SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the registrant |X|
Filed by a party other than the registrant |_|
Check the appropriate box:
|X| Preliminary proxy statement | | Confidential, for Use of the
Commission Only (as Permitted
by Rule 14a-6(e)(2))
|_| Definitive proxy statement
|_| Definitive additional materials
|_| Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
ON TECHNOLOGY CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
ON TECHNOLOGY CORPORATION
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
|_| $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2)
|_| $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3)
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11:1
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid:
$200 (1/50 of 10% of value of transaction)
- --------------------------------------------------------------------------------
(2) Filing party:
ON Technology Corporation
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(3) Filing party:
ON Technology Corporation
- --------------------------------------------------------------------------------
(4) Date Filed:
February 4, 2000
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1 Set forth the amount on which the filing fee is calculated and state how it
was determined.
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ON TECHNOLOGY CORPORATION
880 WINTER STREET, BUILDING FOUR
WALTHAM, MASSACHUSETTS 02451
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL __, 2000
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of ON
Technology Corporation, a Delaware corporation ("ON" or the "Company"), which
will be held at Epstein Becker & Green, P.C., 75 State Street, 27th Floor,
Boston, Massachusetts, at 10:00 a.m., Eastern Standard Time, on April __, 2000,
for the following purposes:
1. To consider and approve the Asset Purchase Agreement, dated as of
January 3, 2000, between the Company and Meeting Maker, Inc., a Cayman Islands
corporation, and the transactions contemplated thereby.
2. To approve and reserve for issuance up to 1,029,674 shares of the
Company's Common Stock issued to Castle Creek Technology Partners LLC and
Marshall Capital Management (the "Investor Purchasers"), pursuant to the
December 29, 1999 Securities Purchase Agreement the Company entered into with
the Investor Purchasers (the "Securities Purchase Agreement") and additional
shares issuable upon exercise of the first set of warrants (the "Initial
Warrants") and the second set of warrants (the "Additional Warrants") issued to
the Investor Purchasers pursuant to the Securities Purchase Agreement.
3. To consider and approve a proposed amendment to the Company's
Certificate of Incorporation, increasing the number of authorized shares of
Common Stock from 20,000,000 to 30,000,000, which has been approved by the
Company's Board of Directors on January 28, 2000.
4. To transact such other business that may properly come before the
meeting or any postponement or adjournment thereof.
Stockholders of record at the close of business on February 29, 2000 are
entitled to notice of, and to vote at, this Special Meeting of Stockholders and
any postponement or adjournment thereof. For ten days prior to this Special
Meeting, a complete list of the stockholders entitled to vote at the meeting
will be available for examination by any stockholder for any purpose relating to
the meeting during ordinary business hours at the principal offices of the
Company.
By Order of the Board of Directors
STEPHEN J. WIETRECKI
SECRETARY
Waltham, Massachusetts
March __, 2000
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE
ENCLOSED REPLY ENVELOPE. BY RETURNING YOUR PROXY CARD, YOU WILL ASSURE
REPRESENTATION OF YOUR SHARES AT THE MEETING. IF YOU ATTEND THE MEETING, YOU
MAY, OF COURSE, VOTE YOUR SHARES IN PERSON EVEN THOUGH YOU HAVE SENT IN YOUR
PROXY. PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER,
BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM
THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
<PAGE>
ON TECHNOLOGY CORPORATION
880 WINTER STREET, BUILDING FOUR
WALTHAM, MASSACHUSETTS 02451
PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS
APRIL __, 2000
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors (the "Board") of proxies to be voted at the Special
Meeting of Stockholders of the Company to be held at Epstein Becker & Green,
P.C., 75 State Street, 27th Floor, Boston, Massachusetts, at 10:00 a.m., Eastern
Standard Time, on April [__], 2000, and at any adjournment thereof (the
"Meeting"), for the purposes set forth in the accompanying Notice of Special
Meeting. This Proxy Statement and the accompanying proxy card are being mailed
on or about April [__], 2000 to the stockholders of record as of the close of
business on February 10, 2000 (the "Record Date").
GENERAL INFORMATION
SOLICITATION OF PROXIES
The cost of soliciting proxies from stockholders will be borne by the
Company. Copies of solicitation materials will be furnished to banks, brokerage
houses, fiduciaries and custodians holding in their names shares of common stock
beneficially owned by others to forward to such beneficial owners. The Company
may reimburse persons representing beneficial owners of Common Stock for their
costs of forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegram or
personal solicitation by directors, officers or employees of the Company.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked in writing
(including by delivery of a later dated proxy) or in person by notifying the
Secretary of the Meeting, in writing, at any time prior to the voting of the
proxy.
VOTING OF PROXIES
If the enclosed proxy card is properly executed and returned to the
Company, all shares represented thereby will be voted as indicated therein. If a
proxy is returned without instructions it will be voted (i) FOR the proposal to
approve the Asset Purchase Agreement, dated as of January 3, 2000 (the "Purchase
Agreement"), between the Company and Meeting Maker, Inc., a Cayman Islands
corporation ("MMI"), and the transactions contemplated thereby (the "MMI
Transaction") (ii) FOR the proposal to approve the issuance of 1,029,674 shares
of the Company's Common Stock to the Investor Purchasers and additional shares
of the Company's Common Stock issuable upon exercise of the Initial Warrants and
the Additional Warrants (the "Additional Share Authorization") and (iii) FOR the
proposal to approve the amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of the Company's Common Stock from
20,000,000 to 30,000,000 shares.
VOTING RIGHTS AND OUTSTANDING SHARES
On the Record Date there were [13,886,813] outstanding shares of Common
Stock, which is the only class of stock outstanding and therefore entitled to
vote at the Meeting. The holders of such shares will be entitled to cast one
vote for each share held of record as of the Record Date. On the Record Date,
the closing sales price of the Common Stock on the Nasdaq National Market was
[$ ] per share.
The holders of a majority of the shares of Common Stock issued, outstanding
and entitled to vote at the Meeting shall constitute a quorum for the
transaction of business at the Meeting. Shares of Common Stock present in person
or represented by proxy will be counted for purposes of determining whether a
quorum exists at the Meeting.
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The affirmative vote of the holders of a majority of the shares of Common
Stock issued, outstanding and entitled to vote at the Meeting is required to
approve Proposal No. 1. The affirmative vote of the holders of a majority of the
shares of Common Stock voting on the matter is required to approve Proposal No.
2. The affirmative vote of the holders of a majority of the shares of Common
Stock voting on the matter is required to approve Proposal No. 3. Abstentions
and shares held by brokers that are present, but not voted because the brokers
do not have the discretionary authority to vote such shares as to a particular
matter, i.e., "broker non-votes," will be counted as present for purposes of
determining if a quorum is present. Abstentions will have the same effect as
negative votes. Broker non-votes, on the other hand, will have no effect on the
outcome of the vote.
IN DETERMINING WHETHER TO APPROVE THE MMI TRANSACTION, THE AUTHORIZATION OF THE
ISSUANCE OF ADDITIONAL SHARES IN THE PRIVATE PLACEMENT AND THE INCREASE IN THE
NUMBER OF AUTHORIZED SHARES, THE STOCKHOLDERS SHOULD CONSIDER ALL OF THE
INFORMATION INCLUDED OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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TABLE OF CONTENTS
PAGE
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........................ 1
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS........................... 1
PROPOSAL NO. 1-- SALE OF THE MEETINGMAKER BUSINESS....................... 14
GENERAL............................................................. 14
USE OF PROCEEDS..................................................... 15
BACKGROUND OF THE MMI TRANSACTION................................... 15
BUSINESS OF THE COMPANY FOLLOWING THE MMI TRANSACTION............... 16
BOARD OF DIRECTORS RECOMMENDATIONS.................................. 17
TERMS OF THE MMI TRANSACTION........................................ 17
SALE OF CERTAIN ASSETS.............................................. 17
PURCHASE PRICE...................................................... 17
ESCROW AGREEMENT.................................................... 17
BUYER NOTE; SECURITY AGREEMENT...................................... 17
WARRANTS............................................................ 18
REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION..................... 18
COVENANTS PENDING CLOSING........................................... 18
CONDITIONS OF CLOSING; FINANCING.................................... 18
TERMINATION......................................................... 19
EMPLOYMENT MATTERS.................................................. 19
LIQUIDATED DAMAGES.................................................. 19
MANAGEMENT OF THE MMI BUSINESS PRIOR TO CLOSING..................... 19
MANAGEMENT AGREEMENT................................................ 19
TRANSITION AGREEMENT................................................ 19
CLOSING............................................................. 19
ACCOUNTING CONSEQUENCES ARISING FROM THE MMI TRANSACTION............ 20
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............................. 20
REQUIRED APPROVALS.................................................. 20
INTERESTS OF CERTAIN PERSONS........................................ 20
APPRAISAL RIGHTS INAPPLICABLE....................................... 20
EXPENSES............................................................ 21
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS............... 21
CERTAIN INFORMATION REGARDING MMI................................... 24
PROPOSAL NO. 2-- AUTHORIZATION OF ISSUANCE OF ADDITIONAL SHARES IN
PRIVATE PLACEMENT............................................... 24
GENERAL............................................................. 24
INVESTORS TRANSACTIONS.............................................. 25
INVESTOR WARRANTS................................................... 26
INVESTORS REGISTRATION RIGHTS....................................... 27
USE OF PROCEEDS..................................................... 28
BOARD OF DIRECTORS RECOMMENDATIONS.................................. 28
OTHER CONSIDERATIONS................................................ 28
POSSIBLE DILUTIVE EFFECT OF INVESTOR WARRANT SHARES................. 28
PAYMENT ON OCCURRENCE OF CERTAIN MAJOR CORPORATE TRANSACTIONS....... 28
POTENTIAL ADDITIONAL CONCENTRATION OF VOTING POWER.................. 29
POTENTIAL ISSUANCE OF 20% OR MORE OF COMMON STOCK................... 29
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ABSENCE OF APPRAISAL RIGHTS......................................... 29
VOTE REQUIRED....................................................... 29
PROPOSAL NO. 3 - AUTHORIZATION OF INCREASE IN NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK............................................. 29
GENERAL ............................................................ 29
PROPOSED AMENDMENT TO CERTIFICATE OF INCORPORATION.................. 29
BOARD OF DIRECTORS RECOMMENDATIONS.................................. 29
PRICE RANGE OF COMMON STOCK; DIVIDENDS................................... 32
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT.............. 33
BUSINESS................................................................. 34
THE COMPANY......................................................... 34
CLIENT MANAGEMENT PRODUCTS.......................................... 35
MEETINGMAKER........................................................ 36
SALES AND MARKETING................................................. 36
CUSTOMERS........................................................... 37
CUSTOMER SUPPORT.................................................... 37
RESEARCH AND DEVELOPMENT............................................ 37
COMPETITION......................................................... 37
OPERATIONS.......................................................... 38
EMPLOYEES........................................................... 39
PROPERTIES............................................................... 39
LEGAL PROCEEDINGS........................................................ 39
SELECTED CONSOLIDATED FINANCIAL DATA..................................... 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................. 41
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................... 45
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK................ 45
TRANSACTION OF OTHER BUSINESS............................................ 45
INDEPENDENT PUBLIC ACCOUNTANTS........................................... 45
STOCKHOLDER PROPOSALS FOR 2000 ANNUAL MEETING............................ 45
AVAILABLE INFORMATION.................................................... 46
OTHER MATTERS............................................................ 47
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................... 48
ON TECHNOLOGY AND MEETINGMAKER are registered trademarks of the Company,
and ON COMMAND CCM is a trademark of the Company for which registration has been
applied. This Proxy Statement also includes trademarks of companies other than
the Company. All other company or product names are trademarks or registered
trademarks of their respective owners.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
SOME STATEMENTS CONTAINED IN THIS PROXY STATEMENT THAT ARE NOT HISTORICAL
STATEMENTS (INCLUDING BUT NOT LIMITED TO, STATEMENTS CONCERNING ESTIMATES OF
FUTURE REVENUES, OPERATING EXPENSE LEVELS AND SUCH OPERATING 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.
THE RISK FACTORS DISCUSSED BELOW, AMONG OTHER FACTORS (INCLUDING THE ACCURACY OF
THE COMPANY'S INTERNAL ESTIMATES OF REVENUE AND OPERATING EXPENSE LEVEL AND THE
OTHER RISK FACTORS DISCLOSED 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 ESTIMATED RESULTS STATED IN SUCH FORWARD-LOOKING
STATEMENTS.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
THE SALE OF MEETINGMAKER WOULD ELIMINATE A HISTORICALLY SIGNIFICANT SOURCE OF
THE COMPANY'S CASH FLOW AND MAY RESULT IN CASH FLOW DEFICITS.
For the fiscal years ended December 31, 1998 and December 31, 1999,
respectively, MeetingMaker produced $7,530,000 and $7,361,000 in revenues,
$3,882,000 and $4,304,000 in operating profits, and significant cash flow. These
results positively impacted the Company's overall financial performance. In
addition, the cash flow generated by the MeetingMaker business was available to
support the activities of the CCM business which, historically, has been
unprofitable and had negative cash flow. For the fiscal years ended December 31,
1998 and December 31, 1999, respectively, the remaining businesses had operating
losses of $4,415,000 and $6,672,000, producing significant negative cash flow.
Management believes that, in the absence of substantial investment, for fiscal
2000 and thereafter MeetingMaker's operating profits and positive cash flow
would substantially diminish, if not disappear in their entirety. In contrast,
management believes that the CCM business will achieve operating profits and
positive cash flow at some time during fiscal 2000 and beyond. These
expectations form the basis of management's decision to divest the MeetingMaker
business. If these expectations turn out to be incorrect, especially insofar as
CCM is concerned, the Company may experience substantial cash flow deficits.
OUR CCM PRODUCT MARKETING STRATEGY DIFFERS FROM OUR PREVIOUS MARKETING STRATEGY
The target market for CCM is entirely different from the target market for
the Groupware products we had marketed and sold through our Free Trial Marketing
system prior to 1998. The target market for CCM consists primarily of large
corporations such as Deutsche Telekom, MCI Worldcom and AutoNation (all existing
CCM customers). 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 our
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 our historical
products. As a result, we have adopted a marketing strategy using a direct sales
force and in-field service organization. This 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. We have developed valuable marketing and service
experience and expertise in Europe and, recently, in the United States. However,
there can be no assurance that we will be able to continue to expand and apply
such experience and expertise to the CCM market.
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
twelve months ended December 31, 1999, two customers
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accounted for $7.6 million, or 24.5% 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.
WE WILL NEED TO EXPAND OUR DISTRIBUTION CHANNELS IN ORDER TO DEVELOP OUR
BUSINESS AND INCREASE REVENUE
We sell our products through our direct sales force and a limited number of
distributors, and we provide maintenance and support services through our
technical and customer support staff. We plan to continue to invest large
amounts of resources in our direct sales force, particularly in North America.
In addition, we are developing additional sales and marketing channels through
value added resellers, system integrators, original equipment manufacturers and
other channel partners. We may not be able to attract channel partners that will
be able to market our products effectively, or that will be qualified to provide
timely and cost-effective customer support and service. If we establish
distribution through such indirect channels, our agreements with channel
partners may not be exclusive. As a result, such channel partners may also carry
competing product lines. If we do not establish and maintain such distribution
relationships, this could materially adversely affect our business, operating
results, and financial condition.
IF THE MARKET FOR OUR ENTERPRISE DESKTOP MANAGEMENT SOFTWARE SOLUTIONS DOES NOT
CONTINUE TO DEVELOP AS WE ANTICIPATE, OUR ABILITY TO GROW OUR BUSINESS AND SELL
OUR PRODUCTS WILL BE ADVERSELY AFFECTED
In recent years, the market for enterprise software solutions has been
characterized by rapid technological change, frequent new product announcements
and introductions, and evolving industry standards. In response to advances in
technology, customer requirements have become increasingly complex, resulting in
industry consolidation of product lines offering similar or related
functionality. In particular, we believe that a market exists for integrated
enterprise-wide infrastructure management solutions. However, the existence of
such a market is unproven. If such a market does not fully develop, this could
have a materially adverse effect on our business, results of operations, and
financial condition. Regardless of the development of a market for integrated
infrastructure management solutions, factors adversely affecting the pricing of,
demand for, or market acceptance of our enterprise desktop management
applications could have a material adverse effect on our business, results of
operations, and financial condition.
IF WE DO NOT RESPOND ADEQUATELY TO OUR INDUSTRY'S EVOLVING TECHNOLOGY STANDARDS,
OR DO NOT CONTINUE TO MEET THE SOPHISTICATED NEEDS OF OUR CUSTOMERS, SALES OF
OUR PRODUCTS MAY DECLINE
As a result of rapid technological change in our industry, our position in
existing markets or other markets that we may enter can be eroded rapidly by
product advances. The life cycles of our products are difficult to estimate. Our
growth and future financial performance depend in part upon our ability to
improve existing products and develop and introduce new products that keep pace
with technological advances, meet changing customer needs, and respond to
competitive products. Our product development efforts will continue to require
substantial investments. We may not have sufficient resources to make the
necessary investments.
THE TECHNOLOGICAL REQUIREMENTS OF THE CCM PRODUCTS MAY PRESENT ADDITIONAL
CHALLENGES IN PRODUCT DEVELOPMENT WHICH, IF WE CANNOT MEET, MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS
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 our
historical products were not as technologically sophisticated as CCM, we have
not to date made all of the required investment and have not proven that we can
develop and maintain the organization required to support such products. We
believe that our experience with CCM to date will provide a valuable base on
which to build the necessary financial, technical and personnel resources to
continue to sell, market, develop and support the CCM
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products. However, there can be no assurance that we will be able to expand and
develop our resources to support CCM products.
CCM is typically larger and more complex than the products that we have
previously developed. Our ability to continue to enhance CCM to meet customer
and market requirements will depend substantially on our ability to effectively
manage this development effort, to attract and retain the required development
personnel in Waltham, Massachusetts and Starnberg, Germany and to coordinate and
manage geographically remote development efforts.
We have experienced product development delays in the past and may
experience delays in the future. Difficulties in product development could delay
or prevent the successful introduction or marketing of new or improved products.
Any such new or improved products may not achieve market acceptance. Our current
or future products may not conform to industry requirements. If, for
technological or other reasons, we are unable to develop and introduce new and
improved products in a timely manner, our business, operating results, and
financial condition could be adversely affected.
ERRORS IN OUR PRODUCTS COULD RESULT IN SIGNIFICANT COSTS TO US AND COULD IMPAIR
OUR ABILITY TO SELL OUR PRODUCTS
Because our software products are complex, these products may contain
errors that could be detected at any point in a product's life cycle. In the
past, we have discovered software errors in certain of our products and have
experienced delays in shipment of our products during the period required to
correct these errors. Despite testing by ON and by current and potential
customers, errors in our products may be found in the future. Detection of such
errors may result in, among other things, loss of, or delay in, market
acceptance and sales of our products, diversion of development resources, injury
to our reputation, or increased service and warranty costs. If any of these
results were to occur, our business, operating results and financial condition
could be materially adversely affected.
IN THE FUTURE, INCLUSION OF FUNCTIONS PROVIDED BY CCM IN SYSTEM SOFTWARE AND
APPLICATION SUITES MAY AFFECT OUR COMPETITIVE POSITION
In the future, vendors of operating system software and applications sold
for a single price (generally referred to as application suites) may continue to
enhance their products to include functions that are currently provided by CCM.
In addition, some vendors may bundle these products in their existing
application suites at no additional charge. The widespread inclusion of the
functions provided by our products as standard features of operating system
software could render our products obsolete and unmarketable particularly if the
quality of such functions were comparable to the functions offered by our
products. Furthermore, even if the software functions provided as standard
features by operating systems are more limited than those of our products, there
is no assurance that a significant number of customers would not elect to accept
such functions instead of purchasing additional software. If we were unable to
develop new CCM software products to further enhance operating systems and to
successfully replace any obsolete products, our business, financial condition,
prospects and results of operations would be materially and adversely affected.
NEW PRODUCT INTRODUCTIONS AND THE ENHANCEMENT OF EXISTING PRODUCTS BY OUR
COMPETITORS COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS
The market for our products is highly competitive and diverse. The
technology for enterprise desktop management software products can change
rapidly. New products are frequently introduced and existing products are
continually enhanced. Competitors vary in size and in the scope and breadth of
the products and services offered.
We face competition from a number of sources, including:
o large and established companies such as Microsoft, Computer Associates and
IBM/Tivoli which offer client management capabilities as part of their
systems, network or desktop management systems;
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o software companies and others who provide application suites such as Intel
and Network Associates, whose products include client management
applications;
o information technology and systems management companies such as IBM,
Computer Associates International, and Hewlett-Packard Company; and
o the internal information technology departments of those companies with
infrastructure management needs.
In addition, 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 the Windows 2000 operating system, as well as the
Microsoft Systems Management Server.
Some of our current and many of our potential competitors have much greater
financial, technical, marketing, and other resources than ON has. As a result,
they may be able to respond more quickly to new or emerging technologies and
changes in customer needs. They may also be able to devote greater resources to
the development, promotion, and sale of their products than we can. We may not
be able to compete successfully against current and future competitors. In
addition, competitive pressures faced by ON may materially adversely affect our
business, operating results, and financial condition.
NEW COMPETITORS AND ALLIANCES AMONG EXISTING COMPETITORS COULD IMPAIR OUR
ABILITY TO RETAIN AND EXPAND OUR MARKET SHARE
Because competitors can easily penetrate the software market, we anticipate
additional competition from other established and new companies as the market
for enterprise desktop management applications develops. In addition, current
and potential competitors have established or may in the future establish
cooperative relationships among themselves or with third parties. Large software
companies may acquire or establish alliances with our smaller competitors. We
expect that the software industry will continue to consolidate. It is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share.
SYSTEM MANAGEMENT COMPANIES MAY ACQUIRE ENTERPRISE DESKTOP MANAGEMENT PROVIDERS
AND CLOSE THEIR SYSTEMS TO OUR PRODUCTS, WHICH COULD HURT OUR ABILITY TO SELL
OUR PRODUCTS
Our ability to sell our products depends in part on their compatibility
with and support by providers of system management products, including Tivoli,
Computer Associates, and Hewlett-Packard. Both Tivoli and Hewlett-Packard have
recently acquired providers of help desk software products. These providers of
system management products may decide to close their systems to competing
vendors like us. They may also decide to bundle their infrastructure management
and/or help-desk software products with other products for enterprise licenses
for promotional purposes or as part of a long-term pricing strategy. If that
were to happen, our ability to sell our products could be adversely affected.
Increased competition may result from acquisitions of help desk and other
infrastructure management software vendors by system management companies. The
results of increased competition, including price reductions of our products,
reduced gross margins, and reduction of market share, could materially adversely
affect our business, operating results, and financial condition.
DUE TO THE TECHNOLOGICAL CHALLENGES ASSOCIATED WITH CCM, WE MAY NOT HAVE THE
FINANCIAL RESOURCES NECESSARY TO CONDUCT THE BUSINESS AS PRESENTLY CONTEMPLATED
Our product development, marketing and sales costs for the CCM products are
approximately $1,250,000 to $1,750,000 per month. We believe that we have enough
cash to fund these costs through December 31, 2000, whether or not we complete
the sale of the MeetingMaker product. There can be no assurance that our
estimate of the marketing, sales and product development costs of the CCM
products is correct, or that these costs will not
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exceed our available financial resources, or that we will be locate additional
sources of financing, if and when needed.
OUR INCREASING RELIANCE ON INTERNATIONAL REVENUE COULD ADVERSELY AFFECT OUR
OPERATING RESULTS
In and fiscal 1999, total revenue from international licenses (license
revenue from outside the United States) represented approximately 54% of our
total revenue. For the fiscal year 2000 and thereafter, we expect that
international revenue may constitute a significantly greater portion of our
total revenue. Accordingly, a greater percentage of our total revenue may be
subject to the risks inherent in international sales, including the impact of
fluctuating exchange rates on demand for 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 materially adverse effect on our
future international license revenue.
Our continued growth and profitability will require continued expansion of
our international operations, particularly in Europe, Latin America, and the
Pacific Rim. Accordingly, we intend to expand our current international
operations and enter additional international markets. Such expansion will
require significant management attention and financial resources. We have only
limited experience in developing local-language versions of our products and
marketing and distributing our products internationally. We may not be able to
successfully translate, market, sell and deliver our products internationally.
If we are unable to expand our international operations successfully and in a
timely manner, our business, operating results, and financial condition could be
adversely affected.
AS OUR EXPANDING INTERNATIONAL OPERATIONS IN EUROPE AND ELSEWHERE ARE
INCREASINGLY CONDUCTED IN CURRENCIES OTHER THAN THE U.S. DOLLAR, FLUCTUATIONS IN
THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN CURRENCY EXCHANGE LOSSES
A large portion of our business is conducted in foreign currencies.
Fluctuations in the value of foreign currencies relative to the U.S. dollar have
caused and will continue to cause currency transaction gains and losses. We
cannot predict the effect of exchange rate fluctuations upon future operating
results. We may experience currency losses in the future. We may implement a
foreign exchange hedging program, consisting principally of purchases of one
month forward-rate currency contracts. However, our hedging activities may not
adequately protect us against the risks associated with foreign currency
fluctuations.
On January 1, 1999, certain member states of the European Economic
Community, the EEC, fixed their respective currencies to a new currency, the
euro. On that date, the euro became a functional legal currency within these
countries. During the three years beginning on January 1, 1999, business in
these EEC member states will be conducted in both the existing national
currencies, such as the French franc or deutsche mark, and the euro. Companies
operating in or conducting business in EEC member states will need to ensure
that their financial and other software systems are capable of processing
transactions and properly handling the existing currencies, as well as the euro.
We are still assessing the impact that the euro will have on our internal
systems and our products. We will take corrective actions based on the results
of such assessment. We have not yet determined the costs related to this
problem. Issues related to the introduction of the euro may materially adversely
affect our business, operating results, and financial condition.
WE HAVE A HISTORY OF LOSSES, WE CANNOT PREDICT OUR FUTURE OPERATING RESULTS AND
WE CANNOT ASSURE OUR CONTINUED PROFITABILITY
Through December 31, 1999, we have recorded cumulative net losses of
approximately $57.7 million. In addition, our products and marketing strategy
have changed substantially since the mid-1990s. We have acquired or developed a
significant number of products in the last five years. As a result, prediction
of our future operating
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results is difficult, if not impossible. There can be no assurance that we will
become or remain profitable on a quarterly or annual basis. In addition, we do
not believe that the growth in revenues we have experienced in recent years is
necessarily indicative of future revenue growth or future operating results.
FUTURE FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS DUE TO A NUMBER OF
FACTORS, MANY OF WHICH ARE BEYOND OUR CONTROL, COULD ADVERSELY AFFECT OUR STOCK
PRICE
Our quarterly operating results have varied significantly in the past and
may vary significantly in the future depending upon a number of factors, many of
which are beyond our control. These factors include, among others:
o our ability to develop, introduce and market new and enhanced versions of
our software on a timely basis;
o market demand for our software; the size, timing and contractual terms of
significant orders;
o the timing and significance of new software product announcements or
releases by ON or our competitors; changes in our pricing policies or our
competitors;
o changes in our business strategies; budgeting cycles of our potential
customers;
o changes in the mix of software products and services sold;
o reliance on indirect sales forces like systems integrators and channels;
o changes in the mix of revenues attributable to domestic and international
sales; and
o the impact of acquisitions of competitors; seasonal trends; the
cancellations of licenses or maintenance agreements; product life cycles;
software defects and other product quality problems; and personnel changes.
We have often recognized a substantial portion of our revenues in the last
month or weeks of a quarter. As a result, license revenues in any quarter are
substantially dependent on orders booked and shipped in the last month or weeks
of that quarter. Due to the foregoing factors, quarterly revenues and operating
results are not predictable with any significant degree of accuracy. In
particular, the timing of revenue recognition can be affected by many factors,
including the timing of contract execution and delivery. The timing between
initial customer contact and fulfillment of criteria for revenue recognition can
be lengthy and unpredictable, and revenues in any given quarter can be adversely
affected as a result of such unpredictability. In the event of any downturn in
potential customers' businesses or the economy in general, planned purchases of
our products may be deferred or canceled, which could have a material adverse
effect on our business, operating results and financial condition.
OUR CONCENTRATION ON THE CCM BUSINESS REPRESENTS A NEW DIRECTION FOR OUR
BUSINESS AND PROBLEMS WITH THE IMPLEMENTATION OF THIS STRATEGY MAY ADVERSELY
AFFECT OUR BUSINESS
On January 3, 2000, we entered into an agreement to sell our Groupware
business to Meeting Maker, Inc. These actions were designed to focus us on CCM
and end our involvement with the Groupware business. We cannot be sure that our
new corporate strategy will be successfully implemented. Furthermore, we cannot
be sure that we will not engage in further reorganizations or restructurings in
the future.
OUR SALES CYCLE IS LONG AND UNPREDICTABLE, AND POTENTIAL DELAYS IN THE CYCLE
MAKE OUR REVENUES SUSCEPTIBLE TO FLUCTUATIONS
The licensing of our software generally requires us to engage in a sales
cycle that typically takes approximately four to nine months to complete. The
length of the sales cycle may vary depending on a number of factors over which
we may have little or no control, including the size of the transaction and the
level of competition which we
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encounter in our selling activities. During the sales cycle, we typically
provide a significant level of education to prospective customers regarding the
use and benefits of our products. Any delay in the sales cycle of a large
license or a number of smaller licenses could have a material adverse effect on
our business, operating results and financial condition.
SEASONAL TRENDS IN SALES OF OUR SOFTWARE PRODUCTS MAY AFFECT OUR QUARTERLY
OPERATING RESULTS
Our business has experienced and is expected to continue to experience
seasonality. Our revenues and operating results in our December quarter
typically benefit from purchase decisions made by the large concentration of
customers with calendar year-end budgeting requirements, and from the efforts of
our sales force to meet fiscal year-end sales quotas. In addition, we are
currently attempting to expand our presence in international markets, including
Europe. International revenues comprise a significant percentage of our total
revenues, and we may experience additional variability in demand associated with
seasonal buying patterns in such foreign markets.
FUTURE ACQUISITIONS PRESENT RISKS WHICH COULD ADVERSELY AFFECT OUR BUSINESS
In the future, ON may make acquisitions of, or large investments in, other
businesses that offer products, services, and technologies that further our goal
of providing enterprise desktop management software solutions to businesses or
which complement our current business. Any future acquisitions or investments
that we may complete present risks commonly encountered with these types of
transactions. The following are examples of such risks:
o difficulty in combining the technology, operations, or work force of the
acquired business;
o disruption of on-going businesses;
o difficulty in realizing the potential financial and strategic position of
ON through the successful integration of the acquired business;
o difficulty in maintaining uniform standards, controls, procedures, and
policies;
o possible impairment of relationships with employees and clients as a result
of any integration of new businesses and management personnel;
o difficulty in adding significant numbers of new employees, including
training, evaluation, and coordination of effort of all employees towards
our corporate mission;
o diversion of management attention;
o difficulty in obtaining preferred acquisition accounting treatment for
these types of transactions; likelihood that future acquisitions will
require purchase accounting resulting in increased intangible assets and
goodwill, substantial amortization of such assets and goodwill, and a
negative impact on reported earnings; and
o potential dilutive effect on earnings.
The risks described above, either individually or in the aggregate, could
materially adversely affect our business, operating results, and financial
condition. Future acquisitions, if any, could provide for consideration to be
paid in cash, shares of ON common stock, or a combination of cash and ON common
stock.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR CCM BUSINESS IN RECENT PERIODS,
AND OUR ABILITY TO MANAGE THIS GROWTH AND ANY FUTURE GROWTH WILL AFFECT OUR
ABILITY TO ACHIEVE AND MAINTAIN PROFITABILITY
We have grown significantly in recent periods, with total CCM revenues
increasing from $8.6 million in fiscal 1997, to $11.3 million in fiscal 1998,
and to $23.5 million in fiscal 1999. If we achieve our growth plans, such growth
may burden our operating and financial systems. This burden will require large
amounts of senior management attention and will require the use of other ON
resources. Our ability to compete effectively and to
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manage future growth (and our future operating results) will depend in part on
our ability to implement and expand operational, customer support, and financial
control systems and to expand, train, and manage our employees. In particular,
in connection with acquisitions, we will be required to integrate additional
personnel and to augment or replace existing financial and management systems.
Such integration could disrupt our operations and could adversely affect our
financial results. We may not be able to augment or improve existing systems and
controls or implement new systems and controls in response to future growth, if
any. Any failure to do so could materially adversely affect our business,
operating results, and financial condition.
OUR BUSINESS DEPENDS IN LARGE PART UPON THE PROTECTION OF OUR PROPRIETARY
TECHNOLOGY THE LOSS OF WHICH WOULD HAVE A MATERIAL ADVERSE AFFECT ON OUR
BUSINESS
Our success is heavily dependent upon our proprietary software technology.
We rely on a combination of contractual rights, trademarks, trade secrets and
copyright to establish and protect our proprietary rights in software.
We use a printed "shrink-wrap" license for users of our products
distributed through traditional distribution channels in order to protect our
copyrights and trade secrets in those products. Since 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 license
terms, including the terms which seek to protect our proprietary technology. If
the printed shrink-wrap licenses prove to be unenforceable, this may have a
material adverse effect on our business, financial condition, prospects and
results of operations.
The laws of some foreign countries either do not protect our proprietary
rights or offer only limited protection for those rights. Furthermore, in
countries with a high incidence of software piracy, we may experience a higher
rate of piracy of our products.
We have obtained registrations in the United States for the following
trademarks: ON Technology, MeetingMaker, CCM, ON Command CCM, Notework, DaVinci
Systems, ON Technology & Design, ON Location and Instant Update. We have filed
for the trademark "ON Command CCM" in the European Community, Canada and
Australia. As a result, we may not be able to prevent a third party from using
our trademarks in many foreign jurisdictions. We have not to date registered any
of our copyrights.
There can be no assurance that the steps taken by ON to protect our
proprietary software technology will be adequate. Lesser sensitivity by
corporate, government or institutional users to avoiding infringement of
propriety rights could have a material adverse effect on our business, financial
condition, prospects and results of operations.
There has been substantial litigation in the software industry involving
intellectual property rights of technology companies. We have not been involved
in any such litigation. Although we do not believe that we are infringing the
intellectual property rights of others, any involvement in this type of
litigation may have a material adverse effect on our business, financial
condition, prospects and results of operations. In addition, since we may
acquire or license a portion of the software included in our future products
from third parties, our exposure to infringement actions may increase because we
must rely upon these third parties for information as to the origin and
ownership of any software being acquired. We generally obtain representations as
to the origin and ownership of such acquired or licensed software and we
generally obtain indemnification to cover any breach of such representations.
However, there can be no assurance that these representations are accurate or
that such indemnification will provide us with adequate compensation for a
breach of these representations. In the future, we may need to initiate
litigation to enforce and protect trade secrets and other intellectual property
rights owned by us. We may also be subject to litigation to defend against
claimed infringement of the rights of others or to determine the scope and
validity of the proprietary rights of others. This litigation could be costly
and cause diversion of management's attention, either of which could have a
material adverse effect on our business, financial condition, prospects and
results of operations. Adverse rulings or findings in such litigation could
result in the loss of our proprietary rights, subject us to significant
liabilities, require us to seek licenses from third parties or prevent us from
manufacturing or selling our products. Any one of these items could have a
material adverse effect on our business, condition, prospects and results of
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operations. Furthermore, there can be no assurance that any necessary licenses
will be available to us on reasonable terms, or at all.
IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE ABLE
TO USE OUR TECHNOLOGY OR TRADEMARKS AND THIS COULD WEAKEN OUR COMPETITIVE
POSITION, REDUCE OUR REVENUE AND INCREASE COSTS
We rely primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. Such laws provide only limited protection. Despite
precautions that we take, it may be possible for unauthorized third parties to
copy aspects of our current or future products or to obtain and use information
that we regard as proprietary. In particular, we may provide our licensees with
access to our data model and other proprietary information underlying our
licensed applications. Such means of protecting our proprietary rights may not
be adequate. Additionally, our competitors may independently develop similar or
superior technology. Policing unauthorized use of software is difficult and,
while we do not expect software piracy to be a persistent problem, some foreign
laws do not protect our proprietary rights to the same extent as United States
laws. Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets, or to determine the validity and
scope of the proprietary rights of others. Litigation could result in
substantial costs and diversion of resources, and could materially adversely
affect our business, operating results, and financial condition.
THIRD PARTIES COULD ASSERT, FOR COMPETITIVE OR OTHER REASONS, THAT OUR PRODUCTS
INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS, AND SUCH CLAIMS COULD INJURE OUR
REPUTATION, CONSUME TIME AND MONEY, AND ADVERSELY AFFECT OUR ABILITY TO SELL OUR
PRODUCTS
While we are not aware that any of our software product offerings infringe
the proprietary rights of third parties, third parties may claim infringement
with respect to our current or future products. We expect that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in the software industry grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, could be time consuming, result in costly litigation, cause
product shipment delays, or require us to enter into royalty or licensing
agreements. Royalty or licensing agreements may not be available on acceptable
terms or at all. As a result, infringement claims could have a material adverse
effect on our business, operating results, and financial condition.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT
COSTS TO US
Our license agreements with our customers typically contain provisions
designed to limit exposure to potential product liability claims. Such
limitation of liability provisions may, however, not be effective under the laws
of certain jurisdictions. Although we have not experienced any product liability
claims to date, the sale and support of our products entails the risk of such
claims. We may be subject to such claims in the future. A product liability
claim could materially adversely affect our business, operating results, and
financial condition.
OUR SENIOR MANAGEMENT AND OTHER KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS, AND
IF THEY CHOOSE TO LEAVE ON, IT COULD HARM OUR BUSINESS
Our success will depend to a significant extent on the continued service of
our senior management and certain other key employees, including selected sales,
consulting, technical and marketing personnel. While our employees are required
to sign standard agreements concerning confidentiality and ownership of
inventions, few of our employees are bound by an employment or noncompetition
agreement. In addition, we do not generally maintain key man life insurance on
any employee. The loss of the services of one or more of our executive officers
or key employees or the decision of one or more such officers or employees to
join a competitor or otherwise compete directly or indirectly with us could have
a material adverse effect on our business, operating results and financial
condition.
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WE WILL NEED TO RECRUIT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL TO
SUCCESSFULLY GROW OUR BUSINESS
Our future success will likely depend in large part on our ability to
attract and retain additional highly skilled technical, sales, management, and
marketing personnel. Competition for such personnel in the computer software
industry is intense, and in the past we have experienced difficulty in
recruiting qualified personnel. New employees generally require substantial
training in the use of our products. We may not succeed in attracting and
retaining such personnel. If we do not, our business, operating results, and
financial condition could be materially adversely affected.
FUTURE CHANGES IN THE FEDERAL IMMIGRATION LAWS COULD LIMIT OUR ABILITY TO
RECRUIT AND EMPLOY SKILLED TECHNICAL PROFESSIONALS FROM OTHER COUNTRIES, AND
THIS COULD ADVERSELY AFFECT OUR BUSINESS AND OPERATING RESULTS
To achieve our business objectives, we must be able to recruit and employ
skilled technical professionals from other countries. Any future shortage of
qualified technical personnel who are either United States citizens or otherwise
eligible to work in the United States could increase our reliance on foreign
professionals. Many technology companies have already begun to experience
shortages of such personnel. Any failure to attract and retain qualified
personnel as necessary could materially adversely affect our business and
operating results. Foreign computer professionals such as those employed by us
typically become eligible for employment in the United States by obtaining a
nonimmigrant visa. The number of nonimmigrant visas is limited by federal
immigration law. Currently, Congress is considering approving an increase in the
number of visas available. We cannot predict whether such legislation will
ultimately become law. We also cannot predict what effect any future changes in
the federal immigration laws will have on our business, operating results, or
financial condition.
BECAUSE ON'S OFFICERS AND DIRECTORS OWN A LARGE PORTION OF ON COMMON STOCK, THEY
MAY BE ABLE TO CONTROL MOST MATTERS REQUIRING STOCKHOLDER APPROVAL, AND THIS MAY
PREVENT OR DISCOURAGE POTENTIAL BIDS TO ACQUIRE ON
Based on shares outstanding as of December 31, 1999, ON's officers,
directors, and entities directly related to such individuals together
beneficially own approximately 16% of the outstanding shares of ON common stock.
As a result, ON's officers and directors may be able to control most matters
requiring stockholder approval, including the election of directors and the
approval of mergers, consolidations, and sales of all or substantially all of
the assets of ON. Such concentrated share ownership may prevent or discourage
potential bids to acquire ON unless the terms of acquisition are approved by
such officers and directors.
PROVISIONS IN OUR CHARTER DOCUMENTS AND IN DELAWARE LAW MAY DISCOURAGE POTENTIAL
ACQUISITION BIDS FOR ON AND PREVENT CHANGES IN OUR MANAGEMENT WHICH OUR
STOCKHOLDERS FAVOR
Certain provisions of ON's charter documents eliminate the right of
stockholders to act by written consent without a meeting and specify certain
procedures for nominating directors and submitting proposals for consideration
at stockholder meetings. Such provisions are intended to increase the likelihood
of continuity and stability in the composition of the ON board of directors and
in the policies set by the board. These provisions also discourage certain types
of transactions which may involve an actual or threatened change of control
transaction. These provisions are designed to reduce the vulnerability of ON to
an unsolicited acquisition proposal. As a result, these provisions could
discourage potential acquisition proposals and could delay or prevent a change
in control transaction. These provisions are also intended to discourage certain
tactics that may be used in proxy fights. However, they could have the effect of
discouraging others from making tender offers for ON's shares. As a result,
these provisions may prevent the market price of ON common stock from reflecting
the effects of actual or rumored takeover attempts. These provisions may also
prevent changes in the management of ON.
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ON's board of directors has the authority to issue up to 2,000,000 shares
of preferred stock in one or more series. The board of directors can fix the
price, rights, preferences, privileges, and restrictions of such preferred stock
without any further vote or action by ON's stockholders. The issuance of
preferred stock allows ON to have flexibility in connection with possible
acquisitions and other corporate purposes. However, the issuance of shares of
preferred stock may delay or prevent a change in control transaction without
further action by the ON stockholders. As a result, the market price of the ON
common stock and the voting and other rights of the holders of ON common stock
may be adversely affected. The issuance of preferred stock may result in the
loss of voting control to others. ON has no current plans to issue any shares of
preferred stock.
ON is subject to the antitakeover provisions of the Delaware General
Corporation Law, which regulates corporate acquisitions. The Delaware law
prevents certain Delaware corporations, including ON, from engaging, under
certain circumstances, in a "business combination" with any "interested
stockholder" for three years following the date that such stockholder became an
interested stockholder. For purposes of Delaware law, a "business combination"
includes, among other things, a merger or consolidation involving ON and the
interested stockholder and the sale of more than 10% of ON's assets. In general,
Delaware law defines an "interested stockholder" as any entity or person
beneficially owning 15% or more of the outstanding voting stock of a company and
any entity or person affiliated with or controlling or controlled by such entity
or person. Under Delaware law, a Delaware corporation may "opt out" of the
antitakeover provisions. ON has not "opted out" of the antitakeover provisions
of Delaware law.
OUR STOCK WILL LIKELY BE SUBJECT TO SUBSTANTIAL PRICE AND VOLUME FLUCTUATIONS
WHICH MAY PREVENT STOCKHOLDERS FROM RESELLING THEIR SHARES AT OR ABOVE THE PRICE
AT WHICH THEY PURCHASED THEIR SHARES
In the past, the market price of our common stock has varied greatly and
the volume of our common stock traded has fluctuated greatly as well. We expect
such fluctuation to continue. The fluctuation results from a number of factors
including:
o any shortfall in revenues or net income from revenues or net income
expected by securities analysts;
o announcements of new products by ON or our competitors;
o quarterly fluctuations in our financial results or the results of other
software companies, including those of our direct competitors;
o changes in analysts' estimates of our financial performance, the financial
performance of our competitors, or the financial performance of software
companies in general;
o general conditions in the software industry;
o changes in prices for our products or the products of our competitors;
o changes in our revenue growth rates or the growth rates of our competitors;
o sales of large blocks of the ON common stock; and
o conditions in the financial markets in general.
In addition, the stock market may from time to time experience extreme
price and volume fluctuations. Many technology companies, in particular, have
experienced such fluctuations. Often, such fluctuations have been unrelated to
the operating performance of the specific companies. The market price of our
common stock may experience significant fluctuations in the future.
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THE LOWER THE TRADING PRICE OF OUR STOCK, THE GREATER THE DILUTION WHICH
SHAREHOLDERS MAY EXPERIENCE AS A RESULT OF THE TRANSACTION WITH THE INVESTOR
PURCHASER.
The number of shares of Common Stock of the Company which must be issued
upon exercise of the Initial Warrants and the Additional Warrants to the
Investor Purchaser is tied to the fluctuating market price of the Company's
Common Stock:
o the lower the average trading price of the Company's Common Stock at the
time of the exercise of those warrants, the greater the number of shares of
Common Stock that must be issued and the greater the dilution caused by
these securities;
o the perceived risk of dilution may cause the Investor Purchasers or other
stockholders to sell their shares, which would contribute to the downward
movement in stock price of the Common Stock; and
o the significant downward pressure on the trading price of the Common Stock
could encourage investors to engage in short sales, which would further
contribute to the downward spiraling price of the Common Stock.
PROPOSAL NO. 1
SALE OF THE
MEETINGMAKER BUSINESS
GENERAL
The Company's current business consists of two product categories: Client
Management products, including CCM, and the MeetingMaker group scheduling
software.
Pursuant to the Purchase Agreement, the Company proposes to sell to MMI the
MeetingMaker software and related accounts receivable, inventory, trade names,
equipment and other assets. The assets being sold are described in more detail
in the section below entitled "Terms of the MMI Transaction;" together, these
assets are called the "MMI Assets" in this Proxy Statement. After the
consummation of the MMI Transaction, the Company's remaining assets will consist
of those associated with the Client Management products. During the interim
period between the execution of the Purchase Agreement and the consummation of
the MMI Transaction, MMI is managing the MMI Assets pursuant to a Management
Agreement.
Since July 1999, the Company has operated the MeetingMaker business
primarily for cash generation. The Company elected to proceed with the MMI
Transaction because it believes that all of its financial and management
resources must be focused on CCM and related Client Management products, and
that any future cash flow contribution of MeetingMaker would be outweighed by
the diversion of corporate resources necessary to support that cash flow
generation capacity.
Subject to the terms and conditions set forth therein, the Purchase
Agreement provides for the acquisition by MMI from the Company of the MMI Assets
for an aggregate price of $1 million, in cash, plus two warrants to purchase up
to 4.9% of the outstanding common stock of MMI (the "Warrants"). See "TERMS OF
THE MMI TRANSACTION -- The Purchase Price" and "TERMS OF THE MMI TRANSACTION --
The Warrants." Except for stockholder approval and the Company's transfer of
certain accounts receivable or their equivalent value in cash, the MMI
Transaction is not subject to any material conditions. See "TERMS OF THE MMI
TRANSACTION -- Purchase and Sale of MMI Assets."
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USE OF PROCEEDS
The Company estimates that the net proceeds of the MMI Transaction will be
approximately $1,012,000. The principal use of the net proceeds will be to
support the needs of the CCM business, including technical development,
marketing and sales.
BACKGROUND OF THE MMI TRANSACTION
From the Company's inception until late 1996, the Company's business model
was predicated upon the development and acquisition of a portfolio of products
in the Groupware, Workgroup Utilities and Network Management and Security
fields. The common element of all of these products was their method of
marketing and distribution: by incorporating ease of installation and use
characteristics, all of these products were suitable for distribution through
the Company's Free Trial Marketing system to network supervisors and other end
users of small-to medium-size local and wide area computer networks. A
significant dimension of most of these networks was their heterogeneous
composition, incorporating various types and generations of personal computers
running the latest, as well as older, operating systems, ranging from various
versions of Windows, DOS, Macintosh and OS/2, among others.
With increased standardization around the Windows-based operating system
and the broad acceptance of product "suites" which integrate functions
previously found in separate products, the Company's Free Trial Marketing
strategy began to be questioned by the Board of Directors and management. To
address this concern, in mid-1996 the Company established an enterprise-oriented
direct sales force to introduce the Company's products to large customers at the
corporate level. At the same time, the Company began evaluating the possible
acquisition of products that were suitable for enterprise-oriented marketing. On
January 28, 1997, the Company acquired a German company that developed and owned
the predecessor product to CCM. Clearly, CCM differed from the Company's other
products, in that it was most suitable to large, centrally administered
networks. To penetrate these customer sites and ensure successful installation
and use of the product required a highly trained direct sales and support team.
Furthermore, to establish and maintain the worldwide reputation of the product
as a leading-edge Client Management solution, substantial resources were
required for product development. The Board concluded that the investment of
those resources were justified by the substantial growth potential offered by
CCM.
After the CCM acquisition, the Company's Board of Directors instructed
management to evaluate the viability, from the perspective of both personnel and
financial resources, of simultaneously pursuing the Free Trial Marketing
strategy for the Company's historical products and the direct marketing strategy
for CCM. The Company retained Arthur Andersen's special project group to perform
various financial analyses, including cash flow analyses, of each of the
Company's products. The Company also retained the consulting firm of Fletcher
Spaght to provide a market analysis of the Company's various products, focusing
primarily on the CCM business.
After considering the analysis and recommendations of the Company's
management and consultants, the Board of Directors determined that the Company's
financial, marketing, technical and management resources were not sufficient to
continue both its Free Trial Marketing strategy and the development and
marketing of CCM and other similar products through a direct sales force.
Moreover, taking into account the changed market environment for its traditional
distribution model, the Board concluded that the CCM business offered greater
opportunities for growth in sales and earnings, and consequently for maximizing
Stockholder value, than the Company's existing product lines. Accordingly, on
July 29, 1997, the Board adopted a restructuring plan whereby new customer
acquisitions for the Company's Groupware, Network Management and Security
products were de-emphasized and those businesses began to be operated with the
objective of providing the cash flow required to support the CCM business. On
October 29, 1997, the Company implemented additional restructuring measures,
including the closing or reducing of some foreign offices, while building up the
CCM software development group in Starnberg, Germany.
At about the same time, management identified a buyer for the Company's
Network Management and Security products, as well as its Free Trial Marketing
system. The Company had offered the buyer, Elron Software, Inc. ("Elron"), the
Groupware products (then consisting of Noteworks and Davinci e-mail and
MeetingMaker group scheduling) in addition to other assets; however, Elron did
not express an interest in the Groupware products.
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On October 29, 1997, an agreement was reached with Elron for the sale of the
Company's Network Management and Security products. This sale was consummated
following the affirmative vote of the Company's stockholders on February 11,
1998.
In November 1997, after signing the purchase agreement with Elron, the
Company's Board of Directors asked management to refine its operational
estimates of the Groupware products. In December 1997, after reviewing those
estimates, the Board concluded that the sale of the Company's Groupware products
should be investigated. In the Spring of 1998, the Board retained the investment
banking firm of RossCrosslandWeston ("RCW") to identify potential third-party
interest in the Groupware products. After a period of four months, RCW reported
to the Board that it was unable to find any buyer for the Groupware business.
The Board then instructed management to continue the strategy of de-emphasizing
Groupware products and using all cash generated by that business to support CCM.
Management continued to pursue this strategy until October 1998. During the
October Board of Directors meeting, management provided to the Board historical
results and estimates of future revenues that projected that the Company's
Noteworks and Davinci e-mail business had declined to the breakeven level. The
Board decided to discontinue the e-mail products as of December 1998, but
continue to service the customer base with support until the end of 1999.
Management also sought to actively assist customers with their migration to
other e-mail products.
The discontinuation of the e-mail products left MeetingMaker as the only
offering within Groupware. During the April 1999 Board of Directors meeting, the
future of Groupware was once again discussed in detail. The lack of a buyer and
the continued contribution of the Groupware business led the Board to conclude
that this business should continue to be managed to provide cash flow for the
CCM business; however, the Board requested management to carefully monitor the
performance of the Groupware business in order to ensure that it did not divert
financial or management resources from CCM.
In September 1999, P. Michael Benninga, a businessman based in Barcelona,
Spain, approached the Company's President, Herman DeLatte, with a proposal to
purchase the MeetingMaker assets and form a new company solely focused on group
scheduling marketplace. Mr. DeLatte brought the idea to the Board for its
consideration. A committee of the Board headed by Christopher Risley was created
to explore Mr. Benninga's proposal. During October 1999, Mr. Risley and Mr.
Benninga exchanged several telephone conversations concerning Mr. Benninga's
interest in MeetingMaker. After ensuring Mr. Benninga's interest, Mr. Risley in
the October 1999 Board Meeting MMI that the Company move forward to a due
diligence process with Mr. Benninga.
Due diligence was begun on November 15, 1999 and continued for
approximately four weeks. After due diligence was completed, Mr. Risley and Mr.
Benninga began to negotiate the terms of an acquisition agreement. Negotiations
started in mid-December, 1999 and continued until January 4, 2000. The Board of
Directors met on December 22, 1999 and authorized Mr. Delatte and Mr. Stephen J.
Wietrecki, the Company's Chief Financial Officer, to negotiate the terms of, and
to execute and deliver a definitive purchase agreement with respect to, the
Groupware assets on terms not less favorable than the parameters discussed by
the Board at its meeting. On January 5, 2000 the terms of the purchase agreement
were accepted by both parties and Mr. Delatte executed a definitive purchases
agreement and entered into a Management Agreement, effective January 3, 2000,
with Mr. Benninga with respect to the Groupware business. Under this Management
Agreement, MMI has agreed to manage the MeetingMaker business until stockholder
approval. See, "MANAGEMENT OF THE CCM BUSINESS PRIOR TO CLOSING."
BUSINESS OF THE COMPANY FOLLOWING THE MMI TRANSACTION
The Company believes that the CCM business offers opportunities for
long-term growth because CCM currently has technological advantages over the
products offered by the Company's principal competitors. The Company believes
that success in the CCM business requires both superior technology and the
financial, marketing and human resources to provide the technology and related
services globally. Certain competitors of the Company have these necessary
resources, but the Company believes that their client management products do not
offer all of the technological advantages of CCM. Unlike most of the products
offered by the Company's competitors, CCM enables network administrators to
install operating system software as well as application software. To build upon
its
14
<PAGE>
technological base, the Company needs to develop its global resources, either on
its own or through strategic relationships with companies with established
global capabilities. Currently, the Company believes that there is no company
offering both global capabilities and the technological advances offered by CCM.
BOARD OF DIRECTORS RECOMMENDATIONS
At the meeting of the Company's Board of Directors held to consider the
purchase agreement and the MMI Transaction, the Board of Directors unanimously
approved the purchase agreement and the MMI Transaction as being fair to,
advisable and in the best interests of the Company and its stockholders. FOR THE
REASONS DISCUSSED ABOVE, THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY
APPROVED THE PURCHASE AGREEMENT AND THE MMI TRANSACTION AND RECOMMENDS THAT THE
COMPANY'S STOCKHOLDERS VOTE "FOR" THE APPROVAL OF PROPOSAL NO. 1. This Proposal
No. 1, if approved, would authorize the Company to sell the MeetingMaker
business on the terms contained in the Purchase Agreement and summarized below.
TERMS OF THE MMI TRANSACTION
The following summary of the MMI Transaction describes the material terms
of the Purchase Agreement, a copy of which is attached hereto as Annex A. This
summary is not intended to be complete and is qualified in its entirety by
reference to the Purchase Agreement. You are urged to read the Purchase
Agreement in its entirety.
SALE OF CERTAIN ASSETS
Subject to the terms and conditions of the Purchase Agreement, the Company
will sell to MMI (a) all of the Company's right, title and interest as owner of
the computer software programs known as MeetingMaker (collectively, the
"Software"); (b) all of the Company's right, title and interest in certain
contracts, agreements, real and personal property leases, licenses and other
instruments; (c) certain accounts receivable, with a Company-guaranteed value of
$600,000; (d) certain equipment, furniture, leasehold improvements; (e) certain
inventory; (f) certain trade names and trademarks; and (g) the goodwill
associated with the foregoing assets (collectively, the "MMI Assets"). For the
year ended December 31, 1999, the net sales of the MMI Business was $7,361,000,
and represented approximately 25% of the Company's net sales. For the same
period, the operating profits of the MMI Business were $4,304,000, and
represented 100% of the Company's operating profits.
PURCHASE PRICE
The fixed purchase price for the MMI Assets is $1 million (the "Purchase
Price"), which will be paid as follows: (i) by deposit of $300,000 into an
escrow account as described below (see "Escrow Agreement"), (ii) by delivery of
a promissory note issued by the Buyer in the principal amount of $700,000 (the
"Buyer Note"), as described below (see "Buyer Note"), and (iii) by issuance of
the warrants.
ESCROW AGREEMENT
Contemporaneously with the execution and delivery of the Purchase
Agreement, MMI deposited $300,000 in escrow (the "Escrow Funds") with Epstein
Becker & Green, P.C. ("EBG"), pursuant to the terms of an Escrow Agreement by
and among MMI, the Company and EBG. The Escrow Funds will be disbursed at the
Closing (see "CLOSING").
BUYER NOTE; SECURITY AGREEMENT
The Buyer Note is a secured promissory note to be issued by MMI as of the
Closing Date in the principal amount of $700,000 with interest payable at the
prime rate as published by The Wall Street Journal plus one percent (1%) per
annum. The principal is to be paid in two equal installments, with accrued
interest, on the first anniversary and the second anniversary of the Closing
Date. The Buyer Note is secured by a security interest in the assets of MMI,
including the MMI Assets, to be granted to the Company by MMI pursuant to a
security agreement between
15
<PAGE>
the Company and MMI (the "Security Agreement). The Company has agreed that upon
the reasonable written request of MMI, the Company will subordinate the Buyer
Note to indebtedness of the Company for money borrowed from banks or other
institutional lenders created or incurred after the date of the Buyer Note, and
which by its terms is not subordinate and junior to MMI's obligations under the
Buyer Note.
WARRANTS
As part of the Purchase Price, MMI will issue to the Company two warrants
to purchase MMI common stock. Under the first warrant, the Company has the right
to purchase shares of MMI common stock representing 4.9% of MMI's outstanding
capital stock on a fully-diluted basis for an aggregate exercise price of
$61,250. The Company's right to exercise the first warrant expires on the first
anniversary of the Closing Date. Under the second warrant, the Company has the
right to purchase shares of MMI common stock representing 2.5% of MMI's capital
stock on a fully-diluted basis for an aggregate exercise price of $31,250. The
second warrant is exercisable only if the first warrant was not exercised on or
before its expiration date, and only until the second anniversary date of the
Closing Date.
REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
The Purchase Agreement contains customary representations and warranties by
the Company and MMI. The Company makes certain representations as to (i) the
organization and good standing of the Company, (ii) proper corporate authority,
no conflicts and requisite approvals, (iii) accuracy of financial statements and
books and records, (iv) title to and condition of assets, (v) accounts
receivable, including the collectability of certain receivables designated as
"Guaranteed Receivables," (vi) inventory, (vii) taxes, (viii) no undisclosed
liabilities and no material adverse change, (ix) employee benefits plans and
employee matters, (x) compliance with laws, (xi) legal proceedings, (xii)
contract matters, (xiii) intellectual property matters, and (xii) warranty and
product liability. The Company will indemnify MMI for certain losses arising
from the breach of the Company's representations and warranties.
The Purchase Agreement contains customary indemnification obligations by
the Company. Generally, neither MMI nor the Company (as the case may be, the
"Indemnifying Party") is obligated to pay any losses suffered by the other party
(the "Indemnified Party"), unless and until the aggregate amount of all losses
exceeds $50,000. Once the aggregate amount of losses exceeds this amount, the
Indemnifying Party is required to pay the excess, up to a maximum of $300,000.
The foregoing indemnity limits do not apply to consensual liens created by MMI
in violation of the Security Agreement. The Company's indemnity obligation
expire on January 3, 2001.
COVENANTS PENDING CLOSING
The Purchase Agreement contains various covenants of the Company and MMI
pending the Closing. Neither the Company nor MMI may take any actions that will
result in any of their representations and warranties set forth in Sections 2
and 3 of the Purchase Agreement becoming untrue in any material respect. Without
the prior written consent of the Company, which consent may not be unreasonably
withheld, MMI may not engage in any activity that is prohibited by the
Management Agreement.
CONDITIONS TO CLOSING; FINANCING
The obligation of MMI to consummate the MMI Transaction is subject solely
to evidence of stockholder approval and transfer of $600,000 in guaranteed
receivables or an equivalent amount in cash. See "CLOSING." There can be no
assurance that these conditions will be satisfied. The satisfaction of these
conditions is not within the exclusive control of the Company. Consummation of
the MMI Transaction is not subject to MMI obtaining financing.
16
<PAGE>
TERMINATION
The Purchase Agreement may be terminated (i) by mutual agreement of the
Company and MMI, or (ii) on June 1, 2000, if the Closing has not occurred by May
31, 2000.
EMPLOYMENT MATTERS
At Closing, approximately 21 employees of the Company will terminate their
employment relationship with the Company and become employees of MMI (the
"Transferred Employees").
LIQUIDATED DAMAGES
The Company will pay to MMI $100,000 in liquidated damages (the "Liquidated
Damages Payment") if the Purchase Agreement is terminated as a result of the
Company's failure to obtain stockholder approval. The Company will have no
liability pursuant to the indemnification provisions of the Purchase Agreement
if the Company is required to make the Liquidated Damages Payment.
MANAGEMENT OF THE MMI BUSINESS PRIOR TO CLOSING
MANAGEMENT AGREEMENT
Contemporaneously with the execution and delivery of the Purchase
Agreement, MMI and the Company executed and delivered a Management Agreement,
pursuant to which MMI will manage the MMI Assets for its benefit and at its risk
and expense and will pay all salaries and other employee related expenses with
respect to the MMI Assets and the Transferred Employees. So long as MMI complies
with the terms of the Management Agreement, the Company cannot participate in,
control, or influence the management of the MMI Assets during the term of the
Management Agreement. During the term of the Management Agreement, the
Transferred Employees will be employed by the Company but shall, to the extent
allowed by law, be subject to the complete supervision, direction and control of
MMI. MMI will pay for all salaries, commission, taxes, insurance, sick leave,
vacation pay, worker's compensation, unemployment compensation, liabilities
pursuant to the Federal Insurance Contributions Act and the Federal Unemployment
Trust Act and all other claims, costs, expenses and liabilities of any nature
whatsoever or related to the Transferred Employees (collectively, the
"Employment Expenses") arising during the period commencing on the date of the
Management Agreement (the "Management Assumption Date") and ending on the date
of termination of the Management Agreement. MMI will be directly responsible for
all such expenses related to any other personnel employed by MMI. During the
term of the Management Agreement, MMI will not (a) mortgage, pledge or subject
to any lien, charge or other encumbrance any of the MMI Assets, except in the
ordinary course of business; (b) sell, assign, transfer any of the MMI Assets,
except for inventory sold in the ordinary course of business; (c) waive any
rights of material value to the MMI Assets, except in the ordinary course of
business; (d) alter the payment terms with respect to any account receivable,
including, without limitation, issue any credit or rebate with respect to any
account receivable; or (e) commit to do any of the foregoing, except in the
ordinary course of business.
TRANSITION AGREEMENT
MMI and the Company have entered into a Transition Agreement which provides
for the orderly transition of the MMI Assets and the Transferred Employees to
MMI.
CLOSING
Contemporaneously with the execution and delivery of the Purchase
Agreement, MMI, the Company and EBG (the "Document Escrow Agent") executed and
delivered an Escrow Agreement pursuant to which the Closing Deliveries (as
defined below) were deposited with the Document Escrow Agent. "Closing
Deliveries" means certain
17
<PAGE>
documentation that is required to effectuate the transfer of the MMI Assets and
the consummation of the MMI Transaction.
Within one business day after the Document Escrow Agent's receipt of a
letter (the "Opinion Release Instructions") authorizing the release of the legal
opinion of Epstein Becker & Green, P.C., the Company's counsel, addressed to
MMI, the Document Escrow Agent will date the Closing Deliveries and release an
original fully executed counterpart of each of the Closing Deliveries to MMI and
to the Company. On the Closing Date, (i) the Company will terminate the
employment of the Transferred Employees and MMI will offer employment to the
Transferred Employees, in accordance with the terms of the Transition Agreement,
(ii) the Company will pay to MMI a cash settlement to satisfy its guarantee
obligations regarding accounts receivable, and (iii) the Company will pay to MMI
any actual damages resulting from the failure to satisfy certain third-party
assignments and consents. In the event that the Opinion Release Instructions are
not delivered to the Document Escrow Agent on or prior to 5:00 p.m. on May 31,
2000, then (i) the Purchase Agreement and the Management Agreement will
immediately terminate, (ii) EBG will transfer the Escrow Funds, plus interest
and earnings thereon, to MMI, and (iii) MMI and the Company will use their best
efforts to transfer the management of the MMI Assets and the MMI business back
to the Company, in accordance with the terms of the Management Agreement.
ACCOUNTING CONSEQUENCES ARISING FROM THE MMI TRANSACTION
The Company will record the transaction as a discontinued operation under
APB 30 and disclose the operations of the MeetingMaker business net of income
taxes as a separate line on the Statement of Operations for all periods
presented. The Company estimates that it will recognize approximately $1,012,000
in gain for accounting purposes as a result of the sale of the MMI Assets, based
on gross proceeds of $1,000,000. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES"
for the income tax treatment of the sale of the MMI Assets.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Company will recognize income, gain or loss equal to the difference
between (i) the consideration received by the Company plus the liabilities of
the Company satisfied or assumed in connection with the sale of the MMI Assets
and (ii) the tax basis with respect to the MMI Assets. The Company intends,
subject to applicable limitations, to use net operating loss carry forwards to
offset any income or gain so recognized as a result of the sale of the MMI
Assets. However, the Company may incur alternative minimum tax liability. While
the Company has not completed its calculations of the income or gain which would
be recognized as a result of the sale of the MMI Assets, it estimates that it
will recognize an ordinary loss with respect to the MMI Transaction for federal
and state income tax purposes. The Company does not believe that the income
taxes payable, if any, as a result of the consummation of the MMI Transaction
will have a material adverse effect on the Company's business, condition
(financial or otherwise), prospects and results of operations.
REQUIRED APPROVALS
The Company is not required to obtain any federal or state approvals of the
MMI Transaction. The Company believes that, other than stockholder approval and
the consents specified in the Purchase Agreement, no further approvals are
necessary for the MMI Transaction.
INTERESTS OF CERTAIN PERSONS
The officers and directors of the Company have no interest in the MMI
Transaction, other than any interests they may have as stockholders of the
Company.
APPRAISAL RIGHTS INAPPLICABLE
Under Delaware law, the holders of Common Stock do not possess any
appraisal rights in relation to the MMI Transaction.
18
<PAGE>
EXPENSES
All expenses incurred by the Company in connection with the MMI Transaction
will be paid by the Company. The estimated fees and expenses to be incurred by
the Company in connection with the MMI Transaction are as follows:
Accounting fees and expenses.............................. $ 25,000
Legal fees and expenses................................... $ 30,000
SEC filing fee............................................ $ 200
Printing and mailing expenses............................. $ 30,000
Miscellaneous expenses.................................... $ 14,800
--------
TOTAL:................ $100,000
No fees or expenses will be paid by or on behalf of the Company to any
broker or other person for soliciting votes. Brokers, dealers, commercial banks,
trust companies and other nominees will be reimbursed by the Company for
reasonable expenses incurred by them in forwarding materials to their customers.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements give effect to the MMI Transaction. The unaudited pro forma condensed
consolidated balance sheet as of December 31, 1999 gives effect to the MMI
Transaction as if it had occurred on December 31, 1999. The unaudited pro forma
condensed consolidated statements of operations for the year ended December 31,
1999 give effect to the MMI Transaction as if it had occurred on January 1,
1999. The sale of the MeetingMaker business qualifies as a discontinued
operation under Financial Accounting Standards Board's (FASB) Accounting
Principles Board Opinion No. 30 (APB 30), REPORTING THE RESULTS OF OPERATIONS --
REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY,
UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS.
The unaudited pro forma condensed consolidated financial statements may not
be indicative of the actual results of the MMI Transaction had it actually
occurred on the above dates, or which may be reported in the future. The
accompanying pro forma condensed consolidated financial statements should be
read in conjunction with the accompanying notes and the historical financial
statements and the related notes of the Company included in this Proxy
Statement.
19
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE><CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------------------
ADJUSTMENTS
----------------------- PRO-FORMA
HISTORICAL DEBIT CREDIT (UNAUDITED)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................... $ 16,941 $ 300(1) $ -- $ 17,241
Accounts receivable, net..................... 7,347 600(1)
353(2) 6,394
Note receivable.............................. -- 350(1) 350
Inventories.................................. 92 75(1) 17
Prepaid expenses & other current assets...... 582 582
Discontinued assets.......................... -- 353(2) 353
-------- --------
Total Current Assets............................... 12,440 24,937
-------- --------
Property and equipment, net.................. 1,642 100(1) 1,542
Other assets & deposits...................... 149 149
Note receivable, long term................... -- 350(1) 350
Purchased intangibles, net................... 35 35
-------- --------
Total Assets..................................... $ 26,788 $ 27,013
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable............................. $ 4,112 $ 4,112
Accrued expenses............................. 1,655 100(1) 1,755
Reserve for distributor inventories.......... 120 120
Deferred revenue............................. 3,931 911(1) 3,020
-------- --------
Total Current Liabilities.......................... 9,818 9,007
-------- --------
Stockholders' Equity............................... 16,970 1,036(1) 18,006
-------- --------
Total Liabilities and Stockholders' Equity......... $ 26,788 $ 27,013
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
20
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE><CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------------------
ADJUSTMENTS
----------------------- PRO-FORMA
HISTORICAL DEBIT CREDIT (UNAUDITED)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue........................................ $ 30,877 $ 7,361(3) $ -- $ 23,516
Operating expenses:
Cost of product revenue............................ 5,431 237(4) 5,194
Sales and marketing................................ 13,396 1,420(4) 11,976
Research and development........................... 9,952 1,400(4) 8,552
General and administrative......................... 4,466 4,466
-------- --------
Loss from continued operations............... (2,368) (6,672)
Interest income, net............................... 153 153
Other income....................................... 216 216
-------- --------
Loss from continued operations.............. $ (1,999) $ (6,303)
======== ========
Discontinued operations:
Gain on disposal of discontinued
operations, net of income taxes................. --- 1,036(5) 1,036(1) ---
Net loss..................................... $ (1,999) $ (6,303)
======== ========
Basic loss per share............................... $ (0.16) $ (0.50)
======== ========
Diluted loss per share............................. $ (0.16) $ (0.50)
======== ========
Basic shares used in per share calculation 12,526,398 12,526,398
======== ========
Diluted shares used in per share
calculation.................................... 12,526,398 12,526,398
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
21
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The unaudited pro forma condensed consolidated financial statements have
been prepared by combining the historical results of the Company and the
following pro forma adjustments:
(1) Represents the planned disposition of the MMI assets and recognition of the
related gain net of estimated transaction costs.
(2) Represents additional discontinued assets not sold as part of the
transaction.
(3) Represents reclassification of net revenue for MeetingMaker software which
is being sold to Meeting Maker, Inc.
(4) Represents reclassification of direct expenses associated with the
MeetingMaker business in accordance with APB 30.
(5) Represents reversal of nonrecurring charges, in accordance with Securities
and Exchange Commission regulations.
The unaudited pro forma condensed consolidated financial statements may not
be indicative of the actual results of the MMI Transaction had it actually
occurred on the above dates, or which may be reported in the future. The
accompanying pro forma condensed consolidated financial statements should be
read in conjunction with the accompanying notes and the historical financial
statements and the related notes of the Company included in this Proxy
Statement.
CERTAIN INFORMATION REGARDING MMI
MMI is a corporation organized under the laws of the Cayman Islands, with
its executive offices located at 880 Winter Street, Building Four, Waltham,
Massachusetts 02451. MMI is an entity established by Mr. Benninga to complete
the MMI Transaction.
PROPOSAL NO. 2
AUTHORIZATION OF ISSUANCE OF ADDITIONAL SHARES
IN PRIVATE PLACEMENT
GENERAL
The Company is seeking Stockholder approval for the issuance of shares of
its Common Stock to two institutional investors (the "Investors") pursuant to
the terms and conditions of a Securities Purchase Agreement dated December 29,
1999 (the "Investors Agreement"). This transaction is described more fully
below. To the extent that the shares of Common Stock issued to the Investors
would equal or exceed 20% of the Company's Common Stock or 20% of the voting
power outstanding immediately prior to the issuance of shares to the Investors,
the Investors Agreement and the Nasdaq rules (by reason of the Company's Common
Stock being listed on the Nasdaq Stock Market National Market System) require
stockholder approval. The Board of Directors has considered the transactions
contemplated by the Investors Agreement, including the potential dilutive
effects of the Investor Warrants (as defined below), approved the transactions,
considers the transactions fair to the Company and its stockholders, and
recommends the approval of Proposal No. 2.
22
<PAGE>
On December 29, 1999, in a private placement under the Securities Act of
1933, as amended, and pursuant to the terms and conditions of the Investors
Agreement, the Company sold 1,029,674 shares of Common Stock (the "Investors
Shares"), equal to approximately 7.4% of the then-total outstanding shares of
the Company's Common Stock, to the Investors, for an aggregate purchase price of
$12,000,000 (the "Investors Transaction"). In connection with the private
placement, the Investors were issued warrants to purchase an aggregate of
514,838 shares of Common Stock, such warrants to be subject to increase under
the circumstances described below (the "Initial Warrants"). In addition, the
Investors were issued warrants to purchase additional shares of Common Stock
under certain circumstances below (the "Additional Warrants," and together with
the Initial Warrants, the "Investor Warrants"). The amount of shares of Common
Stock issuable upon exercise of the Investor Warrants, if any, is to be
determined based upon the formulas contained in such warrants; such amount is
not currently determinable.
THE BOARD OF DIRECTORS BELIEVES THAT THE INVESTORS TRANSACTION IS FAIR TO,
AND IS ADVISABLE AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS STOCKHOLDERS
AND RECOMMENDS A VOTE "FOR" THE PROPOSAL TO APPROVE THE ISSUANCE OF 1,029,674
SHARES OF COMMON STOCK PURSUANT TO THE INVESTORS AGREEMENT AND AN ADDITIONAL
AMOUNT OF SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE INITIAL WARRANTS
AND ADDITIONAL WARRANTS. PROXIES SOLICITED BY THE BOARD WILL BE VOTED IN FAVOR
OF PROPOSAL NO. 2 UNLESS A STOCKHOLDER HAS INDICATED OTHERWISE ON THE PROXY.
INVESTORS TRANSACTION
THE FOLLOWING IS A SUMMARY OF SELECTED INFORMATION RELATING TO THE
INVESTORS TRANSACTION. COPIES OF THE INVESTORS AGREEMENT, THE REGISTRATION
RIGHTS AGREEMENT ENTERED INTO CONCURRENTLY WITH THE INVESTORS AGREEMENT (THE
"REGISTRATION RIGHTS AGREEMENT"), AND THE FORM OF INVESTOR WARRANTS
(COLLECTIVELY, THE "INVESTORS TRANSACTION DOCUMENTS") WHICH RELATE TO THE
INVESTORS TRANSACTION HAVE BEEN FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE "SEC"), AND THE COMPANY WILL, UPON REQUEST, PROVIDE A COPY OF
SUCH INVESTORS TRANSACTION DOCUMENTS TO ANY STOCKHOLDER AT NO COST.
The following table contains a comparison of the (a) authorized, (b)
outstanding, (c) authorized and unissued but reserved, and (d) unreserved shares
of Common Stock prior to the Investors Transaction and following the Investors
Transaction. Prior to the Investors Transaction, reserved shares include shares
of Common Stock reserved for issuance upon exercise of options under the
Company's 1995 Employee and Consultant Stock Option Plan. After the Investors
Transaction, reserved shares include, in addition to those mentioned in the
prior sentence, an estimated number of shares reserved pursuant to the Investor
Warrants.
23
<PAGE>
<TABLE><CAPTION>
=============================================================================================
AUTHORIZED AND
UNISSUED BUT
AUTHORIZED OUTSTANDING RESERVED UNRESERVED
=============================================================================================
<S> <C> <C> <C> <C>
Prior to 12/29/99 20,000,000 Common
Investors 12,804,669 635,619 6,559,712
Transaction 2,000,000 Preferred
- -------------------- ----------------------- -------------- -------------- --------------
- -------------------- ----------------------- -------------- -------------- --------------
After Giving Effect 20,000,000 Common
to Investors 13,834,343 1,150,457 5,015,200
Transaction 2,000,000 Preferred
=============================================================================================
</TABLE>
INVESTOR WARRANTS
The Investor Warrants consist of (i) the Initial Warrants exercisable for
five years from the date of issuance to purchase an aggregate of 514,838 shares
of Common Stock at an exercise price of $15.15 per share (130% of the purchase
price for Investors Shares), with the price per share and number of shares
subject to adjustment on December 29, 2000 if the average closing bid price per
share of the Common Stock for the 15 trading days preceding such date is below
$15.15 per share (assuming the Nasdaq National Market is still the principal
trading market for the Company's Common Stock), which adjustment is described
more fully below; and (ii) the Additional Warrants exercisable for five years
from issuance to purchase an additional number of shares of Common Stock
determined by the formula set forth below at an exercise price equal to the par
value per share ($.01 per share). The Investor Warrants provide for an optional
cashless exercise. The Investor Warrants contain anti-dilution provisions which
increase the number of Warrant Shares issuable upon exercise of the Investor
Warrants if the Company issues its securities for below-market consideration.
The number of Investor Warrant Shares is also subject to adjustment upon
recapitalizations, and upon any sale of shares of Common Stock beneficially
owned by certain executives of the Company during specified periods of time. The
Investors may elect, and to some extent be required to, receive cash
consideration in exchange for the Investor Warrants in connection with certain
major transactions (such as a sale of the Company or its merger into another
company).
INITIAL WARRANTS
The number of shares which may be issuable upon exercise of the Initial
Warrants is subject to adjustment in the event that the average closing bid
price per share for the 15 trading days preceding December 29, 2000 is below
$15.15 per share. In that case, the exercise price per share for shares issuable
upon exercise of the Initial Warrants will be reduced to such 15 day average
closing bid price, and the number of shares issuable upon exercise of the
Initial Warrants will increase to a number of shares such that the total
exercise price for all shares issuable under each of the Initial Warrants
remains $3,899,897.80, which is the initial aggregate exercise price for the
shares of Common Stock underlying each of the Initial Warrants.
The purpose of the adjustment in the Initial Warrants is to protect the
Investors against a decline in the price of the Common Stock from the date of
issuance of the Investors Shares and the Initial Warrants until December 29,
2000. Set forth below is a table indicating the number of shares of Common Stock
issuable upon exercise of the Initial Warrants, assuming that the average
closing bid price per share for the 15 trading days preceding December 29, 2000
is $11.60, $8.70, $5.80 and $2.90. There is no limit on the maximum number of
shares which may be issuable under the Initial Warrants pursuant to this
formula. If the average closing bid price per share of the Common Stock for the
fifteen trading days preceding December 29, 2000 were to be $11.60 (the average
closing bid price per share for the 15 trading days prior to February 21, 2000),
672,396 shares of the Common Stock would be issuable upon exercise of the
Initial Warrants.
24
<PAGE>
<TABLE><CAPTION>
============================= ================================= ===================================
ASSUMED AVERAGE CLOSING BID PERCENTAGE DECLINE FROM 2/21/00 SHARES OF COMMON STOCK ISSUABLE
PRICE PER SHARE ON 12/29/00 15 DAY TRAILING AVERAGE UPON EXERCISE OF INITIAL WARRANTS
============================= ================================= ===================================
<S> <C> <C>
- ----------------------------- --------------------------------- -----------------------------------
$11.60 0% 672,396
- ----------------------------- --------------------------------- -----------------------------------
$8.70 25% 896,528
- ----------------------------- --------------------------------- -----------------------------------
$5.80 50% 1,344,792
- ----------------------------- --------------------------------- -----------------------------------
$2.90 75% 2,689,584
============================= ================================= ===================================
</TABLE>
ADDITIONAL WARRANTS
To the extent that the average closing bid price of the Common Stock for
the 15 trading days preceding the effective date of the registration statement
covering the shares issued or issuable to the Investors described in greater
detail below (the "Effective Date Price") is less than $11.65 per share, the
formula in the Additional Warrants allows the Investors to receive additional
shares of Common Stock, at an exercise price of $.01 per share, in an amount
which, when added to the number of Investor Shares, effectively reduces the
purchase price of the Investors Shares to the Effective Date Price. The
Additional Warrants limit the number of shares issuable upon exercise of the
Additional Warrants to a maximum of 469,788 shares, the number of shares that
would be issuable if the Effective Date Price is equal to or less than $8.00 per
share.
The formula upon which the amount of shares of Common Stock for which the
Additional Warrants are exercisable is determined on the basis of the Effective
Date Price as follows:
(1) Subtract from $11.65 the higher of (x) the Effective Date Price and (y)
$8.00;
(2) Divide the remainder of (1) above by the higher of (x) the Market Price
and (y) $8.00; and
(3) Multiply the result of (2) above by 1,029,674, the total number of
Investors Shares.
The purpose of the above formula in the Additional Warrants is to protect
the Investors against a decline in the price of the Common Stock from the date
of issuance of the Investors Shares and the Investors Warrants until the date
that the registration statement covering such shares (as described below) is
declared effective by the SEC.
Set forth below is a table indicating the number of shares of Common Stock
issuable upon exercise of the Additional Warrants, assuming that the Effective
Date Price is $11.65 or higher, $11.00, $10.00, $9.00, and $8.00 or lower.
<TABLE><CAPTION>
=================== ==============================================
ASSUMED EFFECTIVE NUMBER OF SHARES OF COMMON STOCK ISSUABLE
DATE PRICE UPON EXERCISE OF THE ADDITIONAL WARRANTS
=================== ==============================================
<S> <C>
- ------------------- ----------------------------------------------
$11.65 or higher 0
- ------------------- ----------------------------------------------
$11.00 60,844
- ------------------- ----------------------------------------------
$10.00 169,896
- ------------------- ----------------------------------------------
$9.00 303,181
- ------------------- ----------------------------------------------
$8.00 or lower 469,788
=================== ==============================================
</TABLE>
INVESTORS REGISTRATION RIGHTS
As required under the Registration Rights Agreement, the Company filed with
the Securities and Exchange Commission (the "SEC") on January 25, 2000, a
registration statement on Form S-3 (the "Investors Registration
25
<PAGE>
Statement") covering, among other securities, the Investors Shares and the
shares issuable upon exercise of the Investor Warrants. The Investors
Registration Statement has not been declared effective. Subject to specified
exceptions, the Company has agreed to maintain the effectiveness of the
Registration Statement until such time as all of the Investors Shares and the
shares issuable upon exercise of the Investor Warrant Shares have been sold or
may be sold without registration. The Investors Agreement contains customary
indemnification provisions with respect to the registration for resale of the
shares issuable upon exercise of the Investor Warrants.
USE OF PROCEEDS
Net proceeds from the sale of the Investors Shares and from any exercise of
the Investor Warrants (other than in a cashless exercise) are to be used for
general corporate matters and working capital purposes, enhancement of the
Company's existing software products, expansion of the Company's product lines
by developing new software products principally directed at the consumer
marketplace, and expansion of the Company's distribution network and sales and
marketing forces within the United States and internationally. Pending such
uses, the Company will invest the net proceeds from sale of the Investors Shares
and from any exercise of the Investor Warrants in short-term, investment grade,
interest-bearing securities.
BOARD OF DIRECTORS RECOMMENDATIONS
The Board of Directors has reviewed and considered the terms and conditions
of the Investors Transaction and the potential dilutive effects of the issuance
of the Investors Shares, the Initial Warrants and the Additional Warrants and
believes that the Investors Transaction is fair to, advisable and in the best
interests of the Company and its Stockholders. FOR THE REASONS DISCUSSED ABOVE,
THE BOARD OF DIRECTORS OF THE COMPANY HAVE UNANIMOUSLY APPROVED THE INVESTORS
TRANSACTION, INCLUDING ISSUANCE OF THE SHARES ISSUABLE UPON EXERCISE OF THE
INVESTOR WARRANTS, AND UNANIMOUSLY RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS
VOTE "FOR" THE APPROVAL OF PROPOSAL NO. 2. The Company's directors and executive
officers (who currently hold Common Stock representing approximately 16% of the
Company's outstanding Common Stock) have indicated that they intend to vote all
shares of voting stock over which they exercise voting power as of the close of
business on the Records Date for approval of Proposal No. 2. The Board of
Directors, in recommending Stockholder approval of Proposal No. 2, considered a
number of factors, including (a) the substantial increase in the working capital
of the Company that resulted from sale of the Investors Shares, and, as an
integral part of the Investors Transaction, that will result from the proceeds
from the exercise of the Additional Warrants, (b) the terms of the Investors
Transaction Documents, and (c) the alternatives to the Investors Transaction,
including alternative public or private financing.
OTHER CONSIDERATIONS
While the Board of Directors is of the opinion that the Investors
Transaction is fair to, and is advisable and in the best interests of the
Company and its Stockholders, and has recommenced that the Stockholders approve
Proposal 2, Stockholders should consider the following possible effects, as well
as the other information contained in this Proxy Statement, in determining
whether to approve Proposal No. 2.
POSSIBLE DILUTIVE EFFECT OF INVESTOR WARRANT SHARES
The exercise price of the Initial Warrants were at a premium over the
market price of the Common Stock of the Company at the time of issuance of the
Investor Warrants (December 29, 1999). If, at the time any of such warrants is
exercised, the market price of the Common Stock exceeds the exercise price, the
holders of Common Stock will be diluted by an amount that depends on the
then-current market price of Common Stock. In connection with the issuance of
the Investor Shares, the Investors, in the aggregate, became entitled to
exercise approximately 7.4% of the Company's voting power. The issuance of any
Investor Warrant Shares will have further dilutive effects on the voting power
of the shares of Common Stock outstanding prior to such issuance.
26
<PAGE>
PAYMENT ON OCCURRENCE OF CERTAIN MAJOR CORPORATE TRANSACTIONS
The Investors have the right, upon the occurrence of certain major
corporate transactions involving the Company, to receive cash consideration in
exchange for the Investor Warrants. Such a right may diminish the attractiveness
the Company might have to potential merger or acquisition partners. Accordingly,
approval of Proposal No. 2 may hinder a sale, merger or consolidation of the
Company, should such a transaction be MMI and approved by the Board of
Directors.
POTENTIAL ADDITIONAL CONCENTRATION OF VOTING POWER
Each of the two Investors acquired in the Investors Transaction
approximately 3.7% of the Company's outstanding Common Stock, and could increase
its ownership through the exercise of the Investor Warrants. If the Investor
Warrants held by each of the Investors were exercised and not sold, and none of
the Investor Shares received by such Investor in the Investors Transaction were
sold, such exercise would cause a substantial increase in such Investor's voting
power as a result of its acquisition of Investor Warrant Shares.
POTENTIAL ISSUANCE OF 20% OR MORE OF COMMON STOCK
The Nasdaq rules require Stockholder approval for a transaction in which
the Company may issue 20% or more of its Common Stock. Because the issuance of
the shares of Common Stock upon exercise of the Investor Warrants may constitute
an issuance of 20% or more of its Common Stock, the approval sought hereby would
be effective to satisfy the Stockholder vote required by the Nasdaq rules. The
Company currently has no basis to believe that the Investors would vote together
as a group or seek to exercise actual control of the Company, either with or
against the Company's management.
ABSENCE OF APPRAISAL RIGHTS
Under Delaware law, objecting Stockholders will have no appraisal,
dissenters' or similar rights (i.e., the right to seek a judicial determination
of the "fair value" of the Common Stock and to compel the Company to purchase
their Common Stock for cash in that amount) with respect to the Investors
Transaction, nor will the Company voluntarily accord such rights to
Stockholders. Therefore, approval by the requisite number of shares of the
matters presented at the Special Meeting will bind all Stockholders and
objecting Stockholders will be able to liquidate their Common Stock only be
selling it in the market.
VOTE REQUIRED
The affirmative vote at the Special Meeting by the holders of a majority of
votes cast in person or by proxy on Proposal No. 2 is required to authorize the
issuance of the Investors Shares, including any Investors Shares issuable upon
exercise of the Investor Warrants. For purposes of calculating votes cast,
abstentions and broker non-votes are not included as votes case.
PROPOSAL NO. 3
AUTHORIZATION OF AMENDMENT TO CERTIFICATE
OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK
The Company currently has authorized 20,000,000 shares of Common Stock and
2,000,000 shares of Preferred Stock as provided in Article Fourth of its
Certificate of Incorporation. The Board of Directors has determined that the
Company will need additional shares of Common Stock. No change is being made to
the number of authorized
27
<PAGE>
shares of preferred stock. The additional authorized shares of Common Shares are
needed to fulfill current and potential obligations to issue shares of Common
Stock upon the exercise of stock options and the issuance of shares to the
Investors upon exercise of the Investor Warrants. The Company's Board of
Directors has, therefore, approved, and recommends to the Company's Stockholders
the following amendment to the Company's Certificate of Incorporation that would
amend the first paragraph of Article Fourth to read as follows:
Fourth. Authorized Stock.
------ ----------------
The total number of shares of all classes of stock that the
Corporation shall have the authority to issue is 32,000,000 shares,
$.01 par value, which shall consist of 30,000,000 shares of Common
Stock, $.01 par value per share ("Common Stock"), and 2,000,000 shares
of Preferred Stock, $.01 par value per share ("Preferred Stock").
There can be no assurance that the number of shares of Common Stock to be
authorized pursuant to the above amendment will be sufficient to cover the
issuance of shares to the Investors upon the exercise of the Investor Warrants,
or the issuance of shares to employees and contracts pursuant to the exercise of
stock options which may, in the reasonable discretion of the Board of Directors,
need to be granted in the future. To the extent that the number of shares
authorized are insufficient to meet these needs, the Company may request an
additional amendment to its Certificate of Incorporation to authorize additional
shares of Common Stock.
The primary reason for amending the Certificate of Incorporation to
increase the number of authorized shares of Common Stock is that currently there
are insufficient shares of Common Stock authorized for issuances of Common Stock
which the Company may be required to make in the future. The Company currently
has authorized 20,000,000 shares of Common Stock, of which 13,851,601 shares
were issued and outstanding on the Record Date. The Company estimates, based
upon calculations assuming the Effective Date Price and the average closing bid
price for the fifteen trading days preceeding December 29, 2000 are each $13.375
(the closing bid price on March 6, 2000), that it may be obligated to issue as
many as 583,161 shares of Common Stock in the aggregate in connection with (a)
the exercise of the Investor Warrants and (b) future issuance of Common Stock
upon the exercise of stock options granted and to be granted under the Company's
1992 Employee and Consultant Stock Option Plan and the Company's 1999 Directors
Stock Option Plan (the "Stock Option Plans"). The Company may also require
additional shares of Common Stock for general corporate purposes or to effect
potential acquisitions.
Because it is uncertain whether the Investor Warrants will be exercised by
the holders thereof, and if exercised, how many shares of Common Stock will be
issued pursuant to the terms thereof (because of the antidilution adjustment
contained in the Warrants), it is not possible currently to ascertain the
specific number of shares of Common Stock that may be issued under the Warrants.
The Company currently estimates that, assuming the Effective Date Price and the
average closing bid price for the fifteen trading days preceeding December 29,
2000 are each $13.375 (the closing bid price on March 6, 2000), it would be
required to issue up to approximately an aggregate of 583,161 shares of Common
Stock upon exercise of all of the Investor Warrants.
The Stock Option Plans provide for the grant of options to purchase up to
4,000,000 shares of Common Stock to Employees and Non-Employee Directors. As of
March 6, 2000, options to purchase 2,103,145 shares were outstanding under the
Stock Option Plans, options to purchase 1,766,192 shares had been exercised, and
130,663 shares were available for issuance upon exercise of options which may be
granted in the future. The Company believes that its ability to attract and
retain qualified management depends upon its ability to grant stock options
under its Stock Option Plan.
The Board of Directors also believes that it would be appropriate for the
Company to increase the number of its authorized shares of Common Stock in order
to have shares authorized for possible future acquisition or financing
transactions and other issuances. The Board of Directors believes that the
complexity of customary financing as well as employment and acquisition
transactions require that the Directors be able to respond promptly and
effectively to opportunities that involve the issuance of shares of Common
Stock. For example, if this Proposal No. 3 is approved, the Company will have
the flexibility to authorize certain stock splits and stock dividends and to
enter into joint ventures and corporate financings involving the issuance of
shares of Common Stock. There can be no assurance that the Company will be able
to identify or acquire businesses. While the Company regularly evaluates and
discusses potential acquisitions, the Company currently has no understandings,
commitments or agreements with respect to any acquisitions. The Company
anticipates that it would finance any possible future
28
<PAGE>
acquisition through new borrowings or the issuance of its Common or Preferred
stock. The Company has no current commitments or arrangements for such
additional financing and there can be no assurance that the Company will be able
to obtain additional financing on acceptable terms or at all.
GENERAL
Currently, holders of Common Stock are entitled to one vote per share on
all matters submitted to a vote of stockholders of the Company and ratably
receive dividends, if any, as may be declared from time to time by the Board of
Directors from funds legally available therefor. Upon liquidation, dissolution
or winding up of the Company, holders of Common Stock are entitled to share
ratably in any assets available for distribution to stockholders after payment
of all obligations of the Company, subject to the preferential liquidation
rights of the holders of any Preferred Stock which may be issued in the future,
as set forth in the Certificate of Incorporation.
If the proposed amendment is approved, all or any part of the authorized
but unissued shares of Common Stock or Preferred Stock may thereafter be issued
without further approval from the stockholders, except as may be required by
law, the Certificate of Incorporation or By-laws of the Company, or the policies
of any stock exchange or stock market on which the shares of stock of the
Company may be listed or quoted, for such purposes and on such terms as the
Board of Directors may determine. Holders of the capital stock of the Company do
not have any preemptive rights to subscribe for the purchase of any shares of
Common Stock or Preferred Stock, which means that current stockholders do not
have a prior right to purchase any new issue of Common Stock or Preferred Stock
in order to maintain their proportionate ownership.
The proposed amendment will not affect the rights of existing holders of
Common Stock, except to the extent that further issuances of Common Stock will
reduce each existing stockholder's proportionate ownership.
The flexibility of the Board of Directors to issue additional shares of
Common Stock could enhance the Board of Directors' ability to negotiate on
behalf of stockholders should a proposed takeover arise. Although it is not the
purpose of the proposed amendment and the Board of Directors is not aware of any
pending or proposed effort to acquire control of the Company, the authorized but
unissued shares of Common Stock also could be used by the Board of Directors to
discourage, delay or make more difficult a change in control of the Company. For
example, such shares could be privately placed with purchasers who might align
themselves with the Board of Directors in opposing a hostile takeover bid. The
issuance of additional shares of Common Stock might serve to dilute the stock
ownership of persons seeking to obtain control and thereby increase the cost of
acquiring a given percentage of the outstanding shares.
APPROVAL OF PROPOSAL NO. 3
Approval of this Proposal No. 3 requires the affirmative vote of the
holders of at least a majority of the shares of the Common Stock of the Company
entitled to vote on this Proposal No. 3 at the meeting. With respect to such
proposal, abstentions and broker non-votes are not counted as votes cast.
If this Proposal No. 3 is adopted by the Company's stockholders, it will
become effective on the date a Certificate of Amendment is filed to amend the
Company's Certificate of Incorporation, which the Company will endeavor to do as
soon as practicable after the Meeting.
The Board of Directors deems Proposal No. 3 to be in the best interests of
the Company and its stockholders and recommends a vote "FOR" approval thereof.
Unless authority to do so is withheld, the person(s) named in each proxy will
vote the shares represented thereby "FOR" the approval of the increase of the
Company's authorized capital stock.
29
<PAGE>
PRICE RANGE OF COMMON STOCK; DIVIDENDS
The Company effected its initial public offering on August 1, 1995 at a
price of $15.00 per share. Since that date, the Company's Common Stock has
traded on the Nasdaq National Market under the symbol "ONTC." The following
table sets forth, for the periods indicated, the high and low closing sales
prices for the Common Stock, all as reported by Nasdaq.
HIGH LOW
------- -------
YEAR ENDED DECEMBER 31, 1999
First Quarter $ 2.9690 $ 1.3280
Second Quarter 2.4380 1.3125
Third Quarter 5.6562 1.9370
Fourth Quarter 13.8750 4.7500
YEAR ENDED DECEMBER 31, 1998
First Quarter 2.1250 1.1825
Second Quarter 4.5000 2.1250
Third Quarter 3.9375 1.8125
Fourth Quarter 2.0000 1.0313
YEAR ENDED DECEMBER 31, 1997
First Quarter 6.2500 3.5000
Second Quarter 4.2500 2.5000
Third Quarter 4.3750 2.5625
Fourth Quarter 3.7500 1.1563
On December 30, 1999, when the Company announced the Investors Transaction,
the closing sale price for the Common Stock, as reported on Nasdaq, was $12.563.
On January 6, 2000, when the Company publicly announced the MMI Transaction, the
closing sale price for the Common Stock, as reported on Nasdaq, was $12.438.
As of February [10], 2000, there were approximately 5,700 stockholders of
record of the Company's Common Stock.
The Company has not declared or paid cash dividends on its common stock
since 1992 when it converted from an S Corporation to a C Corporation. The
Company currently intends to retain any earnings for use in developing and
growing its business, and does not anticipate paying any cash dividends on its
common stock in the foreseeable future. The Company's bank line of credit does
not contain any restrictions on the payment of dividends, unless the payment of
such dividends would result in a default thereunder.
30
<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS
AND MANAGEMENT
The following table sets forth, as of January 31, 2000, certain information
relating to the beneficial ownership of Common Stock by (i) each person known by
the Company to own beneficially more than 5% of the Company's Common Stock; (ii)
each director of the Company; (iii) the Company's Chief Executive Officer and
each of the other five most highly compensated executive officers of the Company
(collectively, the "Named Executive Officers"); and (iv) the directors and
officers of the Company as a group:
NUMBER OF
SHARES BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER OWNED(1) COMMON STOCK(2)
- ------------------------ ------------------- --------------
Robert L. Doretti (3) 443,114 2.99%
Herman DeLatte (4) 545,722 3.68%
Christopher A. Risley (5) 1,342,357 9.05%
Laurent Ranaud (6) 211,012 1.42%
Stephen J. Wietrecki (7) 57,172 *
Ram Sudama (8) 10,625 *
Gina Bornino Miller (9) 22,499 *
Robert Badavas (10) 20,740 *
William C. Hulley (11) 545,543 3.68%
All directors and executive officers 1,856,427 12.5%
as a group
(8 persons)(12)
- -----------
* Less than 1%
(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them, subject to community
property laws, where applicable.
(2) The percentages shown in this column are calculated from the 13,851,601
shares of Common Stock actually outstanding on February 15, 2000, in
addition to 966,293 options held by the persons set forth in this table
that are exercisable within 60 days from February 15, 2000.
(3) Includes 443,114 shares issuable upon exercise of stock options.
(4) Includes 311,250 shares issuable upon exercise of stock options.
(5) Includes 286,195 shares of Common Stock held by The Risley Family Limited
Partnership (the "RFLP"). Mr. Risley is a general partner of the RFLP, in
which he holds a 1% general partnership interest. As the general partner,
he has sole voting and investment control over the shares of Common Stock
held by the RFLP. The Risley Children's Trust (the "Risley Trust"), an
irrevocable trust for the benefit of Mr. Risley's children, is the limited
partner of the RFLP. Mr. Risley has no investment or voting control over
the Risley Trust and disclaims beneficial ownership of the Risley Trust's
99% limited partnership interest in the RFLP. Also includes 15,833 shares
issuable upon the exercise of options.
(6) Includes 55,312 shares issuable upon the exercise of stock options.
31
<PAGE>
(7) Includes 25,287 shares issuable upon exercise of stock options. Includes
5,000 shares of Common Stock held by an individual retirement account for
the benefit of Felix Wietrecki. Stephen J. Wietrecki has the power to
direct the sale of such shares but disclaims beneficial ownership thereof.
(8) Consists of 10,625 shares issuable upon the exercise of stock options.
(9) Consists of 22,499 shares issuable upon exercise of stock options.
(10) Consists of 20,740 shares issuable upon the exercise of stock options.
(11) Consists of 483,910 shares of Common Stock held directly by The P/A Fund,
L.P. and 61,633 shares issuable upon exercise of stock options held by Mr.
Hulley. William C. Hulley, a director of the Company, is a general partner
of Adams Capital Management, Inc., a managing partner of The P/A Fund, L.P.
Mr. Hulley disclaims beneficial ownership of the shares held by The P/A
Fund, L.P. Mr. Hulley assigned all stock options he received pursuant to
the Company's stock option plans to The P/A Fund, L.P. and, accordingly,
disclaims beneficial ownership with respect to shares issuable upon the
exercise of such options.
(12) Includes an aggregate of 523,179 shares of Common Stock issuable pursuant
to stock options exercisable within 60 days from February 15, 2000.
Includes 833,876 shares held by affiliates of certain officers and
directors of the Company with respect to which such officers and directors
disclaim beneficial ownership.
The above table does not include any shares of Common Stock currently held by
Castle Creek Technology Partners LLC or Marshall Capital Management Inc., or
Shares of Common Stock issuable upon the exercise of the Investor Warrants held
by such parties. The Investor Warrants, by their terms, cannot be exercised at
any time to the extent that the exercise would result in any Investor having
beneficial ownership of more than 4.9% of the total number of shares of the
Company outstanding at the time of exercise. For example, while Castle Creek
Technology Partners LLC may exercise the Initial Warrants and the Additional
Warrants for and sell 1,007,150 or more shares over the life of the Initial
Warrants and the Additional Warrants, it may not currently exercise the Initial
Warrants or the Additional Warrants to the extent that it would at the time of
exercise beneficially own more than 705,516 shares, based upon 13,883,448 shares
outstanding as of December 29, 1999, and assuming that, at the time of exercise,
it does not beneficially own any other shares. If the total number of shares
outstanding increases, including as a result of issuance of outstanding shares
upon exercise of the Initial Warrants, then the number of shares that an
Investor can own at any one time would also increase.
BUSINESS
THE COMPANY
The Company's current business consists of two product categories: Client
Management products, including CCM, and MeetingMaker. CCM is marketed directly
to corporations with very large local or wide area networks, using
enterprise-oriented direct sales and support teams.
The Company was founded in 1985 and entered the communications software
market in 1990, believing that the rapid proliferation of new client operating
systems (Windows, DOS, Macintosh and OS/2, among others) would create
heterogeneous networks of various types and generations of personal computers
running the latest as well as older operating systems. The Company believed that
these heterogeneous networks would create a demand for communications software
products that run on leading edge as well as on less advanced hardware
platforms. The Company began shipping e-mail products in 1990, and in 1993
expanded its product line to group scheduling software with the acquisition of
substantially all of the assets of ON Technology, Inc. The Company entered the
software metering business by obtaining the exclusive worldwide rights to
SofTrack in December 1993. The Company expanded its e-mail offerings with the
acquisition of Davinci Systems Corporation in 1994. In August of 1995, the
Company completed an initial public offering of 2,360,000 shares of its Common
Stock resulting in net
32
<PAGE>
proceeds of $31,647,000. In the first quarter of 1996, the Company entered the
firewall software and anti-virus software business through the acquisitions of
neTrend Corporation and Leprechaun Software International, Ltd., respectively
and purchased the LAN software business from Technocom plc. The Company began
shipping ON Guard, the Company's firewall software product, and Macro Virus
Track, the Company's anti-virus software product, during the second quarter of
1996. In 1997, the Company entered into the Internet usage monitoring and CCM
businesses through two acquisitions.
CLIENT MANAGEMENT PRODUCTS
In many organizations, Information Technology ("IT") is increasingly viewed
as a strategic resource rather than simply as a support function. At the same
time, IT organizations are under increasing pressure to support more PCs with
fewer resources as well as deliver a higher quality of service (or risk being
outsourced). For example, reducing PC downtime is a major concern for many
organizations because downtime can quickly result in lost revenues or lost
customers due to the unavailability of mission-critical applications. The
dynamics of the current business and technology environment are also placing
significant demand on IT, such as the need to provide Internet or intranet-based
access to data, and to upgrade end-user PCs to high-end systems such as Windows
NT in order to provide end-users with more advanced functionality, security and
performance.
Traditionally, IT tasks such as PC software installation, configuration and
troubleshooting have been handled in a manual, hands-on manner. In many
organizations, this typically involves sending a technician with a CD-ROM drive
to a remote location, such as the manufacturing floor or the trading floor. In
addition, detailed information about end-user PC configurations -- such as
individualized parameters (e.g., username/password, IP address, default font),
list of installed software and revisions, and dependencies between installed
software packages -- has traditionally been managed in an ad hoc manner, making
it difficult and time consuming to troubleshoot and reconfigure PCs in case of
hardware failure, user misconfiguration, or the addition of new software
packages.
CCM is an advanced and scalable software system for managing desktop PCs in
enterprise networks. CCM provides total desktop control from a central
administrative workstation, virtually eliminating the need to dispatch
technicians to implement common IT operations at the end-user desktop. For
example, CCM can remotely install operating system software, update client
application software, or reconfigure PC parameters such as IP addresses or
default screen resolution.
CCM is a scalable system that allows IT organizations to automate
repetitive and error-prone tasks and manage them on entire groups of PCs
simultaneously. Key benefits of CCM include significantly reduced Total Cost of
Ownership (TCO), enhanced quality of service for IT organizations, and the
ability to rapidly implement strategic enterprise-wide technology initiatives.
The target market for CCM is large organizations with 500 to 5,000 PCs. CCM
is primarily sold and supported via a direct sales organization in the United
States, Germany, the United Kingdom and Scandinavia. In addition, the Company is
currently exploring partnerships with local resellers and systems integrators
outside of these areas, including France and Australia.
CCM's capabilities include:
o REMOTE INSTALLATION OF OPERATING SYSTEMS AND APPLICATIONS: CCM's
advanced Pre-OS Agent takes control of the PC regardless of its state,
allowing the system to reformat the disk and install operating systems
under central control -- even when the PC's hard disk is blank, has
been corrupted or misconfigured, or when the operating system or
network operating system ("NOS") is not operational. CCM can also be
used to implement enterprise-wide operating system upgrades from
Windows 3.x or OS/2 to Windows 95 or NT, for example. In addition, CCM
can be used to install application software packages such as Office 97,
Lotus Notes, Netscape Navigator, or Year 2000-compliant client-side
versions of SAP R/3 or Oracle, for example.
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o NATIVE INSTALL TECHNOLOGY: CCM installs software by remotely executing
standard vendor installation procedures on the target PC. This approach
is highly reliable because vendor procedures typically adapt in real
time to specific PC hardware and software configurations. In addition,
CCM's installation technology uses a parametric approach that makes it
extremely easy to create customized installations for individual users
or groups of uses, simply by modifying a parameter table used to drive
the installation process from the administrative console. In
comparison, traditional "snapshot" software installation approaches are
unreliable and difficult to customize because they blindly copy bulk
images or binary files to the target PC, based on an idealized hardware
and software configuration and particular set of installation choices.
o REMOTE CONFIGURATION OF DESKTOP PARAMETERS: CCM's Intelligent Desktop
Agents can remotely configure parameters such as IP or gateway
addresses, default printers, or application options such as default
fonts and URL home pages. In addition, these parameters are stored on
the central CCM server, so that they can be quickly reloaded in case of
failure or misconfiguration.
o SCALABLE ARCHITECTURE: CCM offers powerful grouping capabilities that
allow IT organizations to administer groups of PCs as single
administrative objects. For example, PCs can belong to one or multiple
groups based on hardware manufacturer, physical location, or functional
organization. Network scalability is also supported by CCM's ability to
perform job scheduling and bandwidth management to minimize network
load, and by its use of IP as the underlying protocol for optimum
efficiency.
o ENTERPRISE-CLASS ROBUSTNESS AND EASE-OF-USE: CCM offers a number of
capabilities for robust operation in enterprise environments, including
and- and post-installation dependency checking and detailed logging to
support automatic restart in case of network or power outages. An
intuitive Windows-based graphical user interface is used for
administering and monitoring the status of client management tasks, and
administering client configuration information.
o SUPPORT FOR INDUSTRY STANDARDS AND HETEROGENEOUS ENVIRONMENTS: CCM
supports standard servers (Sun Solaris, Microsoft Windows NT Server),
standard clients (DOS, Windows 3.x, Windows95, Windows NT Workstation)
and standard networks (IP protocol, Ethernet connectivity). The Company
monitors evolving desktop management standards closely and intends to
support them when appropriate.
o OPEN ARCHITECTURE: CCM is based on an open architecture that allows
customers and partners to create customized software installation and
configuration procedures using the ITool Command language.
MEETINGMAKER
MEETINGMAKER is a client/server, cross-platform network scheduling
application that automates the process of proposing meetings, coordinating
agendas, and securing meeting locations with the necessary equipment. Through
its cross-platform architecture, MeetingMaker can be run on Windows (Windows
3.1/95/NT), Macintosh, PowerMac, Unix, and OS/2 workstations -- or seamlessly on
any combination of these platforms in an integrated environment. MeetingMaker
supports networks running either TCP/IP, IPX, AppleTalk, NetBIOS -- or any
combination of these protocols. Large enterprise installations can use the
Windows NT or Unix server options to support thousands of users; workgroups
typically use a Windows, Macintosh or NetWare server platform. Using IP,
organizations can easily connect MeetingMaker servers around the world via the
Internet. With support for SMTP and MAPI, MeetingMaker can easily send meeting
notices to colleagues, customers, business partners and vendors through many
e-mail packages. Mobile users can use MeetingMaker with their portable devices.
SALES AND MARKETING
Beginning late in 1996, the Company began its Enterprise Sales program.
This effort focuses on key accounts with larger companies where the opportunity
exists for volume sales and long-term, repeat business. Through the Enterprise
Sales program, the Company is building relationships in which its knowledge of
the customer's needs translates into purchasing advantages and maximized
support. Regular visits to the customer's site provide the Company's sales
representatives with valuable feedback for technology development, future
upgrades and service
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enhancements. The Company has established direct sales and support offices in
Waltham, Massachusetts; New York, New York; Washington, D.C.; Atlanta, Georgia;
Chicago, Illinois; San Jose, California; London, England; Berlin, Germany;
Hamburg, Germany; Dusseldorf, Germany; and Munich, Germany.
The Company has a limited number of original equipment manufacturer ("OEM")
arrangements. Total revenue derived through these arrangements, however, is not
significant. The Company also attends trade shows and publishes quarterly
newsletters which are mailed to existing and prospective customers.
CUSTOMERS
The Company markets its products primarily to large and medium-size
corporate, government and institutional customers. 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 17% of net
revenue from the Company's current products. For the twelve months ended
December 31, 1999, two customers accounted for $7.6 million, or 24.5% 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.
CUSTOMER SUPPORT
The Company employs professional technical support staff in Starnberg,
Germany and Waltham, Massachusetts to support CCM customers via telephone
hotline, electronic mail and on-site visits. On-site training is also available
on a case-by-case basis.
RESEARCH AND DEVELOPMENT
The Company's product development organization, currently consisting of 46
employees and additional full-time and part-time contract programmers, is
responsible for developing new products, adapting acquired products to fit the
ON product strategy and enhancing existing products. Generally, the Company's
contract programmers do not work exclusively for the Company. In addition, the
development organization provides free trial expiration technology, registration
technology and installation technology to third party developers who are
building products for license to ON.
A key element of the Company's research and development strategy is to make
its products available on platforms that are important to its customers. The
Company is currently extending some of its products to support OS/2, Windows 95,
Windows NT and two dialects of UNIX.
During product tests, ON dedicates staff from the support and sales
department to monitor alpha and beta sites and solicit detailed reports on
usability and errors occurring in customer environments. Many quality assurance
personnel have been recruited from the technical support department because they
are able to test products with greater awareness of the issues which might
confuse customers.
The Company's research and development expenses were approximately
$12,461,000, $9,044,000 and $9,952,000 for the fiscal years December 31, 1999,
1998 and 1997, respectively, in each case excluding charges for purchased
incomplete research and development projects. The Company's practice to date has
been to expense all software development costs as incurred.
COMPETITION
The market for the Company's products is highly competitive, and the
Company expects competition to increase in the future. The Company believes that
the principal competitive factors affecting the market for its products include
performance, functionality, quality, customer support, breadth of 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
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Company's software compete include speed of response, ease of use,
interoperability with other software systems and simplicity of administration.
As is the case in many segments of the software industry, the Company may
encounter increasing price competition in the future. This could reduce average
selling prices and, therefore, profit margins. Competitive pressures could
result not only in sustained price reductions but also in a decline in sales
volume, which could adversely affect the Company's business, condition
(financial or otherwise), prospects and results of operations. There can be no
assurance that the Company will continue to compete effectively against existing
and potential competitors in its markets, many of whom have substantially
greater financial, technical, marketing and support resources and name
recognition than the Company.
The widespread inclusion of the functionality of the Company's products as
standard features of operating systems software could render the Company's
products obsolete and unmarketable, particularly if the quality of such
functionality were comparable to that of the Company's products. If the Company
were unable to develop new communications and network management software to
further enhance operating systems and to replace successfully any obsolete
products, the Company's business, condition (financial or otherwise), prospects
and results of operations would be materially and adversely affected.
The market for our products is highly competitive and diverse. The
technology for enterprise desktop management software products can change
rapidly. New products are frequently introduced and existing products are
continually enhanced. Competitors vary in size and in the scope and breadth of
the products and services offered.
The Company has faced competition from a number of sources, including:
o large and established companies such as Microsoft, Computer Associates and
IBM/Tivoli which offer client management capabilities as part of their
systems, network or desktop management systems
o software companies and others who provide application suites such as Intel
and Network Associates, whose products include client management
applications
o information technology and systems management companies such as IBM,
Computer Associates International, and Hewlett-Packard Company
o the internal information technology departments of those companies with
infrastructure management needs.
In addition, 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 the Windows 2000 operating system, as well as the
Microsoft Systems Management Server.
Some of our current and many of our potential competitors have much greater
financial, technical, marketing, and other resources than the Company has. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer needs. They may also be able to devote greater resources
to the development, promotion, and sale of their products than the Company can.
The Company may not be able to compete successfully against current and future
competitors. In addition, competitive pressures faced by the Company may
materially adversely affect the Company's business, operating results, and
financial condition.
OPERATIONS
The Company designs most of its product, marketing and sales materials
through the use of contracted services. Product orders for the Company's
Groupware products are fulfilled under contract with outside fulfillment
agencies. The balance of other sales and support calls are handled directly by
the Company.
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EMPLOYEES
From December 31, 1998 to December 31, 1999, the number of Company
employees decreased from 185 to 157, primarily due to the reduction of the
number of employees supporting the Groupware products. Competition for qualified
management and technical personnel is intense in the software industry. The
Company's continued success will depend in part on its ability to attract and
retain qualified personnel. None of the Company's employees is represented by a
labor union and the Company believes that its employee relations are good.
PROPERTIES
The Company's headquarters, located in Waltham, Massachusetts currently
occupies approximately (i) 24,496 square feet under a lease expiring June 30,
2002. The Company's Raleigh, North Carolina offices occupy approximately 6,900
square feet under a lease expiring February 28, 2002. This property has been
subleased to the American Diabetes Foundation. The Company's Starnberg, Germany
offices occupy 10,174 square feet pursuant to a lease expiring July 31, 2002.
The Company believes that the facilities currently leased by it are suitable and
adequate for the current operations of the Company. The Company utilizes
approximately 90% of its leased space.
LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data derived from the
Consolidated Financial Statements of the Company. The data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto and
with Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<TABLE><CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Net product revenue $ 43,381 $ 50,165 $ 36,630 $ 15,089 $ 23,427
Other revenue 740 1,627 4,652 4,921 47,450
---------- ---------- ---------- ---------- ----------
Total revenue 44,121 51,792 41,282 20,010 30,877
---------- ---------- ---------- ---------- ----------
Operating expenses:
Cost of product revenue 8,199 11,951 9,315 3,890 5,431
Sales and marketing 20,984 24,176 22,172 10,715 13,396
Research and development 7,014 9,456 12,461 9,044 9,952
General and administrative 3,184 4,407 5,501 3,412 4,466
Charge for purchased incomplete research
and development --- 13,285 15,898 --- ---
Charge for restructuring --- 5,415 10,940 --- ---
Gain on sale of assets --- --- --- (6,518) ---
---------- ---------- ---------- ---------- ----------
Income (loss) from operations 4,740 (16,898) (35,005) (533) (2,368)
Interest income (expense), net 554 1,134 233 325 153
Other income --- --- --- 20 216
---------- ---------- ---------- ---------- ----------
Income (loss) before provision for taxes 5,294 (15,764) (34,772) (188) (1,999)
Provision for income taxes (1,622) (97) --- (27) ---
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 3,672 $ (15,861) $ (34,772) $ (215) $ (1,999)
========== ========== ========== ========== ==========
Basic earnings (loss) per share $ 0.52 $ (1.46) $ (2.88) $ (0.02) $ (0.16)
========== ========== ========== ========== ==========
Diluted earnings (loss) per share $ 0.40 $ (1.46) $ (2.88) $ (0.02) $ (0.16)
========== ========== ========== ========== ==========
Basic weighted average shares outstanding 6,314 10,854 12,079 12,281 12,526
========== ========== ========== ========== ==========
Diluted weighted average shares outstanding 9,087 10,854 12,079 12,281 12,526
========== ========== ========== ========== ==========
</TABLE>
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<PAGE>
<TABLE><CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 33,338 $ 20,774 $ 6,679 $ 8,001 $ 16,941
Working capital 35,562 25,347 3,803 4,686 15,144
Total assets 50,173 44,142 17,382 14,669 26,788
Long-term obligations, less current portion 1,506 510 10 --- ---
Total stockholders' equity (deficit) 40,306 33,493 6,996 7,141 16,970
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is engaged in the development, marketing, sales support, and
distribution of Client Management software, including CCM, and the MeetingMaker
product.
In 1997, the Company acquired all of the stock of csd Software GmbH, a
German developer and marketer of enterprise desktop management software, and
acquired the stock of Purview Technologies Inc., a development stage company
engaged in Internet usage monitoring software development.
On October 29, 1997, the Company announced that it would seek shareholder
approval to sell its Network Management and Network Security Business along with
related marketing systems and organization (the "Assets") to Elron Software Inc.
("Elron"), a wholly owned subsidiary of Elron Electronics Industries (the "Elron
Transaction"). In addition, on October 29, 1997, the Company entered into a
management agreement with Elron (the "Management Agreement"), pursuant to which
Elron agreed to manage the Assets for its benefit and at its risk and expense
and to pay all salaries and other employee related expenses with respect to the
Assets and transferred employees. As a result of the Management Agreement, the
associated revenues and costs of the Assets have been excluded from the
statement of operations since October 30, 1997. On February 11, 1998, the
Company consummated the Elron Transaction.
On December 30, 1999, the Company announced that it had completed a $12
million private placement of common stock and warrants to two institutional
investors. Each investor purchased 514,837 shares of common stock and received
warrants to purchase 257,419 shares of common stock at $15.15 per share (subject
to adjustment). The investors also received warrants to purchase additional
shares of common stock upon certain events.
On January 6, 2000, the Company announced that it would seek shareholder
approval to sell MeetingMaker along with related marketing systems and
organization (the "MMI Assets") to Meeting Maker, Inc. (the "MMI Transaction").
In addition, on January 5, 2000, the Company entered into a management agreement
with Meeting Maker, Inc., effective January 3, 2000, pursuant to which Meeting
Maker, Inc. agreed to manage the MMI Assets for its benefit and at its risk and
expense and to pay all salaries and other employee related expenses with respect
to the Assets and transferred employees. Upon shareholder approval, the Company
will record the transaction as a discontinued operation under APB 30.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain financial
data as percentages of the Company's total revenue:
<TABLE><CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Net product revenue 88.7% 75.4% 75.9%
Other revenue 11.3 24.6 24.1
---------- ---------- ----------
Total revenue 100.0 100.0 100.0
---------- ---------- ----------
Operating expenses:
Cost of product revenue 22.6 19.4 17.6
Sales and marketing 53.7 53.6 43.4
Research and development 30.2 45.2 32.2
General and administrative 13.3 17.1 14.5
Charge for purchased incomplete
research and development 38.5 --- ---
Charge for restructuring 26.5 --- ---
Gain on sale of assets --- (32.6) ---
---------- ---------- ----------
Loss from operations (84.8) (2.7) (7.7)
---------- ---------- ----------
Interest income, net 0.6 1.6 0.5
Other income --- 0.1 0.7
---------- ---------- ----------
Net loss before provision for income taxes (84.2) (1.0) (6.5)
---------- ---------- ----------
Provision for income taxes --- (0.1) ---
---------- ---------- ----------
Net loss (84.2)% (1.1)% (6.5)%
========== ========== ==========
</TABLE>
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NET PRODUCT REVENUE. The Company's net product revenue is derived primarily from
the licensing of software products. Net product revenue for the year ended
December 31, 1997, also included revenue from catalog sales of third party
products and catalog advertising space. The Company sold advertising space in
its catalog for cash or received third party advertised product. Revenue from
catalog advertising space for cash sales was recognized the day the catalog was
mailed to customers. Revenue from third party advertised product received was
recognized as each item was sold. Revenue from catalog advertising sales that
was recognized upon sale of third party products for the year ended December 31,
1997 was $902 thousand. As a result of the Management Agreement and the
subsequent consummation of the Elron Transaction, the Company has not received
since October 30, 1997, and will no longer receive, revenue from catalog product
sales and catalog ad page space. Net product revenue decreased 59% from 1997 to
1998, due primarily to products de-emphasized vesting as part of the strategic
reorganizations and restructurings undertaken in 1997 and the consummation of
the Elron Transaction. Net product revenue increased 55% from 1998 to 1999, due
to growth in the CCM business. Total CCM revenue growth was partially offset by
a decrease in the Groupware continuing business. The Company anticipates that
net product revenue will decrease due to the MMI Transaction.
OTHER REVENUE. The Company's other revenue consists of maintenance revenue,
training and professional services. Other revenue increased by 5.8% from 1997 to
1998 and 51.4% from 1998 to 1999. These increases were primarily attributable to
an increase in revenue from maintenance agreements and professional services.
The small revenue increase from 1997 to 1998 is due primarily to products
de-emphasized as part of the strategic reorganizations and restructurings
undertaken in 1997 and the consummation of the Elron Transaction. The large
revenue increase from 1998 to 1999 is due to the growth of the CCM business. The
Company anticipates that other revenue will decrease due to the MMI Transaction.
COST OF PRODUCT REVENUE. Cost of product revenue consists primarily of expenses
associated with product documentation, production and fulfillment costs, and
royalty fees associated with products that are licensed from third party
developers. In addition, cost of product revenue included the cost of third
party products resold through the Company's catalog, the cost of producing the
catalog and amortization of purchased intangibles. As part of the reorganization
of its operations announced in July 1997, the Company ceased to market, sell,
develop and support the anti-virus business and decreased its emphasis on the
investment in new customer acquisitions for its Groupware and Network Management
and Security businesses. As a result, the product inventory related to the
discontinued product lines and de-emphasized products were subsequently
identified and written-off, all of which is included in cost of product revenue
in the amount of $849 thousand. Cost of product revenue decreased as a
percentage of total revenue from 22.6% in 1997 to 19.4% in 1998. This decrease
was primarily the result of decreased product revenue and the products
de-emphasized as part of the strategic reorganizations and restructurings
undertaken in 1997 and the consummation of the Elron Transaction. As part of the
reorganization of its operations announced in July 1997, the Company has ceased
to market, sell, develop and support the anti-virus business and decreased its
emphasis on the investment in new customer acquisitions for its Groupware and
Network Management and Security businesses. Cost of product revenue decreased as
a percentage of total revenue from 19.4% in 1998 to 17.6% in 1999. The slight
change is due to efforts taken in 1997 as described above.
SALES AND MARKETING EXPENSE. Sales and marketing expense primarily consists of
compensation paid to sales and marketing personnel, the costs of direct mail and
telemarketing campaigns, and the costs of product trials requested by potential
customers. Sales and marketing expense also includes the costs of administering
the catalog operation,
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the costs of public relations, trade shows and conferences, and the telephone
and information technology costs associated with sales activities. Sales and
marketing expense stayed relatively flat as a percentage of total revenue from
53.7% in 1997 to 53.5% in 1998. However, sales and marketing expense decreased
in absolute dollars by $11.5 million from 1997 to 1998. This decrease is
primarily a result of the reorganization of its operations announced in July
1997, the Company has ceased to market, sell, develop and support the anti-virus
business and its decreased emphasis on the investment in new customer
acquisitions for its Groupware and Network Management and Security businesses.
Sales and marketing expense decreased as a percentage of total revenue from
53.5% in 1998 to 43.4% in 1999. However, sales and marketing expense increased
in absolute dollars by $2.7 million from 1998 to 1999. The increase in absolute
dollars was a result of increased direct sales efforts in the CCM business and
increased commissions due to increased CCM revenue.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense includes
costs associated with the development of new products, the enhancement of
existing products, and costs associated with providing technical support.
Research and development expenses increased as a percentage of total revenue
from 30.2% in 1997 to 45.2% in 1998. The increase is associated with the costs
of product development, enhancements and maintenance relating to the CCM product
acquired in the acquisition of csd Software GmbH. The Company plans to continue
to make significant investments in research and development related to the CCM
business. Research and development expenses decreased as a percentage of total
revenue from 45.2% in 1998 to 32.2% in 1999. However, research and development
expenses increased in absolute dollars by $0.9 million from 1998 to 1999. The
increase in absolute dollars was a result of increased efforts in the CCM
business.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense includes
executive compensation and the continued administrative expense associated with
the Company's foreign operations, executive support costs, accounting
operations, planning, investor relations and business development operations.
General and administrative expense increased as a percentage of total revenue
from 13.3% in 1997 to 17.1% in 1998. The percentage increase to total revenue
was primarily the result of decreased product revenue as a result of the
consummation of the Elron Transaction and products de-emphasized in the July
1997 restructuring and reorganization of the Company's operations. However,
general and administrative expense decreased in absolute dollars by $2,089 from
1997 to 1998. The decrease is a direct result of the restructuring and
reorganization of the Company's operations. General and administrative expense
decreased as a percentage of total revenue from 17.1% in 1998 to 14.5% in 1999.
However, general and administrative expenses increased in absolute dollars by
$1.0 million from 1998 to 1999. The increase is due to higher investor relations
charges as well as costs associated with the investigation of a former officer.
CHARGE FOR PURCHASED INCOMPLETE RESEARCH AND DEVELOPMENT. In connection with the
acquisitions of Purview Technologies, Inc. and csd Software GmbH in 1997, the
Company allocated an aggregate of $15.9 million of the respective purchase
prices to incomplete research and development projects. These costs were
expensed as of the acquisition dates and the allocations represent the estimated
fair values related to the incomplete projects determined by appraisals using
appropriate assumptions and valuation techniques. The development of these
projects had not yet reached technological feasibility and the technology had no
alternative future use. The technology acquired in these acquisitions has
required substantial additional development by the Company. The Purview
acquisition was completed in January 1997 and a commercially viable product was
shipped in September 1997. The product development investment in the Purview
technology made by the Company from the date of acquisition through September
1997 was $0.4 million. The csd acquisition was completed in January 1997 and the
acquired company continued to ship its existing technology. In August 1997, the
Company first shipped the CCM product based on the acquired technology and on a
Windows NT Advanced Server. The product development investment made by the
Company from the date of acquisition through August 1997 was approximately $1.5
million. CCM uses client/server architecture that was incomplete at the time of
the acquisition. CCM development continues and a version of the product with an
open API for network management partners was shipped in the spring of 1998. The
additional product development investment required through the spring of 1998
was $3.2 million.
CHARGE FOR RESTRUCTURING. On July 29, 1997, the Company announced that it had
implemented a reorganization of its operations and a restructuring plan (the "97
Plan"). The 97 Plan included write-offs and write-downs of certain assets,
including accruing the costs related to a significant reduction in the
workforce, primarily in the technical support and sales and marketing
departments. In addition, the Company exited from the anti-virus business and
de-
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<PAGE>
emphasized its investment in new customer acquisitions for the Company's
Groupware and Network Management and Security businesses. As a result of the 97
Plan, the Company recorded a restructuring charge of $4.5 million. Included in
the 97 Plan was an additional inventory write-down of $849 thousand which is
included in cost of product revenue in accordance with Emerging Issues Task
Force (EITF) 96-9, CLASSIFICATION OF INVENTORY MARKDOWNS AND OTHER COSTS
ASSOCIATED WITH A RESTRUCTURING.
On October 29, 1997, the Company announced it would refocus its
international sales organization to concentrate on the CCM business and would
close its offices in Sydney, Paris and London, while strengthening its presence
in Starnberg, Germany. As a result, the Company recorded a restructuring charge
related to the write-off and write-down of certain assets, accruing the costs
related to the reduction of its international workforce (excluding csd Software
GmbH), primarily in the technical support and sales and marketing departments,
and accruing the associated costs with closing its international locations
(excluding csd Software GmbH). As a result, the Company recorded a restructuring
charge of $6.4 million.
GAIN ON SALE OF ASSETS. In connection with the Eltron Transaction, the Company
received net proceeds of $8.8 million and incurred $550 thousand of direct
transaction costs. Pursuant to the Eltron Transaction, the Company sold assets
that had a carrying value of $1.8 million, and recorded a gain of $6.5 million
during 1998.
INTEREST INCOME, NET. Interest income, net increased as a percent of total
revenue from 0.6% in 1997 to 1.6% in 1998. The increase is primarily a result of
the decline in revenue from 1997 to 1998 and an increased cash balance due to
the consummation of the Elron Transaction during the first quarter of 1998.
Interest income, net decreased as a percent of total revenue from 1.6% in 1998
to 0.5% in 1999. This decrease is due to a 54.3% increase in net revenue from
1998 to 1999 and lower cash levels during 1999.
OTHER INCOME. Other income in 1998 resulted from the gain on sale of equipment
sold during the year. Other income in 1999 resulted from an insurance claim.
INCOME TAXES. In the year ended December 31, 1998 and 1999, the Company incurred
a significant operating loss for both book and tax purposes and gave benefit to
refundable income taxes which offset certain foreign tax provisions and as a
result no tax provision was recorded. 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. The provision for 1998 represents additional
minimum taxes owed.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through private and
public placements of capital stock and the net proceeds received from the Elron
transaction. At December 31, 1997, 1998, and 1999, the Company had available
cash and cash equivalents of $6.7 million, $8.0 million, and $16.9 million,
respectively, and working capital of $3.8 million, $4.7 million, and $15.1
million, respectively. As of December 31, 1999, the Company has a $1.0 million
letter of credit guarantee outstanding for a subsidiary against a line of credit
with a foreign bank and a $0.7 million letter of credit guarantee outstanding
securing its new facility lease.
Net cash used in operating activities for the years ended December 31,
1997, 1998 and 1999 was $5.3 million, $5.6 million, and $2.0 million,
respectively. In 1997, net cash used in operating activities consisted of a
$34.8 million loss from operations which was the result of a $15.9 million
charge for purchased incomplete research and development relating to the
acquisitions of Purview Technologies Inc and csd Software GmbH, a $5.0 million
charge for asset write-down related to restructuring charges, depreciation and
amortization of $3.4 million, and changes in assets and liabilities of $5.3
million. In 1998, net cash used in operating activities consisted mainly of a
net loss of $215 thousand combined with the gain on sale of assets of $6.5
million, which is offset by $1.6 million in depreciation and amortization, and
changes in assets and liabilities of $423 thousand. In 1999, net cash used in
operating activities consisted mainly of a net loss of $2.0 million and an
increase in accounts receivable of $3.9 million, which is offset by $1.7 million
in depreciation and amortization, and an increase of $2.2 million in deferred
revenue.
Net cash (used in) provided by investing activities for the years ended
December 31, 1997, 1998 and 1999 was ($8.6) million, $7.4 million, and $(1.1)
million, respectively. Direct costs in 1997 relate to the acquisition of csd
Software GmbH, and Purview Technologies Inc., of $5.8 million and $1.1 million,
respectively. The purchase of property and equipment in 1998 was offset by $8.3
million in proceeds from assets held for sale, net of transaction
42
<PAGE>
costs pertaining to the Elron Transaction. The purchase of property and
equipment in 1999 was $1.1 million.
Net cash (used in) provided by financing activities for the years ended
December 31, 1997, 1998 and 1999 was ($169) thousand, ($226) thousand, and $11.7
million, respectively. In 1997, this was a result of the exercise of stock
options of $28 thousand and the sale of stock under the Employee Stock Purchase
Plan of $73 thousand, which were partially offset by the purchase of treasury
stock of $47 thousand and principal repayments of obligations under capital
leases of $223 thousand. In 1998, this was a result of the exercise of stock
options of $64 thousand, the sale of stock under the Employee Stock Purchase
Plan of $66 thousand and offset by the principal payments on obligations under
capital lease of $356 thousand. In 1999, this was a result of the $11.0 million
of net proceeds from the sale of common stock and warrants, the exercise of
stock options of $631 thousand and the sale of stock under the Employee Stock
Purchase Plan of $143 thousand.
The Company believes that its existing cash balances, funds generated from
operations, and available borrowings under its line of credit will be sufficient
to finance the Company's operations through December 2000. In the event the
Company acquires one or more businesses or products, the Company's capital
requirements could increase substantially, and there can be no assurance that
additional capital will be available on terms acceptable to the Company, if at
all.
YEAR 2000 READINESS DISCLOSURE
As of the date of this filing, we have not incurred any significant
business disruptions as a result of year 2000 issues. However, while no such
occurrence has developed, year 2000 issues that may arise related to key
suppliers and service providers may not become apparent immediately. We have
received assurances from key suppliers and service providers such as financial
institutions, our payroll service provider and our retirement plan administrator
as to their year 2000 readiness. We can provide no assurance that we will not be
adversely affected by these suppliers and service providers due to noncompliance
in the future.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's
accountants on accounting or financial disclosure.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company does not hold any market risk sensitive instruments.
TRANSACTION OF OTHER BUSINESS
The Board of Directors of the Company is not aware of any matters that may
be presented at the Special Meeting other than those mentioned in the Company's
Notice of Special Meeting preceding this Proxy Statement and a part hereof. If,
however, other matters do properly come before the Special Meeting, it is
intended that the persons named in the proxy will vote, pursuant to their
discretionary authority and according to their best judgments in the best
interests of the Company.
INDEPENDENT PUBLIC ACCOUNTANTS
A representative of Arthur Andersen LLP, the Company's independent public
accountants, will be present at the Special Meeting, afforded the opportunity to
make a statement and available to respond to questions.
STOCKHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
43
<PAGE>
Any stockholder of the Company who wishes to present a proposal at the 2000
Annual Meeting of Stockholders of the Company and who wishes to have such
proposal included in the Company's proxy statement for that meeting, must have
delivered a copy of such proposal to On Technology Corporation at 880 Winter
Street, Building Four, Waltham, MA 02451, Attention: Corporate Secretary, no
later than December 31, 1999; provided, however, that if the 2000 Annual Meeting
of Stockholders is held on a date more than 30 days before or after the
corresponding date of the 1999 Annual Meeting of Stockholders, any Stockholder
who wishes to have a proposal included in the Company's proxy statement for that
meeting must deliver a copy of the proposal to the Company a reasonable time
before the proxy solicitation is made. The Company reserves the right to decline
to include in the Company's proxy statement any stockholders proposal which does
not comply with the rules of the Commission for inclusion therein.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Information filed by the Company may be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission located at 7 World Trade Center, New York, New York, 10048.
Copies of such material can also be obtained at prescribed rates by addressing
written requests for such copies to the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the
Company is required to file electronic versions of such material with the
Commission through the Commission's Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system. The Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Electronic
filings are publicly available on the Commission's World Wide Web site within 24
hours of acceptance. The address of such site is http://www.sec.gov.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Proxy Statement and prior to
the date of the Special Meeting shall be deemed to be incorporated by reference
into this Proxy Statement and to be a part hereof from the date of filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that is or is deemed to be incorporated by
reference herein) modifies or supersedes such previous statement. Any statement
so modified or superseded shall not be deemed to constitute a part hereof except
as so modified or superseded.
This Proxy Statement summarizes or otherwise refers to documents which are
not delivered herewith. Such documents are available on request, without charge,
directed to ON Technology Corporation, 880 Winter Street, Building Four,
Waltham, MA 02451, Attention: Investor Relations. In order to ensure timely
delivery of the documents, any requests should be made by February 21, 2000.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF PROPOSALS NO.
1, NO. 2 AND NO. 3.
44
<PAGE>
OTHER MATTERS
The Board of Directors is not aware of any matter to be presented for
action at the Meeting, other than the matters set forth herein. Should any other
matter requiring a vote of stockholders arise, the proxies in the enclosed form
of proxy confer upon the person or persons entitled to vote the shares
represented by such proxies discretionary authority to vote the same in
accordance with the best judgment.
By Order of the Board of Directors
Stephen J. Wietrecki
SECRETARY
February 28, 2000
45
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
NUMBER
------
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets:
December 31, 1998 and 1999............................................ F-3
Consolidated Statements of Operations:
Years ended December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Loss:
Years ended December 31, 1997, 1998 and 1999 (unaudited).............. F-5
Consolidated Statements of Cash Flows:
Years ended December 31, 1997, 1998 and 1999 (unaudited).............. F-7
Notes to the Consolidated Financial Statements............................ F-9
1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO ON TECHNOLOGY CORPORATION AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of ON
Technology Corporation (a Delaware corporation) and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and comprehensive loss and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ON Technology Corporation
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 26,2000
F-1
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
December 31,
--------------------
1999 1998
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 16,941 $ 8,001
Accounts receivable, net of allowance
of $666 and $954, respectively 7,347 3,384
Inventories 92 74
Prepaid expenses and other current assets 582 755
-------- --------
Total current assets 24,962 12,214
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Computers and equipment 4,561 3,774
Furniture and fixtures 523 239
Equipment under capital leases -- 193
-------- --------
Less-Accumulated depreciation and amortization 3,442 2,370
-------- --------
1,642 1,836
-------- --------
Other assets and deposits 149 80
Purchased intangible assets, net of $1,999 and $1,539
of accumulated amortization, respectively 35 539
-------- --------
$ 26,788 $ 14,669
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,112 $ 4,409
Accrued expenses 1,655 1,257
Reserve for distributor inventories 120 120
Deferred revenue 3,931 1,742
-------- --------
Total current liabilities 9,818 7,528
-------- --------
Commitments (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, Authorized - 2,000,000 shares
Issued- none -- --
Common stock, $.01 par value - Authorized -
20,000,000 shares Issued and outstanding -
13,848,164 shares and 12,376,095 shares,
respectively 138 124
Additional paid-in capital 74,596 62,793
Accumulated deficit (57,694) (55,695)
Accumulated other comprehensive loss (23) (34)
Treasury stock (15,000 shares at cost) (47) (47)
-------- --------
Total stockholders' equity 16,970 7,141
-------- --------
$ 26,788 $ 14,669
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE><CAPTION>
For the Years Ended December 31,
Year ended December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE:
Net product revenue $ 23,427 $ 15,089 $ 36,630
Other revenue 7,450 4,921 4,652
------------ ------------ ------------
TOTAL REVENUE 30,877 20,010 41,282
------------ ------------ ------------
OPERATING EXPENSES:
Cost of product revenue 5,431 3,890 9,315
Sales and marketing 13,396 10,715 22,172
Research and development 9,952 9,044 12,461
General and administrative 4,466 3,412 5,501
Charge for purchased incomplete research
and development -- -- 15,898
Charge for restructuring -- -- 10,940
Gain on sale of assets -- (6,518) --
------------ ------------ ------------
LOSS FROM OPERATIONS (2,368) (533) (35,005)
Interest expense (16) (71) (178)
Interest income 169 416 411
Other income 216 -- --
------------ ------------ ------------
LOSS BEFORE PROVISION
FOR INCOME TAXES (1,999) (188) (34,772)
Provision for income taxes -- (27) --
------------ ------------ ------------
NET LOSS $ (1,999) $ (215) $ (34,772)
============ ============ ============
Basic loss per share $ (0.16) $ (0.02) $ (2.88)
============ ============ ============
Diluted loss per share $ (0.16) $ (0.02) $ (2.88)
============ ============ ============
Basic weighted average shares outstanding 12,526,398 12,280,953 12,079,264
============ ============ ============
Diluted weighted average shares outstanding 12,526,398 12,280,953 12,079,264
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(In thousands)
<TABLE><CAPTION>
---------------------------------------------------------------------------
Common Stock
--------------------
Number $.01 Additional Cumulative
of Par Paid-in Deferred Accumulated Translation
shares value Capital Compensation Deficit Adjustment
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 11,008 $ 110 $ 55,637 $ -- $ (20,708) $ 88
Issuance of common stock in
connection with acquisitions 1,150 12 6,535 -- -- --
Sale of common stock under the
Employee Stock Purchase Plan 23 -- 73 -- -- --
Exercise of common stock options 42 -- 28 -- -- --
Deferred compensation related to
grants of common stock options -- -- 392 (392) -- --
Amortization of deferred
Compensation related to grants
of common stock options -- -- -- 163 -- --
Purchase of treasury stock -- -- -- -- -- --
Cumulative translation adjustment -- -- -- -- -- (123)
Net loss -- -- -- -- (34,772) --
Comprehensive loss -- -- -- -- -- --
------ -------- -------- -------- -------- --------
Balance, December 31, 1997 12,223 122 62,665 (229) (55,480) (35)
Sale of common stock under the
Employee Stock Purchase Plan 58 1 65 -- -- --
Exercise of common stock options 95 1 63 -- -- --
Amortization of deferred
compensation related to grants
of common stock options -- -- -- 229 -- --
Cumulative translation adjustment -- -- -- -- -- 1
Net loss -- -- -- -- (215) --
Comprehensive loss -- -- -- -- -- --
------ -------- -------- -------- -------- --------
Balance, December 31, 1998 12,376 124 62,793 -- (55,695) (34)
Sale of common stock and warrants,
net of $1,039 of issuance costs 1,030 10 10,951 -- -- --
Sale of common stock under the
Employee Stock Purchase Plan 122 1 142 -- -- --
Exercise of common stock options 320 3 628 -- -- --
Deferred compensation related to
grants of common stock options -- -- 82 (82) -- --
Amortization of deferred
Compensation related to grants
of common stock options -- -- -- 82 -- --
Cumulative translation adjustment -- -- -- -- -- 11
Net loss -- -- -- -- (1,999) --
Comprehensive loss -- -- -- -- -- --
------ -------- -------- -------- -------- --------
Balance, December 31, 1999 13,848 $ 138 $ 74,596 $ -- $(57,694) $ (23)
====== ======== ======== ======== ======== ========
</TABLE>
F-4
<PAGE>
<TABLE><CAPTION>
---------------------------------------------------
Treasury Stock
---------------------
Number
of Comprehensive
shares Cost Total Loss
---------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 (258) $(1,634) $ 33,493
Issuance of common stock in
connection with acquisitions 258 1,634 8,181
Sale of common stock under the
Employee Stock Purchase Plan -- -- 73
Exercise of common stock options -- -- 28
Deferred compensation related to
grants of common stock options -- -- --
Amortization of deferred
Compensation related to grants
of common stock options -- -- 163
Purchase of treasury stock (15) (47) (47)
Cumulative translation adjustment -- -- (123) (123)
Net loss -- -- (34,772) (34,772)
--------
Comprehensive loss -- -- -- $(34,895)
------- ------- -------- ========
Balance, December 31, 1997 (15) (47) 6,996
Sale of common stock under the
Employee Stock Purchase Plan -- -- 66
Exercise of common stock options -- -- 64
Amortization of deferred
compensation related to grants
of common stock options -- -- 229
Cumulative translation adjustment -- -- 1 1
Net loss -- -- (215) (215)
--------
Comprehensive loss -- -- -- $ (214)
------- ------- -------- ========
Balance, December 31, 1998 (15) (47) 7,141
Sale of common stock and warrants,
net of $1,039 of issuance costs -- -- 10,961
Sale of common stock under the
Employee Stock Purchase Plan -- -- 143
Exercise of common stock options -- -- 631
Deferred compensation related to
grants of common stock options -- -- --
Amortization of deferred
Compensation related to grants
of common stock options -- -- 82
Cumulative translation adjustment -- -- 11 11
Net loss -- -- (1,999) (1,999)
-------
Comprehensive loss -- -- -- $(1,988)
------- ------- -------- =======
Balance, December 31, 1999 (15) $ (47) $ 16,970
======= ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE><CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,999) $ (215) $(34,772)
Adjustments to reconcile net loss
to net cash used in operating activities:
Charge for purchased incomplete research and development -- -- 15,898
Asset write-down related to restructuring charge -- -- 4,975
Gain on sale of assets -- (6,518) --
Depreciation and amortization 1,726 1,580 3,384
Change in direct marketing costs -- -- 31
Amortization of deferred compensation 82 229 163
Change in net deferred income taxes -- -- 1,543
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable (3,946) (443) 7,240
Inventories (18) 191 1,001
Prepaid expenses and other current assets 181 1,744 (827)
Accounts payable (633) (323) (1,402)
Accrued expenses 399 (2,460) 345
Reserve for distributor inventories -- (96) 12
Deferred revenue 2,189 735 (2,858)
-------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES (2,019) (5,576) (5,267)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in other assets and deposits (24) 1 5
Purchase of property and equipment, net (1,072) (878) (1,728)
Purchase of Purview Technologies, Inc, net of cash acquired -- -- (1,121)
Purchase of csd Software GmbH, net of cash acquired -- -- (5,781)
Proceeds from assets held for sale, net of transaction costs -- 8,273 --
-------- -------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,096) 7,396 (8,625)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock and
Warrants 10,961 -- --
Exercise of stock options 631 64 28
Sale of stock under the Employee Stock Purchase Plan 143 66 73
Purchase of treasury stock -- -- (47)
Principal repayments on obligations under capital lease (10) (356) (223)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 11,725 (226) (169)
-------- -------- --------
Effect of exchange rates on cash and cash equivalents 330 (272) (34)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,940 1,322 (14,095)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,001 6,679 20,774
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 16,941 $ 8,001 $ 6,679
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE><CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Acquisition of Purview Technologies, Inc.:
Fair value of assets acquired $ -- $ -- $ 2,379
Fair value of stock issued -- -- (1,139)
Liabilities assumed -- -- (107)
Cash acquired -- -- (12)
------------- ------------- -------------
Cash paid for acquisition and direct costs,
net of cash acquired $ -- $ -- $ 1,121
============= ============= =============
Acquisition of csd Software GmbH:
Fair value of assets acquired $ -- $ -- $ 17,949
Fair value of stock issued -- -- (7,042)
Liabilities assumed -- -- (5,100)
Cash acquired -- -- (26)
------------- ------------- -------------
Cash paid for acquisition and direct costs,
net of cash acquired $ -- $ -- $ 5,781
============= ============= =============
Cash paid for-
Interest $ 16 $ 71 $ 178
============= ============= =============
Income taxes $ -- $ 37 $ 1,181
============= ============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ON Technology Corporation and Subsidiaries (the "Company") is engaged in
the development, marketing, sales support and distribution of software for local
area networks.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described below and elsewhere in
the notes to the consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
MANAGEMENT ESTIMATES AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expense during the
reporting period. Actual results could differ from those estimates.
The Company is subject to a number of risks and uncertainties similar to
those of other companies of the same size within the software industry, change
in marketing strategy, competition, rapid technological changes, continued
financing, achieving profitability and dependence on key individuals.
REVENUE RECOGNITION
Revenue from software product sales is recognized upon shipment of the
product to customers where the Company has no significant vendor obligations in
accordance with American Institute of Certified Public Accountants Statement
97-2. During the year ended December 31, 1997, the Company sold advertising
space in its catalog for cash or received third-party advertising product.
Revenue for catalog advertising space for cash is recognized the day the catalog
is mailed to customers. Revenue for third party advertised product received is
recognized as each item is sold. During the years ended December 31, 1999 and
1998, the Company did not earn revenue from sales of catalog advertising space
due to the sale of its catalog business to Elron Software, Inc. (Elron) a wholly
owned subsidiary of Elron Electronics Industries (see Note 12). The deferred
revenue balance at December 31, 1999 and 1998 relates primarily to revenue on
software maintenance contracts, which is recognized ratably as it is earned. The
reserve for distributor inventories balance at December 31, 1999 and 1998
relates to sales to distributors for which the Company has accrued its estimate
of future distributor returns when the product was shipped.
CASH AND CASH EQUIVALENTS
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES. The Company has classified its cash equivalents as held-to-maturity
and recorded them at amortized cost, which approximates market value. The
Company considers all highly liquid cash investments with maturities of three
months or less at the date of acquisition to be cash equivalents. Cash
equivalents consisted of commercial paper and money market funds at December 31,
1999 and 1998.
F-7
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of an estimate of the fair value of certain financial
instruments. The Company's financial instruments consist of cash equivalents and
accounts receivable. The estimated fair value of these financial instruments
approximates their carrying value at December 31, 1999 and 1998. The estimated
fair values have been determined through information obtained from market
sources and management estimates.
DIRECT MARKETING COSTS
As part of the sale of assets (see Note 12), the Company no longer
capitalized any direct marketing costs. For the year ended December 31, 1997,
the Company recorded $5,891 of direct marketing expense for costs capitalized in
accordance with the American Institute of Certified Public Accountants' (AICPA)
Statement of Position 93-7, REPORTING ON ADVERTISING COSTS.
DEPRECIATION
The Company provides for depreciation by charges to operations in amounts
estimated to allocate the cost of the assets over their estimated useful lives,
using the straight-line method, as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- ---------------
Computers and equipment................................. 3-7 Years
Furniture and fixtures.................................. 5-7 Years
Equipment under capital leases.......................... Life of lease
IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for its long-lived assets in accordance with SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF. At each balance sheet date, the Company evaluates the
realizability of long-lived assets based on profitability expectations, using
the undiscounted cash flow method, for each subsidiary having a material
long-lived assets. Based on its most recent analysis, the Company believes that
no impairment of long-lived assets exists at December 31, 1999.
SOFTWARE DEVELOPMENT COSTS
Costs incurred in the development of computer software to be sold have been
expensed as research and development costs in the accompanying consolidated
statements of operations, in accordance with SFAS No. 86, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. The costs
incurred subsequent to the attainment of technological feasibility in 1999, 1998
and 1997 are insignificant and accordingly have been charged to research and
development. The Company has recorded charges for purchased incomplete research
and development related to the acquisitions discussed in Note 2. In each case,
the Company determined that technological feasibility of the in-process
purchased technology acquired had not been established and that the technology
had no alternative future use.
F-8
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOREIGN CURRENCY TRANSLATION
The Company translates the assets and liabilities of its foreign
subsidiaries at the exchange rates in effect at fiscal year-end in accordance
with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. Revenues and expenses are
translated using exchange rates in effect during each period.
POSTRETIREMENT BENEFITS
The Company has no obligations for postretirement benefits.
CONCENTRATION OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet concentrations
of credit. The Company's financial instruments that subject the Company to
credit risk consist of cash and cash equivalents and accounts receivable. The
Company maintains the majority of cash balances with two financial institutions.
The Company's accounts receivable credit risk is not concentrated within any
geographic area. During the year ended December 31, 1999, two customers
accounted for $7.6 million of Desktop Management revenue (see Note 11) or 24.5%
of consolidated total revenue. During the year ended December 31, 1998, one
customer accounted for $3.5 million of Desktop Management revenue (see Note 11)
or 18% of consolidated total revenue. During the year ended December 31, 1997,
no single customer accounted for greater than 10% of revenues or represented a
significant credit issue to the Company.
LOSS PER SHARE
The Company calculates loss per share in accordance with SFAS 128, EARNINGS
PER SHARE. Basic loss per share is calculated by dividing net loss by the
weighted average number of common shares outstanding for the period. Diluted
loss per share is the same as basic loss per share since the effect of stock
options and warrants would be anti-dilutive.
Anti-dilutive securities which consist of stock options and warrants, that
were not included in diluted loss per share were 1,093,250, 1,764,968 and
1,935,628 for the years ended December 31, 1999, 1998 and 1997, respectively.
COMPREHENSIVE LOSS
The Company adopted SFAS 130, REPORTING COMPREHENSIVE INCOME, effective
January 1, 1998 and has disclosed comprehensive loss for all periods presented
in the accompanying consolidated statements of stockholders' equity and
comprehensive loss. SFAS 130 establishes standards for reporting and display of
comprehensive income (loss) in the financial statements. The Company's only item
of other comprehensive loss relates to cumulative translation adjustment, and is
presented separately on the balance sheet as required.
F-9
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NEW ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS
No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL
OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, which defers the effective date
of SFAS No. 133 to all fiscal years beginning after June 15, 2000. SFAS No. 133
ACCOUNTING FOR DERIVATIVE INSTRUMENTS ANd HEDGING ACTIVITIES, issued in June
1998, establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Company does not expect adoption of this
statement to have a significant impact on its consolidated financial position or
results of operations.
(2) ACQUISITIONS
ACQUISITION OF PURVIEW TECHNOLOGIES, INC.
On January 24, 1997, the Company acquired all of the capital stock of
Purview Technologies, Inc., a company engaged in Internet access monitoring and
management software. The aggregate purchase price of $2,379 was allocated based
on the fair market value of the tangible and intangible assets acquired as
follows:
Current assets............................................... $ 51
Purchased intangible assets, including acquired technology... 210
Purchased incomplete research and development................ 2,118
----------
$ 2,379
==========
As consideration, the Company paid $1,000 in cash and issued 205,251 shares
of common stock with a fair market value of $5.55 per share, assumed $107 in
liabilities and incurred $133 in direct acquisition costs. This transaction was
accounted for as a purchase and accordingly, the results since January 24, 1997,
are included in the accompanying consolidated financial statements (see Note
12).
ACQUISITION OF CSD SOFTWARE GMBH (CSD)
On January 28, 1997, Wilma 96 Vermogensverwaltungs GmbH ("Wilma GmbH") a
wholly owned subsidiary of the Company purchased all of the capital stock of
csd, a German corporation engaged in the development of PC desktop software
management tool products. The aggregate purchase price of $15,048 was allocated
based on the fair market value of the tangible and intangible assets acquired as
follows:
Purchased intangible assets, including acquired technology... $ 1,268
Purchased incomplete research and development................ 13,780
----------
$ 15,048
==========
As consideration, the Company paid $5,000 in cash and issued 1,253,854
shares of common stock of the Company with a fair value of $5.62, assumed $5,100
in liabilities, and incurred $734 in direct acquisition costs. This transaction
was accounted for as a purchase, and accordingly; the results since January 28,
1997, are included in the accompanying consolidated financial statements.
F-10
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
For all acquisitions in 1997, intangible assets are being amortized on a
straight-line basis over the estimated useful life, not to exceed three years.
The portion of the purchase price allocated to incomplete research and
development projects that had not yet reached technological feasibility and did
not have any future alternative use was expensed as purchased incomplete
research and development, as of the acquisition dates. The amounts allocated to
incomplete research and development projects represent the estimated fair value
related to these projects determined by an independent appraisal. Proven
valuation procedures and techniques were utilized in determining the fair value
of the purchased intangible assets. To bring these projects to technological
feasibility, high risk development and testing issues needed to be resolved,
which required substantial additional effort and testing.
The Purview acquisition was completed in January 1997 and a commercially
viable product was shipped in September 1997. The product development investment
in the Purview technology made by the Company from the date of acquisition
through September 1997 was approximately $0.4 million. The csd acquisition was
completed in January 1997 and the acquired company continued to ship its
existing technology. In August 1997, the Company first shipped the CCM product
based on the acquired technology and on Windows NT Advanced Server. The product
development investment made by the Company from the date of acquisition through
August 1997 was approximately $1.5 million. CCM uses client/server architecture
that was incomplete at the time of the acquisition. CCM development continued
and a version of the product with an open API for network management partners
was shipped in the spring of 1998. The additional product development investment
required through the spring of 1998 was approximately $3.2 million.
(3) CHARGE FOR RESTRUCTURING
On July 29, 1997, the Company announced that it had implemented a
reorganization of its operations and a restructuring plan (the "97 Plan"). The
97 Plan included write-offs and write-downs of certain assets, including
accruing the costs related to a 68 employee reduction in the workforce, of which
59 were in the technical support and sales and marketing departments. In
addition, the Company has exited from the anti-virus business and de-emphasized
its investment in new customer acquisitions for the Company's groupware, network
management and security businesses. As a result of the 97 Plan, the Company
recorded a restructuring charge of $4,530. Included in the 97 Plan was an
additional inventory write-down of $849, which is included in cost of product
revenue in accordance with Emerging issue Task Force 96-9.
The following are the significant components of the $4,530 charge for
restructuring:
<TABLE><CAPTION>
Restructure Non-Cash Cash To Be
Charge Portion Disbursed Paid
<S> <C> <C> <C> <C>
Employee severance, benefits and related costs $ 1,980 $ 350 $ 1,630 $ ---
Write-off and write-down of assets to net
realizable value excluding inventory 1,346 1,346 --- ---
Provision for costs in closing facilities 1,204 --- 1,108 96
--------- --------- --------- ---------
$ 4,530 $ 1,696 $ 2,738 $ 96
========= ========= ========= =========
</TABLE>
The Company anticipates the remaining cash payments to be made over the life of
the facility lease which ends in 2001.
F-11
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On October 29, 1997, the Company announced that it would seek shareholder
approval to sell its Network Management and Network Security Business along with
related marketing systems and organization to Elron (see Note 12). Concurrently,
the Company announced that it would refocus its international sales organization
to concentrate on the Client Management Business and would close its offices in
Sydney, Paris and London, while strengthening its presence in Starnberg,
Germany. As a result, the Company recorded a restructuring charge related to the
write-off and write-down of certain assets, accruing the costs related to the 19
employee reduction of its international workforce (excluding csd) of which nine
were in the technical support and sales and marketing departments and accruing
the associated costs with closing its international locations (excluding csd).
The following are the significant components of the $6,410 charge for
restructuring:
<TABLE><CAPTION>
Restructure Non-Cash Cash
Charge Portion Disbursed
<S> <C> <C> <C>
Employee severance, benefits and related costs $ 762 $ --- $ 762
Write-off and write-down of assets to net
realizable value 3,600 3,280 320
Provision for costs in closing facilities 2,048 1,798 250
--------- --------- ---------
$ 6,410 $ 5,078 $ 1,332
========= ========= =========
</TABLE>
(4) INCOME TAXES
The Company provides for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. Under the liability method specified by SFAS No.
109, a deferred tax asset or liability is determined based on the difference
between the financial statement and tax basis of assets and liabilities, as
measured by the enacted tax rates assumed to be in effect when these differences
reverse. In the year ended December 31, 1999 and 1997, the Company incurred a
significant operating loss for both book and tax purposes and as a result no tax
provision was recorded. 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. The provision for 1998 represents additional minimum taxes
owed.
The components of domestic and foreign income (loss) before the provision for
income taxes are as follows:
1999 1998 1997
-------- -------- --------
Domestic $ (4,161) $ 941 $(27,644)
Foreign 2,162 (1,129) (7,128)
-------- -------- --------
$ (1,999) $ (188) $(34,772)
======== ======== ========
F-12
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The components of the provision for income taxes are as follows:
1999 1998 1997
------- ------- -------
Current
Federal $ -- $ (27) $ (409)
State -- -- (72)
Foreign -- -- --
------- ------- -------
-- (27) (481)
Deferred
Federal -- -- (496)
State -- -- (87)
Foreign -- -- 1,064
------- ------- -------
-- -- 481
------- ------- -------
$ -- $ (27) $ --
======= ======= =======
The Company provides deferred income taxes for temporary differences between
assets and liabilities recognized for financial reporting and income tax
purposes. The income tax effects of these temporary differences are as follows:
1999 1998
--------- ---------
Deferred tax asset ---
Purchased intangibles $ 3,819 $ 4,714
Other temporary differences 1,375 1,617
Net operating loss and tax
credit carryforwards 9,730 7,711
--------- ---------
14,924 14,042
Valuation allowance (14,924) (14,042)
--------- ---------
$ -- $ --
========= =========
The Company has placed a full valuation allowance against its net deferred
tax asset since the Company believes it is "more likely than not" that it will
not be able to utilize its deferred tax asset.
As of December 31, 1999, the Company has available Federal net operating
loss carryforwards of $16,016. These carryforwards expire through 2019 and are
subject to review and possible adjustment by the Internal Revenue Service. The
Tax Reform Act of 1997 contains provisions that may limit the amount of net
operating loss and credit carryforwards that the Company may utilize in any one
year in the event of certain cumulative changes in ownership over a three-year
period in excess of 50%, as defined.
A reconciliation of the federal statutory rate to the Company's effective tax
rate is as follows:
1999 1998 1997
------ ------ ------
Federal statutory rate (34.0%) (34.0%) (34.0%)
State taxes, net of federal benefit (6.2%) (6.2%) (6.2%)
Increase in valuation allowance 40.2% 54.6% 40.2%
------ ------ ------
Effective tax rate -- 14.4% --
F-13
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(5) LINE OF CREDIT
As of December 31, 1999, the Company has a $1.0 million letter of credit
guarantee outstanding for a subsidiary against a line of credit with a foreign
bank and a $0.7 million letter of credit guarantee outstanding securing our new
facility lease. The Company has an unused and available line of credit of $5.0
million with a commercial bank. The Company can borrow under this line of credit
up to the greater of $5.0 million or the sum of 80% of qualified domestic
accounts receivable. Advances pursuant to the line of credit are secured by
liens granted on the Company's accounts receivable. At December 31, 1999 and
1998, the Company did not have an outstanding balance under the line of credit
agreement.
(6) COMMITMENTS
LEASES
The Company conducts its operations in leased facilities under operating
leases expiring at various times through 2003.
The approximate minimum annual lease payments under the operating leases are as
follows:
OPERATING
LEASES
-----------
2000......................... $ 1,187
2001......................... 1,058
2002......................... 737
2003......................... 33
-----------
$ 3,015
===========
Total rental expense included in the accompanying consolidated statements
of operations for the years ended December 31, 1999, 1998 and 1997 was $1,290,
$1,547 and $1,954, respectively.
ROYALTIES
The Company had entered into several software license agreements. These
agreements provided the Company with exclusive worldwide licenses to distribute
certain software products. The Company was required to pay royalties on all
related sales, subject to certain royalty targets to maintain exclusive
distribution rights to that software product. As a result of the software
products sold to Elron (see Note 12), the Company has no minimum royalty
requirement to maintain exclusive distribution rights as of December 31, 1999.
Total royalty expense included in the accompanying consolidated statements of
operations for the years ended December 31, 1999, 1998 and 1997 was $413, $252
and $1,412, respectively.
(7) STOCKHOLDERS' EQUITY
COMMON STOCK
The Company has 20,000,000 authorized shares of common stock $.01 par
value, of which 13,848,164 shares were issued at December 31, 1999.
F-14
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PREFERRED STOCK
The Company has 2,000,000 shares of Preferred Stock, which may be issued
from time to time in one or more series. The Company's Board of Directors has
authority to issue the shares of Preferred Stock in one or more series, to
establish the number of shares to be included in each series and to fix the
designation, powers, preferences and rights of the shares of each series and the
qualifications, limitations or restrictions thereof, without any further vote or
action by the stockholders. The issuance of Preferred Stock could decrease the
amount of earnings and assets available for distribution to holders of Common
Stock, and may have the effect of delaying, deferring or preventing a change in
control of the Company. The Company has not issued any shares of preferred stock
as of December 31, 1999.
PRIVATE PLACEMENT
In December 1999, the Company completed a $12,000 private placement of
common stock and warrants for the purchase of additional shares of common stock
to two institutional investors. Each investor purchased 514,837 shares of common
stock and received warrants to purchase 257,419 shares of common stock at $15.15
per share exercisable for five years from the date of issuance. In addition, the
investors received warrants to purchase additional shares of common stock upon
certain events, as defined.
(8) STOCK OPTION PLANS
In July 1992, the Company adopted the 1992 Employee and Consultant Stock
Option Plan (the Plan). Pursuant to the Plan, the Company may grant, to
employees and consultants of the Company, statutory and nonstatutory stock
options to purchase up to 3,800,000 shares of common stock as amended.
The Company's 1995 Director's Stock Option Plan (the "Director's Plan") was
adopted on May 18, 1995 and provides for the granting of options to purchase up
to 200,000 shares of common stock to directors who are not employees of the
Company.
Stock option activity for the option plans was as follows:
NUMBER WEIGHT AVERAGE
OF EXERCISE PRICE
SHARES PER SHARE
----------- -----------
Outstanding, December 31, 1996....... 1,022,906 $ 7.57
Granted.......................... 2,124,689 2.39
Exercised........................ (41,537) 0.67
Terminated....................... (1,170,430) 6.49
----------- -----------
Outstanding, December 31, 1997....... 1,935,628 2.66
Granted.......................... 971,036 2.19
Exercised........................ (95,035) 0.67
Terminated....................... (521,399) 3.23
----------- -----------
Outstanding, December 31, 1998....... 2,290,230 2.45
Granted.......................... 879,000 3.28
Exercised........................ (320,373) 1.97
Terminated....................... (875,845) 2.71
----------- -----------
Outstanding, December 31, 1999....... 1,973,012 $ 2.78
=========== ===========
F-16
<PAGE>
Exercisable, December 31, 1999....... 539,587 $ 2.64
=========== ===========
Exercisable, December 31, 1998....... 660,834 $ 2.90
=========== ===========
Exercisable, December 31, 1997....... 219,274 $ 5.24
=========== ===========
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table presents weighted average price and remaining contractual
life information about significant option groups outstanding and exercisable at
December 31, 1999.
<TABLE><CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Weight
Average
Remaining Weight Weight
Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
- --------------------------- -------------- -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 0.01 33,231 7.20 $ .01 33,231 $ .01
0.50 - 1.53 149,664 8.25 1.39 35,729 1.39
1.63 - 3.13 1,455,929 8.33 2.12 385,128 2.27
3.31 - 5.63 139,688 8.40 3.38 57,999 3.43
11.50 - 15.00 194,500 9.53 8.88 27,500 10.87
-------------- -------------
1,973,012 539,587
============== =============
</TABLE>
In October 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK BASED
COMPENSATION, which requires the measurement of the fair value of stock options
or warrants to be included in the statement of operations or disclosed in the
notes to the financial statements. The Company has determined that it will
continue to account for stock-based compensation for employees under APB No. 25
and elect the disclosure-only alternative under SFAS No. 123 for options granted
after January 1, 1995 using the Black-Scholes option pricing model prescribed by
SFAS No. 123. The weighted average assumptions used are as follows:
1999 1998 1997
-------- -------- --------
Risk-free interest rate...................... 5.78% 5.28% 7.00%
Expected dividend yield...................... --- --- ---
Expected lives............................... 7 7 7
Expected volatility.......................... 131% 128% 111%
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net loss and basic and diluted net loss per share would
have been reduced to the following pro forma amounts:
1999 1998 1997
-------- -------- --------
Net Loss As Reported $ (1,999) $ (215) $(34,772)
Pro Forma (3,224) (1,400) (36,270)
Basic Net Loss Per Share As Reported (0.16) (0.02) (2.88)
Pro Forma (0.26) (0.11) (3.00)
Diluted Net Loss Per Share As Reported (0.16) (0.02) (2.88)
Pro Forma (0.26) (0.11) (3.00)
Because the method prescibed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The Company recorded $392 of deferred compensation during the year ended
December 31, 1997. The deferred compensation represented the excess of the fair
market value of the Company's common stock over the exercise price of certain
options on the date of the grant. Deferred compensation has been amortized to
compensation expense over the vesting period of each employee's stock option.
F-17
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
During the year ended December 31, 1999 the Company granted options to
certain nonemployees and recorded $82 of compensation expense in accordance with
SFAS No. 123. The Company will record additional compensation expense during the
year ended December 31, 2000.
EMPLOYEE STOCK PURCHASE PLAN
On May 18, 1995, the Company adopted the 1995 Employee Stock Purchase plan
pursuant to which up to 1,000,000 shares of common stock may be issued. The plan
consists of semiannual offerings commencing on the first day the Company's
common stock was publicly traded and each subsequent offering commencing on
January 1 and July 1 of each year. The maximum number of shares of common stock
that may be purchased by an employee is determined on the first day of each
offering period, as defined. The price at which the shares are purchased is the
lower of 85% of the closing price on the first or last day of the offering
period.
(9) 401 (K) PLAN
In 1994, the Company established a plan under Section 401(k) of the
Internal Revenue Code (the "401(k) Plan") covering all eligible employees, as
defined. Participants in the 401(k) Plan may not contribute more than the lesser
of specified statutory amount or 15% of his or her pretax total compensation.
The 401(k) Plan permits, but does not require, additional contributions to the
401(k) Plan by the Company. The Company made no contributions during 1999, 1998
or 1997.
(10) ACCRUED EXPENSES
Accrued expenses consisted of the following:
1999 1998
---------- ----------
Payroll and payroll related ... $ 1,183 $ 784
Restructuring ................. 96 145
Other ......................... 376 328
---------- ----------
$ 1,655 $ 1,257
========== ==========
(11) SEGMENT REPORTING
During 1999 and 1998, the Company has 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 other segment during 1997
includes products that were either de-emphasized as part of prior restructurings
or products that were included in the sale of assets to Elron.
F-18
<PAGE>
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates segment
performance based on gross margin from operations and does not capture segment
net income (loss) or segment assets.
F-19
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table illustrates segment operating data.
Desktop Groupware
Management Continuing Other Total
------- ------- ------- -------
1999
Product Revenue $17,996 $ 5,431 $ -- $23,427
Other Revenue 5,524 1,926 -- 7,450
------- ------- ------- -------
Total Revenue 23,520 7,357 -- 30,877
Cost of Sales 4,787 644 -- 5,431
------- ------- ------- -------
Gross Margin 18,733 6,713 -- 25,446
1998
Product Revenue 8,176 6,913 -- 15,089
Other Revenue 3,124 1,797 -- 4,921
------- ------- ------- -------
Total Revenue 11,300 8,710 -- 20,010
Cost of Sales 3,093 797 -- 3,890
------- ------- ------- -------
Gross Margin 8,207 7,913 -- 16,120
1997
Product Revenue 6,378 12,137 18,115 36,630
Other Revenue 2,253 1,145 1,254 4,652
------- ------- ------- -------
Total Revenue 8,631 13,282 19,369 41,282
Cost of Sales 2,201 1,030 6,084 9,315
------- ------- ------- -------
Gross Margin $ 6,430 $12,252 $13,285 $31,967
F-20
<PAGE>
The following table represents geographic information:
<TABLE><CAPTION>
North
America Europe Other Elimination Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1999
Sales to unaffiliated customers $ 14,036 $ 16,834 $ 7 $ -- $ 30,877
Transfers between geographic areas 1,110 -- -- (1,110) --
-------- -------- -------- -------- --------
Total Sales 15,146 16,834 7 (1,110) 30,877
Identifiable assets 56,685 9,153 2 (39,052) 26,788
1998
Sales to unaffiliated customers 10,335 9,670 5 -- 20,010
Transfers between geographic areas 20 -- -- (20) --
-------- -------- -------- -------- --------
Total Sales 10,355 9,670 5 (20) 20,010
Identifiable assets 32,662 6,005 2 (24,000) 14,669
1997
Sales to unaffiliated customers 26,930 13,679 673 -- 41,282
Transfers between geographic areas 3,847 -- -- (3,847) --
-------- -------- -------- -------- --------
Total Sales 30,777 13,679 673 (3,847) 41,282
Identifiable assets $ 34,440 $ 4,122 $ 4 $(21,184) $ 17,382
</TABLE>
Transfers between geographic areas are accounted for equivalent to an arm's
length basis.
F-21
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(12) GAIN ON SALE OF ASSETS
On October 29, 1997 the Company entered into a management agreement with
Elron, pursuant to which Elron shall manage certain assets as defined in the
purchase and sale agreement (collectively the MMI Assets) for its benefit and at
its risk and expense and shall pay all salaries and other employee related
expenses with respect to the MMI Assets and approximate 100 transferred
employees. As a result of the management agreement, the associated revenues and
costs of the MMI Assets have been excluded from the statement of operations
since October 30, 1997. As of December 31, 1997, assets held for sale, net
represents the net book value of the MMI Assets as of October 29, 1997. On
February 11, 1998, the Company received shareholder approval to sell to Elron
the MMI Assets. Upon sale, the Company received $8,273 of proceeds net of
transaction costs and recorded a gain of $6,518.
Unaudited pro forma operating results for the Company, assuming the sale of
assets occurred on January 1, 1997 is as follows:
December 31,
1997
-----------
(Unaudited)
Net sales $ 23,454
Net loss $ (40,233)
Basic and diluted net loss per share $ (3.33)
Shares used in computing profoma basic
and diluted net loss per share 12,079,264
For purposes of the pro forma operating results, the associated revenues
and costs of the MMI Assets have been excluded from the statement of operations
for 1997. The associated gain on the sale of assets has not been included in
accordance with the Securities and Exchange Commission regulations on
non-recurring charges.
(13) SCHEDULES OF VALUATION RESERVES
A summary of the reserve for doubtful accounts is as follows:
<TABLE><CAPTION>
OTHER
BALANCE, ADDITIONS BALANCE,
BEGINNING CHARGED TO END
OF YEAR TO EXPENSE ALLOWANCE WRITE-OFFS OF YEAR
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997 $ 1,191 $ 35 $ 1,801(1) $ 52 $ 2,975
Year ended December 31, 1998 2,975 85 -- 2,106(2) 954
Year ended December 31, 1999 954 738 -- 1,026 666
</TABLE>
(1) Includes $301 of additions arising through the acquisition of csd Software
GmbH and $1,500 of restructuring-related reserve.
(2) Includes $1,500 of restructuring-related write-offs.
F-22
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A summary of the accrued restructuring account is as follows:
<TABLE><CAPTION>
BALANCE, BALANCE,
BEGINNING CHARGED TO NON CASH CASH END
OF YEAR EXPENSE WRITE-OFFS EXPENDITURES OF YEAR
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997 $ -- $10,940 $(6,774) $(1,941) $ 2,225
Year ended December 31, 1998 2,225 -- -- (2,080) 145
Year ended December 31, 1999 145 -- -- (49) 96
</TABLE>
(14) SUBSEQUENT EVENT
On January 6, 2000, the Company announced that it would seek shareholder
approval to sell its Meeting Maker product line along with related marketing
systems and organization (the Assets) to Meeting Maker, Inc. In addition, on
January 6, 2000, the Company entered into a management agreement with Meeting
Maker, Inc., pursuant to which Meeting Maker, Inc. assumed operating control of
the assets and agreed to manage the Assets for its benefit and its risk and to
incur all related expenses including paying all salaries and other employee
related expenses with respect to the Assets and transferred employees. Upon
shareholder approval, the Company will record the transaction as a discontinued
operation under APB 30.
F-23
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ANNEX A
-------
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
ON TECHNOLOGY CORPORATION
AND
MEETING MAKER, INC.
JANUARY 3, 2000
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "AGREEMENT") is made effective as of the
3rd day of January, 2000 (the "MANAGEMENT ASSUMPTION DATE") by and between
Meeting Maker, Inc., a company organized under the laws of the Cayman Islands,
with its principal office at 880 Winter Street, Building Four, Waltham,
Massachusetts 02451-1449 (the "BUYER") and ON Technology Corporation, a Delaware
corporation with its principal office at 880 Winter Street, Building Four,
Waltham, Massachusetts 02451-1449 (the "COMPANY").
WHEREAS The Company owns, licenses and supports computer software known as
MeetingMaker, which is a group calendar and scheduling software products,
together with certain rights and other assets related to the foregoing, as more
fully described in this Agreement (the "ACQUIRED BUSINESS"); and
WHEREAS Subject to the terms and conditions of this Agreement, the Buyer
desires to purchase, and the Company desires to sell, all of the assets
comprising the Acquired Business.
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth and other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereby agree as follows:
1. Purchase and Sale of the Assets.
1.1 Purchase of the Assets.
(a) Subject to and upon the terms and conditions of this
Agreement, at the Closing (defined below) of the transactions
contemplated by this Agreement, the Company shall sell, transfer,
convey, assign and deliver to the Buyer, and the Buyer shall purchase,
acquire, accept, assume and pay for, all of the Company's right, title
and interest in and to the assets and rights listed on Schedule 1.1A
hereto, free and clear of all liens, charges, claims, pledges, security
interests and other encumbrances of any nature whatsoever, except as
otherwise listed on Schedule 2.3 hereto (the "ACQUIRED ASSETS").
(b) Notwithstanding the provisions of Section 1.1(a) above, there
shall be excluded from the assets, properties, rights and interests to
be transferred to the Buyer hereunder, the assets listed on Schedule
1.1B hereto (the "EXCLUDED ASSETS").
1.2 Consideration for the Acquired Assets.
(a) The purchase price (the "PURCHASE PRICE") to be paid by the
Buyer for the Acquired Assets shall be $1,000,000, payable as follows:
(i) Deposit of Portion of Purchase Price. Upon execution of
this Agreement the Buyer will deposit $300,000 with Epstein,
Becker & Green, P.C., as "ESCROW AGENT" as part of the Purchase
Price (the "INITIAL PAYMENT"). The Initial Payment shall be held
in and disbursed from escrow in accordance with the terms hereof
and the Escrow Agreement (Management Assumption).
(ii) Remainder of Purchase Price. The remaining $700,000 of
the Purchase Price to be paid by the Buyer to the Company shall be
paid on the Closing Date, by delivering to the Company the Buyer
Note (as defined in, and pursuant to Section 1.3(c)(i) below).
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(b) Warrant. The Buyer shall issue to the Company a warrant (the
"COMPANY WARRANT") to purchase shares of the Buyer in accordance with
the terms thereof, which warrant shall be in substantially the form
attached hereto as Exhibit A.
1.3 Management Assumption.
(a) Except with respect to the conditions precedent set forth in
Sections 7.1, 7.2 and 8.1 hereof, including the Company's obligation to
obtain the approval of its shareholders to the transactions
contemplated herein (the "SHAREHOLDER APPROVAL"), all of the Buyer's
and all of the Company's conditions precedent to the Closing have been
satisfied in all respects.
(b) Contemporaneously with the execution and delivery of this
Agreement, the Buyer and the Company shall execute and deliver (i) an
Escrow Agreement (Management Assumption) by and among the Buyer, the
Company, and Epstein, Becker & Green, P.C., as escrow agent (the
"DOCUMENT ESCROW AGENT"), pursuant to which the Closing Deliveries (as
defined in Section 8.3) shall be deposited with the Document Escrow
Agent, (ii) a Management Agreement (the "MANAGEMENT AGREEMENT"),
pursuant to which the Buyer shall manage the Acquired Assets for its
benefit and at its risk and expense and pursuant to which the Buyer
shall pay all salaries and other employee-related expenses with respect
to the Acquired Business, as more particularly set forth in the
Management Agreement, (iii) all exhibits to the Escrow Agreement
(Management Assumption) and the Management Agreement (including a
Security Agreement) and (iv) the Escrow Agent shall confirm receipt of
the Initial Payment.
(i) Within one (1) business day after receipt of a letter
authorizing the release of the legal opinion of the Company's
counsel (the "OPINION RELEASE INSTRUCTIONS"), which shall be in
the form attached as an exhibit to the Escrow Agreement
(Management Assumption) and which shall be signed by a member of
the firm of Epstein Becker & Green, P.C., the Document Escrow
Agent shall date each of the Closing Deliveries as of the date of
the Document Escrow Agent's receipt of the Opinion Release
Instructions (the "CLOSING DATE"), and release each of the Closing
Deliveries to the Buyer and to the Company, as indicated in the
upper right hand corner of the first page of each of the Closing
Deliveries.
(ii) As Escrow Agent with respect to the Initial Payment,
Epstein, Becker & Green, P.C. shall, within one (1) business day
after its release of the Opinion Release Instructions, disburse
the Initial Payment by wire transfer to the account specified in
Schedule 1.3(c) attached hereto.
(c) On the Closing Date:
(i) the Buyer shall issue to the Company a Promissory Note
(the "BUYER NOTE") in the principal amount of $700,000
representing the portion of the Purchase Price not paid on the
Closing Date, and which note shall be in substantially the form
attached hereto as Exhibit B,
(ii) the Company shall terminate the employment of the
Transferred Employees and the Buyer shall hire the Transferred
Employees, in accordance with the terms of the Transition
Agreement executed by the Buyer and the Company, dated as of the
date hereof (the "TRANSITION AGREEMENT"),
(iii) the Company shall pay to the Buyer a cash settlement in
an amount that is equal to the amount, if any, of Guaranteed
Receivables, less any amounts of Guaranteed Receivables that have
been collected and remitted to the Buyer pursuant to Section 4.10
of the Management Agreement,
(iv) the Company shall retain all uncollected Guaranteed
Receivables as of the Closing Date;
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<PAGE>
(v) the parties shall make the closing adjustments specified
in Section 4.9 of the Management Agreement and paragraph 4 of the
Transition Agreement. All payments referenced in clauses (ii),
(iv), and (vi) shall be effected by means of wire transfer to
accounts designated in writing by each party. The transactions
described in this Section 1.3(c) are referred to herein as the
"CLOSING"; and
(vi)the Buyers shall issue to the Company the Company Warrant.
(d) In the event that the Opinion Release Instructions are not
delivered to the Document Escrow Agent on or prior to 5:00 p.m., Boston
time on May 31, 2000 (the "TERMINATION DATE"), then (i) this Agreement
and the Management Agreement shall immediately terminate, (ii) the
Initial Payment shall be returned to the Buyer, and (iii) the Company
and the Buyer shall use their best efforts to transfer the management
of the Acquired Business and the Acquired Assets back to the Company,
in accordance with the terms of the Management Agreement.
(e) Notwithstanding anything herein to the contrary, in the event
of the occurrence or existence of any fact that would otherwise
constitute a breach of any of the Company's representations and
warranties herein that would not have occurred had the Closing occurred
on the Management Assumption Date (including, without limitation, any
breach that is caused by any act or omission of the Buyer pursuant to
the Buyer's obligations under the Management Agreement), then such
breach shall not be deemed to be a breach by the Company of such
representation or warranty.
(f) The Buyer and the Company agree that the only conditions
precedent to the Closing are the Shareholder Approval and the release
of the Opinion Release Instructions by the Escrow Agent.
Notwithstanding the discovery or occurrence, prior to, on, or after the
Management Assumption Date, of any matter whatsoever, including,
without limitation, the breach of any representation or warranty herein
or in any other agreement between the Buyer and the Company (regardless
of the extent of materiality), or any defect claim, damage, loss,
liability, cost or expense relating to any matter whatsoever
(regardless of the extent of materiality and whether or not latent),
including without limitation, the Acquired Business, the Acquired
Assets and the Transferred Employees, the sole recourse of each of the
Buyer and the Company shall be the indemnification provisions set forth
in Section 9 of this Agreement. The Buyer covenants and agrees that it
shall not take any other action to enjoin or otherwise hinder or delay,
in any manner whatsoever, the delivery of the Closing Deliveries and/or
the effectuation of the Closing.
1.4 Further Assurances. At any time and from time to time after the
Closing, at the Buyer's request and without further consideration, the
Company shall promptly execute and deliver such instruments of sale,
transfer, conveyance, assignment and confirmation, and take all such other
action, as the Buyer may reasonably request, more effectively to transfer,
convey and assign to the Buyer, and to confirm the Buyer's title to, all of
the Acquired Assets, to put the Buyer in actual possession and operating
control thereof.
1.5 Assumption of Liabilities.
(a) At the Closing, the Buyer shall deliver an instrument of
assumption of liabilities (the "INSTRUMENT OF ASSUMPTION"), which shall
be substantially in the form attached hereto as Exhibit C, pursuant to
which it shall assume and agree to perform, pay and discharge the
liabilities, obligations and commitments of the Company (the "ASSUMED
LIABILITIES") that are specifically set forth in Schedule 1.5 hereto.
(b) The Buyer shall not at the Closing assume or agree to perform,
pay or discharge, and the Company shall remain unconditionally liable
for, all obligations, liabilities and commitments, fixed or contingent,
of the Company other than the Assumed Liabilities (the "RETAINED
LIABILITIES").
1.6 Allocation of Purchase Price and Assumed Liabilities. Schedule 1.6
hereto sets forth an allocation of the aggregate amount of the Purchase
Price and the Assumed Liabilities among the Acquired Assets and the
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<PAGE>
Assumed Liabilities as provided in Section 1060 of the Internal Revenue
Code of 1986 and the regulations promulgated thereunder, and both the Buyer
and Company hereby agree to file all necessary tax returns consistent with,
and not to take any position on any income, transfer or gains tax return
inconsistent with, such agreed upon allocation.
1.7 Closing. The Management Assumption and the Closing shall occur in
the manner set forth in Section 1.2 above. The transfer of the Acquired
Assets to the Buyer shall be deemed to occur at 9:00 a.m., Boston time, on
the Closing Date.
2. Representations of the Company.
The Company represents and warrants to the Buyer that:
2.1 Organization.
The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
corporate power to own its properties, to carry on its business as now
being conducted, to execute and deliver this Agreement and the agreements
contemplated herein, and to consummate the transactions contemplated hereby
and thereby. The Company is duly qualified to do business and in good
standing in all jurisdictions in which its ownership of property or the
character of its business requires such qualification, except where the
failure to be so qualified will not have a material adverse effect on the
business and operations of the Company and its subsidiaries, taken together
as a whole. Certified copies of the Certificate of Incorporation and Bylaws
of the Company, as amended to date, have been previously delivered to the
Buyer, are complete and correct, and no amendments have been made thereto
or have been authorized since the date thereof.
2.2 Authorization. The execution and delivery by the Company of this
Agreement and the agreements provided for herein, and the consummation by
the Company of all transactions contemplated hereunder and thereunder, have
been duly authorized by all requisite corporate action, subject to receipt
of Shareholder Approval. This Agreement has been duly executed by the
Company. This Agreement and all other agreements and obligations entered
into and undertaken in connection with the transactions contemplated hereby
to which the Company is a party constitute the valid and legally binding
obligations of the Company enforceable against it in accordance with their
respective terms except as such enforceability may be limited by the
application of bankruptcy, insolvency, moratorium or other similar laws
affecting the enforcement of creditors' rights generally. The execution,
delivery and performance by the Company of this Agreement and the
agreements provided for herein, and the consummation by the Company of the
transactions contemplated hereby and thereby, will not, with or without the
giving of notice or the passage of time or both, (a) violate the provisions
of any law, rule or regulation applicable to the Company (b) violate the
provisions of the Certificate of Incorporation or Bylaws of the Company; or
(c) violate any judgment, decree, order or award of any court, governmental
body or arbitrator; or (d) conflict with or result in the breach or
termination of any term or provision of, or constitute a default under, or
cause any acceleration under, or cause the creation of any lien, charge or
encumbrance upon the properties or assets of the Company pursuant to, any
indenture, mortgage, deed of trust or other agreement or instrument to
which the Company is a party or by which the Company is or may be bound.
Schedule 2.2 hereto sets forth a true, correct and complete list of all
consents and approvals of third parties that are required in connection
with the consummation by the Company and of the transactions contemplated
by this Agreement. Except with respect to the Shareholder Approval, all
consents, approvals, authorizations and other requirements prescribed by
any law, rule or regulation which must be obtained or satisfied by the
Company and which are necessary for the consummation of the transactions
contemplated by this Agreement have been obtained and satisfied.
2.3 Ownership of the Acquired Assets. Schedule 2.3 hereto sets forth a
true, correct and complete list of all claims, liabilities, liens, pledges,
charges, encumbrances and equities of any kind affecting the Acquired
Assets (collectively, the "ENCUMBRANCES"). The Company is, and at the
Closing will be, the true and lawful owner of the Acquired Assets, and will
have the right to sell and transfer to the Buyer good, clear, record and
A-5
<PAGE>
marketable title to such Acquired Assets, free and clear of all
Encumbrances of any kind. Except as set forth in Schedule 2.3, the delivery
to the Buyer of the instruments of transfer of ownership contemplated by
this Agreement will vest good and marketable title to the Acquired Assets
in the Buyer, free and clear of all liens, mortgages, pledges, security
interests, restrictions, prior assignments, encumbrances and claims of any
kind or nature whatsoever. The Acquired Assets comprise all of the assets
that are used for the Acquired Business as it is currently conducted by
Seller.
2.4 Financial Statements; Books and Records. Attached hereto as
Schedule 2.4 are the unaudited balance sheet of the Company as of September
30, 1999 (the "CURRENT BALANCE SHEET") and the related statements of
income, shareholders' equity, retained earnings and changes in financial
condition of the Company for the nine (9) month period then ended
(collectively, the "CURRENT FINANCIAL STATEMENTS"). The Current Financial
Statements are consistent with the books and records of the Company and
have been prepared in accordance with United States generally accepted
accounting principles ("GAAP") applied on a consistent basis. The general
ledgers and books of account of the Company (i) are complete and correct in
all material respects.
2.5 Absence of Undisclosed Liabilities. Except as and to the extent (a)
reflected and reserved against in the Current Balance Sheet, (b) set forth
on Schedule 2.5 hereto, or (c) incurred in the ordinary course of business
after the date of the Current Balance Sheet and not material in amount,
either individually or in the aggregate, the Company has no liability or
obligation, secured or unsecured, whether accrued, absolute, contingent,
unasserted or otherwise, which is material to the condition (financial or
otherwise) of the Acquired Business.
2.6 Litigation. Except as set forth on Schedule 2.6 hereto, with
respect to the Acquired Business, (a) there is no action, suit or
proceeding to which the Company is a party pending or, to the knowledge of
the Company, threatened before any court or governmental agency, authority,
body or arbitrator that would, if decided adversely to the Company, have a
material adverse effect upon the Acquired Business and/or the Acquired
Assets; (b) the Company has not been permanently or temporarily enjoined by
any order, judgment or decree of any court or any governmental agency,
authority or body from engaging in or continuing any conduct or practice;
and (c) there is not in existence on the date hereof any order, judgment or
decree of any court, tribunal or agency enjoining or requiring the Company
to take any action of any kind.
2.7 Accounts Receivable; Inventory.
(a) Schedule 2.7(a) hereto sets forth a true and correct list of
the accounts receivable of the Company that will constitute a part of
the Acquired Assets and all deposits and prepayments with respect to
such accounts receivable (collectively, the "GUARANTEED RECEIVABLES").
All Guaranteed Receivables, as shown on Schedule 2.7(a), are net of
royalty and maintenance fee obligations. The Guaranteed Receivables are
collectible at 100% of their respective amount stated on such Schedule
within 90 days after the date that they were created.
(b) The inventory of the Company that are Acquired Assets (the
"INVENTORY") consists of raw materials and supplies, goods in process
and finished goods, all of which were used by the Company in connection
with the Acquired Business. The Inventory is listed on Schedule 2.7(b),
hereto. The Inventory has a minimum net book value, taken in the
aggregate, of $78,000, computed in accordance with the Company's usual
and customary inventory valuation policies and GAAP.
(c) In the event that the Buyer's customers that are distributors
or resellers return inventory to the Buyer and provided that (i) the
inventory was in the customer's actual possession on the Management
Assumption Date, (ii) such inventory was subject to the inventory
rotation or return provisions of a distribution or reseller agreement
between the customer and the Company that was in effect on the
Management Assumption Date, (iii) the Buyer provides such inventory to
the Company for its inspection within 30 business days of the Buyer's
receipt of such inventory, (iv) such inventory is returned to the Buyer
in accordance with the stock rotation or return terms of the applicable
distributor or reseller agreement, and (v) the Buyer provides the
Company with a written statement indicating the rotation value of
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such inventory (based upon the per-unit price schedule set forth in
Schedule 2.7(c) hereto), then within 60 days of its receipt of such
statement, the Company shall pay to the Buyer the rotation value of
such inventory, and the Company shall issue a credit or repay its
customer in accordance with the provisions of the applicable
distributor or reseller agreement. The Buyer may not exercise the
foregoing inventory rotation privilege on more than six occasions. The
Buyer shall not issue a credit or rebill any customers in connection
with accounts receivable related to any such stock rotation or return.
2.8 Tax Matters. All tax returns and reports of the Company required by
law to be filed have been filed and are complete and correct in all
respects, and all material taxes and levies of every kind, character or
description upon the Company or upon any of its properties, assets, income
or franchises which are or were owed, have been paid in full, other than
those currently payable without penalty or interest, those currently under
appeal (for which adequate reserves have been taken) and those which would,
notwithstanding any such non-payment, not have a material adverse effect on
Acquired Business and/or the Acquired Assets. No tax lien has been filed
and to the knowledge of the Company no claim is being asserted with respect
to, any taxes or levies owed by, or with respect to any properties, assets,
income or franchises of, the Company. The Company has withheld and timely
paid all taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor, or
other third party.
2.9 Contracts and Commitments.
(a) Schedule 2.9(a) hereto contains a true, complete and correct
list and description of the following contracts and agreements, whether
written or oral, which directly affect the Acquired Business and/or the
Acquired Assets (collectively, the "CONTRACTS") which will continue
after the Closing Date: (i) all loan agreements, indentures, mortgages
and guaranties to which the Company is a party or by which the Company
is bound; (ii) all pledges, conditional sale or title retention
agreements, security agreements (including but not limited to
maintenance agreements), equipment obligations, personal property
leases and lease purchase agreements to which the Company is a party or
by which the Company or any of its property is bound; (iii) all prepaid
maintenance contracts; (iv) all contracts, agreements, commitments,
purchase orders or other understandings or arrangements to which the
Company is a party or by which the Company or any of its property is
bound (including upgrade, restocking and return agreements) which
either involve payments or receipts by the Company of more than $25,000
in the case of any single contract, agreement, commitment,
understanding or arrangement under which full performance (including
payment) has not been rendered by all parties thereto, or may
materially adversely effect the condition (financial or otherwise) or
the properties, assets, business or prospects of the Company; (v) all
collective bargaining agreements, employment and consulting agreements,
noncompetition agreements or arrangements, executive compensation
plans, bonus plans, deferred compensation agreements, pension plans,
retirement plans, employee stock option or stock purchase plans and
other employee benefit plans, agreements, arrangements or commitments
to which the Company is a party; (vi) all agency, fulfillment house,
distributor, agency distributor, sales representative, franchise or
similar agreements to which the Company is a party; (vii) all
contracts, agreements or other understandings or arrangements between
the Company and its affiliates; and (viii) all leases of personal
property, whether operating, capital or otherwise, under which the
Company is lessor or lessee, and (ix) the lease for the premises at
which the Company conducts the Acquired Business.
(b) Except as set forth on Schedule 2.9(b) hereto:
(i) each Contract is a valid and binding agreement of the
Company, enforceable against the Company in accordance with its
terms, and the Company does not have any knowledge that any
Contract is not a valid and binding agreement of the other parties
thereto; (ii) the Company has fulfilled all material obligations
required pursuant to the Contracts to have been performed by the
Company on its part prior to the date hereof, and the Company has
no reason to believe that it will not be able to fulfill, when
due, all of its obligations under the Contracts that remain to be
performed after the date hereof; (iii) the Company is not in
breach of or default under any term of any Contract, and to the
knowledge of the Company, no event has occurred which with the
passage of time or giving of notice or both would constitute such
a breach or default; and (iv) to the knowledge of the Company
there is no
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existing breach or default by any other party to any Contract.
True, correct and complete copies of all Contracts, as amended to
date, have previously been delivered by the Company to the Buyer.
2.10 Compliance with Agreements and Laws. Except as set forth on
Schedule 2.10 hereto, the Company has all licenses, permits and
certificates, including environmental, health and safety permits, from
federal, state, provincial and local authorities necessary to conduct the
Acquired Business and own and operate the Acquired Assets (collectively,
the "PERMITS"). Schedule 2.10 hereto sets forth a true, correct and
complete list of all such Permits, copies of which have previously been
delivered by the Company to the Buyer. To the Company's knowledge the
Acquired Business as conducted on the date hereof does not violate, in any
material respect, any federal, state, provincial, local or foreign laws,
regulations or orders the enforcement of which would have a material
adverse effect on the Acquired Business.
2.11 Employee Relations. The Company is in compliance with all federal,
state, provincial and municipal laws respecting employment and employment
practices, terms and conditions of employment, and wages and hours, and is
not engaged in any unfair labor practice, and there are no arrears in the
payment of wages or social security taxes. None of the Company's employees
are represented by a union and to the knowledge of the Company there have
been no union organizing efforts conducted at the Company and none is now
being conducted. The Company has not had at any time, nor, to the knowledge
of the Company is there now threatened, any strike. Schedule 2.11 hereto
sets forth a true, correct and complete list as of the date hereof showing
each employee of the Company that is expected to transfer employment to the
Buyer (collectively, the "TRANSFERRED EMPLOYEES"), his or her position,
salary, benefits and bonuses (if any). The Company has no knowledge that
any Transferred Employee will, or is likely to, decline the offer of
employment by Buyer at the Closing.
2.12 Employee Benefit Plans.
(a) Schedule 2.12 hereto contains a true, correct and complete
list of all pension, benefit, profit sharing, trust agreements,
insurance contracts, retirement, deferred compensation, welfare,
insurance, disability, bonus, vacation pay, severance pay and other
similar plans, programs and agreements, whether reduced to writing or
not, relating to the Transferred Employees (the "EMPLOYEE PLANS"). All
Employee Plans comply in all respects with the requirements prescribed
by all statutes, orders or governmental rules or regulations currently
in effect, including Employee Retirement Income Security Act of 1974,
as amended ("ERISA") and the Internal Revenue Code of 1986, as amended
(the "CODE") applicable to such Employee Plans. The Company has in all
respects performed all obligations required to be performed by it under
the Employee Plans. The Company has not ever been obligated to
contribute to any "MULTIEMPLOYER PLAN," as such term is defined in
Section 3(37) of ERISA and has no "defined benefit plan," as such term
is defined in Section 3(35) of ERISA.
(b) Prohibited Transactions. To the knowledge of the Company,
neither the Company nor any of its directors, officers, employees or
agents, or any "party in interest" or "disqualified person," as such
terms are defined in Section 3 of ERISA, and Section 4975 of the ode
has, with respect to any Employee Plan, engaged in or been a party to
any nonexempt "prohibited transaction," as such term is defined in
Section 4975 of the Code or Section 406 of ERISA, in connection with
which, directly or indirectly, the Buyer or any of its affiliates,
directors or employees or any Employee Plan or any related funding
medium could be subject to either a penalty assessed pursuant to
Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code.
(c) Copies of Employee Plans and Related Documents. The Company
has previously delivered to the Buyer true, correct and complete copies
of all Employee Plans that have been reduced to writing and written
descriptions of all Employee Plans that have not been reduced to
writing, and all agreements, including trust agreements and insurance
contracts, related to such Employee Plans, and the Summary Plan
Description and all modifications thereto for each Employee Plan
communicated to employees.
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(d) Qualifications; Claims. Each Employee Plan and all amendments
thereto intended to qualify under Section 401(a) of the Code have been
determined by the Internal Revenue Service to so qualify, and the
trusts created thereunder have been determined to be exempt from tax
under the provisions of Section 501(a) of the Code, and nothing has
since occurred, or will occur prior to the Closing Date, which might
cause the loss of such qualification or exemption. Except as set forth
on Schedule 2.12(d), to the knowledge of the Company there are no
pending claims, suits or other proceedings by present or former
employees of the company or its affiliates, plan participants,
beneficiaries or spouses of any of the above, including claims against
the assets of any trust, involving any Employee Plan, or any rights or
benefits thereunder, other than ordinary and usual claims for benefits
by participants or beneficiaries.
(e) No Implied Rights. Nothing expressed or implied herein shall
confer upon any past or present employee of the Company, its
representatives, beneficiaries, successors and assigns, nor upon any
collective bargaining agent, any rights or remedies of any nature,
including, without limitation, any rights to employment or continued
employment with the Buyer, the Company, or any successor or affiliate;
nor shall the Buyer, the Company or their affiliates be precluded or
prevented from terminating or amending any Employee Plan.
2.13 Regulatory Approvals. All consents, approvals, authorizations or
other requirements prescribed by any law, rule or regulation which must be
obtained or satisfied by the Company and which are necessary for the
execution and delivery by the Company of this Agreement or any documents to
be executed and delivered by the Company in connection herewith are set
forth on Schedule 2.13 hereto and have been, or prior to the Closing Date
will be, obtained and satisfied.
2.14 Intellectual Property. Schedule 2.14 hereto sets forth a true,
correct and complete list of items of Intellectual Property (as defined in
Schedule 1.1A), including but not limited to copyrights, copyright
registrations, trademarks, trademark registrations, tradenames, patents,
patent registrations, domain names, and trade secrets, owned by, or used in
the business of, the Company and which constitute Acquired Assets. Except
as otherwise disclosed in Schedule 2.14: (i) the Company is the sole and
exclusive owner of all right, title and interest in and to the Intellectual
Property and all designs, permits, labels and packages used on or in
connection therewith, free and clear of all liens, security interests,
charges, encumbrances, and other adverse claims; (ii) the Company has the
right and authority to use the Intellectual Property in connection with the
conduct of its business in the manner presently conducted, and, to the
knowledge of the Company, such use does not conflict with, infringe upon or
violate any rights of any other person, corporation or entity; (iii) the
Company has not received notice of a pleading or threatened claim,
interference action or other judicial or adversarial proceeding against the
Company alleging that or questioning whether any of the Intellectual
Property infringes any patent, trademark, trade name, copyright, trade
secret or other property right of a third party, or that it is illegally or
otherwise using the trade secrets, formulae or property rights of others;
and (iv) there are no outstanding, disputes or other disagreements with
respect to any licenses or similar agreements or arrangements described in
Schedule 2.14 or with respect to infringement by a third party of any of
the Intellectual Property. Each item of Intellectual Property owned or used
by the Company immediately prior to the Closing will be owned or licensed
for use by the Buyer on identical terms and conditions immediately
subsequent to the Closing.
2.15 Tangible Personal Property. Schedule 2.15 hereto sets forth a
true, correct and complete list (the "PERSONAL PROPERTY LIST") of all
equipment, furniture, leasehold improvements and other tangible personal
property that constitute Acquired Assets and that has a book value, with
respect to any individual item, of at least $500. All such tangible
personal property is in good operating condition and repair, ordinary wear
and tear excepted.
2.16 Absence of Changes. Except as disclosed on Schedule 2.16 or
otherwise approved in writing by Buyer, since the date of the Current
Balance Sheet, there has not been with respect to the Acquired Business,
any (a) transaction by the Company except in the ordinary course of
business as conducted during the 12 month period ending on that date; (b)
capital expenditures exceeding $50,000 or Inventory net movement exceeding
$50,000, in each case in the aggregate; (c) physical destruction, damage
to, or loss of any Acquired Asset (whether or not covered by insurance)
that, individually or in the aggregate had a material adverse effect on the
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Acquired Business, taken as a whole; (d) any increase in compensation
payable to, or any employment, bonus or compensation agreement entered into
with, any Transferred Employees (other than those made after consultation
with Buyer); (e) change in accounting methods or practices (including,
without limitation, changes in depreciation or amortization policies or
rates) by the Company; (f) upward revaluation of the Acquired Assets; (g)
sale or transfer of any asset of the Acquired Business except in the
ordinary course of business; (h) waiver or release of any material right or
claim of the Company that is directly related to the Acquired Business,
except in the ordinary course of business; or (i) any payment or provision
with respect to any employee benefit plan, except in the ordinary course of
the administration of such plans.
2.17 Product and Warranty Liability. Except for returns of products
under the Company's 30-day, money back guarantee return policy, to the
Company's knowledge, there are no pending warranty or product liability
claims against the Company that are related to the Acquired Business.
2.18 Accounts Payable. Since the date of the Current Balance Sheet, the
Company has been paying its vendors in the ordinary course of business.
2.19 No Misleading Statements. This Agreement, the information and the
schedules referred to herein do not, when taken as a whole, include any
untrue statement of a material fact and do not omit to state any material
fact necessary to make the statements contained herein or therein, in light
of the circumstances under which they were made, not misleading in any
material respect.
3. Representations of the Buyer.
The Buyer represents and warrants to the Company as follows:
3.1 Organization and Authority. The Buyer is a company duly organized,
validly existing and in good standing under the laws of the Cayman Islands,
and has all requisite power and authority (corporate and other) to own its
properties and to carry on its business as now being conducted. The Buyer
has complete power to execute and deliver this Agreement and the agreements
contemplated herein, and to consummate the transactions contemplated hereby
and thereby.
3.2 Authorization. The execution and delivery of this Agreement by the
Buyer, and the agreements provided for herein, and the consummation by the
Buyer of the transactions contemplated hereby and thereby, have been duly
authorized by all requisite corporate action. This Agreement and all such
other agreements and written obligations entered into and undertaken in
connection with the transactions contemplated hereby constitute the valid
and legally binding obligations of the Buyer, enforceable against the Buyer
in accordance with their respective terms except as such enforceability may
be limited by the application of bankruptcy, insolvency, moratorium or
other similar laws affecting the enforcement of creditors' rights
generally. The execution, delivery and performance of this Agreement and
the agreements provided for herein, and the consummation by the Buyer of
the transactions contemplated hereby and thereby, will not, with or without
the giving of notice or the passage of time or both, (a) violate the
provisions of any material law, rule or regulation applicable to the Buyer;
(b) violate the provisions of the Buyer's Certificate of Incorporation or
Bylaws; (c) violate any judgment, decree, order or award of any court,
governmental body or arbitrator; or (d) conflict with or result in the
breach or termination of any material term or provision of, or constitute a
default under, or cause any acceleration under, or cause the creation of
any lien, charge or encumbrance upon the properties or assets of the Buyer
pursuant to, any indenture, mortgage, deed of trust or other agreement or
instrument to which the Buyer is a party or by which the Buyer is or may be
bound.
3.3 Regulatory Approvals. All consents, approvals, authorizations and
other requirements prescribed by any law, rule or regulation which must be
obtained or satisfied by the Buyer and which are necessary for the
consummation of the transactions contemplated by this Agreement have been,
or will be prior to the Closing Date, obtained and satisfied.
4. Access to Information; Public Announcements.
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4.1 Access to Management, Properties and Records. From the date of this
Agreement until the Closing Date, the Company shall afford the officers,
attorneys, accountants and other authorized representatives of the Buyer
reasonable access upon reasonable notice and during normal business hours
to all management personnel, offices, properties, books and records of the
Company, for the sole purpose of facilitating the closing of the
transactions contemplated hereunder and to the extent directly related to
the Acquired Assets and the Transferred Employees. The Company shall
furnish to the Buyer such financial and operating data and other
information as to the business of the Company related to the Acquired
Assets and the Transferred Employees as the Buyer shall reasonably request.
The Buyer shall also have the right to contact the Company's vendors,
customers and other persons having business dealings with the Company for
the sole purpose of facilitating the closing of the transactions
contemplated hereunder relating to the Acquired Assets.
4.2 Public Announcements. Without the prior written consent of the
other party, neither the Company nor the Buyer will disclose the fact that
this Agreement exists or any of the terms hereof, unless and only to the
extent that such disclosure (and only after consultation with the other
party) is, in the opinion of the other party's counsel, required by
applicable securities laws. The Company is a publicly traded company and
United States securities laws prohibit any person or entity who has
received material, non-public information concerning a publicly traded
company from purchasing or selling securities of such company or from
communicating such information to any person under circumstances in which
it is reasonably foreseeable that such person is likely to purchase or sell
such securities while in possession of material, non-public information.
The fact that the Buyer and the Seller have entered into this Agreement,
and the terms of this Agreement, could be considered material, non-public
information. Notwithstanding the foregoing, each party acknowledges that
the other may desire to issue a press release regarding the execution of
this Agreement, and each party will cooperate with the other to diligently
review and comment on, and not unreasonably withhold their respective
consent to, any such press release.
5. Pre-Closing Covenants of the Company and the Buyer.
From and after the date hereof and until the Closing Date, the Buyer and
the Company agree as follows:
5.1 Absence of Material Changes. Without the prior written consent of
the Company, which consent shall not be unreasonably withheld, the Buyer
shall not take any actions that are prohibited pursuant to Section 4.7 of
the Management Agreement.
5.2 Continued Truth of Representations and Warranties. Neither the
Company nor the Buyer will take any actions which would result in any of
the representations or warranties set forth in Sections 2 or 3 hereof
becoming untrue in any material respect.
5.3 Reports, Taxes. With respect to the Acquired Business and the
Acquired Assets, the Buyer will duly and timely file all reports or returns
required to be filed as a result of the Buyer's management of the Acquired
Business with federal, state, provincial, local and foreign authorities and
will promptly pay all federal, state, provincial, local and foreign taxes,
assessments and governmental charges levied or assessed upon it or any of
its properties (unless contesting such in good faith and adequate provision
has been made therefor).
5.4 Communications with Customers and Suppliers. The Company and the
Buyer will cooperate in communications with suppliers and customers in
connection with the conveyance of the Acquired Assets to the Buyer on the
Closing Date.
5.5 Shareholder Approval. Subject to the fiduciary duties of the
Company's Board of Directors, the Company shall use its best efforts to
obtain the Shareholder Approval, in accordance with applicable law and in
accordance with the Company's organizational documents. Without limiting
the foregoing, the Company shall prepare a Proxy Statement for a Special
Meeting of Shareholders to solicit the Shareholder Approval and shall
submit such Proxy Statement to the Buyer for its review and, in the case of
any information therein with respect to the Buyer, for the Buyer's
approval, which shall not be unreasonably withheld or delayed.
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5.6 No Solicitations. From and after the date hereof, the Company,
without the prior written consent of the Buyer, will not, and will not
authorize any of its officers, employees, directors, stockholders or other
representatives to, directly or indirectly, solicit, initiate or encourage
or take any other action to facilitate knowingly any inquiries or the
making of any proposal that constitutes or could be reasonably expected to
lead to an Alternative Proposal (as defined below) from any person or
engage in any discussions or negotiations relating thereto or accept any
Alternative Proposal or make or authorize any statement, recommendation or
solicitation in support of any Alternative Proposal; provided, however,
that notwithstanding any other provision hereof, the Company may (a) at any
time prior to the time that the Company's stockholders shall have voted to
approve this Agreement and the transactions contemplated hereby, engage in
discussions or negotiations with a third party who (without any
solicitation, initiation, encouragement, discussion or negotiation,
directly or indirectly, by or with the Company or any officer, employee,
director, stockholder or other representative of the Company after the date
hereof) seeks to initiate such discussions or negotiations and may furnish
such third party with information concerning the Acquired Business and the
Acquired Assets if, and only to the extent that, (i) (x) such third party
has first made, after the date hereof, an Alternative Proposal in writing,
the terms of which reflect a superior transaction (including, without
limitation, the impact on the Transferred Employees to the extent
appropriate) than the transactions contemplated by this Agreement and has
demonstrated that the funds necessary for the Alternative Proposal are
likely to be available (as determined in good faith in each case by the
Company's Board of Directors after consultation with its financial
advisors) and (y) the Company's Board of Directors shall have determined in
good faith, on the basis of advice of outside counsel, that such action is
necessary for the Board of Directors to comply with the fiduciary duties to
stockholders under applicable law and (ii) prior to furnishing information
to our entering into discussions or negotiations with such person, the
Company receives from such person an executed confidentiality agreement in
usual and customary form; or (b) comply with Rule 14(e)-(2) promulgated
under the Securities and Exchange Act of 1934, as amended, with regard to a
tender or exchange offer. The Company shall not release any third party
from or waive any provision of, any standstill agreement to which it is a
part or any confidentiality agreement between it and another person who has
made, or who may reasonably be considered likely to make, an Alternative
Proposal, unless its Board of Directors shall determine in good faith, on
the basis of advice of outside legal counsel, that such action is necessary
for the Board of Directors to comply with its fiduciary duties to
stockholders under applicable law. The Company shall notify the Buyer in
writing of any such inquiries (that are or appear to be serious or
legitimate) offers of proposals (including the terms and conditions of any
such offer or proposal, the identity of the person making it, and a copy of
any written Alternative Proposal), as promptly as practicable and in any
event within 48 hours after the receipt thereof, shall keep the Buyer
informed of the status and details of any such inquiry, offer or proposal,
and shall give the Buyer 5 days advance written notice of any agreement to
be entered into with, or any information to be supplied to, any person
making such inquiry, offer or proposal.
The term "ALTERNATIVE PROPOSAL" shall mean a proposal or offer (other
than by the Buyer) for a stock purchase, asset acquisition, merger,
consolidation or other business combination involving the Acquired Business
or any proposal to acquire in any manner a direct or indirect, majority
equity interest in the Company, or all or substantially all of the Acquired
Assets.
5.7 Cooperation to Obtain Third-Party Consents. The Company and Buyer
shall cooperate with one another and use their commercially reasonable
efforts to obtain the consents and approvals of third parties listed on
Schedule 2.2.
6. Ancillary Agreements.
6.1 Ancillary Agreements. The Company and the Buyer agree that, except
with respect to the conditions set forth in Sections 7.1 and 7.2 below, all
of the conditions precedent to the Closing have been satisfied. The Buyer
and the Company shall each use their best efforts to obtain the assignments
and consents set forth in Section 6.2 below (the "ANCILLARY AGREEMENT") on
or prior to the 45th day following the Management Assumption Date. The
Company agrees to pay the amounts specified in Section 6.2 below in
connection with any such Ancillary Agreement (the "ACTUAL DAMAGES"). The
Buyer and the Company shall use their best
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efforts to agree upon the Actual Damages, if any, on or prior to the
Closing Date, and if the parties are unable to agree by such date then the
Actual Damages shall, at the opinion of the Buyer or the Company, be
determined by arbitration conducted in accordance with the provisions of
Subsection 12.3 below. The Actual Damages shall constitute the Buyer's
complete and liquidated damages due to a failure to satisfy the Ancillary
Agreement. The failure to satisfy the Ancillary Agreement shall not estop
the Closing or the delivery of the Purchase Price as set forth herein.
6.2 Transferred Premises. The Buyer shall obtain the agreement of BGS
Systems, Inc. and 880 Winter Street, LLC., as sub-landlord and landlord,
respectively, to the sub-sublease of premises located at 880 Winter Street,
Building Four, Waltham, Massachusetts, and specifically identified in the
Sub-sublease Agreement by and between the Buyer and the Company, dated as
of the Closing Date, it being agreed that if such sub-sublease requires the
payment of any sums in addition to those already paid by the Company, such
additional amounts shall constitute Actual Damages.
6.3 Agreements to Be Deposited into Escrow. The Ancillary Agreement
specified in Section 6.2 above, shall, upon their execution by the
applicable parties, be deposited with the Document Escrow Agent pursuant to
the Escrow Agreement (Management Assumption) and shall constitute Closing
Deliveries for purposes of such Escrow Agreement.
7. Conditions to Obligations of the Buyer.
The obligations of the Buyer under this Agreement are subject solely to the
conditions specified in Sections 7.1 and 7.2 below.
7.1 Opinion Release Instructions. The release of the Opinion Release
Instructions, in accordance with Section 1.3 above.
7.2 Accounts Receivable. The Company shall have paid to the Buyer all
amounts due with respect to the Guaranteed Receivables, as set forth in
Section 1.3(c)(iv) herein.
7.3 Closing Deliveries. The Document Escrow Agent has received at least
two fully executed originals of each of the following documents:
(a) an Assignment and Assumption of Contracts;
(b) the Management Agreement and all exhibits and schedules
thereto;
(c) an opinion of Epstein Becker & Green, P.C., counsel to the
Company, in the form attached hereto as Exhibit D;
(d) a bill of sale in the form attached hereto as Exhibit E;
(e) an Instrument of Assumption of Liabilities;
(f) the Escrow Agreement (Management Assumption), together with
the delivery of the Closing Deliveries to the Escrow Agent;
(g) a certificate signed by the Secretary of the Company attesting
to the incumbency of the Company's officers, the authenticity
of the resolutions authorizing the transactions contemplated
by this Agreement, and the authenticity and continuing
validity of the charter documents delivered pursuant to
Section 2.1;
(h) a cross-receipt executed by the Buyer and the Company (the
"CROSS RECEIPT"); and
(i) an Assignment of Trademarks.
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8. Condition to Obligations of the Company.
8.1 Conditions Precedent. The obligations of the Company under this
Agreement are subject solely to (i) the delivery of the Opinion Release
Instructions to the Document Escrow Agent, as set forth in Section 1.2
above (ii) the payment of $300,000 of the Purchase Price to the Company, as
set forth in Section 1.2(b) above, and (iii) receipt of the Buyer Note, as
set forth in Section 1.3(c)(i) above.
8.2 Opinion of Buyer's Counsel. On the Management Assumption Date, the
law firm of Morse, Barnes-Brown & Pendleton, P.C. ("MBBP"), counsel for the
Buyer, shall deliver an opinion to the Company, in the form agreed upon by
the parties. On the Closing Date, the Buyer shall cause MBBP to deliver a
bring-down opinion to the Company, in the form attached hereto as Exhibit
F. The foregoing condition may be waived by the Company in its sole
discretion.
8.3 Closing Deliveries. The Document Escrow Agent has received at
least:
(a) two fully executed originals of a certificate signed by the
Secretary of the Buyer attesting to the incumbency of the Buyer's
officers, the authenticity of the resolutions authorizing the
transactions contemplated by this Agreement;
(b) one fully executed original of the Buyer Note; and
(c) one fully executed original of the Company Warrant.
The documents described in Section 7.3 and 8.3 of this Agreement, are
referred to herein as the "CLOSING DELIVERIES").
9. Indemnification.
9.1 By the Company. The Company hereby indemnifies and hold harmless
the Buyer from and against all claims, damages, losses, liabilities, costs
and expenses, including, without limitation, settlement costs and any
legal, accounting or other expenses for investigating or defending any
actions or threatened actions (collectively, the "LOSSES"), in connection
with any breach of any representation, warranty, covenant or condition made
by the Company in this Agreement, or in connection with any obligation of
the Company with respect to the Transferred Employees and/or the Acquired
Business that arose prior to the Management Assumption Date.
9.2 By the Buyer. The Buyer hereby indemnifies and holds harmless the
Company from and against all Losses in connection with any breach of any
representation, warranty, covenant or condition made by the Buyer in this
Agreement, or in connection with any obligation of the Buyer with respect
to the Transferred Employees and/or the Acquired Business (unless due
directly from the Company's inability to obtain Shareholder Approval) that
arises on or after the Management Assumption Date, provided, however, that
if Shareholder Approval is not obtained as provided herein, then only with
respect to matters that arise on or before the Termination Date.
9.3 Claims for Indemnification. Whenever any claim shall arise for
indemnification under this Section 9, the Buyer, on the one hand, or the
Company on the other hand, seeking indemnification (the "INDEMNIFIED
PARTY"), shall promptly notify the other party hereto (the "INDEMNIFYING
PARTY") of the claim and, when known, the facts constitute-ting the basis
for such claim. In the event of any such claim for indemnification
hereunder resulting from or in connection with any claim or legal
proceedings by a third party, the notice shall specify, if known, the
amount or an estimate of the amount of the liability arising therefrom. The
Indemnified Party shall not settle or compromise any claim by a third party
for which it is entitled to indemnification hereunder without the prior
written consent, which shall not be unreasonably withheld or delayed, of
the Indemnifying Party; provided, however, that if suit shall have been
instituted against the Indemnified Party and the Indemnifying Party shall
not have taken control of such suit after notification thereof
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as provided in Section 9.4 of this Agreement, the Indemnified Party shall
have the right to settle or compromise such claim upon giving notice to the
Indemnifying Party as provided in Section 9.4.
9.4 Defense of any Claim. In connection with any claim which may give
rise to indemnity hereunder resulting from or arising out of any claim or
legal proceeding by a third party, the Indemnifying Party may, upon written
notice to the Indemnified Party, assume the defense of any such claim or
legal proceeding. If the Indemnifying Party assumes the defense of any such
claim or legal proceeding, the Indemnifying Party shall select counsel
reasonably acceptable to the Indemnified Party to conduct the defense of
such claims or legal proceedings and at the sole cost and expense of the
Indemnifying Party shall take all steps necessary in the defense or
settlement thereof. The Indemnifying Party shall not consent to a
settlement of, or the entry of any judgment arising from, any such claim or
legal proceeding, without the prior written consent of the Indemnified
Party (which consent shall not be unreasonably withheld or delayed). The
Indemnified Party shall be entitled to participate in (but not control) the
defense of any such action, with its own counsel and at its own expense. If
the Indemnifying Party does not assume the defense of any such claim or
litigation resulting therefrom within 60 days after the date such claim is
made or pursue such claim in a reasonably prudent manner: (a) the
Indemnified Party may defend against such claim or litigation in such
manner as it may deem appropriate, including, but not limited to, settling
such claim or litigation, after giving notice of the same to the
Indemnifying Party, on such terms as the Indemnified Party may deem
appropriate, and (b) the Indemnifying Party shall be entitled to
participate in (but not control) the defense of such action, with its
counsel and at its own expense. If the Indemnifying Party thereafter seeks
to question the manner in which the Indemnified Party defended such third
party claim or the amount or nature of any such settlement, the
Indemnifying Party shall have the burden to prove by a preponderance of the
evidence that the Indemnified Party did not defend or settle such third
party claim in a reasonably prudent manner.
9.5 Survival of Representations; Claims for Indemnification. If the
Closing occurs, all representations and warranties made in this Agreement,
and in the schedules and exhibits hereto, and in all certificates delivered
pursuant hereto shall survive through and until the expiration of the 12th
full calendar month following the Management Assumption Date (the
"TERMINATION DATE"). After the Termination Date, all such representations
and warranties shall immediately expire except with respect to claims, if
any, asserted in writing on or prior to the Termination Date. All claims
and actions for indemnity hereunder shall be asserted and maintained in
writing by a party hereto on or prior to the Termination Date.
9.6 Payment of Indemnification Claims. All indemnification hereunder
shall be effected by payment of cash or delivery of a cashier's check to
the Indemnified Party in the amount of the indemnification liability.
9.7 Exclusion for Certain Indemnity Obligations. Notwithstanding
anything to the contrary in this Section 9 or elsewhere in this Agreement,
and except for consensual liens created by the Company or the Buyer in
violation of the respective Security Agreements referenced in Sections 9.1
and 9.2 hereof (as to which Losses shall not be subject to the limitations
and exclusions set forth in this Section 9.7), neither Indemnifying Party
shall be obligated to pay any Losses suffered by the appropriate
Indemnified Party unless and until the aggregate amount of all such Losses
exceeds $50,000 (the "RECOVERABLE"). Once the aggregate amount of such
Losses exceeds the Recoverable, such Indemnifying Party shall be required
to pay Losses only in excess of the Recoverable and in an aggregate amount
not to exceed, in any event $300,000 (the "CAP"); provided, however, that
the Cap and the Recoverable shall apply to only those Retained Liabilities
that are within the scope of the representations and warranties in Section
2 above. In no event shall either party be liable under this Agreement,
whether pursuant to this Section 9 or otherwise, for any amount in addition
to, or from sources other than, those specified in this Section 9.7.
10. Post-Closing Agreements.
The Company and the Buyer, as applicable, agree that from and after the
Management Assumption Date:
10.1 Proprietary Information.
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The Company shall hold in confidence, and use its best efforts to
have the Company's officers, directors and personnel hold in
confidence, all knowledge and information of a secret or confidential
nature with respect to the Acquired Business and the Acquired Assets
and shall not disclose, publish or make use of the same without the
consent of the Buyer, except to the extent that such information shall
have become public knowledge other than by breach of this Agreement by
the Company. The Company agrees that the remedy at law for any breach
of this Section 10.1 would be inadequate and that the Buyer shall be
entitled to injunctive relief in addition to any other remedy it may
have on breach of any provision of this Section 10.1.
10.2 Sharing of Data.
(a) The Company shall have the right for a period of three (3)
years following the Closing Date to have reasonable access to such
books, records and accounts, including financial and tax information,
correspondence, production records, employments records and other
similar information as are transferred to the Buyer pursuant to the
terms of this Agreement for the limited purposes of concluding its
involvement in the business of the Company related to the Acquired
Assets prior to the Closing Date and for complying with its obligations
under applicable securities, tax, environmental, employment or other
laws and regulations. The Buyer shall have the right for a period of
three (3) years following the Closing Date to have reasonable access to
those books, records and accounts, including financial and tax
information, correspondence, production records, employment records and
other similar records which are retained by the Company pursuant to the
terms of this Agreement to the extent that any of the foregoing relates
to the business of the Company transferred to the Buyer hereunder or is
otherwise needed by the Buyer in order to comply with its obligations
under applicable securities, tax, environmental, employment or other
laws and regulations. Each of the Company and the Buyer shall, as a
condition to the rights specified in this Section 10.2(a), require its
employees and agents to sign a confidentiality agreement in reasonable
form prior to exercising its rights hereunder.
(b) The Company and the Buyer agree that from and after the
Closing Date they shall cooperate fully with each other to facilitate
the transfer of the Acquired Assets from the Company to the Buyer and
the operation thereof by the Buyer.
10.3 Cooperation.
(a) The Company will cooperate with the Buyer in furnishing
information or other assistance reasonably requested in connection with
any actions, proceedings, arrangements or disputes involving the
Acquired Business and based upon contracts, arrangements, property
rights, acts or omissions of the Company which were in effect or
carried on prior to the Management Assumption Date. The Buyer shall
reimburse the Company, upon demand, for all reasonable out-of-pocket
expenses incurred in providing such cooperation.
(b) The Buyer will cooperate with the Company in furnishing
information or other assistance reasonably requested in connection with
any actions, proceedings, arrangements or disputes involving the
business of the Buyer and based upon contracts, arrangements, property
rights, acts or omissions of the Buyer which were in effect or carried
on or after the Management Assumption Date, but only to the extent
involving any potential liability of the Company. The Company shall
reimburse the Buyer, upon demand, for all reasonable out-of-pocket
expenses incurred in providing such cooperation.
10.4 Non-Competition. Neither the Company nor any of its affiliates
will, directly or indirectly in the United States or elsewhere in the
world, engage in any business that provides any calendar or scheduling
services or software products that are competitive with those offered by
the Acquired Business.
10.5 Non-Solicitation. Unless the Buyer consents in writing, neither
the Company nor any of its affiliates will, for a period of two (2) years
from the Management Assumption Date, directly or indirectly, solicit for
employment or employ any of the Buyer's employees, including the
Transferred Employees. Unless the
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Company consents in writing, neither the Buyer nor any of its affiliates
will, for a period of two (2) years from the Management Assumption Date,
directly or indirectly, solicit for employment or employ any of the
Company's employees.
10.6 Enforceability. If any court determines that any of the
restrictive covenants set forth in Section 10.4 or Section 10.5, or any
part of such covenants, is unenforceable because of the duration of such
provision or the area covered thereby, such court shall have the power to
reduce the duration or area of such provision and, in its reduced form,
such provision shall then be enforceable and shall be enforced. It is
further understood and agreed that money damages would not be a sufficient
remedy for any breach of the provisions of Section 10.4 or Section 10.5 by
the Company or any of its affiliates and that Buyer shall be entitled to
equitable relief, including injunction and specific performance, as a
remedy for any such breach. Such remedies shall not be deemed to be the
exclusive remedies for a breach by the Company of the provisions of Section
10.4 or Section 10.5 but shall be in addition to all other remedies
available at law or equity to Buyer.
10.7 Use of Name. For a period of 30 days following the Closing Date,
the Buyer shall be entitled to use the Company's name and trademarks on all
products, sales brochures and other documentation which constitute a
portion of the Acquired Business. Upon expiration of such 30 day period,
the Buyer shall immediately cease to have any rights with regard to such
name and trademarks.
11. Termination of Agreement.
11.1 Termination by Lapse of Time. This Agreement shall terminate on
the Termination Date (as defined in Section 1.3(d) above), unless such date
is extended by the written consent of the Company, and the Buyer.
11.2 Termination by Agreement of the Parties. This Agreement may be
terminated by the mutual written agreement of the parties hereto. In the
event of such termination by agreement, the Buyer shall have no further
obligation or liability to the Company under this Agreement and the Company
shall have no further obligation or liability to the Buyer under this
Agreement.
12. Dispute Resolution.
12.1 General. In the event that after the Management Assumption Date
any dispute should arise between the parties hereto with respect to any
matter covered by this Agreement, the parties hereto shall resolve such
dispute in accordance with the procedures set forth in this Section 12.
12.2 Consent of the Parties. In the event of any dispute after the
Management Assumption Date between the parties with respect to any matter
covered by this Agreement, the parties shall first use their best efforts
to resolve such dispute among themselves. If the parties are unable to
resolve such dispute within 30 calendar days after the commencement of
efforts to resolve such dispute, such dispute will be submitted to
arbitration in accordance with this Section 12.
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12.3 Arbitration.
(a) Either the Buyer, on the one hand, or the Company on the other
hand, may submit any matter referred to in Section 12.2 hereof to
arbitration by notifying the other party hereto, in writing, of such
dispute. Within 10 days after receipt of such notice, the Buyer and the
Company shall designate in writing one arbitrator to resolve the
dispute; provided, however, that if the parties hereto cannot agree on
an arbitrator within such 10-day period, the arbitrator shall be
selected by the American Arbitration Association. The arbitrator so
designated shall not be a current or former employee, consultant,
officer, director or stockholder of any party hereto or any affiliate
of any party to this Agreement.
(b) Within 15 days after the designation of the arbitrator, the
arbitrator, the Buyer and the Company shall meet, at which time the
Buyer and the Company shall be required to set forth in writing all
disputed issues and a proposed ruling on each such issue.
(c) The arbitrator shall set a date(s) for a hearing(s), which
shall be no later than 30 days after the submission of written
proposals pursuant to paragraph (b) above, to discuss each of the
issues identified by the Buyer and the Company. Each such party shall
have the right to be represented by counsel. The arbitration shall be
governed by the rules of the American Arbitration Association;
provided, that the arbitrator shall have sole discretion with regard to
the admissibility of evidence.
(d) The arbitrator shall use his best efforts to rule on each
disputed issue within 30 days after the completion of the hearings
described in paragraph (c) above. The determination of the arbitrator
as to the resolution of any dispute shall be binding and conclusive
upon all parties hereto. All rulings of the arbitrator shall be in
writing and shall be delivered to the parties hereto and to the Escrow
Agent.
(e) The arbitrator may, in his or her discretion, award attorneys'
fees and expenses in connection with the arbitration determination,
consistent with the provisions of Section 20 hereof.
(f) Any arbitration pursuant to this Section 12 shall be conducted
in Boston, Massachusetts. Any arbitration award may be entered in and
enforced by any court having jurisdiction thereover and the parties
hereby consent and commit themselves to the jurisdiction of the courts
of The Commonwealth of Massachusetts for purposes of the enforcement of
any arbitration award.
13. Brokers.
13.1 The Company. The Company represents and warrants that, no person,
firm or corporation has acted in the capacity of broker or finder on its
behalf to bring about the negotiation of this Agreement. The Company agrees
to indemnify and hold harmless the Buyer against any claims or liabilities
asserted against it by any person acting or claiming to act as a broker or
finder on behalf of the Company.
13.2 For the Buyer. The Buyer represents and warrants that, no person,
firm or corporation has acted in the capacity of broker or finder on its
behalf to bring about the negotiation of this Agreement. The Buyer agrees
to indemnify and hold harmless the Company against any claims or
liabilities asserted against it by any person acting or claiming to act as
a broker or finder on behalf of the Buyer.
14. Notices. Any notices or other communications required or permitted
hereunder shall be sufficiently given if delivered personally or sent by
telecopy, overnight courier, registered or certified mail, postage prepaid,
addressed as follows or to such other address of which the parties may have
given notice:
To the Company: ON Technology Corporation
880 Winter Street, Building Four
Waltham, MA 02451-1449
Attention: President
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With a copy to: Gabor Garai, Esq.
Epstein Becker & Green, P.C.
75 State Street
Boston, MA 02109
To the Buyer: MeetingMaker, Inc.
880 Winter Street, Building Four
Waltham, MA 02451-1449
Attention: President
With a copy to: Andrew G. Stone, Esq.
14 Walnut Street
Marblehead, MA 01945
Unless otherwise specified herein, such notices or other communications shall be
delivered by a recognized overnight delivery courier such as DHL or Federal
Express and shall be deemed received on the date of actual receipt.
15. Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, except that the Buyer, on the one hand, and the Company, on the other
hand, may not assign their respective obligations hereunder without the prior
written consent of the other party. Any assignment in contravention of this
provision shall be void. No assignment shall release the Buyer or the Company
from any obligation or liability under this Agreement. The Company may, without
the Buyer's consent, assign its rights and obligations hereunder in connection
with the sale of all or substantially all of the Company's assets or stock, or
in connection with the merger or consolidation of the Company with a third
party; provided, however, that the Company is the surviving entity, and that
such assignee assumes the Company's obligations hereunder.
16. Entire Agreement; Amendments; Attachments.
16.1 This Agreement, all Schedules and Exhibits hereto, and all
agreements and instruments to be delivered by the parties pursuant hereto
represent the entire understanding and agreement between the parties hereto
with respect to the subject matter hereof and supersede all prior oral and
written and all contemporaneous oral negotiations, commitments and
understandings between such parties.
16.2 The Buyer, by the consent of its Board of Directors or officers
authorized by such Board, on the one hand, and the Company by the consent
of its Board of Directors or officers authorized by such Board, on the
other hand, may amend or modify this Agreement, in such manner as may be
agreed upon, by a written instrument executed by the Buyer and the Company.
16.3 This Agreement shall not preclude or supersede any obligation that
either the Company or the Buyer may have with respect to the purchase,
sales or support of products under existing agreements.
16.4 If the provisions of any Schedule or Exhibit to this Agreement are
inconsistent with the provisions of this Agreement, the provisions of the
Agreement shall prevail. The Exhibits and Schedules attached hereto or to
be attached hereafter are hereby incorporated as integral parts of this
Agreement.
17. Severability. Any provision of this Agreement which is invalid, illegal
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity, illegality or unenforceability,
without affecting in any way the remaining provisions hereof in such
jurisdiction or rendering that or any other provision of this Agreement invalid,
illegal or unenforceable in any other jurisdiction.
18. Expenses; Sales Taxes. The Buyer, on the one hand, and the Company, on
the other hand, will pay all fees and expenses incurred by them in connection
with the transactions contemplated hereunder. All sales taxes that arise
directly from the transfer of the Acquired Assets to the Buyer shall be the sole
responsibility of the Company.
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19. Liquidated Damages.
19.1 In the event that the Shareholder Approval is not obtained as
provided herein, then the Company shall on June 1, 2000, (i) return to the
Buyer the Initial Payment, and (ii) pay to the Buyer the amount of $100,000
by wire transfer of immediately available funds to the Buyer's Account,
which amount shall constitute the Buyer's complete and liquidated damages,
and sole and exclusive remedy, for the Company's inability to effect the
Closing, and which amount shall not be subject to any offset. Such $100,000
payment is referred to herein as the "LIQUIDATED DAMAGE PAYMENT."
19.2 The Buyer and the Company agree that Liquidated Damage Payment is
the parties' best estimate of the Actual Damages that the Buyer would incur
as a result of the Company's inability to effect the Closing, including
damages with respect to the Buyer's operation of the Acquired Business
pursuant to the Management Agreement.
20. Legal Fees. In the event that legal proceedings are commenced by the
Buyer against the Company, or by the Company against the Buyer, in connection
with this Agreement or the transactions contemplated hereby, the party or
parties which do not prevail in such proceedings shall pay the reasonable
attorneys' fees and other costs and expenses, including investigation costs,
incurred by the prevailing party in such proceedings.
21. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of The Commonwealth of Massachusetts. Each party hereto
irrevocably consents to the exclusive personal jurisdiction of the state courts
of The Commonwealth of Massachusetts and the federal courts of the United States
resident in The Commonwealth of Massachusetts, and waives any objection which it
might have based on improper venue or forum non conveniens to the conduct of
proceedings in any such court, waives personal service on it, and consents that
all such service of process may be made by mail in accordance with Section 13
hereof.
22. Section Headings. The section headings are for the convenience of the
parties and in no way alter, modify, amend, limit, or restrict the contractual
obligations of the parties.
23. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be one and the same document.
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IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto as of and on the date first above written.
MEETING MAKER, INC.
By:___________________________
ON TECHNOLOGY CORPORATION
By:___________________________
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