protection for those rights.
Furthermore, the Company has obtained only four foreign registrations of its
Notework mark, two foreign registrations of its Meeting Maker mark, and one
foreign registration of its AuditTrack trademark, due to the significant costs
involved in obtaining foreign registrations. As a result, the Company may not
be able to prevent a third party from using its trademarks in many foreign
jurisdictions. If such licenses are not enforceable, the user would not be
bound by the terms thereof, including the terms which seek to protect the
Company's proprietary technology.
There can be no assurance that the steps taken by the Company to protect
its proprietary software technology will be adequate to deter misappropriation
of this technology. In addition, the Company does provide customer support to
unlicensed users during the Free Trial Marketing period. Lesser sensitivity by
corporate, government or institutional users to avoiding copyright infringement
could have a material adverse effect on the Company's business, financial
condition and results of operation. While the Company to date has not taken any
legal action to enforce its intellectual property rights against infringing
users, it believes, based upon current interpretations of law, that its use of
Free Trial Marketing and the widespread availability of its trials do not
significantly impact its ability to enforce its intellectual property rights
against infringing users, including corporate, institutional and government
entities. However, there is no assurance that a court or other authority may
not rule otherwise in the future. Such a ruling would have a material adverse
effect on the Company's business, financial condition and results of operations.
There has been substantial litigation in the software industry involving
intellectual property rights of technology companies, although, to date, the
Company has not been subject to any such litigation. Although the Company does
not believe that it is infringing the intellectual property rights of others,
there can be no assurance that such claims, if asserted, would not have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, as the Company may acquire or license a
portion of the software included in its future products from third parties, its
exposure to infringement actions may increase because the Company must rely upon
such third parties for information as to the origin and ownership of any
software being acquired. The Company generally obtains representations as to
the origin and ownership of such acquired or licensed software and generally
obtains indemnification to cover any breach of such representations. However,
there can be no assurance that such representations are accurate or that such
indemnification will provide adequate compensation for a breach of such
representations. In the future, litigation may be necessary to enforce and
protect trade secrets and other intellectual property rights owned by the
Company. The Company 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. Any such litigation could be
costly and cause diversion of management's attention, either of which could have
a material adverse effect on the Company's business, financial condition or
results of operations. Adverse determinations in such litigation could result
in the loss of the Company's proprietary rights, subject the Company to
significant liabilities, require the Company to seek licenses from third parties
or prevent the Company from manufacturing or selling its products, any one of
which could have a material adverse effect on the Company's business, financial
condition or results of operations. Furthermore, there can be no assurance that
any necessary licenses will be available on reasonable terms, or at all.
16
<PAGE>
RISKS ASSOCIATED WITH INTERNATIONAL REVENUE
In 1995 and in the nine months ended September 30, 1996, total revenue from
international licenses (license revenue from outside the United States)
represented approximately 14% and 17%, respectively, of the Company's total
revenue. The Company expects that total revenue from international licenses
will increase in future years; however, there can be no assurance that the
Company will be successful in penetrating international markets. Substantially
all of the Company's license fees are in United States dollars. Risks inherent
in the Company's international sales generally include the impact of fluctuating
exchange rates or demand for its products, longer payment cycles, greater
difficulty in protecting intellectual property, greater difficulty in accounts
receivable collection, unexpected changes in regulatory requirements,
seasonality due to the slowdown in European business activity during the third
quarter, and tariffs and other trade barriers. There can be no assurance that
these factors will not have a material adverse effect on the Company's future
international license revenue. Further, in countries with a high incidence of
software piracy, the Company may experience a higher rate of piracy of its
products.
In addition, a significant portion of the Company's international revenue
is generated through independent distributors and resellers. Since these
distributors and resellers are not employees of the Company and are not required
to offer the Company's products exclusively, there can be no assurance that they
will continue to market the Company's products. Also, despite the Company's
substantial dependence in the international market upon the marketing, sales and
customer support of its distributors and resellers, the Company currently has
limited control over its distributors and resellers, and the Company may be
unaware of the nature and scope of the representations made to customers by
these agents. For example, independent agents could make representations to
customers about the Company's current and future products which are inaccurate
or incomplete, which could result in the products not meeting customers'
expectations or requirements.
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends to a significant extent upon a number of key
technical and management employees. While the Company's employees are required
to sign standard agreements concerning confidentiality and ownership of
inventions, the employees, with the exception of Messrs. Risley, Platzman,
Batson, Bogdan, Rizzi and O'Sullivan are generally not otherwise subject to
employment agreements or noncompetition covenants. The loss of the services of
any of the Company's key employees could have a material adverse effect on the
Company's business, financial condition or results of operation. The Company
does not maintain life insurance policies on key employees. The Company's
success also depends in large part upon its ability to attract and retain highly
skilled technical, managerial, sales and marketing personnel. Competition in the
software industry for such personnel is intense. There can be no assurance that
the Company will be successful in retaining its existing key personnel and in
attracting and retaining the personnel it requires.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been, and in the future
may be, subject to wide fluctuations in response to actual or anticipated
quarterly operating results of the Company, announcements of technological
innovations or new applications by the Company or its competitors and general
market conditions in the software industry, as well as other events or factors.
In addition, stock markets have experienced extreme price and volume trading
volatility in recent years. This volatility has had a substantial effect on the
market price of many technology companies and has often been unrelated to the
operating performance of those companies. This volatility may adversely effect
the market price of the Company's Common Stock.
RISKS ASSOCIATED WITH STRATEGIC REORGANIZATION AND RESTRUCTURE
In August 1996, the Company implemented a reorganization and restructuring
of its operations. This action was designed to consolidate the three
acquisitions the Company made during the first quarter ended March 31, 1996, to
decrease the Company's emphasis on mature products, such as e-mail, and to
better focus the Company's resources on bringing new products to the rapidly
changing network management software market. There can be no assurance that
these objectives will be achieved. Furthermore, there can be no assurance that
the Company will not engage in further reorganizations or restructurings in the
future.
17
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
FORM 10-Q, September 30, 1996
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed in the accompanying Exhibit Index on page 20
are filed or incorporated by reference as part of this Report.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated August 14,
1996 in relation to the announcement of a strategic Company
reorganization and restructuring.
18
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
FORM 10-Q, September 30, 1996
SIGNATURES
Pursuant to the requirements 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/ Christopher A. Risley
__________________________
Date: November 14, 1996 Name: Christopher A. Risley
Title: Chief Executive Officer
/s/ John M. Bogdan
__________________________
Date: November 14, 1996 Name: John M. Bogdan
Title: Vice President of Finance
and Chief Financial Officer
19
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
FORM 10-Q, September 30, 1996
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11.0 Computation of Net (Loss) Income per share
27.0 Financial Data Schedule
20
<PAGE>
EXHIBIT 11.0
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
Computation of Net (Loss) Income Per Share (1)
FORM 10-Q, September 30, 1996
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
1996 1995 1996 1995
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net (Loss) Income (6,226) 1,116 (17,900) 2,156
Weighted Average Common Shares
Outstanding During Period......... 10,980,103 9,092,356 10,875,798 8,064,991
Weighted Average Common Equivalent
Shares Outstanding During Period.... --- 448,068 --- 525,025
------------ ----------- ------------ -----------
10,980,103 9,540,424 10,875,798 8,590,016
============ =========== ============ ===========
Net (Loss) Income Per Share......... $ (.57) $ .12 $ (1.65) $ .25
============ =========== ============ ===========
</TABLE>
________________________________
(1) Primary and fully diluted net (loss) income per share has not been
separately presented, as the amounts would not be meaningful.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 23,004
<SECURITIES> 0
<RECEIVABLES> 9,694
<ALLOWANCES> 2,786
<INVENTORY> 1,556
<CURRENT-ASSETS> 32,660
<PP&E> 9,489
<DEPRECIATION> 3,777
<TOTAL-ASSETS> 41,291
<CURRENT-LIABILITIES> 8,875
<BONDS> 0
0
0
<COMMON> 110
<OTHER-SE> 31,552
<TOTAL-LIABILITY-AND-EQUITY> 41,291
<SALES> 36,619
<TOTAL-REVENUES> 37,772
<CGS> 9,713
<TOTAL-COSTS> 37,900
<OTHER-EXPENSES> 18,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 179
<INCOME-PRETAX> (17,944)
<INCOME-TAX> 44
<INCOME-CONTINUING> (17,990)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,900)
<EPS-PRIMARY> (1.65)
<EPS-DILUTED> (1.65)
</TABLE>
