<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 June 1998
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
-------- -------
12,330,644 shares of the registrant's Common stock, $0.01 par value, were
outstanding as of August 6, 1998.
THIS DOCUMENT CONTAINS XX PAGES.
------
THE EXHIBIT INDEX IS ON PAGE XX.
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
FORM 10-Q, June 30, 1998
CONTENTS
Item Number Page
- ----------- ----
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Balance sheets:
June 30, 1998 and December 31, 1997 3
Statements of operations:
Three and six months ended June 30, 1998 and 1997 4
Statements of cash flows:
Six months ended June 30, 1998 and 1997 5
Notes to condensed consolidated financial statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-18
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBIT INDEX 21
2
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 11,289 $ 6,679
Accounts receivable, net of allowance for doubtful
accounts and sales returns of $1,678 and $2,975,
respectively 2,820 2,970
Inventories 125 267
Prepaid expenses and other current assets 750 2,508
Assets held for sale --- 1,755
--------- ---------
Total current assets 14,984 14,179
--------- ---------
Property and equipment, at cost:
Computers and equipment 3,034 2,892
Equipment acquired under capital leases 1,392 2,443
Furniture and fixtures 239 292
--------- ---------
Less Accumulated depreciation 2,950 3,477
--------- ---------
1,715 2,150
--------- ---------
Other assets and deposits 85 81
Purchased intangibles, net of $1,313 and $1,106 of
accumulated amortization, respectively 766 972
--------- ---------
$ 17,550 $ 17,382
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $ 96 $ 356
Accounts payable 3,645 5,072
Accrued expenses 2,781 3,719
Reserve for distributor inventories 111 216
Deferred revenue 1,074 1,013
--------- ---------
Total current liabilities 7,707 10,376
--------- ---------
Capital lease obligations, net of current portion --- 10
--------- ---------
Stockholders' Equity:
Common stock, $.01 par value Authorized - 20,000,000
shares Issued and outstanding - 12,281,649 shares and
12,223,213 shares, respectively 123 122
Additional paid in capital 62,716 62,665
Deferred compensation --- (229)
Accumulated deficit (52,877) (55,480)
Cumulative translation adjustment (72) (35)
Treasury stock (15,000 and 15,000 shares at cost,
respectively) (47) (47)
--------- ---------
Total stockholders' equity 9,843 6,996
--------- ---------
$ 17,550 $ 17,382
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
- --------
Net product revenue $ 3,768 $ 13,137 $ 6,891 $ 24,597
Other revenue 1,242 1,078 2,294 2,111
----------- ---------- ---------- ----------
Total revenue 5,010 14,215 9,185 26,708
----------- ---------- ---------- ----------
Operating expenses:
- -------------------
Cost of product revenue 1,056 2,306 1,929 4,385
Sales and marketing 2,580 7,187 4,992 13,494
Research and development 2,258 3,545 4,586 6,681
General and administrative 911 1,222 1,694 2,309
Charge for purchased incomplete
research and development --- --- --- 15,898
Gain on sale of assets --- --- (6,518) ---
----------- ---------- ---------- ----------
Income (loss) from operations (1,795) (45) 2,502 (16,059)
---------- ---------- ---------- ----------
Interest income, net 81 53 121 175
---------- ---------- ---------- ----------
Income (loss) before provision
For income taxes (1,714) 8 2,623 (15,884)
----------- ---------- ---------- ----------
Provision for income
Taxes (22) (775) (22) (775)
========== ========== ========== ==========
Net Income (loss) $ (1,736) $ (767) $ 2,601 $ (16,659)
========== ========== ========== ==========
Basic earnings (loss) per share $ (0.14) $ (0.06) $ 0.21 $ (1.39)
========== ========== ========== ==========
Diluted earnings (loss) per share $ (0.14) $ (0.06) $ 0.21 $ (1.39)
========== ========== ========== ==========
Basic shares used in
per share calculation 12,235,207 12,030,000 12,227,698 11,949,435
========== ========== ========== ==========
Diluted shares used in
per share calculation 12,235,207 12,030,000 12,598,288 11,949,435
========== ========== ========== ==========
</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>
SIX MONTHS
ENDED JUNE 30,
--------------
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 2,601 $ (16,659)
Adjustments to reconcile net income (loss)
to net cash used in operating activities
Charge for purchased research and development --- 15,898
Gain on sale of assets (6,518) ---
Amortization of deferred compensation 229 ---
Depreciation and amortization 732 2,267
Change in direct marketing costs --- (73)
Change in deferred tax asset --- 1,062
Changes in assets and liabilities:
Accounts receivable 120 (112)
Inventories 140 (189)
Prepaid expenses and other current assets 1,757 (536)
Accounts payable (1,318) 2,096
Accrued expenses (935) (2,337)
Reserve for distributor inventory (105) (100)
Deferred revenue 68 (2,215)
------- ---------
Net cash used in operating activities (3,229) (898)
------- ---------
Cash Flows From Investing Activities
(Increase) decrease in other assets and deposits (3) 45
Purchase of property and equipment, net (106) (1,269)
Purchase of Purview Technologies, Inc., net of cash acquired --- (1,228)
Purchase of csd Software GmbH, net of cash acquired (33) (5,770)
Net proceeds from assets held for sale, net of deal costs 8,273 ---
------- ---------
Net cash provided by (used in) investing activities 8,131 (8,222)
------- ---------
Cash Flows From Financing Activities
Exercise of stock options 34 8
Stock purchase through ESPP 20 38
Purchase of treasury stock --- (47)
Principal repayments on obligation under capital lease (268) (556)
------- ---------
Net cash used in financing activities (214) (557)
------- ---------
Net effect of exchange rates on cash & cash equivalents (78) (34)
Net increase (decrease) in cash and cash equivalents 4,610 (9,711)
Cash and cash equivalents, beginning of period 6,679 20,774
------- ---------
Cash and cash equivalents, end of period $11,289 $ 11,063
======= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for -
Interest paid $ 44 $ 64
======= =========
Income taxes paid 22 $ 454
======= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Return of property and equipment under capital equipment - $ 1,049 $ ---
======= =========
</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, June 30, 1998
(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, 1997) 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 June 30, 1998 and December 31, 1997, and results of operations for the three
and six months ended June 30, 1998 and June 30, 1997. 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 Registration Statement on Form 10-K.
2. Earnings (loss) per Share
-------------------------
The Company calculates earnings (loss) per share in accordance with
Statement of Financial Accounting Standards No. 128 "SFAS 128", Earnings Per
Share. Basic earnings per share is calculated by dividing net income (loss) by
the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of stock options that
could share in the earnings of the Company.
Basic and diluted EPS as required by SFAS 128, are as follows:
<TABLE>
<CAPTION>
(dollars in thousands, except per share data) Three Months Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
1998 1997 1998 1997
------------------------ -----------------------
<S> <C> <C> <C> <C>
Net Income (loss) $ (1,736) $ (767) $ 2,601 $ (16,659)
Basic weighted average shares outstanding 12,235 12,030 12,228 11,949
Weighted average common equivalent shares --- --- 370 ---
-------- -------- -------- ----------
Diluted weighted average shares outstanding 12,235 12,030 12,598 11,949
======== ======== ======== ==========
Basic earnings per share $ (0.14) $ (0.06) $ 0.21 $ (1.39)
======== ======== ======== ==========
Diluted earnings per share $ (0.14) $ (0.06) $ 0.21 $ (1.39)
======== ======== ======== ==========
Anti-dilutive securities, that were not included in the
Above table are as follows:
Stock Options: $787,780 $930,230 $695,471 $ 948,065
======== ======== ======== ==========
</TABLE>
6
<PAGE>
3. New Accounting Pronouncements
-----------------------------
The Company adopted SFAS 130, "Reporting Comprehensive Income",
effective January 1, 1998. SFAS 130 establishes standards for reporting and
display of comprehensive income and its financial statements. The Company's
only item of other comprehensive income relates to foreign currency translation
adjustments, and is presented separately on the balance sheet as required. If
presented on the statement of operations for the three and six months ended June
30, 1998, comprehensive income would be $46 higher and $37 lower, respectively
than reported net income (loss), due to foreign currency translation
adjustments. If presented on the statement of operations for the three and six
months ended June 30, 1997, comprehensive income would be $0 and $29 lower,
respectively than reported net income (loss), due to foreign currency
translation adjustments.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS 131, "Disclosures about Segments of an Enterprise and Related Information".
In February 1998 FASB issued SFAS 132, "Employer's Disclosures about Pensions
and other Post-Retirement Benefits". Both SFAS 131 and SFAS 132 are effective
fiscal years beginning after December 15, 1997. The Company believes that the
adoption of these accounting standards will not have a material impact on the
Company's consolidated financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
requires computer software costs associated with internal use software to be
expensed as incurred until certain capitalization criteria are met. The Company
will adopt SOP 98-1 prospectively beginning January 1, 1999. Adoption of this
Statement will not have a material impact on the Company's consolidated
financial position or results of operations.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The Company will adopt SOP 98-5 beginning January 1,
1999. Adoption of this Statement will not have a material impact on the
Company's consolidated financial position or results of operations.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging instruments. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement applies to all entities and is effective for all
fiscal quarters beginning after June 15, 1999. Initial application of this
Statement should be as of the beginning of an entity's fiscal quarter. As of
June 30, 1998 and during the quarter then ended, the Company did not hold any
derivative instruments or have any hedging activities. The Company does not
expect adoption of this Statement to have a significant impact on its financial
position or results of operations.
4. Gain on Sale of Assets
----------------------
In connection with the Sale of Assets to Elron Software Inc., the
Company received net proceeds of $8,823 and incurred $550 of deal costs. The
Sale of Assets that had a carrying value of $1,755, resulted in a net gain of
$6,518, which was recorded in the first quarter of 1998.
7
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition and
Results of Operations
FORM 10-Q, June 30, 1998
(unaudited)
OVERVIEW
ON Technology Corporation and Subsidiaries (the "Company") is engaged
in the development, marketing, sales support, and distribution of Groupware and
Desktop Management software.
The Company does not provide forecasts of the future financial
performance of the Company. From time to time, however, the 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. See "Certain Factors That May Affect Future
Results."
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 SIX MONTHS ENDED
---------------------- ---------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Net product revenue 75.2% 92.4% 75.0% 92.1%
Other revenue 24.8% 7.6% 25.0% 7.9%
---------------------- ---------------------
Total revenue 100.0% 100.0% 100.0% 100.0%
---------------------- ---------------------
Operating expenses:
Cost of product revenue 21.1% 16.2% 21.0% 16.4%
Sales and marketing 51.4% 50.6% 54.3% 50.5%
Research and development 45.1% 24.9% 49.9% 25.0%
General and administrative 18.2% 8.6% 18.5% 8.6%
Charge for purchased R&D 0.0% 0.0% 0.0% 59.5%
Gain on sale of assets 0.0% 0.0% (70.9)% 0.0%
---------------------- ---------------------
Income (loss) from operations (35.8)% (0.3)% 27.2% (60.1)%
---------------------- ---------------------
Interest income, net 1.6% 0.4% 1.3% 0.7%
---------------------- ---------------------
Net income (loss) before
Provision for income taxes (34.2)% 0.1% 28.6% (59.5)%
---------------------- ---------------------
Provision for income taxes (0.5)% (5.5)% (0.3)% (2.9)%
---------------------- ---------------------
Net income (loss) (34.7)% (5.4)% 28.3% (62.4)%
===================== =====================
</TABLE>
NET PRODUCT REVENUE. The Company's net product revenue is derived
primarily from the licensing of software products. Net product revenue, for the
three and six months ended June 30, 1997, also includes revenue from catalog
sales of third party products and catalog advertising space of $1.1 million and
$2.2 million, respectively. For the three months ended June 30, net product
revenue decreased $9.4 million (71.3%) from 1997 to 1998. For the six months
ended June 30, net product revenue decreased $17.7 million (72.0%) from 1997 to
1998. The decrease is due primarily to products de-emphasized as part of the
strategic reorganization and restructurings undertaken in 1997 and the Company's
sale of its Network Management and Network Security Business along with the
related marketing systems and organization to Elron Software Inc., in February
1998 (the "Elron Transaction").
8
<PAGE>
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, maintenance revenue, training and
consulting. For the three and six months ended June 30, other revenue increased
$164 thousand (15.2%) and $183 thousand (8.7%), respectively, from 1997 to 1998.
This increase is primarily attributed to an increase in revenue from maintenance
contracts for existing customers.
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 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 and six months
ended June 30, cost of product revenue decreased $1.2 million (54.2%) and $2.5
million (56.0%), respectively, from 1997 to 1998. This decrease was primarily
the result of decreased product revenue. As part of the Company's announced
reorganization of its operations, the Company has ceased to market, sell,
develop and support the anti-virus business and decreased cash spent for new
customer acquisitions for its groupware businesses. The cost of product revenue
decreased in absolute dollars due to the Elron Transaction.
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 and six months
ended June 30, sales and marketing expenses decreased $4.6 million (64.1%) and
$8.5 million (63.0%), respectively, from 1997 to 1998. The decrease in absolute
dollars is due to the Elron Transaction.
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 and
six months ended June 30, research and development expense decreased $1.3
million (36.3%) and $2.1 million (31.4%), respectively, from 1997 to 1998. The
decrease in absolute dollars is due to the Elron Transaction. The Company plans
to continue to make significant investments in research and development related
to the Company's desktop management software business.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
includes executive compensation, executive support costs, accounting operations,
planning, and business development operations. For the three and six months
ended June 30, general and administrative expense decreased $311 thousand
(25.5%) and $615 thousand (26.6%), respectively, from 1997 to 1998. The
percentage of general and administrative expense to total revenue increased due
to reduced sales resulting from the Elron Transaction.
CHARGE FOR PURCHASED RESEARCH AND DEVELOPMENT. In connection with the
acquisitions of Purview Technologies, Inc. and csd Software GmbH during the
three and six months ended June 30, 1997, the Company allocated an aggregate of
$15.9 million of the aggregate purchase price for such acquisitions to purchased
incomplete research and development projects. Accordingly, these costs were
expensed as of the acquisition dates. These allocated costs represent the
estimated fair market value related to the incomplete projects as determined by
an appraisal. The development of these projects had not 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.
GAIN ON SALE OF ASSETS. In connection with the Elron Transaction, the
Company received net proceeds of $8.8 million and incurred $550 thousand of
direct transaction costs. Pursuant to the Elron Transaction, the Company sold
assets that had a carrying value of $1.8 million, and recorded a gain of $6.5
million in the six months ended June 30, 1998.
9
<PAGE>
INTEREST INCOME, NET. Interest income consists primarily of interest
expense associated with equipment leases and interest income earned on cash and
cash equivalents. For the three months ended June 30, interest income increased
$28 thousand (52.8%) from 1997 to 1998. The increase is due to the improved cash
position of the Company resulting from the net proceeds received through the
Elron Transaction. For the six months ended June 30, interest income decreased
$54 thousand (30.9%) from 1997 to 1998. The decrease is a result of the change
in cash available for investment during the first three months of 1998.
INCOME TAXES. The Company recorded a book gain on the Sale of Assets to
Elron; however, for tax purposes the Company recognized an ordinary loss on this
transaction. As a result, no tax provision is required for the three and six
months ended June 30, 1998. There was a $22 thousand income tax adjustment as a
result of prior year review and adjustments. There was a tax provision of $775
thousand recorded for the three and six months ended June 30, 1997. This tax
provision was a result of the csd Software GmbH acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through cash
flow from operations, public and private placements of capital stock and net
proceeds received from the sale of certain assets to Elron Software. At June 30,
1998, the Company had available cash and cash equivalents of $11.3 million. The
Company has an unused and available line of credit of $10.0 million with a
commercial bank. The Company can borrow under this line of credit up to the
greater of $10.0 million or the sum of 80% of qualified domestic accounts
receivable and 40% of qualified foreign accounts receivable. Advances pursuant
to the line of credit are secured by liens granted on the Company's accounts
receivable. At June 30, 1998, the Company did not have an outstanding balance
under the line of credit agreement.
Net cash used in operating activities for the six months ended June 30,
1997 and June 30, 1998, was $898 thousand and $3.2 million, respectively. For
the six months ended June 30, 1997, net used in operating activities consisted
primarily of a net loss of $16.7 million offset by a charge for purchased
research and development of $15.9 million. Additional factors contributing to
net cash used in operating activities included depreciation and amortization of
$2.3 million, an increase in accounts receivable of $112 thousand and accounts
payable of $2.0 million and a decrease in accrued expenses of $2.3 million.
These charges are primarily the result of the acquisitions of Purview
Technologies and csd Software GmbH. For the six months ended June 30, 1998, net
cash used in operating activities consisted primarily of net income of $2.6
million which is offset by a $6.5 million gain on sale of assets and net change
in depreciation and amortization, amortization of deferred compensation and
operating assets and liabilities of $689 thousand.
Net cash provided by (used in) investing activities for the six months
ended June 30, 1997 and June 30, 1998 was ($8.2) million and $8.1 million,
respectively. For the six months ended June 30, 1997, net cash used in investing
activities primarily reflects purchases of property and equipment of $1.3
million, and direct costs of the acquisitions of Purview Technologies, Inc. and
csd Software GmbH of $1.2 million and $5.8 million, respectively. For the six
months ended June 30, 1998 cash provided by investing activities was primarily a
result of net proceeds from assets held for sale of $8.3 million.
Net cash used in financing activities for the six months ended June 30,
1997 and June 30, 1998 was $557 thousand and $214 thousand, respectively. For
the six months ended June 30, 1997, net cash used in financing activities
consisted of principal repayment on obligations under capital lease of $556. The
exercises of stock options and stock purchases through the Company's Employee
Stock Purchase Plan ("ESPP") of $46 thousand was offset through the purchase of
treasury stock of $47 thousand. For the six months ended June 30, 1998, net cash
used in financing activities consisted of principal repayment on obligations
under capital lease of $268 thousand, partially offset by the exercises of stock
options and stock purchases through the ESPP of $54 thousand.
10
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
SOME 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 HARBOUR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THE FOLLOWING RISK FACTORS, AMONG OTHER FACTORS (INCLUDING THE ACCURACY OF THE
COMPANY'S INTERNAL ESTIMATES OF REVENUE AND OPERATING EXPENSE LEVEL AND OTHER
RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES
AND EXCHANGE COMMISSION), MAY CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE RESULTS STATED IN SUCH FORWARD LOOKING STATEMENTS.
CHANGE IN MARKETING STRATEGY
Historically, the Company has marketed all of its products other than
the Comprehensive Client Management ("CCM") products through its Free Trial
Marketing system. Pursuant to the Elron Transaction, the Company sold, among
other things, its Free Trial Marketing system, subject to a limited license-back
to the Company. This license will allow the Company to continue to use the Free
Trial Marketing system to market its current Groupware products, including
future versions and feature extensions of such products, to existing customers
and identified potential customers, for a period of three years from the closing
date of the Elron Transaction (the "Closing Date"), subject to termination in
the event of a sale of the Groupware products or a sale of all or substantially
all of the Company's business or assets.
Although the Company retains limited rights to the Free Trial Marketing
system, the Company's ability to implement a marketing strategy based on the
Free Trail Marketing system has been severely curtailed because the Company no
longer has the personnel and infrastructure necessary to support such a
strategy. Moreover, the Company has made the strategic decision to limit its
Groupware marketing efforts to exclusively selling new seats to its existing
customer base, while focusing the majority of its management, financial and
technical resources on its CCM products.
CCM PRODUCT MARKETING STRATEGY
The target market for the CCM products is entirely different from the
target market for the products the Company has marketed and sold through its
Free Trial Marketing system. The target market for CCM products consists
primarily of large corporations such as Deutsche Telekom and Munich Reinsurance
(both existing CCM customers). In addition, CCM product sales per customer are
generally in the range of $20,000 to $500,000, as opposed to an average sale per
customer for the Company's Groupware products of approximately $2,500. Sales of
CCM products pose significantly greater financial risks, and require greater up-
front investments in marketing, technical and financial resources, than sales of
the Company's historical products. As a result, the Company is adopting a new
and untested marketing strategy using a direct sales force and in-field service
organization. This marketing strategy requires significant investments in
additional marketing and technical personnel, retraining of existing personnel,
ongoing product development and creation of an in-field service organization. To
date, substantially all of the Company's marketing of CCM products has been in
Europe. While the Company has developed valuable experience and expertise in
Europe, there can be no assurance that the Company will be able to transfer such
experience and expertise to the North American market.
As a result of the Elron Transaction, the Company relies on fewer large
resellers and distributors for its revenue since the target market for CCM
products is primarily large corporations. Currently, only one customer accounts
for more than 10% of the Company's net revenue. For the twelve months ended
December 31, 1997, Deutsche Telekom accounted for $4.5 million, or 52% of net
revenue from the Company's current products. For the three and six months ended
June 30, 1998, Deutsche Telekom accounted for $884 thousand, or 18% and $1.7
million, or 19%, respectively of net revenue. It is possible that the Company's
change in marketing strategy will result in other customers accounting for more
than 10% of the Company's net revenues.
11
<PAGE>
TECHNOLOGICAL REQUIREMENTS OF THE CCM PRODUCTS; PRODUCT DEVELOPMENT
The technological demands of the CCM products require a commitment of
significant ongoing financial, technical and personnel resources to product
development, training of service technicians and customer training. Because the
Company's historical products were not as technologically sophisticated as the
CCM products, the Company has not to date made the required investment and has
not proven that it can develop and maintain the organization required to support
such products. The Company believes that its experience with the CCM products in
Europe will provide a valuable base on which to build the necessary financial,
technical and personnel resources to sell, market, develop and support the CCM
products in North America; however, there can be no assurance that the Company
will be able to expand and develop its resources to support CCM products in
North America.
The CCM product is typically larger and more complex than the products
that the Company has previously developed. The Company's ability to continue to
enhance the CCM product to meet customer and market requirements will depend
substantially on its ability to effectively manage its development effort, to
attract and retain the required development personnel in Cambridge,
Massachusetts and Starnberg, Germany and to coordinate and manage geographically
remote development efforts.
FINANCIAL RESOURCES REQUIRED BY THE CCM PRODUCTS
The Company has estimated that the product development, marketing and
sales costs of the CCM products are approximately $1.0 to $1.5 million per
month. The Company believes that it has sufficient financial resources to fund
these costs through at least December 1998. There can be no assurance that the
Company's estimate of the marketing, sales and product development costs of the
CCM products will prove correct, that such costs will not increase beyond the
Company's available financial resources, or that additional sources of capital,
if and when needed, will be sufficient or available.
RAPID TECHNOLOGICAL CHANGE
The Groupware and Enterprise Desktop 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. As discussed above, the
Company has made a strategic decision to limit its Groupware marketing efforts
to exclusively selling new seats to its existing customer base. The Company has
identified a number of enhancements to CCM which it believes are important to
its continued success in the Enterprise Desktop Management software market.
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, condition (financial and
otherwise), prospects and results of operations. In addition, from time to time
the Company or its competitors may announce new products with capabilities or
technology 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, Windows NT, UNIX, 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 customer users would have a
material adverse effect on the Company's business, condition (financial or
otherwise), prospects and results of operations.
12
<PAGE>
COMPETITION
The market for the Company's products is highly competitive, and the
Company expects competition to increase in the future. The Company believes that
the principal competitive factors affecting the market for its products include
performance, functionality, ease of use, ease of installation, quality, customer
support, breadth or product line, speed of product delivery, frequency of
upgrades and updates, brand name recognition, company reputation, adherence to
industry standards, integration with third-party solutions and price. Certain of
the criteria upon which the performance and quality of the Company's Groupware
software compete includes speed of response, ease of use, ease of installation,
interoperability with other messaging systems and simplicity of administration.
The Company believes that it generally competes favorably with respect to each
of these factors; howver, 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
that 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 have a material adverse effect on the
Company's business, condition (financial or otherwise), prospects and results of
operations. There can be no assurance that the Company will continue to compete
effectively against existing and potential competitors in these markets, many of
whom have substantially greater financial, technical, marketing and support
resources and name recognition than the Company.
The Groupware and Enterprise Desktop Management software markets are
highly fragmented, with products offered by many vendors. In the e-mail market,
the Company competes with offerings from software, shareware and freeware
developers. Shareware is software that is made available electronically on
bulletin boards 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. 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.
In the Enterprise Desktop Management market, the Company faces
competition from large and established companies, such as Microsoft, Intel and
IBM/Tivoli, which offer client management capabilities as part of their systems,
network and/or desktop management systems. Moreover, Microsoft has announced the
Zero Administration Initiative for Windows ("ZAW"), which includes a set of
technologies that address some of the same client management issues as CCM.
Microsoft has described components of ZAW as being available for future versions
of the Windows NT and Windows 95 operating systems, as well as the Microsoft
Systems Management Server product. There can be no assurance that the Company
can continue to compete effectively against Client Management software which is
included free with operating system software.
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, condition (financial or otherwise), prospects and
results of operations.
13
<PAGE>
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. Failure to
release such enhancements on a timely basis could have a material adverse effect
on the Company's business, condition (financial or otherwise), prospects and
results of operations. There can be no assurance that the Company will be
successful in these efforts.
If the Company believes that a 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 expiring licenses, or that the economic
arrangements for such extensions would be comparable to the arrangements in
effect during the initial license term.
INCLUSION OF CCM AND GROUPWARE IN SYSTEM SOFTWARE AND APPLICATION SUITES
In the future, vendors of operating system software and applications
sold for a single price (generally referred to as application suites) may
continue to enhance their products to include certain functions that are
currently provided most often by CCM and Groupware software or may 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 CCM and
Groupware software functions provided as standard features by operating systems
are more limited than those 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 CCM and Groupware software products to further enhance operating systems and
to replace successfully any obsolete products, the Company's business, condition
(financial or otherwise), prospects and results of operations would be
materially and adversely affected.
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.
PAST ACQUISITIONS
The Company has in the past made a number of acquisitions that have
been and are being integrated and incorporated into the Company's operations,
along with the acquired product lines, technologies and personnel. If the
Company's management is unable to continue to manage these challenges, the
Company's business, financial condition or results of operations could be
materially adversely affected. There can be no assurance that any acquired
products will gain acceptance in the Company's markets.
INDIRECT CHANNELS OF DISTRIBUTION
The Company markets its products (other than ON Command CCM) through
distributors and resellers in addition to its direct sales force. 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. Management believes that the current reserve balance is
14
<PAGE>
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.
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 uses a printed "shrink-wrap" license for users of its
Groupware 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. If the printed shrink-wrap licenses prove to
be unenforceable, this may have a material adverse effect on the Company's
business, condition (financial or otherwise), prospects and results of
operations.
The Company has signed license agreements from users of its CCM
products to protect its copyrights and trade secrets in those products. The
licenses may not be enforceable under some 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. If the signed license agreements prove to be
unenforceable, this may have a material adverse effect on the Company's
business, condition (financial or otherwise), prospects and results of
operations.
The laws of some foreign countries either do not protect the Company's
proprietary rights or offer only limited protection for those rights.
Furthermore, in countries with a high incidence of software piracy, the Company
may experience a higher rate of piracy of its products.
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 DaVinci Systems. The Company has filed
for the trademark "ON Command CCM" in the United States, the European Community,
Canada and Australia. The Company has obtained only four foreign registrations
of its Notework mark and two foreign registrations of its Meeting Maker mark,
due to 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. The Company has not to date registered
any of its copyrights.
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. Lesser sensitivity by corporate, government
or institutional users to avoiding copyright infringement could have a material
adverse effect on the Company's business, condition (financial or otherwise),
prospects and results of operation.
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, condition (financial
or otherwise) prospects 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
15
<PAGE>
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,
condition (financial or otherwise), prospects and 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, condition (financial or otherwise),
prospects and results of operations. Furthermore, there can be no assurance that
any necessary licenses will be available on reasonable terms, or at all.
The Company could be subjected to lawsuits by customers, past, present
or future, and others due to possible errors in the Company's software. The
Company is not aware of any material errors in its software or any pending or
threatened litigation. The Company maintains insurance covering such liabilities
in the amounts of $12 million domestically and $4 million internationally. The
Company believes that its insurance coverages are sufficient to cover any such
losses.
INTERNATIONAL REVENUE
For the years ended December 31, 1996 and 1997 and the three and six
months ended June 30, 1998, total revenue from international licenses (license
revenue from outside the United States) represented approximately 17%, 37%, 45%
and 48%, respectively, of the Company's total revenue. The Company expects that
international revenue will constitute a significantly greater portion of the
Company's total revenue in the last two fiscal quarter of 1998. Accordingly, a
greater percentage of the Company's total revenue will be subject to the risks
inherent in international sales, including the impact of fluctuating exchange
rates on demand for its products, longer payment cycles, greater difficulty in
protecting intellectual property, greater difficulty in accounts receivable
collection, unexpected changes in legal and regulatory requirements, seasonality
due to the slowdown of European business activity in the third quarter and
tariffs and other trade barriers. There can be no assurance that these factors
will not have a material adverse effect on the Company's future international
license revenue.
LOSS OF KEY MANAGEMENT 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. Herman DeLatte, Loren
Platzman, John Bogdan and Edward Green, 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, condition (financial or otherwise), prospects and 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.
GROUPWARE BUSINESS
The Company has made the strategic decision to limit its Groupware
marketing efforts to exclusively selling new seats to its existing customer
base, while focusing the majority of its management, financial and technical
resources on the CCM products. The Company believes that in the short-term the
Company can significantly reduce the costs associated with the Groupware
products while continuing to generate cash flow from the sale of these products.
However, there can be no assurance that cash flow from the sale of the Groupware
products will not decrease faster than expected. In addition, over the longer
term, the Company's strategic decision to cease marketing the Groupware products
to new customers will lead to an erosion of the customer base and a reduction of
revenue from such products.
16
<PAGE>
The Company's ability to attract and retain the employees needed to
service the Groupware products may be materially adversely affected by the
Company's strategic decision to de-emphasize the Groupware products. Any loss of
revenue from the Groupware products may have a material adverse effect on the
Company's business, condition (financial or otherwise), prospects and results of
operation.
STRATEGIC REORGANIZATION
On July 29, 1997, the Company reorganized and restructured its
operations. On October 29, 1997, additional restructuring actions were
implemented. These actions were designed to focus the Company on the CCM
business. To date, the implementation of this new corporate strategy has
included hiring a new Chief Executive Officer, electing a new Chairman of the
Board of Directors, de-emphasizing the acquisition of new customers in the
Company's Groupware and Network Management and Security business, discontinuing
sales of the Company's virus protection software, closing or reducing the
Company's offices in Sydney, Australia; Paris, France; London, United Kingdom;
and Munich, Germany while building up the Company's office in Starnberg, Germany
and laying off approximately 118 employees. There can be no assurance that the
Company's new corporate strategy will be successfully implemented. Furthermore,
there can be no assurance that the Company will not engage in further
reorganizations or restructurings in the future.
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 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, condition (financial or otherwise), prospects and
results of operations. Because of the nature of its distribution methods for its
Groupware, the Company has virtually no backlog with respect to such products
and generally cannot predict when users will license such products. As a result
of the longer enterprise sales and product roll-out cycle for CCM, the Company
will be better able to assess anticipated customer orders for CCM. Historically,
repeat orders have accounted for a significant portion of the Company's total
revenue; however, there can be no assurance that the Company will be able to
sustain current repeat order rates in the future, in light of the de-emphasis in
marketing efforts for the Groupware products. 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 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.
17
<PAGE>
YEAR 2000 ISSUE
The Company is currently working to evaluate the potential impact of
the year 2000 on the processing of date-sensitive information by the Company's
computerized information systems and by the Company's products. The year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Any of the Company's programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000, which could result in miscalculation or system
failures. Based on preliminary information, costs of addressing potential
problems are not currently expected to have a material impact on the Company's
financial position, results of operations or cash flows in future periods.
However, failure of the Company, its customers or vendors to resolve such
processing issues in a timely manner, could have a material adverse effect on
the Company's business, condition (financial or otherwise), prospects and
results of operations.
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.
18
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
FORM 10-Q, June 30, 1998
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
On April 30, 1998, the Company held its annual meeting of stockholders
(the "Annual Meeting"). At the Annual Meeting, the Company submitted the
following proposals: (1) a proposal to elect Christopher A. Risley as a director
to serve until the annual meeting in the year 2001 ("Proposal One"); (2) a
proposal to approve an amendment to the Company's 1992 Employee and Consultant
3,300,000 to 3,800,000 shares ("Proposal Two"); and (3) a proposal to ratify the
Board of Directors selection of Arthur Andersen LLP as the Company's independent
auditors ("Proposal Three"). After the Annual Meeting, Messrs. William Hulley,
Herman DeLatte, Michael J. Zak and Brian T. Horey continued as directors.
The number of shares issued, outstanding and eligible to vote as of the
record date of March 6, 1998 was 12,226,920. The votes cast at the Annual
Meeting were as follows:
Delivered
Votes For Votes Against Abstain Not Voted
- --------- ------------- ------- ---------
Proposal One:
- -------------
10,068,667 0 151,604 0
Proposal Two:
- -------------
9,741,756 428,273 25,325 24,917
Proposal Three:
- ---------------
10,183,593 22,184 14,494 0
Item 5. Other Information
If a stockholder intends to present a proposal at the Annual Meeting of
Stockholders of the Company in 1999 (the "1999 Annual Meeting") and
does not submit such proposal on or before December 31, 1998, such
proposal will not be included in the proxy statement and proxy card
related to the 1999 Annual Meeting. Nonetheless, such stockholder may
raise such proposal at the 1999 Annual Meeting; however, as a result of
the adoption by the SEC on May 21, 1998 of new rule 14a-4(c)(1) under
the Securities and Exchange Act of 1934, as amended, if such
stockholder fails to notify the Company at least 45 days prior to March
31, 1999 (i.e., the month and day of the mailing of the Company's proxy
statement and proxy card related to the Annual Meeting of Stockholders
of the Company in 1998) of its intent to raise such proposal at the
1999 Annual Meeting, then management proxies would be allowed to use
their discretionary voting authority in the event such proposal is
raised at the 1999 Annual Meeting, without any discussion of the matter
in the proxy statement related to the 1999 Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed in the accompanying Exhibit Index on page 22
are filed or incorporated by reference as part of this Report.
(b) Reports on Form 8-K
None
19
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
FORM 10-Q, June 30, 1998
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/ Herman DeLatte
-------------------
Date: August 14, 1998 Name: Herman DeLatte
Title: Chief Executive Officer
/s/ John M. Bogdan
------------------
Date: August 14, 1998 Name: John M. Bogdan
Title: Vice President of Finance
and Chief Financial Officer
20
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
FORM 10-Q, June 30, 1998
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.0 Financial Data Schedule
21
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<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 11,289 11,063
<SECURITIES> 0 0
<RECEIVABLES> 2,820 12,554
<ALLOWANCES> 1,678 1,320
<INVENTORY> 125 2,557
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<PP&E> 1,715 12,071
<DEPRECIATION> 2,950 6,210
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0 0
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<CGS> 1,929 4,385
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<OTHER-EXPENSES> (6,518) 15,898
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 121 175
<INCOME-PRETAX> 2,623 (15,884)
<INCOME-TAX> (22) (775)
<INCOME-CONTINUING> 2,623 (15,884)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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