<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
____________________
FORM 10-Q/A
AMENDMENT NO. 1 TO
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
Commission File Number 0-25794
-------------------
OPEN ENVIRONMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3168610
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
25 Travis Street
Boston, Massachusetts 02134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 562-0900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [_] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
The Registrant had 6,903,873 shares of Common Stock, $.01 par value, outstanding
as of May 26, 1995
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<PAGE>
OPEN ENVIRONMENT CORPORATION
QUARTERLY REPORT ON FORM 10-Q/A
FOR THE PERIOD ENDED MARCH 31, 1995
Index
<TABLE>
<CAPTION>
Page
----
PART I - Financial Information
ITEM 1. Financial Statements
<S> <C>
Consolidated Balance Sheets as of March 31, 1995
and December 31, 1994 (restated) 1
Consolidated Statements of Operations for the three
months ended March 31, 1995 and 1994 (restated) 2
Consolidated Statements of Cash Flows for the three
months ended March 31, 1995 and 1994 (restated) 3
Notes to Consolidated Financial Statements (restated) 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, as Amended 5
PART II - Other Information 7
ITEM 6. Exhibits and Reports on Form 8-K -
SIGNATURES 9
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
OPEN ENVIRONMENT CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
------------- ----------------
(Restated) (Restated)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $425,838 $1,693,118
Marketable securities 89,721 94,589
Accounts receivable, net 5,904,327 3,869,596
Prepaid expenses and other current assets 968,921 606,511
------------- ----------------
Total current assets 7,388,807 6,263,814
Property and equipment, net 2,552,969 2,049,392
Capitalized software costs, net 448,803 427,879
Investment in and advances to joint venture 101,354 387,862
Deferred income taxes 293,393 137,362
Other assets 225,046 209,349
------------- ----------------
$11,010,372 $9,475,658
============= ================
LIABILITIES
Current liabilities:
Notes payable to bank $828,928
Accounts payable and accrued expenses 3,163,290 $2,828,470
Advance billings and customer deposits 677,068 640,833
Deferred maintenance revenue 808,254 780,345
Income taxes payable 289,742 269,260
Current portion of capital lease
obligations 236,328 245,489
------------- ----------------
Total current liabilities 6,003,610 4,764,397
Deferred income taxes 180,770 172,270
Obligations under capital leases, less
current portion 157,088 206,089
Series A Convertible Preferred Stock 5,854,332 5,854,332
Common stockholders' equity (deficiency)
Common stock 51,939 51,754
Additional paid-in capital 763,680 777,126
Retained earnings 1,498,953 1,149,690
Treasury stock (3,500,000) (3,500,000)
------------- ----------------
Total common stockholders' equity
(deficiency) (1,185,428) (1,521,430)
------------- ----------------
$11,010,372 $9,475,658
============= ================
</TABLE>
1
<PAGE>
The accompanying notes are an integral part of these financial statements.
OPEN ENVIRONMENT CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended March 31,
1995 1994
------------ ------------
(Restated)
<S> <C> <C>
Revenues
Software $4,636,531 $1,299,544
Maintenance and service fees 1,320,491 370,617
Education and training 514,662 1,724,583
------------ ------------
Total revenues 6,471,684 3,394,744
------------ ------------
Cost of revenues
Cost of software, maintenance and services 965,205 718,921
Cost of education and training 402,131 572,753
------------ ------------
Total cost of revenues 1,367,336 1,291,674
------------ ------------
Gross profit 5,104,348 2,103,070
Operating expenses
Selling and marketing 2,625,153 1,071,594
General and administrative 751,543 431,048
Research and development 956,032 594,686
------------ ------------
Total operating expenses 4,332,728 2,097,328
------------ ------------
Operating income 771,620 5,742
Equity in loss of joint venture (312,384) (82,568)
Other income (expense), net 7,453 18,531
------------ ------------
Income (loss) before income taxes 466,689 (58,295)
Provision for income taxes (benefit) 117,426 11,483
------------ ------------
Net income (loss) $349,263 ($69,778)
============ ============
Net income (loss) per share $0.05 ($0.01)
============ ============
Weighted average shares outstanding 6,734,840 5,590,291
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
OPEN ENVIRONMENT CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended March 31
1995 1994
------------ ------------
(Restated)
<S> <C> <C>
Operating activities
Net income (loss) $349,263 ($69,778)
Adjustments to net income (loss)
Depreciation 275,929 87,952
Amortization of capitalized software 66,490 8,168
Allowance for doubtful accounts 65,842
Equity in loss of joint venture 312,384 82,568
Deferred income taxes (175,777) (9,310)
Changes in operating assets and liabilities
Accounts receivable (2,129,656) 225,218
Prepaid expenses and other current assets (357,474) (165,477)
Due from joint venture 15,104
Other assets 20,723 (43,926)
Accounts payable and accrued expenses 310,839 337,279
Advance billings and customer deposits 47,341 (332,618)
Deferred maintenance revenue 31,529 (52,996)
Income taxes payable 27,746 (24,093)
Due to related party (2,348) (144,637)
------------ ------------
Net cash used in operating activities (1,142,065) (101,650)
Investing activities
Investment in and advances to joint ventures (63,302) (92,157)
Purchase of property and equipment (794,531) (293,414)
Additions to capitalized software (87,414) (8,952)
------------ ------------
Net cash used in investing activities (945,247) (394,523)
------------ ------------
Financing activities
Net proceeds of notes payable to bank 828,928 200,000
Repayment of capital lease obligations (58,162)
Exercise of stock options 66,900 198
------------ ------------
Net cash provided by financing activities 837,666 200,198
Effect of exchange rates on cash (17,634) 10,102
Net decrease in cash and equivalents (1,267,280) (285,873)
Cash and equivalents at beginning of period 1,693,118 918,409
------------ ------------
Cash and equivalents at end of period $425,838 $632,536
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
OPEN ENVIRONMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed consolidated financial statements presented have
been prepared by Open Environment Corporation and subsidiaries (the "Company")
without audit and, in the opinion of management, reflect all adjustments
consisting only of normal recurring adjustments necessary for fair presentation
of the financial results for the interim periods shown. The results of
operations for the interim periods shown in this report are not necessarily
indicative of results for any future interim period or for the entire fiscal
year. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted, although the Company believes that the disclosures
included are adequate to make the information presented not misleading.
Restatement of Financial Statements
Prior to the second quarter of 1995, the Company and certain of its customers
entered into non-cancellable letters of understanding ("Non-cancellable LOUs")
whereby the Company's customers agreed to purchase certain software and services
from the Company and which specified a future date at or on which a mutually
acceptable software license and services agreement would be finalized. In eight
instances, the parties agreed to enter into a mutually acceptable software
license and services agreement within a specified period (the "Specified
Period") after the date of execution of such Non-cancellable LOU. At the time of
revenue recognition all products were delivered, the Company believed that
persuasive evidence existed to document an agreement to license the Company's
software by the customer and there were no significant contingencies existing at
the date of revenue recognition. After a review by the staff of the Securities
and Exchange Commission (the "Staff"), the Company has agreed that the
recognition of revenue under such Non-cancellable LOUs should be delayed until
the earlier of the date such software license and services agreements were
executed by the parties (the "L&S Execution Date") or the expiration of the
Specified Period. The length of the Specified Periods ranged from two days to 45
days. The Company has restated its historical financial statements contained in
certain of its reports filed pursuant to the Securities Exchange Act of 1934
with respect to the five Non-cancellable LOUs where the earlier of the L&S
Execution Date or the end of the Specified Period occurred in the quarter
following the date of execution of the Non-cancellable LOU. The changes decrease
revenue and net income reported in the fourth quarter of 1994 and increase
revenue and net income reported in each of the first and second quarters of
1995. There was no change in the aggregate revenue and net income reported over
such three quarter period.
The following summarizes the effect of the restatement on the consolidated
financial statements of the Company for the period presented:
<TABLE>
<CAPTION>
As Reported Restated
----------- --------
Three months ended March 31, 1995
<S> <C> <C>
Revenues 6,192,574 6,471,684
Cost of software, maintenance and services 948,459 965,206
Gross Profit 4,841,985 5,104,348
Selling and marketing expenses 2,600,033 2,625,153
Provision for income taxes 55,743 117,426
Net Income 173,702 349,263
Net Income per share .03 .05
Accounts receivable 6,236,577 5,904,327
Total assets 11,342,622 11,010,372
Accounts payable and accrued expenses 3,213,129 3,163,290
Income taxes payable 363,169 289,742
Stockholders' equity (deficiency) (976,443) (1,185,428)
</TABLE>
2. Acquisition of Jarrah Technologies
On August 31, 1995 the Company issued 408,000 shares of Common Stock in
exchange for all outstanding shares of the capital stock of Jarrah Technologies
Pty Ltd. ("Jarrah Technologies"). The acquisition was accounted for as a
pooling of interests and, accordingly, the accompanying consolidated financial
statements of the Company have been restated to include the accounts and
operations of Jarrah Technologies for all periods prior to the acquisition.
Quarterly results of operations differ from those previously reported due to
the inclusion of the following amounts related to Jarrah Technologies:
<TABLE>
<CAPTION>
Quarter ended
March 31, 1995 March 31, 1994
<S> <C> <C>
Total Revenues $1,000,201 $939,614
Gross Profit 469,229 415,247
Income (loss) from operations 13,369 148,417
Net income (loss) 73,369 137,745
</TABLE>
3. Consolidated Financial Statement Information
Initial Public Offering
On April 13, 1995 the Company completed its initial public offering of
common stock whereby 3,162,500 shares were sold to the public in exchange for
net proceeds of approximately $44,000,000. Of these amounts, the Company issued
1,700,000 shares in exchange for net proceeds of approximately $23,000,000.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number
of common and dilutive common equivalent shares outstanding during each period.
Included in these amounts are dilutive common stock options and 1,428,571
shares of Series A Convertible Preferred Stock which automatically converted
upon the closing of the initial public offering into 999,998 shares of common
stock. Fully diluted and primary earnings per share data are the same for each
period presented.
4. Related Party Transactions
The Company entered into a reseller agreement with Cambridge Technology
Group, Inc. (CTG). CTG is principally owned by the Company's Chairman of the
Board and a stockholder. Under the terms of the Reseller Agreement, as amended,
CTG was appointed as a non-exclusive reseller of the Company's products in the
U.S. and Canada effective February 1, 1995. Prior to February 1, 1995, CTG did
not distribute the Company's products. Pursuant to this agreement, CTG receives
a 50% discount from list prices of the Company's software and a 30% discount
from list prices on the Company's educational programs. The Company is permitted
to cancel the agreement at any time upon payment to CTG of a termination fee
equal to $2,500,000 less 20% of aggregate list price value of software products
sold by CTG under the Reseller Agreement. Sales to CTG under this agreement
during the three months ended March 31, 1995 amounted to $350,000.
4
<PAGE>
OPEN ENVIRONMENT CORPORATION AND SUBSIDIARY
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Restatement of Financial Statements
- -----------------------------------
Prior to the second quarter of 1995, the Company and certain of its customers
entered into non-cancellable letters of understanding ("Non-cancellable LOUs")
whereby the Company's customers agreed to purchase certain software and services
from the Company and which specified a future date at or on which a mutually
acceptable software license and services agreement would be finalized. In eight
instances, the parties agreed to enter into a mutually acceptable software
license and services agreement within a specified period (the "Specified
Period") after the date of execution of such Non-cancellable LOU. At the time of
revenue recognition all products were delivered, the Company believed that
persuasive evidence existed to document an agreement to license the Company's
software by the customer and there were no significant contingencies existing at
the date of revenue recognition. After a review by the staff of the Securities
and Exchange Commission (the "Staff"), the Company has agreed that the
recognition of revenue under such Non-cancellable LOUs should be delayed until
the earlier of the date such software license and services agreements were
executed by the parties (the "L&S Execution Date") or the expiration of the
Specified Period. The length of the Specified Periods ranged from two days to 45
days. The Company has restated its historical financial statements contained in
certain of its reports filed pursuant to the Securities Exchange Act of 1934
with respect to the five Non-cancellable LOUs where the earlier of the L&S
Execution Date or the end of the Specified Period occurred in the quarter
following the date of execution of the Non-cancellable LOU. The changes decrease
revenue and net income reported in the fourth quarter of 1994 and increase
revenue and net income reported in each of the first and second quarters of
1995. There was no change in the aggregate revenue and net income reported over
such three quarter period.
The following summarizes the effect of the restatement on the consolidated
financial statements of the Company for the period presented:
<TABLE>
<CAPTION>
As Reported Restated
----------- --------
Three months ended March 31, 1995
<S> <C> <C>
Revenues 6,192,574 6,471,684
Cost of software, maintenance and services 948,459 965,206
Gross profit 4,841,985 5,104,348
Selling and marketing expenses 2,600,033 2,625,153
Provision for income taxes 55,743 117,426
Net income 173,702 349,263
Net income per share .03 .05
Accounts receivable 6,236,577 5,904,327
Total assets 11,342,622 11,010,372
Accounts payable and accrued expenses 3,213,129 3,163,290
Income taxes payable 363,169 289,742
Stockholders' equity (deficiency) (976,443) (1,185,428)
</TABLE>
Results of operations
- ---------------------
Total revenues increased 91% to $6,472,000 in the three months ended March 31,
1995 from $3,395,000 in the three months ended March 31, 1994.
The revenue increase was largely attributable to software license fees, which
increased to $4,637,000 in the three months ended March 31, 1995 from $1,300,000
in the three months ended March 31, 1994. Also contributing to the increase were
increases in maintenance and service fees, which increased to $1,320,000 in the
three months ended March 31, 1995 from $371,000 in the three months ended March
31, 1994. These increases reflect growing market awareness and acceptance of the
Company's software products as well as a broadening of the Company's installed
base.
These increases were partially offset by a decrease in education revenues to
$515,000 in the three months ended March 31, 1995 from $1,725,000 in the three
months ended March 31, 1994. This decrease is consistent with the Company's
shift away from the use of education to further market awareness to the use of
education as technical training for software licensing.
International revenue accounted for $2,967,000 (46%) of total net revenues for
the three months ended March 31, 1995, as compared to $1,744,000 (51%) for the
three months ended March 31, 1994. This increase is attributable to a
combination of direct and channel sales to international customers as the
Company continues to enter additional markets to expand its operations outside
of the United States. The Company believes that international sales will
continue to represent a significant portion of the Company's net revenue.
However, the percentage of revenue derived from international sales may
fluctuate based on the timing of orders from international customers and
resellers and the addition of new international customers and resellers.
Costs of sales increased to $1,367,000 for the three months ended March 31, 1995
from $1,292,000 for the three months ended March 31, 1994, and gross margins
improved to 79% for the three months ended March 31, 1995 from 62% for the three
months ended March 31, 1994. These improvements reflect the product shift from
the lower-margin education business (22% gross margin in the three months ended
March 31, 1995) to the higher-margin software and services business (84% gross
margin in the three months ended March 31, 1995).
Selling and marketing expenses increased to $2,625,000 in the three months ended
March 31, 1995 from $1,072,000 in the three months ended March 31, 1994. This
increase is the result of the hiring of additional personnel and increased
marketing programs as the Company develops a qualified direct sales force,
builds its marketing channels and increases its promotional activities to
broaden market awareness. The Company expects to continue to invest a
significant amount of its resources in its selling and marketing efforts.
General and administrative expenses increased to $752,000 in the three months
ended March 31, 1995 from $431,000 in the three months ended March 31, 1994 but
decreased as a percentage of revenues to 12% in the three months ended March 31,
1995 as compared to 13% in the three months ended March 31, 1994. This
percentage decrease reflects the semi-fixed nature of these expenses, as well as
the economies of scale the Company achieves as its customer base and revenues
expand.
Research and development expenses increased to $956,000 in the three months
ended March 31, 1995 from $595,000 in the three months ended March 31, 1994,
which is principally attributable to the hiring
5
<PAGE>
of additional personnel. Software development costs capitalized under FAS 86
for the three months ended March 31, 1995 amounted to $87,000, while
amortization of previously capitalized software amounted to $66,000, as compared
to capitalizations of $9,000 and amortization expense of $8,000 for the three
months ended March 31, 1994. The Company expects to increase its research and
development expenses in 1995 to keep pace with the technological needs of the
marketplace.
Equity in the loss of the Japanese joint venture, which represents the Company's
50% share of the joint venture's income or loss, increased to $312,000 for the
three months ended March 31, 1995 as compared to $83,000 in the three months
ended March 31, 1994. The operating results of the Japanese joint venture were
negatively impacted when a large deal was not completed as expected in the first
quarter. The Company received no royalties from the Japanese joint venture in
the three months ended March 31, 1995 as compared to $43,000 in the three months
ended March 31, 1994. While the Company expects that the Japanese joint venture
will be profitable in 1995, the joint venture is at an early stage in its
development. As a result, there can be no assurance that it will become
profitable, nor can there be any assurance that operating results of the joint
venture will not vary significantly from quarter to quarter.
Liquidity and Capital Resources
- -------------------------------
As of March 31, 1995, the Company's cash and cash equivalents decreased to
$426,000 from $1,693,000 at December 31, 1994. This decrease was primarily the
result of an increase in accounts receivable, as the Company's sales patterns,
as well as its customers' buying patterns, are weighted towards the last month
of the quarter.
The Company has financed operations to date through operating cash flow, its
bank line of credit, and through a private equity placement. Operations in 1993
and most of 1994 were financed through operating cash flow. The Company
completed a two-step private equity placement in November 1994 in which it
issued bridge notes in the amount of $3,500,000 and issued Series A Convertible
Preferred Stock in the amount of $6,000,000. A portion of the proceeds from the
Series A Convertible Preferred Stock financing was used to repay the bridge
notes.
In February 1995, the Company renegotiated its bank line of credit (which was
executed in March 1995) which has a demand line of credit of $2,000,000 and a
revolving equipment line of $1,000,000. Availability under the demand line of
credit is based on a percentage of qualified accounts receivable. Borrowings
outstanding on December 31, 1995 under the revolving equipment line convert to a
two-year term note. Interest on the demand line of credit accrues at the prime
rate, and interest on the revolving equipment line accrues at prime plus
one-quarter percent. As of March 31, 1995, aggregate borrowings under the line
of credit amounted to $800,000, which were principally used to finance
approximately $760,000 in additions to property and equipment due to the hiring
of additional personnel, the acquisition of new computer equipment and regional
office buildouts.
On April 13, 1995, the Company completed its initial public offering of common
stock by issuing 1,700,000 common shares in exchange for net proceeds of
approximately $23,000,000. Upon completion of the public offering, the
1,428,571 shares of Series A Convertible Preferred Stock were automatically
converted to 999,998 common shares.
While the Company believes that the net proceeds from the initial public
offering, borrowings under its line of credit facility and cash flow from
operations will be adequate to meet its planned capital requirements for the
remainder of 1995, acquisition opportunities could require the Company to seek
additional capital prior to such time. There is no assurance that, if the
Company seeks additional financing, such financing will be available upon
acceptable terms, if at all.
PART II. OTHER INFORMATION
6
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
- -----------------------------------------
A. Exhibits
Exhibit 10.1 - Loan and Security Agreement with State Street Bank and
Trust Company (previously filed with the Company's Form
10-Q as filed with the Security and Exchange Commission
on May 26, 1995)
Exhibit 11.1 - Statement regarding computation of Net Income (Loss)
Per Share (restated)
B. Reports on Form 8-K
None.
7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
OPEN ENVIRONMENT CORPORATION
Date: October 10, 1996 By: /s/ Phillip R. Copeland
------------------------------------
Phillip R. Copeland,
Acting Chief Executive Officer
(Principal Executive Officer)
By: /s/ James J. Driscoll
------------------------------------
James J. Driscoll,
Vice President of Finance
(Principal Financial Officer and
Principal Accounting Officer)
8
<PAGE>
Exhibit 11.1
OPEN ENVIRONMENT CORPORATION AND SUBSIDIARY
Computation of Net Income (Loss) Per Share.
<TABLE>
<CAPTION>
Three Months Ended March 31
1995 1994 (1)
---------------- ---------------
(Restated)
<S> <C> <C>
Weighted average shares of common stock 4,610,560 4,590,293
outstanding
Common stock equivalents:
Series A Convertible Preferred Shares 999,998 999,998
Dilutive effect of stock options 1,124,282
---------------- ---------------
6,734,840 5,590,291
================ ===============
Net income (loss) $349,263 ($69,778)
================ ===============
Net income (loss) per share $0.05 ($0.01)
================ ===============
</TABLE>
(1) Common Stock equivalents were not considered in the three months ended
March 31, 1994 due to their dilutive effect on the Company's net loss per
share.
