<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
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
----- ----
<PAGE>
EXPLANATORY NOTE
This amendment amends the form 10-K filed with the Securities and Exchange
Commission on March 30, 1997. Item 7 and 14 have been changed.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
ON Technology Corporation is a leading providing of network security, network
management and network scheduling software and services that help people work
together on networks and across the Internet. ON Technology product brand names
include ON Guard, an award winning Internet firewall; VirusTrack, innovative
technology for preventing the spread of macro viruses; SofTrack, a market-
leading software metering solution for both NetWare and Windows NT networks;
Meeting Maker, a leading calendaring and scheduling solution; and DaVinci and
Notework, two best-selling e-mail packages specifically for NetWare LANs. ON
Technology products operate on NetWare, Windows NT, LAN Manager and Internet
networks that include combinations of Windows, Windows 95, Windows NT,
Macintosh, PowerMac, OS/2, Unix and DOS/Windows workstations using IP, IPX,
NetBIOS and AppleTalk protocols.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain financial data
as percentages of the Company's total revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996
---------------------------------------------------
<S> <C> <C> <C>
Revenue:
Net product revenue 97.7% 98.3% 96.9%
Other revenue 2.3 1.7 3.1
---------------------------------------------------
Total revenue 100.0 100.0 100.0
---------------------------------------------------
Operating expenses:
Cost of product revenue 26.0 18.6 23.1
Sales and marketing 41.9 47.6 46.6
Research and development 20.4 15.9 18.3
General and administrative 9.0 7.2 8.5
Charge for purchased R&D 18.2 -- 25.6
Charge for restructuring -- -- 10.5
---------------------------------------------------
(Loss) income from operations (15.5) 10.7 (32.6)
---------------------------------------------------
Interest (expense) income, net (0.3) 1.3 2.2
---------------------------------------------------
Net (loss) income before provision for
income taxes (15.8) 12.0 (30.4)
---------------------------------------------------
Provision for income taxes -- (3.7) (.2)
---------------------------------------------------
Net (loss) income (15.8)% 8.3% (30.6)%
===================================================
</TABLE>
NET PRODUCT REVENUE. The Company's net product revenue is derived primarily
from the 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.
Revenue from catalog advertising sales that was recognized upon sale of third
party products for the years ended December 31, 1994, 1995 and 1996 was $1.3
million, $2.4 million and $2.5 million, respectively. Net product revenue
increased 72.0% from 1994 to 1995, and 15.6% from 1995 to 1996, due primarily to
the increase in volume of sales of communications and new network management
software to new customers and to customers upgrading existing licenses. In
addition, net product revenue for the first six months of 1994 includes the
recognition of approximately $1.5 million of product revenue relating to
products shipped in 1993 for which the Company had significant customer
obligations which were satisfied by the shipment of a final product version in
the first quarter of 1994.
OTHER REVENUE. The Company's other revenue consists of rentals of portions of
the Company's customer lists, royalties received in connection with licensing
ON's software to third parties and maintenance revenue. Other revenue increased
by 25.9% from 1994 to 1995, and 119.9% from 1995 to 1996. These increases were
primarily due to an increase in revenue generated from maintenance agreements.
COST OF PRODUCT REVENUE. Cost of product revenue consists primarily of expenses
associated with product documentation, production and fulfillment costs, and
royalty fees associated with products that are licensed from third party
developers. In addition, cost of product revenue includes the cost of third
party products resold through the Company's catalog, the cost of
<PAGE>
producing the catalog and amortization of purchased intangibles. Cost of product
revenue decreased as a percentage of total revenue from 26.0% in 1994 to 18.6%
in 1995 as catalog revenue decreased as a percentage of total revenue in both
1994 and 1995. The four editions of the Editors' Choice catalog published in
1995 were similar in breadth of product offering to the four editions published
in 1994. The revenue growth of the other product offerings of the Company
significantly outpaced the growth of catalog revenue, as the catalog had
substantially reached its mature revenue level per edition. Cost of product
revenue increased as a percentage of total revenue from 18.6% in 1995 to 23.1%
in 1996. This increase was primarily due to a $571,000 elimination of profit for
inventory previously sold to Technocom, plc, prior to the Company's acquisition
of their LAN software business, a $2.0 million inventory write down related to
the restructuring in the third quarter of 1996, and an increase in product sales
from 1995 to 1996. As part of the Company's 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, and discontinued 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 paid to sales and marketing personnel, the costs of direct mail and
telemarketing campaigns, and the costs of product trials requested by potential
customers. Sales and marketing expense also includes the costs of administering
the catalog operation, the costs of public relations, trade shows and
conferences, and the telephone and information technology costs associated with
sales activities. Sales and marketing expense increased as a percentage of total
revenue from 41.9% in 1994 (46.1% excluding the impact of the 1993 deferred
revenue) to 47.6% in 1995 due principally to the Company's investment in its
telemarketing organization in North Carolina. Sales and marketing expense
decreased slightly as a percentage of total revenue from 47.6% in 1995 to 46.7%
in 1996. This slight decrease is a result of the restructuring of The company,
offset by the additional sales personnel required to support the growth in the
customer base, the costs associated with the Company's marketing efforts of
existing products, the beginning of ON Technology UK Ltd.'s marketing programs
in Europe, and the launch of the Company's new firewall product, ON Guard. 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 costs associated with providing technical support.
Research and development expense decreased as a percentage of total revenue from
20.4% in 1994 to 15.9% in 1995 primarily as a result of increased licensing of
third party network management software products which more than offset the cost
of continued development of incomplete products acquired from DaVinci in 1994.
Research and development expense increased as a percentage of total revenue from
15.9% in 1995 to 18.3% in 1996. This 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 the Company's acquisitions of neTrend Corporation and
Leprechaun Software International, Ltd. 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. General and administrative
expense increased in absolute dollars from $5.3 million in 1994 to $7.0 million
in 1995 due to personnel growth and associated costs, and decreased as a
percentage of total revenue from 9.0% in 1994 to 7.2% in 1995. General and
administrative expense increased in absolute dollars from $7.0 million in 1995
to $9.5 million in 1996 and as a percentage of sales from 7.2% in 1995 to 8.5%
in 1996. The increase reflects personnel growth and associated costs in general
support areas including costs associated with the Company's acquisition of the
LAN software business from Technocom plc in the first quarter of 1996, resulting
in the newly formed ON Technology UK Ltd., and the related expenses of
administering that office.
CHARGE FOR PURCHASED RESEARCH AND DEVELOPMENT. In connection with the
acquisition of DaVinci in 1994, the Company allocated $4.7 million of the
purchase price to incomplete research and development projects. In connection
with the acquisitions of neTrend Corporation, Leprechaun Software International,
Ltd. and the LAN Software business from Technocom plc in 1996, the Company
allocated an aggregate of $13.3 million of the respective purchase prices to
incomplete research and development projects. These costs were expensed as of
the acquisition dates and the allocations represent the estimated fair values
related to the incomplete projects determined by appraisals using appropriate
assumptions and valuation techniques. The development of these projects had not
yet reached technological feasibility and the technology had no alternative
future use. The technology acquired in these acquisitions have required
substantial additional development by the Company. The neTrend technology was
acquired in January 1996 and a limited product based on the acquired technology
was shipped in June 1996. Development continued in the product throughout 1996
and into 1997.
<PAGE>
The product development investment made by the Company in the neTrend technology
from the date of acquisition is estimated to be approximately $1.7 million. The
Leprechaun technology was acquired in January 1996 and is being developed into
1997. The investment in product development made by the Company in the
Leprechaun technology from the date of acquisition into 1997 is estimated to be
approximately $1.4 million. The research and development projects included in
the assets purchased from the Technocom plc are not expected to be material to
the operation of the Company.
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 write-downs 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 non-
recurring charge of $5.4 million. Included in the Plan was an inventory write-
down of $2.0 million which is included in cost of product revenue in accordance
with Emerging Issues Task Force (EITF) 96-9, Classification of Inventory
Markdowns and Other Costs Associated with a Restructuring.
The following are the significant components of the $5.4 million charge for
restructuring:
<TABLE>
<CAPTION>
<S> <C>
Employee severance, benefits and related costs $1.5
Write-off and write-down of assets to net realizable value excluding inventory 3.5
Provision for lease loss and related costs in closing facility .4
----
$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 write-down 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 $280,000 of equipment at the facility being
closed, $1,558,000 million to write-off capitalized direct marketing costs,
$764,000 of prepaid expenses consisting of prepaid license fees, royalties and
trade show costs, $589,000 of customer deductions and concessions and $397,000
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 $360,000 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 $115,000.
INCOME TAXES. The provision for income taxes during 1994 consisted of federal
alternative minimum and minimum state taxes. The tax provision for 1995 was
calculated based upon the Company's effective tax rate, giving benefit to
available net operating loss and credit carryforwards. In the year ended
December 31, 1996, the Company incurred a significant operating loss. However,
included in the book charges were amounts not currently deductible for income
taxes. The 1996 tax provision includes the amount currently payable with an
offsetting deferred tax benefit to record a portion of the Company's deferred
tax asset.
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth certain unaudited quarterly results of
operations for each of the eight quarters in the period ended December 31, 1996.
In the opinion of management, this information has been prepared on the same
basis as the audited Consolidated Financial Statements and includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of this information in accordance with generally accepted
accounting principles. Such quarterly results are not necessarily indicative of
future results of operations and should be read in conjunction with the audited
Consolidated Financial Statements and the Notes thereto.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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MAR. 31, JUNE 30, SEPT 30, DEC. 31, MAR. 31, JUNE 30, SEPT 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Net product revenue $8,637 $10,359 $11,331 $13,054 $ 10,967 $13,405 $12,248 $13,546
Other revenue 174 166 168 232 342 421 389 474
Total revenue 8,811 10,525 11,499 13,286 11,309 13,826 12,637 14,020
---------------------------------------------------------------------------------------
Operating expenses:
Cost of product revenue 1,719 1,975 2,093 2,412 2,770 2,520 4,423 2,238
Sales and marketing 4,265 5,044 5,440 6,235 5,471 6,577 6,172 5,953
Research and development 1,600 1,706 1,774 1,934 1,965 2,317 2,493 2,681
General and administrative 744 731 798 911 947 1,142 1,102 1,217
Charge for purchased R&D -- -- -- -- 13,285 -- -- --
Charge for restructuring -- -- -- -- -- -- 5,415 --
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Income (loss ) from operations 483 1,069 1,394 1,794 (13,129) 1,270 (6,968) 1,931
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Interest (expense) income, net (26) (26) 214 392 342 282 259 250
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Net income (loss) before
provision for income taxes 457 1,043 1,608 2,186 (12,787) 1,552 (6,709) 2,181
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(Provision) benefit for income
taxes (140) (320) (492) (670) (327) (112) 483 (141)
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Net income (loss) $ 317 $ 723 $ 1,116 $ 1,516 $(13,114) $ 1,440 $(6,226) $ 2,040
=======================================================================================
</TABLE>
The following table sets forth certain unaudited quarterly results of operations
expressed as a percentage of total revenue for each of the eight quarters in the
period ended December 31, 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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MAR. 31, JUNE 30, SEPT 30, DEC. 31, MAR. 31, JUNE 30, SEPT 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Net product revenue 98.0% 98.4% 98.5% 98.3% 97.0% 97.0% 96.9% 96.6%
Other revenue 2.0 1.6 1.5 1.7 3.0 3.0 3.1 3.4
---------------------------------------------------------------------------------------
Total revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
---------------------------------------------------------------------------------------
Operating expenses:
Cost of product revenue 19.5 18.8 18.2 18.2 24.5 18.2 35.0 16.0
Sales and marketing 48.4 47.9 47.3 46.9 48.4 47.6 48.8 42.5
Research and development 18.2 16.2 15.5 14.6 17.4 16.8 19.7 19.1
General and administrative 8.4 6.9 6.9 6.9 8.3 8.3 8.7 8.7
Charge for purchased R&D -- -- -- -- 117.5 -- -- --
Charge for restructuring -- -- -- -- -- -- 42.9 --
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Income (loss ) from operations 5.5 10.2 12.1 13.4 (116.1) 9.1 (55.1) 13.8
---------------------------------------------------------------------------------------
Interest (expense) income, net (0.3) (0.3) 1.9 3.0 3.0 2.1 2.0 1.8
Net income (loss) before
provision for income taxes 5.2 9.9 14.0 16.4 (113.1) 11.2 (53.1) 15.6
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(Provision) benefit for income
taxes (1.6) (3.0) (4.3) (5.0) (2.9) (.8) 3.8 (1.0)
---------------------------------------------------------------------------------------
Net income (loss) 3.6% 6.9% 9.7% 11.4% (116.0)% 10.4% (49.3)% 14.6%
=======================================================================================
</TABLE>
Historically, revenues in the first quarter have been lower than in the
preceding fourth quarter due to customer budgeting and purchasing patterns. The
Company's results of operations have been and may in the future be subject to
significant quarterly fluctuations. These fluctuations may be due to a variety
of factors, including the timing of significant orders, the timing of the
introduction or announcement of new or enhanced products by the Company or its
competitors, variations in net revenue by product and distribution channel,
increased price and other competition, capital spending patterns of end-users,
delays in shipping new or existing products, conditions within the software and
networking industries, and economic conditions generally.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through cash flow
from operations and private and public placements of capital stock. At December
31, 1994, 1995, and 1996 the Company had available cash and cash equivalents
of $2.8 million, $33.3 million and $20.8 million, respectively, and working
capital of $1.3 million, $35.6 million and $25.3 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 domestic 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
December 31, 1994, 1995 and 1996, the Company did not have an outstanding
balance under the line of credit agreement.
Net cash provided by (used in) operating activities for the years ended
December 31, 1994, 1995 and 1996 was $1.2 million, $(265) thousand and $(656)
thousand, respectively. In 1994, net cash provided by operating activities
consisted of a $4.1 million net loss which was the result of a $4.7 million
charge for incomplete research and development relating to the acquisition of
DaVinci, a $2.4 million increase in accounts receivable, a $712 thousand
increase in direct marketing costs and a $1.4 million decrease in deferred
revenue offset by an increase of $1.9 million in accounts payable, $1.4 million
in accrued expenses and $1.2 million in the reserve for distributor inventory.
The increase in the reserve for distributor inventory represents the Company's
estimate of product paid for by distributors that will be returned. In 1995,
net cash used in operating activities consisted of approximately $3.7 million of
net income from operations, a $311 thousand decrease in accrued expenses, a $91
thousand decrease in accounts payable, a $2.0 million increase in accounts
receivable, a $279 thousand decrease in reserve for distributor inventory, and a
$2.0 million increase in inventories. The increase in inventories was due
primarily to new product introductions, increased stocking levels as a result of
increased revenue and related unit shipments, and procedures put in place by the
Company during 1995 to help ensure more complete availability of product in
stock. In 1996, net cash used in operating activities consisted of
approximately $15.9 million net loss from operations which was the result of a
$13.3 million charge for incomplete research and development relating to the
acquisitions of Leprechaun Software International, Ltd., neTrend Corporation and
the LAN software business from Technocom, plc, a $3.0 million charge for
restructuring, depreciation and amortization of $3.2 million, offset by an
increase in accounts receivable of $3.2 million and increase in prepaid assets
of $1.4 million.
Net cash used in investing activities for the years ended December 31,
1994, 1995 and 1996 was $6.1 million, $611 thousand and $9.5 million,
respectively. This primarily reflects purchases of property and equipment of
$374 thousand, $1.2 million, and $4.5 million, respectively, and direct costs of
the acquisition of DaVinci of $5.0 million in 1994 and of Leprechaun Software
International, Ltd., neTrend Corporation, and the LAN software business from
Technocom plc of $628 thousand, $2.2 million, and $2.0 million, respectively.
While the Company expects capital expenditures to increase as revenue and the
number of employees increases, there are currently no plans to change the
Company's current pattern of investment in property and development on either a
long or short term basis.
Net cash (used in) provided by financing activities for the years ended
December 31, 1994, 1995 and 1996 was $7.6 million, $31.4 million and ($2.6)
million, respectively. In 1994, this was the result of multiple private
placements of capital stock of $8.5 million, borrowings under the line of credit
of $562 thousand, payments under the line of credit of $1.2 million and
principal repayments on obligations of capital leases of $280 thousand. In
1995, this was a result of principal repayments on obligations of capital leases
of $869 thousand, and $31.6 million in net proceeds from the issuance of common
stock from the initial public offering in August 1995. In 1996, this was a
result of principal repayments on obligations of capital leases of $1.2 million
and the purchase of treasury stock of $1.6 million.
On January 24, 1997, the Company acquired the stock of Purview Technologies,
Inc. , a development stage company engaged in Internet usage monitoring software
development. The Company paid $1million in cash and issued 205,712 shares of
its common stock. The aggregate purchase price including estimated direct
acquisition costs was approximately $2.3 million. This transaction will be
accounted for as a purchase in accordance with APB No. 16.
On January 28, 1997, the Company acquired the stock of csd Software GmbH , a
German developer and marketer of PC Desktop Software Management Tools. The
Company paid $5 million in cash and issued 1,315,790 shares of its common stock.
The aggregate purchase price including estimated direct acquisition costs was
approximately $15.6 million. This transaction will be accounted for as a
purchase in accordance with APB No. 16.
For each of these acquisitions, the Company is in the process of obtaining
independent appraisals to value the intangible assets acquired including
incomplete purchased research and development. The Company anticipates that a
substantial portion of the purchase price for these two acquisitions will be
charged to operations as purchased incomplete research and development.
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
<PAGE>
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.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
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<CAPTION>
Page Number
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Report of Independent Public Accountants 27
Consolidated Balance Sheets:
December 31, 1996 and 1995 28
Consolidated Statements of Operations:
Years ended December 31, 1996, 1995 and 1994 29
Consolidated Statements of Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit):
Years ended December 31, 1996, 1995 and 1994 30
Consolidated Statements of Cash Flows:
Years ended December 31, 1996, 1995 and 1994 31-32
Notes to the Consolidated Financial Statements 33-44
(a)(2) Consolidated Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 1996, 1995 and 1994 36
</TABLE>
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 48. The Exhibits listed in the
accompanying Index of Exhibits are filed or incorporated by reference as
part of this report.
(b) Reports on Form 8-K: None in the fourth quarter of 1996.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ON Technology Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of ON Technology
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, redeemable
convertible preferred stock and stockholders' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ON Technology Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 21, 1997
(except for the matters discussed in Note 12
as to which the dates are January 24, 1997
and January 28, 1997, respectively )
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1996 1995
----------------------- -------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 20,774 $ 33,338
Accounts receivable, net of allowance
of $1,191 and $605, respectively 9,852 6,377
Inventories 2,323 2,834
Prepaid expenses and other current assets 2,537 1,374
----------------------- -------------------------
Total current assets 35,486 43,923
----------------------- -------------------------
Property and Equipment, at cost:
Computers and equipment 6,226 2,173
Equipment under capital leases 3,895 3,804
Furniture and fixtures 247 133
Less-Accumulated depreciation and amortization 4,527 2,069
----------------------- -------------------------
5,841 4,041
----------------------- -------------------------
Direct marketing costs 1,067 1,554
Other assets and deposits 86 127
Purchased intangibles, net of $1,261 and $993
of accumulated amortization, respectively 1,662 528
----------------------- -------------------------
$ 44,142 $ 50,173
======================= =========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $ 1,063 $ 1,143
Accounts payable 5,619 3,392
Accrued expenses 2,252 2,265
Reserve for distributor inventories 204 934
Deferred revenue 1,001 627
----------------------- -------------------------
Total current liabilities 10,139 8,361
----------------------- -------------------------
Capital lease obligations, net of current portion 510 1,506
----------------------- -------------------------
Commitments (Note 7)
Stockholders' Equity:
Common stock, $.01 par value - Authorized - 20,000,000 shares
Issued and outstanding - 11,008,243 shares and
10,180,024 shares, respectively 110 102
Additional paid-in capital 55,637 45,051
Accumulated deficit (20,354) (4,493)
Accumulated deficit of S corporation (354) (354)
Cumulative translation adjustment 88 ---
Treasury stock (257,867 shares at cost) (1,634) ---
----------------------- -------------------------
Total stockholders' equity 33,493 40,306
----------------------- -------------------------
$ 44,142 $ 50,173
======================= =========================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------
1996 1995 1994
-------------------- ------------------- -------------------
<S> <C> <C> <C>
Revenue:
Net product revenue $ 50,165 $ 43,381 $ 25,240
Other revenue 1,627 740 588
-------------------- ------------------- -------------------
Total revenue 51,792 44,121 25,828
-------------------- ------------------- -------------------
Operating expenses:
Cost of product revenue 11,951 8,199 6,716
Sales and marketing 24,176 20,984 10,824
Research and development 9,456 7,014 5,277
General and administrative 4,407 3,184 2,319
Charge for purchased incomplete research
and 13,285 --- 4,700
development
Charge for restructuring 5,415 --- ---
-------------------- ------------------- -------------------
(Loss) income from
operations (16,898) 4,740 (4,008)
Interest expense (250) (288) (97)
Interest income 1,384 842 17
-------------------- ------------------- -------------------
(Loss) income before provision
for income taxes (15,764) 5,294 (4,088)
Provision for income taxes (97) (1,622) (11)
-------------------- ------------------- -------------------
Net (loss) income $ (15,861) $ 3,672 $ (4,099)
==================== =================== ===================
Pro forma net (loss) income per common
and common equivalent share $ (1.46) $ 0.40 $ (0.59)
==================== =================== ===================
Pro forma weighted average number of
common and
common
equivalent
shares
outstanding 10,853,814 9,086,764 6,951,836
==================== =================== ===================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Redeemable Convertible Preferred Stock
------------------------------------------------------------------------ ---------------------
Series A Series B Series C Common Stock
-------------------- ---------------- ----------------- --------------------
Number $.01 Number $.01 Number $.01 Number $.01
of Par of Par of Par of Par
shares value shares value shares value Total shares value
------------------------------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance , December 31, 1993 231 $ 1,275 1,166 $ 1,930 --- $ --- $ 3,205 3,161 $ 31
Sale of Series C redeemable
convertible preferred stock,
net of issuance costs of $25 --- --- --- --- 14,921 8,500 8,500 --- ---
Exercise of common stock options --- --- --- --- --- --- --- 377 4
Retirement of common stock --- --- --- --- --- --- --- (5) ---
Accretion of preferred stock dividends --- 86 --- --- --- 397 483 --- ---
Net loss --- --- --- --- --- --- --- --- ---
--------------------------------------------------------------------------------------------
Balance , December 31, 1994 231 1,361 1,166 1,930 14,921 8,897 12,188 3,533 35
Exercise of common stock options --- --- --- --- --- --- --- 445 4
Accretion of preferred stock dividends --- 50 --- --- --- 397 447 --- ---
Sale of common stock, net of issuance
costs of $1,275 --- --- --- --- --- --- --- 2,360 24
Conversion of preferred stock (231) (1,411) (1,166) (1,930) (14,921) (9,294) (12,635) 3,842 39
Tax benefit from stock options --- --- --- --- --- --- --- --- ---
Net income --- --- --- --- --- --- --- --- ---
--------------------------------------------------------------------------------------------
Balance, December 31, 1995 --- --- --- --- --- --- --- 10,180 102
Issuance of common stock in
connection with acquisitions --- --- --- --- --- --- --- 727 7
Sale of common stock under the
Employee Stock Purchase Plan --- --- --- --- --- --- --- 9 ---
Exercise of common stock options --- --- --- --- --- --- --- 92 1
Purchase of treasury stock --- --- --- --- --- --- --- --- ---
Cumulative translation adjustment --- --- --- --- --- --- --- --- ---
Net loss --- --- --- --- --- --- --- --- ---
--------------------------------------------------------------------------------------------
Balance, December 31, 1996 --- $ --- --- $ --- --- $ --- $ --- 11,008 $ 110
============================================================================================
<CAPTION>
Stockholder's Equity (Deficit)
-----------------------------------------------------------------------------------
Treasury Stock
------------------
Additional Accumulated Cumulative Number
Paid-in Accumulated Deficit of Translation of
Capital Deficit S Corporation Adjustment shares Cost Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance , December 31, 1993 $ 225 $ (3,136) $ (354) $ -- --- $ --- $ (3,234)
Sale of Series C redeemable
convertible preferred stock,
net of issuance costs of $25 (25) --- --- -- --- --- (25)
Exercise of common stock options (2) --- --- -- --- --- 2
Retirement of common stock --- --- --- -- --- --- ---
Accretion of preferred stock dividends --- (483) --- -- --- --- (483)
Net loss --- (4,099) --- -- --- --- (4,099)
------------------------------------------------------------------------------------------
Balance , December 31, 1994 198 (7,718) (354) -- --- --- (7,839)
Exercise of common stock options 148 --- --- -- --- --- 152
Accretion of preferred stock dividends --- (447) --- -- --- --- (447)
Sale of common stock, net of issuance
costs of $1,275 31,623 --- --- -- --- --- 31,647
Conversion of preferred stock 12,596 --- --- -- --- --- 12,635
Tax benefit from stock options 486 --- --- -- --- --- 486
Net income --- 3,672 --- -- --- --- 3,672
------------------------------------------------------------------------------------------
Balance, December 31, 1995 45,051 (4,493) (354) -- --- --- 40,306
Issuance of common stock in
connection with acquisitions 10,351 --- --- -- --- --- 10,358
Sale of common stock under the
Employee Stock Purchase Plan 93 --- --- -- --- --- 93
Exercise of common stock options 142 --- --- -- --- --- 143
Purchase of treasury stock --- --- --- -- (258) (1,634) (1,634)
Cumulative translation adjustment --- --- --- 88 --- --- 88
Net loss --- (15,861) --- -- --- --- (15,861)
------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 55,637 $ (20,354) $ (354) $ 88 (258) $ (1,634) $ 33,493
==========================================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994
----------------- ---------------- --------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net (loss) income $ (15,861) $ 3,672 $ (4,099)
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating activities
Charge for purchased incomplete research and development 13,285 --- 4,700
Non-cash charge for restructuring 3,048 --- ---
Depreciation and amortization 3,217 1,880 837
Retirements of property and equipment --- --- 48
Change in direct marketing costs (1,074) (842) (712)
Change in net deferred income taxes (481) --- ---
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable (3,211) (1,953) (2,382)
Inventories 524 (2,030) (94)
Prepaid expenses and other current assets (1,440) (785) (160)
Accounts payable 1,823 (91) 1,859
Accrued expenses (11) (311) 1,387
Reserve for distributor inventories (730) (279) 1,213
Deferred revenue 255 474 (1,427)
----------------- ---------------- -----------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (656) (265) 1,170
----------------- ----------------- -----------------
Cash Flows from Investing Activities:
Escrow receivable --- 625 (625)
Change in other assets and deposits (27) 4 (92)
Purchase of property and equipment, net (4,476) (1,240) (374)
Purchase of DaVinci Systems Corporation,
net of cash acquired --- --- (4,976)
Purchase of Leprechaun Software International, Ltd.,
net of cash acquired (628) --- ---
Purchase of technology from neTrend Corporation (2,260) --- ---
Purchase of certain assets from Technocom, plc (1,963) --- ---
----------------- ---------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (9,354) (611) (6,067)
----------------- ---------------- -----------------
Cash Flows from Financing Activities:
Proceeds from sale of redeemable convertible preferred stock --- --- 8,475
Exercise of stock options 143 152 2
Sale of stock under the Employee Stock Purchase 93 --- ---
Plan
Tax benefit from stock options --- 486 ---
Purchase of treasury stock (1,634) --- ---
Principal repayments on obligation under capital lease (1,168) (869) (280)
Net proceeds from sale of common stock --- 31,647 ---
Borrowings under line of credit and demand note payable --- --- 562
Repayments on line of credit and demand note payable -- --- (1,165)
------------------ ------------------ -------------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (2,566) 31,416 7,594
----------------- ---------------- -----------------
Effect of exchange rates on cash and cash 12 --- ---
equivalents
NET (DECREASE) INCREASE IN CASH AND CASH (12,564) 30,540 2,697
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 33,338 2,798 101
----------------- ---------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,774 $ 33,338 $ 2,798
================= ================ =================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------- -------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Accretion of preferred stock dividends $ --- $ 447 $ 483
========================= =================== ===================
Conversion of preferred stock into common stock $ --- $ 12,635 $ ---
========================= =================== ===================
Acquisition of equipment under capital leases $ 91 $ 2,124 $ 1,233
========================= =================== ===================
Cashless exercise of stock option $ --- $ --- $ 22
========================= =================== ===================
ACQUISITION OF DAVINCI SYSTEMS CORPORATION
Fair value of assets acquired $ --- $ --- $ 6,655
Liabilities assumed --- --- (1,479)
Cash acquired --- --- (200)
------------------------- ------------------- -------------------
Cash paid for acquisition and direct costs
net of cash acquired $ --- $ --- $ 4,976
========================= =================== ===================
ACQUISITION OF LEPRECHAUN SOFTWARE INTERNATIONAL, LTD.
Fair value of assets acquired $ 1,158 $ --- $ ---
Fair value of stock issued (158) --- ---
Liabilities assumed (370) --- ---
Cash acquired (2) -- --
------------------------- ------------------- -------------------
Cash paid for acquisition and direct costs
net of cash acquired $ 628 $ --- $ ---
========================= =================== ===================
ACQUISITION OF INTANGIBLE ASSETS FROM
NETREND CORPORATION AND VIMAL VAIDYA
Fair value of assets acquired $ 12,460 $ --- $ ---
Fair value of stock issued (10,200) -- --
------------------------- ------------------- -------------------
Cash paid for acquisition and direct costs $ 2,260 $ --- $ ---
========================= =================== ===================
ACQUISITION OF TECHNOCOM PLC.
Fair value of assets acquired $ 1,963 $ --- $ ---
Cash paid for acquisition and direct costs $ 1,963 $ --- $ ---
========================= =================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for-
Interest $ 205 $ 271 $ 94
========================= =================== ===================
Income taxes $ 1,302 $ 657 $ ---
========================= =================== ===================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ON Technology Corporation and its Subsidiaries (the "Company") are engaged in
the development, marketing, sales support, and distribution of software for
local area networks.
In 1994, the Company acquired all of the outstanding stock of DaVinci Systems
Corporation (DaVinci), a company engaged in the development and marketing of
software. This transaction was accounted for as a purchase in accordance with
Accounting Principles Board (APB) No. 16 (see Note 2).
During 1996, the Company completed three acquisitions. The Company acquired
all of the assets and assumed certain liabilities of Leprechaun Software
International, Ltd., certain technology of neTrend Corporation and certain
intangible assets of Technocom plc. These acquisitions were accounted for as the
purchase of business combinations in accordance with APB No. 16 (see Note 3).
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
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expense during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Revenue from software product sales is recognized upon shipment of the product
to customers where the Company has no significant vendor obligations. 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. The deferred
revenue balance at December 31, 1996 and 1995 relates primarily to revenue on
software maintenance contracts, which is recognized ratably as it is earned.
The reserve for distributor inventories balance at December 31, 1996, 1995 and
1994 relates to sales to distributors for which the Company has accrued its
estimate of future distributor returns when the product was shipped. In
addition, the Company accrues the costs associated with providing telephone
support related to certain products.
Cash and Cash Equivalents
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company has classified its cash equivalents as held-to-maturity
and recorded them at amortized cost, which approximates market value. The
Company considers all highly liquid cash investments with maturates of three
months or less at the date of acquisition to be cash equivalents. Cash
equivalents consisted of commercial paper and money market funds at December 31,
1996 and 1995.
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Fair Value of Financial Instruments
SFAS No. 107, Disclosure About Fair Value of Financial Instruments, requires
disclosure of an estimate of the fair value of certain financial instruments.
The Company's financial instruments consist of cash equivalents, accounts
receivable and capital leases. The estimated fair value of these financial
instruments approximates their carrying value at December 31, 1996 and 1995.
The estimated fair values have been determined through information obtained from
market sources and management estimates.
Direct Marketing Costs
The Company sells its products through various channels, including free trial
marketing. The Company incurs substantial costs in advance of a free trial
campaign, including the rental of mailing lists, postage and printing. The
Company capitalizes 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
$1,067 and $1,554 of net capitalized direct marketing costs in the accompanying
consolidated balance sheets at December 31, 1996 and 1995, respectively. The
Company recorded $7,387, $7,291 and $3,032 of direct marketing expense for the
years ended December 31, 1996, 1995 and 1994, respectively.
Inventories
The Company values inventories at the lower of cost (first-in, first-out) or
market. Inventories consist principally of computer software disks, computer
hardware, packaging costs and other related purchased computer peripheral items.
The components of inventories are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
<S> <C> <C>
Raw Materials........................................ $ 637 $ 444
Finished Goods....................................... 1,686 2,390
------------------------- -------------------------
$ 2,323 $ 2,834
========================= =========================
</TABLE>
Depreciation
The Company provides for depreciation by charges to operations in amounts
estimated to allocate the cost of the assets over their estimated useful lives,
using the straight-line method, as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- ---------------------
<S> <C>
Computers and equipment.......................................................... 3-7 Years
Equipment acquired under capital leases.......................................... Life of lease
Furniture and fixtures........................................................... 5-7 Years
</TABLE>
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
The Company accounts for its long-term assets in accordance with SFAS No. 121,
Accounting for the Impairment of Long -lived Assets and for Long- lived Assets
to be Disposed of. Under SFAS No. 121, the Company is required to assess the
valuation of its long-lived assets, including cost in excess of net assets
acquired, based on the estimated future cash flows to be generated by such
assets. At each balance sheet date, the Company evaluated the realizability of
goodwill based on profitability expectations, using the undiscounted cash flow
method, for each subsidiary having a material goodwill balance. Based on it's
most recent analysis, the Company believes that no impairment of goodwill exists
at December 31, 1996.
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. SFAS No.
86 requires that costs incurred in creating a computer software product be
charged to research and development expense until technological feasibility has
been established for the product. The costs incurred subsequent to the
attainment of technological feasibility in 1994, 1995 and 1996 are
insignificant. The Company has recorded charges for purchased incomplete
research and development related to the acquisitions discussed in Notes 2 and 3.
In each case, the Company determined that technological feasibility of the in-
process purchased technology acquired had not been established and that the
technology had no alternative future use.
Foreign Currency Translation
The Company translates the assets and liabilities of its foreign subsidiaries
at the exchange rates in effect at fiscal year-end in accordance with SFAS No.
52, Foreign Currency Translation. Revenues and expenses are translated using
exchange rates in effect during each period. The cumulative translation
adjustment component of stockholders' equity relates primarily to the Company's
European operation which was established in 1996.
Postretirement Benefits
The Company has no obligations for postretirement benefits.
Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with Off-
balance-sheet Risk and Financial Instruments with Concentrations of Credit Risk,
requires disclosure of any significant off-balance sheet and credit risk
concentrations. The Company has no significant off-balance-sheet concentrations
of credit risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements. 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 four
financial institutions. The Company's accounts receivable credit risk is not
concentrated within any geographic area, and no single customer accounts for
greater than 10% of revenues or represents a significant credit risk to the
Company.
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Pro Forma Net (Loss) Income per Common and Common Equivalent Share
For the three years ended December 31, 1996, pro forma net (loss) income per
common and common equivalent share was based on the weighted average number of
common and common equivalent shares outstanding during the period, computed in
accordance with the treasury stock method. Pro forma net (loss) income per
common equivalent shares for the years ended December 31, 1995 and 1994 was
computed using the pro forma weighted average number of common shares assuming
that all series of redeemable convertible preferred stock had been converted to
common stock as of the original issuance dates. Other shares of stock issuable
pursuant to stock options have been included when their effect is dilutive.
Export Revenue
Export revenue as a percentage of total revenue for the years ended December
31, 1996, 1995 and 1994 was 18%, 14% and 10%, respectively.
(2) ACQUISITION OF DAVINCI
On June 1, 1994, the Company acquired all of the outstanding stock of DaVinci.
As consideration, the Company paid $3,532 to DaVinci's shareholders, assumed
$1,479 of liabilities and paid off $900 of DaVinci's notes payable to certain
investors. This transaction was accounted for as a purchase, and accordingly,
the results of DaVinci since June 1, 1994, are included in the accompanying
consolidated statements of operations. The aggregate purchase price of $6,655
(which consisted of $4,432 in cash, including $900 paid to certain investors who
held notes payable, $1,479 of assumed liabilities, and $744 of direct
acquisitions costs) was allocated based on the fair value of the tangible and
intangible assets as follows:
<TABLE>
<S> <C>
Current assets........................................... $1,014
Property and equipment................................... 153
Purchased intangible assets, including acquired 788
technology...............................................
Purchased incomplete research and development............ 4,700
---------
$6,655
=========
</TABLE>
Included in purchased intangible assets are amounts related to trade names,
customer lists and acquired technologies including acquired software products.
These intangibles have been fully amortized as of December 31, 1996. The
portion of the purchase price allocated to incomplete research and development
projects that had not yet reached technological feasibility and did not have a
future alternative use, totaling $4,700, was charged to expense as of the
acquisition date. The amount allocated to incomplete research and development
projects represents the estimated fair value related to these projects
determined by an independent appraisal. Proven valuation procedures and
techniques were utilized in determining the fair value of each intangible asset.
To bring these projects to technological feasibility, high risk developmental
and testing issues needed to be resolved which required substantial additional
effort and testing.
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(3) ACQUISITIONS IN 1996
Acquisition of Leprechaun Software International, Ltd.
On March 6, 1996, the Company acquired substantially all the assets and
assumed certain liabilities of Leprechaun Software International, Ltd., a
company engaged in the development of an antivirus software product. The
aggregate purchase price including direct acquisition costs of $1,158 was
allocated based on fair value of the tangible and intangible assets acquired as
follows:
<TABLE>
<S> <C>
Current assets........................................... $ 51
Property and equipment................................... 13
Purchased intangible assets, including acquired 157
technology...............................................
Purchased incomplete research and development............ 937
-------------
$1,158
=============
</TABLE>
As consideration, the Company paid $330 in cash, $200 in notes, issued 9,471
shares of common stock of the Company with a fair value of $16.68 per share,
assumed $370 in liabilities and incurred $100 in direct acquisition costs. This
transaction was accounted for as a purchase and, accordingly, the results since
March 6, 1996 are included in the accompanying consolidated financial
statements. Included in purchased intangible assets are amounts related to
acquired technology and goodwill.
Acquisition of Intangible Assets from neTrend Corporation and Vimal Vaidya
On January 30, 1996, the Company acquired certain intangible assets,
consisting primarily of incomplete firewall software technology from Vimal
Vaidya and acquired technology from neTrend Corporation, a development stage
company wholly owned by Vimal Vaidya, which, together with Vimal Vaidya,
developed the firewall software technology. The aggregate purchase price
including direct acquisition costs of $12,460 was allocated based on fair value
of the intangible assets acquired as follows:
<TABLE>
<S> <C>
Acquired technology...................................... $ 676
Purchased incomplete research and development............ 11,784
---------------
$12,460
===============
</TABLE>
As consideration, the Company paid $2,000 in cash, issued 717,300 shares of
common stock with a fair value of $14.22 per share and incurred $260 in direct
acquisition costs.
Acquisition of Technocom plc.
On March 29, 1996 the Company acquired certain assets of Technocom plc's LAN
software distribution business. The aggregate purchase price including direct
acquisition costs of $1,963 was allocated based on the fair value of the
tangible and intangible assets acquired as follows:
<TABLE>
<S> <C>
Property and equipment................................... $ 110
Purchased intangible assets, including acquired 1,289
technology...............................................
Purchased incomplete research and development............ 564
----------
$1,963
==========
</TABLE>
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(3) ACQUISITIONS IN 1996- (CONTINUED)
As consideration, the Company paid $1,803 in cash and incurred $160 in direct
acquisition costs. Also, included in cost of product revenue for the year ended
December 31, 1996 is a $571 charge for the elimination of profit for inventory
previously sold to Technocom plc. This transaction was accounted for as a
purchase and, accordingly, the results since March 29, 1996 are included in the
accompanying consolidated financial statements. Included in purchased intangible
assets are amounts related to acquired technology, goodwill, trade names and
customer lists.
These intangible assets are being amortized on a straight line basis over the
estimated useful life not to exceed three years. The portion of the purchase
price allocated to incomplete research and development projects that had not yet
reached technological feasibility and did not have any future alternative use
was expensed as purchased incomplete research and development as of the
acquisition dates. The amounts allocated to incomplete research and development
projects represents the estimated fair value related to these projects
determined by an independent appraisal. Proven valuation procedures and
techniques were utilized in determining the fair value of the purchased
intangible assets. To bring these projects to technological feasibility, high
risk development and testing issues needed to be resolved which required
substantial additional effort and testing.
(4) 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 non-recurring charge of
$5,415. Included in the Plan was an additional inventory writedown of $2,026
which is included in cost of product revenue in accordance with Emerging Issues
Task Force (EITF) 96-9, Classification of Inventory Markdowns and Other Costs
Associated with a Restructuring.
The following are the significant components of the $5,415 charge for
restructuring:
<TABLE>
<S> <C>
Employee severance, benefits and related costs $1,531
Write-off and writedown of assets to net realizable value excluding inventory 3,522
Provision for lease loss and related costs in closing facility 362
------
$5,415
======
</TABLE>
The total cash impact of the restructuring amounted to $2,367 which had been
paid as of December 31, 1996.
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(5) INCOME TAXES
The Company provides for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under the liability method specified by SFAS No.
109, a deferred tax asset or liability is determined based on the difference
between the financial statement and tax basis of assets and liabilities, as
measured by the enacted tax rates assumed to be in effect when these differences
reverse. The income tax provision for the years ended December 31, 1996 and
1995 was calculated based on the Company's effective tax rate giving benefit to
available net operating loss and research and development credit carryforwards
and by recognizing a portion of the Company's deferred tax asset in the year
ended December 31, 1996. The income tax provision for the year ended December
31, 1994 consists of federal alternative minimum and minimum state income taxes
payable.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- --------------- --------------
<S> <C> <C> <C>
Current
Federal............................. $ 735 $ 1,092 $ 7
State............................... 444 530 4
-------------- --------------- --------------
1,179 1,622 11
Deferred
Federal............................. (675) --- ---
State............................... (407) --- ---
--- --- ---
(1,082) --- ---
-------------- --------------- --------------
$ 97 $ 1,622 $ 11
============== =============== ==============
</TABLE>
In the year ended December 31, 1996, the Company incurred a significant
operating loss. However, included in the book changes were amounts not currently
deductible for income taxes. The 1996 tax provision includes the amount
currently payable with an offsetting deferred tax benefit to record a portion of
the Company's deferred tax asset. 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:
<TABLE>
<CAPTION>
1996 1995
----------------- ------------------
<S> <C> <C>
Deferred tax asset ---
Accounts receivable allowance................. $ 479 $ 218
Inventory reserve............................. 1,215 322
Purchased intangibles......................... 5,910 680
Reserve for distributor inventories........... 82 336
Other temporary differences................... 461 187
Net operating loss and tax credit 571 482
carryforwards.................................
8,718 2,225
----------------- ------------------
Deferred tax liability---
Direct marketing costs and prepaid expenses... (535) (308)
----------------- ------------------
Valuation allowance (7,702) (1,917)
----------------- ------------------
$ 481 $ ---
================= ==================
</TABLE>
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(5) INCOME TAXES - (CONTINUED)
The Company has placed a significant valuation allowance against its net
deferred tax asset. The valuation allowance increased during 1996 by $5,785
since the Company believes it is "more likely than not" that it will not be able
to utilize it's deferred tax asset. The Company has recorded a deferred tax
asset for that portion to which it will "more likely than not" benefit.
As of December 31, 1996, the Company has available net operating loss
carryforwards of $1,023. These carryforwards expire through 2008 and are
subject to review and possible adjustment by the Internal Revenue Service. The
Tax Reform Act of 1986 contains provisions that may limit the amount of net
operating loss and credit carryforwards that the Company may utilize in any one
year in the event of certain cumulative changes in ownership over a three-year
period in excess of 50%, as defined, therein.
A reconciliation of the federal statutory rate to the Company's effective tax
rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- --------
<S> <C> <C> <C>
Federal Statutory Rate........................................................... (34.0%) 34.0% (34.0%)
State taxes, net of federal benefit.............................................. (6.2%) 6.6% (5.1%)
Recognition of net operating loss carryforwards and deferred provision........... 39.6% (10.0%) 38.9%
---------- ----------- --------
Effective tax rate............................................................... 0.6% 30.6% 0.2%
========== =========== ========
</TABLE>
(6) LINE OF CREDIT
The Company has a $10,000 line of credit (the "Line") that allows the
Company to borrow up to the lesser of $10,000 or 80% of qualified eligible
accounts receivable, as defined, plus 40% of foreign qualified receivables, as
defined. Borrowings bear interest at the bank's prime rate (8.25% at December
31, 1996). The Line expires on April 1, 1998, at which time all outstanding
borrowings must be repaid. The Company has pledged all accounts receivable as
collateral. The Line requires the Company to meet certain financial covenants,
as defined in the Line. At December 31, 1996, the Company was in compliance
with all of these covenants. As of December 31, 1996, no amounts were
outstanding.
(7) LONG-TERM OBLIGATIONS AND COMMITMENTS
Leases
The Company conducts its operations in leased facilities and leases certain
equipment under operating and capital leases expiring at various times through
2001.
The Company has a master lease agreement, as modified, that allows the Company
to enter into up to $3,000 in fair market value equipment leases. Borrowings
under both lease agreements are payable in monthly installments ranging from $1
to $9, including interest ranging from 7.01 % to 24.49% with terms ranging
between 36 and 50 months. As of December 31, 1996, the Company had the ability
to borrow up to $3,000 under this master lease agreement.
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(dollars in thousands, except per share data)
(7) LONG-TERM OBLIGATIONS AND COMMITMENTS -(CONTINUED)
The approximate minimum annual lease payments under both the operating and
capital leases are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------------------- ---------------------
<S> <C> <C>
1997............................................................... $ 1,670 $ 1,164
1998............................................................... 1,513 503
1999............................................................... 1,165 28
2000............................................................... 326 0
Thereafter......................................................... 976 0
--------------------- ---------------------
$ 5,650 1,695
=====================
Less --- Amount representing interest.............................. 122
---------------------
Present value of minimum lease payments............................ 1,573
Less --- Current portion........................................... 1,063
---------------------
$ 510
=====================
</TABLE>
Total rental expense included in the accompanying consolidated statements of
operations for the years ended December 31, 1996, 1995 and 1994 was $1,418,
$846 and $486, respectively.
The amount of equipment under capital lease and the related accumulated
amortization are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------- ------------------
<S> <C> <C>
Equipment acquired under capital lease $ 3,895 $ 3,804
Accumulated amortization.............. (2,559) (1,300)
----------------- ------------------
Net equipment acquired under capital $ 1,336 $ 2,504
lease.................................
================= ==================
</TABLE>
Total amortization expense included in the accompanying consolidated
statements of operations for the years ended December 31, 1996, 1995 and 1994 is
$1,259, $1,001 and $273 , respectively.
Royalties
The Company has entered into several software license agreements. These
agreements provide the Company with exclusive worldwide licenses to distribute
certain software products. The Company is required to pay royalties on all
related sales, subject to the following aggregate royalty targets. If the
royalty targets for any specific product are not met by the Company, then the
Company may lose the exclusive distribution rights to that software product.
<TABLE>
<S> <C>
1997..................................................... $ 2,105
1998..................................................... 3,050
1999..................................................... 3,900
2000..................................................... 500
2001..................................................... 500
Thereafter............................................... 2,000
--------------------
$12,055
====================
</TABLE>
Total royalty expense included in the accompanying consolidated statements of
operations for the years ended December 31, 1996, 1995 and 1994 was $2,178,
$2,333 and $1,184, respectively.
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(dollars in thousands, except per share data)
(8) STOCKHOLDERS' EQUITY
Initial Public Offering
In August of 1995, the Company completed an initial public offering (the
"IPO") of 2,360,000 shares of its common stock for $15.00 per share. The sale
of common stock resulted in net proceeds to the company of $31,647, after
deducting all expenses related to the IPO. In connection with the Company's
initial public offering, the redeemable convertible preferred shares were
automatically converted into 3,841,632 shares of common stock.
Common Stock
The Company has 20,000,000 authorized shares of common stock $.01 par value,
of which 11,008,243 shares were issued and outstanding at December 31, 1996.
Preferred Stock
The Company has an authorized class of Preferred Stock consisting of 2,000,000
shares, 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 had not issued any shares of Preferred Stock as of December 31, 1996.
Reserved Shares of Stock
The Company had reserved 2,726,614 shares of common stock at December 31, 1996
for the exercise of stock options under the 1992 Employee and Consultant Stock
Option Plan, 1995 Directors Stock Option Plan and 1995 Employee Stock Purchase
Plan.
Stock Split
On May 18, 1995, the Board of Directors approved a one-for-six reverse stock
split. Accordingly, all shares of common stock and the conversion ratio of
preferred stock have been retroactively adjusted in the accompanying
consolidated financial statements for all periods presented to reflect these
split.
(9) STOCK OPTION PLANS
In July 1992, the Company adopted the 1992 Employee and Consultant Stock
Option Plan, as amended (the "Plan"). Pursuant to the Plan, the Company may
grant to employees and consultants of the Company statutory and nonstatutory
stock options to purchase up to 2,550,000 shares of common stock.
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 100,000 shares of Common Stock to directors who are not employees of the
Company.
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(9) STOCK OPTION PLANS-(CONTINUED)
Stock option activity for the option plans was as follows:
<TABLE>
<CAPTION>
WGHT AVG
NUMBER EXERCISE
OF EXERCISE PRICE PRICE
SHARES RANGE PER SHARE PER SHARE
------------ -------------------------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding, December 31, 1993........ 1,009,099 $ .0307 - $ 1.2600 $ .2259
Granted............................... 638,502 .5040 - 2.4600 2.1185
Exercised............................. (376,874) .0307 - .9600 .0349
Terminated............................ (192,286) .5040 - 2.4600 1.7355
------------- --------------------------------------------------
Outstanding, December 31, 1994........ 1,078,441 .0307 - 2.4600 1.1685
Granted............................... 308,607 2.4600 - 17.5000 10.7900
Exercised............................. (444,878) .0307 - 9.0000 .3412
Terminated............................ (318,446) .5040 - 16.1250 2.0496
------------- --------------------------------------------------
Outstanding, December 31, 1995........ 623,724 .0307 - 17.5000 5.6373
Granted............................... 603,217 5.1250 - 16.7500 8.8626
Exercised............................. (91,795) .5040 - 9.0000 1.5642
Terminated............................ (112,240) .5040 - 16.1250 8.6597
------------- --------------------------------------------------
Outstanding, December 31, 1996........ 1,022,906 $ .0307 - $ 17.5000 $ 7.5710
============= ==================================================
Exercisable, December 31, 1996........ 186,721 $ .0307 - $ 17.5000 $ 5.2891
============= ==================================================
</TABLE>
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123
Accounting for Stock Based Compensation, which requires the measurement of the
fair value of stock options or warrants to be included in the statement of
operations or disclosed in the notes to the financial statements. The Company
has determined that it will continue to account for stock-based compensation for
employees under Accounting Principles Board Opinion No. 25 and elect the
disclosure-only alternative under SFAS No. 123 for options granted in 1996 and
1995 using the Black-Scholes option pricing model prescribed by SFAS No. 123.
The weighted average assumptions are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ----------------------
<S> <C> <C>
Risk-free interest rate.............................. 6.34% 6.50%
Expected dividend yield.............................. --- ---
Expected lives....................................... 7 7
Expected volatility.................................. 73.56% 73.56%
</TABLE>
Had compensation cost for these plans been determined consistent with SFAS No.
123, the Company's net (loss) income and pro forma net (loss) income per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1995
--------------------- ----------------------
<S> <C> <C> <C>
Net (Loss) Income......................... As Reported (15,861) 3,672
Pro Forma (16,846) 3,378
Net (Loss) Income Per Share............... As Reported (1.46) 0.40
Pro Forma (1.55) .37
</TABLE>
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(dollars in thousands, except per share data)
(9) STOCK OPTION PLANS-(CONTINUED)
Because the method prescribed by SFAS No. 123 has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
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 in the Plan. 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.
(10) 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 the
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 1996,
1995 or 1994.
(11) ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------------- ------------------
<S> <C> <C>
Payroll and payroll related........... $ 691 $ 564
Royalties............................. 240 511
Other................................. 1,321 1,190
----------------- ------------------
$ 2,252 $ 2,265
================= ==================
</TABLE>
(12) SUBSEQUENT EVENTS
On January 24, 1997, the Company acquired the stock of Purview Technologies,
Inc. , a development stage company engaged in Internet usage monitoring software
development. The Company paid $1,000 in cash and issued 205,712 shares of its
common stock. The aggregate purchase price including estimated direct
acquisition costs was $2,292. This transaction will be accounted for as a
purchase in accordance with APB No. 16.
On January 28, 1997, the Company acquired the stock of csd Software GmbH , a
German developer and marketer of PC Desktop Software Management Tools. The
Company paid $5,000 in cash and issued 1,315,790 shares of its common stock.
The aggregate purchase price including estimated direct acquisition costs was
$15,623. This transaction will be accounted for as a purchase in accordance
with APB No. 16.
For each of these acquisitions, the Company is in the process of obtaining
independent appraisals to value the intangible assets acquired including
incomplete purchased research and development. The Company anticipates that a
substantial portion of the purchase price for these two acquisitions will be
charged to operations as purchased incomplete research and development.
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto authorized.
Date: May 1, 1998
ON TECHNOLOGY CORPORATION
Name: John M. Bogdan By: /s/ John M. Bogdan
------------------------------
Title: Vice President of Finance
and Chief Financial Officer
Name: Herman DeLatte By: /s/ Herman DeLatte
------------------------------
Title: President and
and Chief Executive Officer
<PAGE>
ON Technology Corporation
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this form 10-K/A, into the Company's previously filed
Registration Statements No's 33-95194, 33-95192, 33-98688 and 333-44367
/s/ Arthur Andersen LLP
----------------------------
ARTHUR ANDERSEN LLP
Boston, Massachusetts
May 1, 1998
