<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 1999
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ to ________
Commission file number 0-26376
ON TECHNOLOGY CORPORATION
(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
-------- --------
12,536,683 shares of the registrant's Common stock, $0.01 par value, were
outstanding as of August 9, 1999.
THIS DOCUMENT CONTAINS 24 PAGES.
------
THE EXHIBIT INDEX IS ON PAGE 23.
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
FORM 10-Q, June 30, 1999
CONTENTS
<TABLE>
<CAPTION>
Item Number Page
- ----------- ----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Balance sheets:
June 30, 1999 and December 31, 1998 3
Statements of operations:
Three and six months ended June 30, 1999 and 1998 4
Statements of cash flows:
Six months ended June 30, 1999 and 1998 5
Notes to condensed consolidated financial statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-19
Item 3. Quantitative and Qualitative Disclosure about Market Risk 19
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
EXHIBIT INDEX 23
</TABLE>
2
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- -------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 5,570 $ 8,001
Accounts receivable, net of allowance for doubtful accounts and
sales returns of $636 and $954, respectively 5,060 3,384
Inventories 91 74
Prepaid expenses and other current assets 1,220 755
-------- --------
Total current assets 11,941 12,214
-------- --------
Property and equipment, at cost:
Computers and equipment 4,064 3,774
Equipment under capital leases -- 193
Furniture and fixtures 239 239
-------- --------
Less Accumulated depreciation 2,758 2,370
-------- --------
1,545 1,836
-------- --------
Other assets and deposits 80 80
Purchased intangibles, net of $1,768 and $1,539 of accumulated
Amortization, respectively 311 539
-------- --------
$ 13,877 $ 14,669
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $ -- $ 10
Accounts payable 4,524 4,399
Accrued expenses 1,129 1,257
Reserve for distributor inventories 120 120
Deferred revenue 2,696 1,742
-------- --------
Total current liabilities 8,469 7,528
-------- --------
Stockholders' Equity:
Common stock, $.01 par value Authorized - 20,000,000 shares
Issued and outstanding 12,478,189 shares and 12,376,095 125 124
shares, respectively
Additional paid in capital 62,876 62,793
Accumulated deficit (57,568) (55,695)
Cumulative translation adjustment 22 (34)
Treasury stock (15,000 and 15,000 shares at cost, respectively) (47) (47)
-------- --------
Total stockholders' equity 5,408 7,141
-------- --------
$ 13,877 $ 14,669
======== ========
</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,
------------------------------- ----------------------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
Net product revenue $ 5,494 $ 3,768 $ 11,084 $ 6,891
Other revenue 1,905 1,242 3,165 2,294
------------ ------------ ------------ ------------
Total revenue 7,399 5,010 14,249 9,185
------------ ------------ ------------ ------------
Operating expenses:
Cost of product revenue 1,284 1,056 2,374 1,929
Sales and marketing 3,729 2,580 7,081 4,992
Research and development 2,479 2,258 4,885 4,586
General and administrative 1,124 911 2,105 1,694
Gain on sale of assets -- -- -- (6,518)
Income (loss) from operations (1,217) (1,795) (2,196) 2,502
------------ ------------ ------------ ------------
Interest income, net 65 81 120 121
Other income 20 -- 203 --
------------ ------------ ------------ ------------
Income (loss) before provision
for income taxes (1,132) (1,714) (1,873) 2,623
------------ ------------ ------------ ------------
Provision for income
Taxes -- (22) -- (22)
============ ============ ============ ============
Net Income ( loss) $ (1,132) $ (1,736) $ (1,873) $ 2,601
============ ============ ============ ============
Basic earnings (loss) per share $ (0.09) $ (0.14) $ (0.15) $ 0.21
============ ============ ============ ============
Diluted earnings (loss) per share $ (0.09) $ (0.14) $ (0.15) $ 0.21
============ ============ ============ ============
Basic shares used in
per share calculation 12,463,022 12,235,207 12,441,958 12,227,698
============ ============ ============ ============
Diluted shares used in
per share calculation 12,463,022 12,235,207 12,441,958 12,598,288
============ ============ ============ ============
</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,
--------------------------------------
1999 1998
------ ------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ (1,873) $ 2,601
Adjustments to reconcile net income (loss)
to net cash used in operating activities
Gain on sale of assets -- (6,518)
Amortization of deferred compensation -- 229
Depreciation and amortization 810 732
Changes in assets and liabilities:
Accounts receivable (1,677) 120
Inventories (17) 140
Prepaid expenses and other current assets (448) 1,757
Accounts payable (165) (1,318)
Accrued expenses (127) (935)
Reserve for distributor inventory -- (105)
Deferred revenue 954 68
--------- ----------
Net cash used in operating activities (2,543) (3,229)
--------- ----------
Cash Flows From Investing Activities
Increase in other assets and deposits -- (3)
Purchase of property and equipment, net (290) (106)
Purchase of csd Software GmbH, net of cash acquired -- (33)
Net proceeds from assets held for sale, net of deal costs -- 8,273
--------- ----------
Net cash provided by (used in) investing activities (290) 8,131
--------- ----------
Cash Flows From Financing Activities
Exercise of stock options 20 34
Stock purchase through ESPP 66 20
Principal repayments on obligation under capital lease (10) (268)
--------- ----------
Net cash (used in) provided by financing activities 76 (214)
--------- ----------
Net effect of exchange rates on cash & cash equivalents 326 (78)
Net increase (decrease) in cash and cash equivalents (2,431) 4,610
Cash and cash equivalents, beginning of period 8,001 6,679
Cash and cash equivalents, end of period $ 5,570 $ 11,289
========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for -
Interest $ 15 $ 44
Income taxes $ -- $ 22
========= ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
</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, 1999
(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, 1998) 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, 1999 and December 31, 1998, and results of operations for the three
and six months ended June 30, 1999 and June 30, 1998. 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,
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Income (loss) $ (1,132) $ (1,763) $ (1,873) $ 2,601
Basic weighted average shares outstanding 12,463 12,235 12,442 12,228
Weighted average common equivalent shares -- -- -- 370
--------- --------- --------- ---------
Diluted weighted average shares outstanding 12,463 12,235 12,442 12,598
========= ========= ========= =========
Basic earnings per share $ (0.09) $ (0.14) $ (0.15) $ 0.21
========= ========= ========= =========
Diluted earnings per share $ (0.09) $ (0.14) $ (0.15) $ 0.21
========= ========= ========= =========
Anti-dilutive securities, that were not
included in the Above table are as follows:
Stock Options: 2,292,153 787,780 2,296,912 695,471
========= ========= ========= =========
</TABLE>
6
<PAGE>
3. 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.
4. Reporting Comprehensive Income
------------------------------
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 accompanying statement of operations for the three months ended
June 30, 1999 and June 30, 1998, comprehensive loss would be $23 lower and $46
lower, respectively than reported net loss, due to foreign currency translation
adjustments. If presented on the statement of operations for the six months
ended June 30, 1999, comprehensive loss would be $56 lower. If presented on the
statement of operations for the six months ended June 30, 1998, comprehensive
income would be $37 lower.
7
<PAGE>
5. Segment Reporting
-----------------
During the three and six months ended June 30, 1999 and 1999, the Company had
two reportable segments: Desktop Management and Groupware Continuing.
Management has organized the segments based on differences in products and
services because each segment requires different technology and marketing
strategies. The Desktop Management segment constitutes the ON Command CCM
product line, which develops, markets and supports enterprise desktop management
products. The Groupware Continuing segment develops, markets and supports
real-time group scheduling products
The Company evaluates segment performance based on gross margin from
operations and does not capture segment net income (loss) or segment assets.
The following tables illustrate segment operating data for the three and six
months ended June 30, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED, DESKTOP GROUPWARE TOTAL
JUNE 30, MANAGEMENT CONTINUING
<S> <C> <C> <C>
1999
Net Product Revenue $ 3,909 $ 1,585 $ 5,494
Other Revenue 1,441 464 1,905
------- ------- --------
Total Revenue 5,350 2,049 7,399
Cost of Product
Revenue 1,133 151 1,284
------- ------- --------
Gross Margin $ 4,217 $ 1,898 $ 6,115
1998
Net Product Revenue $ 2,004 $ 1,764 $ 3,768
Other Revenue 763 479 1,242
------- ------- --------
2,767 2,243 5,010
Cost of Product
Revenue 757 299 1,056
------- ------- --------
Gross Margin $ 2,010 $ 1,944 $ 3,954
<CAPTION>
SIX MONTHS ENDED,
JUNE 30,
<S> <C> <C> <C>
1999
Net Product Revenue $ 8,429 $ 2,655 $ 11,084
Other Revenue 2,299 866 3,165
------- ------- --------
Total Revenue 10,728 3,521 14,249
Cost of Product
Revenue 2,024 350 2,374
------- ------- --------
Gross Margin $ 8,704 $ 3,171 $ 11,875
1998
Net Product Revenue $ 3,503 $ 3,388 $ 6,891
Other Revenue 1,401 893 2,294
------- ------- --------
Total Revenue 4,904 4,281 9,185
Cost of Product
Revenue 1,436 493 1,929
------- ------- --------
Gross Margin $ 3,468 $ 3,788 $ 7,256
</TABLE>
8
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition and Results of
Operations
FORM 10-Q, June 30, 1999
(unaudited)
OVERVIEW
ON Technology Corporation and Subsidiaries (the "Company") is engaged in
providing open and scalable desktop management solutions that result in
financial, operational and strategic benefits for enterprise networks.
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,
1999 1998 1999 1998
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Net Product Revenue 74.3 % 75.2 % 77.8 % 75.0 %
Other revenue 25.7 % 24.8 % 22.2 % 25.0 %
----------------------- ----------------------
Total revenue 100.0 % 100.0 % 100.0 % 100.0 %
----------------------- ----------------------
Operating expenses:
Cost of product revenue 17.4 % 21.1 % 16.7 % 21.0 %
Sales and marketing 50.4 % 51.4 % 49.7 % 54.3 %
Research and development 33.5 % 45.1 % 34.2 % 49.9 %
General and administrative 15.2 % 18.2 % 14.8 % 18.5 %
Gain on sale of assets -- -- -- (70.9)%
----------------------- ----------------------
Income (loss) from operations (16.5)% (35.8)% (15.4)% 27.2 %
Interest income, net 0.9 % 1.6 % 0.9 % 1.3 %
Other income 0.3 % -- 1.4 % --
----------------------- ----------------------
Net income (loss) before
Provision for income taxes (15.3)% (34.2)% (13.1)% 28.6 %
----------------------- ----------------------
Provision for income taxes -- (0.5)% -- (0.3)%
----------------------- ----------------------
Net income (loss) (15.3)% (34.7)% (13.1)% 28.3 %
======================= ======================
</TABLE>
NET PRODUCT REVENUE. The Company's net product revenue is derived primarily
from the licensing of software products. For the three and six months ended
June 30, net product revenue increased $1.7 million (45.8%) and $4.2 million
(60.8%), respectively, from 1998 to 1999. The increase is due primarily to
higher sales associated with the Company's Desktop Management software business
of $1.9 million (95.1%) and $4.9 million (140.6%) over each of the respective
periods. The increase in the Company's Desktop Management software business was
offset by a decline in Groupware continuing sales of approximately $179 thousand
(10.1%) and $733 thousand (21.6%).
9
<PAGE>
OTHER REVENUE. The Company's other revenue consists of maintenance revenue,
professional services and royalties received in connection with licencing ON's
software to third parties. For the three and six months ended June 30, other
revenue increased $663 thousand (53.4%) and $871 thousand (38.0%), respectively
from 1998 to 1999. The increase is attributed to higher maintenance and
professional services associated with the sales of the Company's desktop
management software business.
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 amortization of
purchased intangibles. For the three and six months ended June 30, cost of
product revenue increased $228 thousand (21.6%) and $445 thousand (23.1%),
respectively from 1998 to 1999. This increase was primarily the result of
increased product revenue.
SALES AND MARKETING EXPENSE. Sales and marketing expense primarily consists
of compensation and benefits paid to sales and marketing personnel. Sales and
marketing expense also includes the costs associated with public relations,
trade shows and conferences. For the three and six months ended June 30, sales
and marketing expenses increased $1.1 million (44.5%) and $2.1 million (41.8%),
respectively from 1998 to 1999. The increase is due to the Company's expansion
of its Desktop Management software sales and marketing effort.
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 increased $221
thousand (9.8%) and $299 thousand (6.5%), respectively from 1998 to 1999. The
increase is attributed to additional investments in the Company's desktop
management software business. 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 administrative 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 increased
$213 thousand (23.4%) and $411 thousand (24.3%), respectively from 1998 to 1999.
The increase in absolute dollars is due to higher investor relations charges as
well as costs associated with the investigation of a former officer, as
previously disclosed. The percentage of general and administrative expense to
total revenue decreased due to an increase in the Company's revenues.
GAIN ON SALE OF ASSETS. In connection with the Elron Transaction in 1998, the
Company received net proceeds of $8.8 million and incurred $550 thousand of
direct transaction costs. As a result of the Sale of Assets that had a carrying
value of $1.8 million, the Company recorded a gain of $6.5 million.
INTEREST INCOME, NET. Interest income consists primarily of interest income
earned on cash and cash equivalents. For the three months ended June 30,
interest income decreased by $16 thousand (19.8%) due to a decrease in funds
available for investment from 1998 to 1999. Overall, interest income for the
six months ended June 30 decreased by $1 thousand (0.8%) from 1998 to 1999.
OTHER INCOME. Other income of $20 thousand and $203 thousand for the three
and six month periods ended June 30, 1999, respectively, resulted from an
insurance receivable.
INCOME TAXES. For the three and six months ended June 30, 1998, there was a
$22 thousand income tax adjustment as a result of a prior year review. There
were no tax provisions for the three and six months ended June 30, 1999.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through private and
public placements of capital stock and the net proceeds received from the Elron
transaction. At June 30, 1998 and 1999, the Company had available cash and cash
equivalents of $11.3 million and $5.6 million respectively. As of June 30,
1999, the Company has a $1.2 million letter of credit guarantee outstanding for
a subsidiary against a line of credit with a foreign bank.
Net cash used in operating activities for the six months ended June 30, 1998
and June 30, 1999, was $3.2 million and $2.5 million respectively. 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.
For the six months ended June 30, 1999, net cash used in operating activities
consisted primarily of a net loss of $1.9 million coupled with a net change in
operating assets and liabilities of $(2.4) million offset by depreciation and
amortization $810 thousand and deferred revenue of $954 thousand.
Net cash provided by (used in) investing activities for the six months ended
June 30, 1998 and June 30, 1999 was $8.1 million and $(290) thousand,
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. For the six months ended June 30, 1999 cash used in
investing activities consisted of the purchases of property and equipment of
$290 thousand.
Net cash (used in) provided by financing activities for the six months ended
June 30, 1998 and June 30, 1999 was $(214) thousand and $76 thousand,
respectively. 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. For the six
months ended June 30, 1999 cash provided by financing activities consisted of
the exercises of stock options and stock purchases through the ESPP of $86
thousand offset by the remaining principal repayments on obligations under
capital lease of $(10) thousand.
11
<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.
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 thirty day
free trial marketing system used prior to 1998. The target market for CCM
products consists primarily of large corporations such as Deutsche Telekom, MCI
Worldcom and AutoNation (all 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. The Company has
developed valuable experience and expertise in Europe, however, there can be no
assurance that the Company will be able to continue to transfer such experience
and expertise to the North American market.
Currently, only two customers account for more than 10% of the Company's
net revenue. For the twelve months ended December 31, 1998, one customer
accounted for $3.5 million, or 18% of net revenue from the Company's current
products. For the six months ended June 30, 1999, two customers accounted for
$4.4 million, or 30.8% 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.
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.
12
<PAGE>
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 1999. 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 Enterprise Desktop Management and Groupware 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. 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, Mac-OS 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.
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; however, there can be no assurance that the
Company will be able to continue to compete successfully against current and
future competitors. Certain of the Company's competitors have been in the
market longer than the Company, and other competitors are larger and may have
greater name recognition than the Company. As is the case in many segments of
the software industry, the Company may encounter increasing price competition in
the future. This could reduce average selling prices and, therefore, profit
margins. Competitive pressures could result not only in sustained price
reductions but also in a decline in sales volume, which could 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.
13
<PAGE>
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.
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.
The Company licenses certain products as development tools or as components of
its products. 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 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 Enterprise Desktop Management 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 Enterprise Desktop Management 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 Enterprise Desktop
Management 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.
14
<PAGE>
INDIRECT CHANNELS OF DISTRIBUTION
The Company markets its Enterprise Desktop Management and Groupware products
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. Although management believes that the current reserve balance is
adequate to cover this exposure, there can be no assurance that any future
period reserves for returns will be adequate. In addition, the Company may be
unaware of the nature and scope of the representations made to customers by
these distributors and resellers. For example, they could make representations
to customers about the Company's current and future products that 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 uses either a printed "shrink-wrap" license or obtains signed
license agreements from users of its Enterprise Desktop Management 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 email. 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.
15
<PAGE>
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 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 or results of operations. Adverse determinations in such
litigation could result in the loss of the Company's proprietary rights, subject
the Company to significant liabilities, require the Company to seek licenses
from third parties or prevent the Company from manufacturing or selling its
products, any one of which could have a material adverse effect on the Company's
business, 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 software errors
and omissions of $2 million domestically and $1 million internationally in
addition to an umbrella policy covering liabilities of up to $10 million
globally. The Company believes that its insurance coverages are sufficient to
cover any such losses.
INTERNATIONAL REVENUE
For the years ended December 31, 1997 and 1998 and the six months ended June,
1999, total revenue from international licenses (license revenue from outside
the United States) represented approximately 37%, 54% and 50% respectively, of
the Company's total revenue. The Company expects that international revenue may
constitute a significantly greater portion of the Company's total revenue in
1999. 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 and
Stephen Wietrecki, 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.
16
<PAGE>
The Company announced the resignation of the Chief Financial Officer, John
Bogdan, and the appointment of Stephen Wietrecki as the interim Chief Financial
Officer on April 5, 1999. On April 8, 1999, the Company announced the alerting
to the U.S. Attorney as to possible misappropriation of Company funds by John
Bogdan. On May 6, 1999, the Company announced the appointment of Stephen
Wietrecki as Chief Financial Officer and Vice President of Finance.
The Company also announced on July 21, 1999 the resignations of Robert Orr,
Vice President, North American Sales and Support, and Roy Sanford, Vice
President, Worldwide Marketing, in an effort to streamline its senior sales and
marketing staff. In conjunction with this effort, the Company appointed Hans-
Till Freiherr von Ruexleben to Vice President Sales and Support on July 21,
1999.
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.
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.
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, 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.
17
<PAGE>
The Company believes that period-to-period comparisons of its financial
results should not be relied upon as an indication of future performance.
YEAR 2000 ISSUE
As explained below, the Company has, and will continue to address Year 2000
issues. However, because no single standard for Year 2000 compliance has been
agreed upon by any industry group or promulgated by any government body, there
can be no assurance that the Company's efforts to address Year 2000 issues will
result in its products and internal computerized information systems being Year
2000 compliant in accordance with the various standards that have developed and
will continue to develop in the industry.
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
internal computerized information systems and the Company's software products
being sold. 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 products 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 business, condition (financial or otherwise), prospects
and results of operations. 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.
Over the past year, the Company has made substantial modifications and
improvements to its operational software. An integral part of this process has
been to review all newly purchased and internally developed software for Year
2000 compliance. The Company has completed a preliminary evaluation of all of
the existing software used in its internal systems and operations and expects
that such software will be Year 2000 compliant by the end of the third quarter
of 1999, at a cost not to exceed $250 thousand. The Company is still evaluating
various hardware and equipment components used in its operations and also
expects to be Year 2000 compliant in this area by the end of the third quarter
of 1999, at cost not to exceed $50 thousand. The Company believes that although
these costs are not material to its business, if these efforts are not completed
on time, or if the cost of updating or replacing the Company's information
systems greatly exceeds the Company's current estimates, the Year 2000 issue
could have a material adverse impact on the Company's business, condition
(financial or otherwise), prospects and results of operations.
The Company also intends to determine the extent to which the Company may
be vulnerable to any failures by its major suppliers, customers and service
providers to remedy their own Year 2000 issues, and is in the process of
initiating formal communications with these parties. At this time the Company
is unable to estimate the nature or extent of any potential adverse impact
resulting from the failure of third party suppliers, customers and service
providers to achieve Year 2000 compliance, although the Company does not
currently anticipate that it will experience any material shipment delays from
its major product suppliers or any material payment delays from its major
customers due to Year 2000 issues. However, there can be no assurance that
these third parties will not experience Year 2000 problems or that any problems
would not have a material adverse effect on the Company's results of operations.
Because the cost and timing of Year 2000 compliance by third parties such as
suppliers, customers and service providers is not within the Company's control,
no assurance can be given with respect to the cost or timing of such efforts or
any potential adverse effects on the Company of any failure by these third
parties to achieve Year 2000 compliance.
The Company is in the process of establishing contingency plans to manage
the impact of a failure by any of its third party suppliers, customers or
service providers to be Year 2000 compliant. The Company believes that its
relationships with multiple third party suppliers and service providers and the
diversity of its customer base should reduce to some extent the impact of any
such failures. There can be no assurance that the contingency plans implemented
by the Company will successfully mitigate issues resulting from Year 2000 non-
compliance, and in the event that such plans do not successfully, in whole or in
part, mitigate such issues, there could be a material adverse affect on the
Company's business, condition (financial or otherwise), prospects or results of
operations.
18
<PAGE>
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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
19
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
FORM 10-Q, June 30, 1999
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, 1999, 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 William C. Hulley and Herman
DeLatte as Class I directors to serve until the Company's Annual Meeting of
Stockholders held in 2002 and until their successors are duly elected and
qualified ("Proposal One"); (2) a proposal to approve amendments to the 1995
Directors Stock Option Plan increasing the number of shares available under such
plan from 100,000 to 200,000 and authorizing annual grants of options to
purchase 10,000 shares of the Company's common stock for the Company's outside
directors, which options shall vest in equal quarterly installments over a one
year period ("Proposal Two"); (3) a proposal to ratify the selection of Arthur
Anderson LLP as the independent auditors of the Company for the fiscal year
ending December 31, 1999 ("Proposal Three").
The number of shares issued, outstanding and eligible to vote as of the
record date of March 8, 1999 was 12,462,689. The votes cast at the Annual
Meeting were as follows:
<TABLE>
<CAPTION>
Delivered
Votes For Votes Against Abstain Not Voted
- --------- ------------- ------- ---------
<S> <C> <C> <C>
Proposal One:
- -------------
William C. Hulley
9,109,762 0 49,915 0
Herman DeLatte
9,109,571 0 50,106 0
Proposal Two:
- -------------
8,681,228 188,378 290,071 0
Proposal Three:
- ---------------
9,107,265 34,585 17,827 0
</TABLE>
20
<PAGE>
Item 5. Other Information
If a stockholder intends to present a proposal at the Annual Meeting of
Stockholders of the Company in 2000 (the "2000 Annual Meeting") and does not
submit such proposal on or before December 31, 1999, such proposal will not be
included in the proxy statement and proxy card related to the 2000 Annual
Meeting. Nonetheless, such stockholder may raise such proposal at the 2000
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, 2000 (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 1999) of its intent to raise such proposal at the 2000 Annual
Meeting, then management proxies would be allowed to use their discretionary
voting authority in the event such proposal is raised at the 2000 Annual
Meeting, without any discussion of the matter in the proxy statement related to
the 2000 Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K
The Company filed a current report dated April 5, 1999 in connection with
the resignation of the Chief Financial Officer, John Bogdan, and appointment of
interim Chief Financial Officer, Stephen Wietrecki. The Company also alerted
the U.S. Attorney as to possible misappropriation of Company funds.
The Company filed a current report dated May 7, 1999 in connection with
the appointment of Stephen Wietrecki as Chief Financial Officer and Vice
President of Finance.
The Company filed a current report dated July 23, 1999 in relation to the
appointment of Hans-Till Freiherr von Ruexleben to Vice President, North
American Sales and Support, replacing former Vice President, Robert Orr, who
resigned to pursue other non-competing interests. The Company also announced
the resignation of Roy Sanford, Vice President, Worldwide Marketing, in the same
current report. These changes were implemented in an effort to streamline its
senior sales and marketing staff.
21
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
FORM 10-Q, June 30, 1999
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 13, 1999 Name: Herman DeLatte
Title: Chief Executive Officer
/s/ Stephen J. Wietrecki
----------------------------------------
Date: August 13, 1999 Name: Stephen J. Wietrecki
Title: Vice President of Finance
and Chief Financial Officer
22
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
FORM 10-Q, June 30, 1999
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.0 Financial Data Schedule
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 5,570 11,289
<SECURITIES> 0 0
<RECEIVABLES> 5,060 2,820
<ALLOWANCES> 636 1,678
<INVENTORY> 91 125
<CURRENT-ASSETS> 11,941 14,984
<PP&E> 1,545 1,715
<DEPRECIATION> 2,758 2,950
<TOTAL-ASSETS> 13,877 17,550
<CURRENT-LIABILITIES> 8,469 7,707
<BONDS> 0 0
0 0
0 0
<COMMON> 125 123
<OTHER-SE> 5,283 9,720
<TOTAL-LIABILITY-AND-EQUITY> 13,877 17,550
<SALES> 11,084 6,891
<TOTAL-REVENUES> 14,249 9,185
<CGS> 2,374 1,929
<TOTAL-COSTS> 14,071 11,272
<OTHER-EXPENSES> (203) (6,518)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 120 121
<INCOME-PRETAX> (1,873) 2,623
<INCOME-TAX> 0 (22)
<INCOME-CONTINUING> (1,873) 2,623
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,873) 2,601
<EPS-BASIC> (0.15) .21<F1>
<EPS-DILUTED> (0.15) .21<F1>
<FN>
<F1> Basic and diluted EPS information has been prepared in accordance with SFAS
No 128, and basic and diluted have been entered in place of primary and diluted
EPS, respectively.
</FN>
</TABLE>
