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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
____________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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. [X] Yes [_] 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 7,562,749 shares of Common Stock, $.01 par value,
outstanding as of November 4, 1996.
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OPEN ENVIRONMENT CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1996
INDEX
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Page
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PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995 1
Condensed Consolidated Statements of Operations for the three
months ended September 30, 1996 and 1995 and the nine months
ended September 30, 1996 and 1995 2
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995 3
Notes to Condensed Consolidated Financial Statements 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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OPEN ENVIRONMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------- ------------
ASSETS
Current assets:
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Cash and cash equivalents $ 4,782,721 $ 7,012,333
Marketable securities 3,075,796 10,678,125
Accounts receivable, net 3,238,060 7,609,007
Due from related parties 2,362,752
Due from joint ventures 440,465 1,428,090
Prepaid expenses and other
current assets 2,726,725 1,676,530
----------- ----------
Total current assets 14,263,767 30,766,837
Property and equipment, net 2,535,033 3,214,341
Capitalized software costs, net 423,129 800,206
Investment in and advances to joint
ventures 515,414 858,123
Deferred income taxes 547,184
Other assets 911,944 459,982
----------- -----------
$18,649,287 $36,646,673
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 817,661 $ 1,545,684
Accounts payable and accrued
expenses 4,578,424 4,143,880
Advance billings and customer
deposits 535,825 629,734
Deferred maintenance revenue 790,838 1,054,135
Income taxes payable 82,384 350,000
Current portion of capital lease
obligations 67,968 178,904
----------- ----------
Total current liabilities 6,873,100 7,902,337
Obligations under capital leases, less
current portion 3,330 27,185
Stockholders' equity:
Preferred Stock
Common Stock 81,461 80,505
Additional paid-in capital 30,885,234 30,694,500
Retained earnings (deficit) (15,693,838) 1,442,146
Treasury stock (3,500,000) (3,500,000)
----------- ----------
Total stockholders' equity 11,772,857 28,717,151
----------- -----------
$18,649,287 $36,646,673
=========== ===========
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
1
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OPEN ENVIRONMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1996 1995 1996 1995
------------- ------------ ------------ -----------
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Revenues:
Software $ 1,505,101 $ 5,876,290 $ 4,908,933 $16,227,234
Maintenance and service fees 1,132,533 1,612,988 3,972,212 4,490,413
Education and training 261,571 507,587 846,030 1,562,059
------------- ------------ ------------ -----------
Total revenues 2,899,205 7,996,865 9,727,175 22,279,706
Cost of revenues:
Cost of software, maintenance
and services 1,455,916 1,427,741 5,304,467 3,777,411
Cost of education and training 275,681 385,756 957,332 1,184,784
------------- ------------ ------------ ------------
Total cost of revenues 1,731,597 1,813,497 6,261,799 4,962,195
------------- ------------ ------------ ------------
Gross profit 1,167,608 6,183,368 3,465,376 17,317,511
Operating expenses:
Selling and marketing 3,458,756 3,240,681 12,032,508 8,938,871
General and administrative 880,197 974,491 2,781,964 2,659,810
Research and development 1,477,065 1,103,552 4,354,336 3,111,550
Provision for restructuring
charges 678,655 1,083,114 678,655
------------- ------------ ------------ ------------
Total operating expenses 5,816,018 5,997,379 20,251,922 15,388,886
------------- ------------ ------------ ------------
Operating income (loss) (4,648,410) 185,989 (16,786,546) 1,928,625
Equity in income (loss) of
joint venture 8,130 11,577 (273,643)
Other income (expense), net 149,905 249,989 486,481 447,398
------------- ------------ ------------- ------------
Income (loss) before income taxes (4,490,375) 435,978 (16,288,488) 2,102,380
Provision for income taxes 0 169,000 847,497 637,372
------------- ------------ ------------ ------------
Net income (loss) ($4,490,375) $ 266,978 ($17,135,985) $ 1,465,008
============= ============ ============ ============
Net income (loss) per share $(0.59) $0.03 ($2.28) $0.18
============= ============ ============ ============
Dividends $ 141,844
============
Dividends per share $0.02
============
Weighted average shares
outstanding 7,560,619 8,572,125 7,518,797 7,919,327
============= ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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OPEN ENVIRONMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
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OPERATING ACTIVITIES
Net income (loss) ($17,135,984) $ 1,465,008
Adjustments to net income (loss):
Depreciation 1,298,897 991,197
Amortization of capitalized software 400,025 212,162
Allowance for doubtful accounts 775,486 221,848
Provision for restructuring charges 786,451
Equity in loss of joint venture (11,269) 267,246
Deferred income taxes 798,649 (187,935)
Changes in operating assets and liabilities:
Accounts receivable 3,624,004 (7,512,926)
Due from related parties 2,362,752
Prepaid expenses and other current assets (1,681,977) (215,877)
Due from joint venture 987,625
Other assets (456,567) (403,154)
Accounts payable and accrued expenses 389,347 1,324,204
Advance billings and customer deposits (112,024) (140,418)
Deferred maintenance revenue (263,297) 138,201
Income taxes payable (222,200) 403,148
Due to Related Party (54,395) (2,347)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (8,514,477) (3,439,643)
INVESTING ACTIVITIES
Purchase of marketable securities (12,243,398) (35,896,244)
Proceeds from maturities of
marketable securities 19,848,424 22,261,984
Investment in and advances to joint ventures 208,569 (1,206,474)
Purchase of property and equipment (855,702) (2,254,530)
Additions to capitalized software (21,716) (438,990)
------------ -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 6,936,177 (17,534,254)
FINANCING ACTIVITIES
Net proceeds of notes payable to bank (728,023) 1,845,726
Repayment of capital lease obligations (134,791) (177,921)
Net proceeds from issuance of Common Stock 22,879,165
Dividends paid (141,844)
Exercise of stock options 126,292 629,813
Issuance of Common Stock under stock purchase plan 65,398
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES (671,124) 25,034,939
----------- -----------
Effect of exchange rates on cash 19,812 (14,139)
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (2,229,612) 4,046,903
Cash and equivalents at beginning of period 7,012,333 1,693,118
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 4,782,721 $ 5,740,021
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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OPEN ENVIRONMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED 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 the 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. The
condensed consolidated financial statements and the notes included herein should
be read in conjunction with the financial statements and notes for the fiscal
year ended December 31, 1995 included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995 as amended on Form 10-K/A as
filed with the Securities and Exchange Commission on October 11, 1996.
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2. CONSOLIDATED FINANCIAL STATEMENT INFORMATION
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 fiscal
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 Company's initial public offering into 999,998
shares of common stock on April 13, 1995. Fully diluted and primary earnings per
share data are the same for each period presented.
Investment Securities
All of the Company's investments are classified as held-to-maturity at September
30, 1996 and December 31, 1995. Investment securities are deemed to be held-to-
maturity when the Company has the positive intent and ability to hold the
securities to maturity. The fair market value of the Company's investments at
September 30, 1996 and December 31, 1995 approximates amortized cost basis. The
following is a summary of these investments:
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SEPTEMBER 30, DECEMBER 31,
1996 1995
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U.S. Treasury securities and obligations
of U.S. government agencies $3,551,696 $12,135,987
Tax-exempt mutual and money market funds 1,431,603 1,513,183
90-day bank notes 2,195,558 2,136,747
-------------------------------
$7,178,857 $15,785,917
===============================
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Foreign Currency Translation
Assets and liabilities of foreign operations are translated at period-end
exchange rates, and statement of operations accounts are translated at average
exchange rates. Gains and losses from translation are not material for the
periods presented. Foreign currency transaction gains and losses are included in
the statements of operations and are not material for the periods presented.
3. INVESTMENT IN AND ADVANCES TO JOINT VENTURES
On January 17, 1994, the Company entered into a joint venture agreement with a
Japanese corporation to develop, distribute, promote and market the Company's
software products and provide related educational services in Japan. Under the
terms of the agreement, the Company owned 50% of the outstanding voting common
stock and two shares of the non-voting preferred stock. Concurrent with this
agreement, the Company granted the joint venture an exclusive license to
establish, develop, distribute and market the Company's software products and
educational services in Japan. In return for this license, the Company receives
royalties from the sale of these products and services as follows: software
products (40%); educational services (25%); and maintenance services (60%).
On September 30, 1995, the Company sold 30.5% of the outstanding voting common
stock of the joint venture to its joint venture partner for $488,000, which
approximated the Company's cost basis in the joint venture. As a result, the
Company currently owns 19.5% of the voting common stock of the joint venture.
The Company accounted for the joint venture using the equity method from the
inception of the joint venture until September 30, 1995. Effective October 1,
1995, the Company accounts for its remaining investment in the joint venture
using the cost method.
At September 30, 1996, investment in and advances to joint ventures consisted of
investment in and advances to the Japanese joint venture of $379,000, and
investments in other joint ventures of $136,000. Due from joint ventures
represents trade accounts receivable due from the Company's joint ventures.
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 major 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. The Company made no sales to CTG under
this agreement during the three months ended September 30, 1996. Sales to CTG
under this agreement during the three months ended September 30, 1995 amounted
to $550,000.
5
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OPEN ENVIRONMENT CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, AS AMENDED
INTRODUCTION
- ------------
The Company derives revenues from product license fees and charges for services,
including education and training, on-site technical support and phone-in
customer support (maintenance). For all periods presented, the Company has
recognized revenue in accordance with Statement of Position 91-1 entitled
"Software Revenue Recognition," ("SOP 91") issued by the American Institute of
Certified Public Accountants. SOP 91 requires that software license revenues be
recognized upon shipment, provided no significant obligations to the customer
then exist, and that maintenance revenues be recognized ratably over the term of
the maintenance agreement. Revenues for other services and training are
recognized upon delivery of the service. The Company's license agreements
generally do not provide a right of return. Reserves are maintained for
potential credit losses.
Prior to 1994, the Company's focus was largely educational in nature. During
1994, the Company began to shift its focus from educational services to software
development and licensing in order to capitalize on the growing demand for its
products and services which had been generated by the Company's education
seminars. In the early stages of this transition, the Company's educational
services provided the Company with name recognition and introductory marketing
opportunities. However, as the Company has transitioned to the business of
developing and licensing software, its continued growth is increasingly based on
a growing installed base, the continued acceptance by that installed base of the
Company's products, increased distribution and marketing channels and
technological competitiveness, rather than a continued emphasis on educational
services. This evolution has caused the Company to shift the focus of its
education offerings from marketing to post-sales training and customer support.
As the Company shifted its focus to software development and licensing, it also
expanded its efforts in international markets, including the establishment of
joint ventures in Japan in 1994, Korea in 1995 and China/Hong Kong in 1996 and
the acquisition of Jarrah Technologies Pty. Limited ("Jarrah Technologies",
"Open Environment Australia") in 1995.
On May 11, 1996, the Company signed a definitive agreement to merge with a
wholly-owned subsidiary of Borland International, Inc. ("Borland"). This
agreement was amended on July 31, 1996 and October 8, 1996. Completion of the
merger is subject to the approval of the stockholders of the Company. The merger
is more fully disclosed in the combined Prospectus/Proxy Statement contained in
the Registration Statement on Form S-4 filed by Borland with the Securities and
Exchange Commission (the "Commission") on October 11, 1996.
For a discussion of uncertainties associated with the Company's business, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the fiscal year ended December 31, 1995 included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995, as
amended on Form 10-K/A as filed with the Securities and Exchange Commission on
October 11, 1996.
Total revenues decreased 64% to $2,899,000 in the three months ended September
30, 1996 from $7,997,000 in the three months ended September 30, 1995, and to
$9,727,000 in the nine months ended September 30, 1996 from $22,279,000 in the
nine months ended September 30, 1995. The revenue decreases were largely
attributable to a decline in software license fees, which decreased to
$1,505,000 in the three months ended September 30, 1996 from $5,876,000 in the
three months ended September 30, 1995, and to $4,909,000 in the nine months
ended September 30, 1996 from $16,227,000 in the nine months ended September 30,
1995. Software revenues accounted for 52% of total revenues for the three months
ended September 30, 1996 as compared to 73% for the three months ended September
30, 1995.
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These revenue decreases are attributable to a number of factors. The Company
continues to rely on major transactions each quarter to reach revenue targets.
Such reliance carries the associated risk of revenue shortfall if such
transactions are delayed or fail to close. The Company closed one transaction
over $250,000 in the three months ended September 30, 1996 as compared to
closing six transactions over $250,000 in the three months ended September 30,
1995. The Company believes the pending merger with Borland has caused certain
customers to postpone purchases until the completion of the merger, as these
customers have expressed their desire to see the impact of the merger on the
Company's products prior to making significant financial investments in the
Company's products.
The Company currently experiences an extended sales cycle of approximately 9 to
12 months for its products. An inconsistent marketing message has lengthened
this sales cycle beyond the 6 to 9 months experienced in the past, which has
made it more difficult for the Company to forecast revenues for any given
period until such period has ended. Based on its analysis of operations for the
period ending March 31, 1996, it is now the Company's business judgement that
the manner in which it marketed products has been too broad and, in particular,
that the Company has marketed its products into too many market segments and to
companies at too many stages of distributed client/server application
development and deployment. This included expansion of the Company's marketing
efforts to include desktop and first generation users in addition to users more
experienced with management of computer operations in a client/server
environment. We believe that this has contributed to the lengthening in OEC's
sales cycle in the following manners: a changing product positioning detracted
from the clear understanding of our existing customer base and some qualified
leads, thus extending the decision process; such a strategy resulted in certain
leads entering the sales pipeline when, based on the development of additional
data, such leads later did not appear likely to meet the criteria for qualified
lead and, therefore, generate appropriate sales; these factors also caused
certain operational challenges within the Company's sales and marketing
organization, including the re-education of sales personnel, development of new
sales and seminar presentations and marketing collateral, and changes in the
Company's product development plans.
Additionally, revenues from reselling Gupta software products by Open
Environment Australia decreased to $117,000 in the three months ended September
30, 1996 from $502,000 in the three months ended September 30, 1995, and to
$712,000 in the nine months ended September 30, 1996 from $1,874,000 in the nine
months ended September 30, 1995. This decrease is the result of Open Environment
Australia's continued transition from such resale activities to the sale of the
Company's Entera product line, as well as the underlying impact of the merger
with Borland, with whom Gupta competes directly.
There has also been some level of employee and management distraction as a
result of the planning and integration process for completion of the merger and
post-merger operations. The Company believes that this has contributed to the
decline in revenues in the three months ended September 30, 1996.
Also contributing to the decrease in total revenues was a decrease in education
revenues to $262,000 in the three months ended September 30, 1996 from $508,000
in the three months ended September 30, 1995, and to $846,000 in the nine months
ended September 30, 1996 from $1,562,000 in the nine months ended September 30,
1995. These decreases are 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.
Maintenance and service fees decreased to $1,133,000 in the three months ended
September 30, 1996 from $1,613,000 in the three months ended September 30, 1995,
and to $3,972,000 in the nine months ended September 30, 1996 from $4,490,000 in
the nine months ended September 30, 1995. Project related services and
maintenance revenues have decreased due to the decreased level of software
license revenues in the nine months ended September 30, 1996.
Revenues of Open Environment Australia and other international revenues
accounted for $797,000 (27%) of total net revenues for the three months ended
September 30, 1996, as compared to $3,544,000 (44%) for the three months ended
September 30, 1995, and $3,163,000 (33%) for the nine months ended September 30,
1996, as compared to $9,904,000 (46%) for the nine months ended September 30,
1995. This decrease is attributable to the factors described above and the
timing of orders from international resellers. 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.
Cost of revenues decreased to $1,732,000 for the three months ended September
30, 1996 from $1,813,000 for the three months ended September 30, 1995, and
increased to $6,262,000
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in the nine months ended September 30, 1996 from $4,962,000 in the nine months
ended September 30, 1995. Gross profits decreased to 40% for the three months
ended September 30, 1996 from 77% for the three months ended September 30, 1995,
and to 36% for the nine months ended September 30, 1996 from 78% for the nine
months ended September 30, 1995. The increase in cost of revenues is due
primarily to increased staffing in the services department, as the Company has
hired additional personnel to serve the demand for project related services. The
decrease in gross profit is the result of decreases in revenues without
corresponding cost reductions. The Company's cost structure is predominantly
fixed in the short term because it largely represents personnel and the
infrastructure necessary to support them. A shortfall in revenues has a direct
and immediate impact on the Company's gross profits and operating profitability
due to the Company's inability to react to a revenue shortfall from a cost
perspective in the near term. Fixed costs that are classified as cost of
revenues include personnel costs in the education, services and maintenance
departments as well as amortization of capitalized software.
Selling and marketing expenses increased to $3,459,000 in the three months ended
September 30, 1996 from $3,241,000 in the three months ended September 30, 1995,
and to $12,033,000 in the nine months ended September 30, 1996 from $8,939,000
in the nine months ended September 30, 1995. These increases are the result of
the hiring of additional personnel as the Company continues to develop its
direct sales force, and expand its marketing channels. The Company expects to
continue to invest a significant amount of its resources in its selling and
marketing efforts. In addition, the Company recorded specific additional
reserves for potential bad debts of $475,000 in the nine months ended September
30, 1996 as a direct result of the deteriorated aging of two international
accounts, one of which is a reseller in Saudi Arabia and the other is an end-
user in India. The Company has been pursuing collection of these balances, but
has been unsuccessful in obtaining cooperation from the customers, and although
the Company is still pursuing collection of the balances, management provided
for these amounts given their age and uncertainty.
General and administrative expenses decreased to $880,000 in the three months
ended September 30, 1996 from $974,000 in the three months ended September 30,
1995, and increased to $2,782,000 in the nine months ended September 30, 1996
from $2,660,000 in the nine months ended September 30, 1995. The increase for
the nine months ended September 30, 1996 is a result of increased professional
fees related to a number of corporate matters surrounding the pending
transaction with Borland. The Company has made a concerted effort to control
general and administrative expenses in recent months, as the Company has focused
on slowing growth in areas that are not revenue related. As a result, the
quarter-to-quarter level of general and administrative expenses has remained
relatively flat with the exception of the professional fees noted above.
Research and development expenses increased to $1,477,000 in the three months
ended September 30, 1996 from $1,104,000 in the three months ended September 30,
1995, and to $4,354,000 in the nine months ended September 30, 1996 from
$3,112,000 in the nine months ended September 30, 1995. These increases reflect
personnel increases in the research and development department, increases in
contracted work for certain porting activities to various platforms and
international localization efforts for certain of the Company's products. Also
contributing to the increases in research and development expenses was the fact
that only $22,000 of software development costs were capitalized under FAS 86
for the nine months ended September 30, 1996, as compared to $403,000 in the
nine month period ended September 30, 1995, respectively. Amortization of
previously capitalized software, which is included in the cost of software,
amounted to $46,000 and $400,000 in the three and nine month periods ended
September 30, 1996, respectively, as compared to $77,000 and $212,000 in the
three and nine month periods ended September 30, 1995, respectively. The
decrease in software development costs capitalized in 1996 was due to the fact
that minimal activities were devoted to projects at the point of technological
feasibility as defined by FAS 86. The Company expects to
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continue to increase its research and development expenses to keep pace with the
technological needs of the marketplace.
The Company recorded a provision for restructuring charges of $1,083,000 in the
nine month period ended September 30, 1996. Charges included the write-off of
inventory and prepaid royalties related to the Company's Learning Center
division, as the Company has discontinued all activities related to the Learning
Center ($381,000), the write-off of certain assets related to worldwide
education facilities, as the Company is no longer operating such facilities
($302,000), severance costs ($254,000), the write-off of the Company's
investment in a failed joint venture ($81,000), and other miscellaneous related
costs ($65,000). Substantially all of these charges were incurred prior to
June 30, 1996. The restructuring charge in the nine months ended September
30, 1995 reflected the acquisition costs related to the Jarrah acquisition.
During the third quarter of 1995, the Company sold a portion of its interest in
its Japanese joint venture to its joint venture partner. The transaction
results in the Company now owning 19.5% of the joint venture and accordingly,
accounting for the joint venture under the equity method has been discontinued.
The Company will continue to recognize royalty revenue from the joint venture,
but no longer recognizes any share of the venture's operating income or loss.
Other income decreased to $150,000 in the three months ended September 30, 1996
from $250,000 in the three months ended September 30, 1995, but increased to
$486,000 in the nine months ended September 30, 1996 from $447,000 in the nine
months ended September 30, 1995. The decrease for the three months ended
September 30, 1996 reflects the reduction of income generated from the remaining
investment of the net proceeds of the initial public offering of the Company's
common stock in April 1995. Those invested balances have decreased with the
Company's recent operating losses.
The Company also recorded a provision for income taxes in the nine months ended
September 30, 1996 of $847,000. This provision, recorded in the quarter ended
June 30, 1996, represents the write off of deferred tax assets under Statement
of Financial Accounting Standards 109, Accounting for Income Taxes, due to the
Company's operating losses. Those losses have put the ultimate realization of
the Company's deferred tax assets in doubt.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of September 30, 1996, the Company's cash and cash equivalents decreased to
$4,782,000 from $7,012,000 at December 31, 1995, and the Company also held
marketable securities amounting to $3,076,000 at September 30, 1996, a decrease
from $10,678,000 at December 31, 1995. The net decrease in cash and cash
equivalents and marketable securities was primarily the result of cash used to
fund the Company's operating losses in the first nine months of 1996.
The Company's credit facility consisting of a $2 million demand line of credit
and a $1 million equipment line of credit was allowed to lapse on September 26,
1996. The notes payable on the balance sheet at September 30, 1996 represent the
remaining balances on the Company's equipment term note portion of the line. The
balances are repayable quarterly through December 31, 1997 and carry an interest
rate of prime plus one quarter percent. This balance is classified as currently
payable due to the fact that the Company is in violation of financial covenants
related to quarterly cash flows and operating losses.
In the event that the Company continues to experience significant losses and is
unable to consummate a strategic transaction or sale of its business, management
of the Company anticipates that it would be required to make immediate,
significiant reductions in its expenditure levels and seek additional sources of
working capital by the beginning of 1997. There is no assurance that, if the
Company seeks additional financing in the future, such financing will be
available upon acceptable terms, if at all.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------------------------------------------
A. EXHIBITS
Exhibit 10.1 - Amendment No. 2 to the Merger Agreement dated as of October 8,
1996, by and among Borland International, Inc., Aspen Acquisition Corporation
and the Company.
Exhibit 11.1 - Statement regarding computation of Net Income (Loss) Per Share
(restated).
B. REPORTS ON FORM 8-K
NONE
10
<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: November , 1996
By: /s/ Adam Honig
---------------------------------------------------
Adam Honig, Acting President
By: /s/ James J. Driscoll
---------------------------------------------------
James J. Driscoll, Vice President of Finance
(Principal Financial Officer and Principal
Accounting Officer)
11
<PAGE>
EXHIBIT 10.1
AMENDMENT NO. 2 TO MERGER AGREEMENT
This AMENDMENT NO. 2 (this "Amendment") is made and entered into as of this
8th day of October 1996 by and among Borland International, Inc., a Delaware
corporation ("Acquiror"), Aspen Acquisition Corp., a Delaware corporation and a
direct, wholly-owned subsidiary of Acquiror ("Acquiror Sub"), and Open
Environment Corporation, a Delaware corporation (the "Target"), with reference
to the following:
Acquiror, Acquiror Sub and Target are parties to that certain Agreement and
Plan of Merger dated as of May 11, 1996 (the "Merger Agreement"), pursuant
to which Acquiror is to acquire Target by way of a merger of Acquiror Sub
into Target.
The parties hereto agree that the Merger Agreement is amended as follows:
1. The date after which the Merger Agreement may be terminated pursuant
to Section 8.01(b) is changed from October 31, 1996 to November 25, 1996.
2. The parties agree that the terms of the Merger Agreement and their
respective rights and obligations thereunder, remain in full force and
effect notwithstanding the restatement of, or amendment to, the OEC
financial statements included as part of the Proxy Statement/Prospectus
Amendment No. 3 to be filed with the Securities and Exchange Commission on
October 11.
3. Except as provided above, the Merger Agreement remains in full force
and effect.
IN WITNESS WHEREOF, Acquiror, Acquiror Sub and the Target have caused this
Amendment to be executed as of the date first written above by their respective
officers thereunto duly authorized.
BORLAND INTERNATIONAL, INC.
By /s/ Paul W. Emery, II
----------------------------------
Name: Paul W. Emery, II
Title: Vice President
ASPEN ACQUISITION CORP.
By /s/ Paul W. Emery, II
----------------------------------
Name: Paul W. Emery, II
Title: Vice President
OPEN ENVIRONMENT CORPORATION
By /s/ Adam Honig
---------------------------------
Name: Adam Honig
Title: President
<PAGE>
Exhibit 11.1
<TABLE>
<CAPTION>
OPEN ENVIRONMENT CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares of
common stock outstanding 7,560,619 7,408,984 7,518,797 6,326,243
Common stock equivalents:
Series A Convertible Preferred
Shares 377,289
Dilutive effect of stock options 1,163,141 1,215,795
---------- ---------- ---------- ---------
7,560,619 8,572,125 7,518,797 7,919,327
========== ========== ========== =========
Net income (loss) ($4,490,375) $ 266,978 ($17,135,985) $1,465,008
========== ========== =========== =========
Net income (loss) per share ($0.59) $0.03 ($2.28) $0.18
========== ========== =========== =========
</TABLE>
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS (RESTATED FINANCIAL DATA) SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM FORM 10-Q/A FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> AUG-01-1996 AUG-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 4,782,721 4,782,721
<SECURITIES> 3,075,796 3,075,796
<RECEIVABLES> 4,587,996 4,587,996
<ALLOWANCES> (1,349,935) (1,349,935)
<INVENTORY> 0 0
<CURRENT-ASSETS> 142,263,767 142,263,767
<PP&E> 6,195,106 6,195,106
<DEPRECIATION> (3,660,074) (3,660,074)
<TOTAL-ASSETS> 18,649,287 18,649,287
<CURRENT-LIABILITIES> 6,873,100 6,873,100
<BONDS> 0 0
0 0
0 0
<COMMON> 81,461 81,461
<OTHER-SE> 11,691,396 11,691,396
<TOTAL-LIABILITY-AND-EQUITY> 18,649,287 18,649,287
<SALES> 2,899,205 9,727,175
<TOTAL-REVENUES> 2,899,205 9,727,175
<CGS> 1,731,597 6,261,799
<TOTAL-COSTS> 1,731,597 6,261,799
<OTHER-EXPENSES> 5,816,018 20,251,922
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (4,490,375) (16,288,488)
<INCOME-TAX> 0 847,497
<INCOME-CONTINUING> (4,490,375) (17,135,985)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,490,375) (17,135,985)
<EPS-PRIMARY> (0.59) (2.28)
<EPS-DILUTED> (0.59) (2.28)
</TABLE>
