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Open Environment Corp – ‘10-Q’ for 9/30/96

As of: Thursday, 11/14/96 · For: 9/30/96 · Accession #: 927016-96-1740 · File #: 0-25794

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

11/14/96  Open Environment Corp             10-Q        9/30/96    4:39K                                    Donnelley R R & S… 07/FA

Quarterly Report — Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Form 10-Q From 09/30/96                               13     70K 
 2: EX-10.1     Amendment No. 2 to Merger Agreement                    2±     8K 
 3: EX-11.1     Computation of Net Income Per Share                    1      6K 
 4: EX-27       Financial Data Schedule                                2      8K

10-Q — Form 10-Q From 09/30/96
Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Condensed Consolidated Financial Statements Exhibits and Reports on Form 8-K Management's Discussion and Analysis of Financial Condition and Results of Operations, as Amended
1	1st Page - Filing Submission
2	Item 1. Condensed Consolidated Financial Statements
8	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, as Amended
12	Item 6. Exhibits and Reports on Form 8-K

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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 

                                                                [Download Table]

                                                                         Page
                                                                         ----
                                                                             
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                            

                                                                [Download Table]


                 OPEN ENVIRONMENT CORPORATION AND SUBSIDIARIES                
                     CONDENSED CONSOLIDATED BALANCE SHEETS                    

                                                   SEPTEMBER 30, DECEMBER 31, 
                                                      1996           1995     
                                                   ---------     ------------ 

ASSETS                                                                        
Current assets:                                                               
                                                                              
    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 
                                                 ===========      =========== 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.  

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                                                        [Enlarge/Download Table]


                                           OPEN ENVIRONMENT CORPORATION AND SUBSIDIARIES                     
                                          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                    

                                        THREE MONTHS ENDED SEPTEMBER 30,      NINE MONTHS ENDED SEPTEMBER 30,

                                              1996            1995               1996               1995     
                                         -------------    ------------        ------------       ----------- 
                                                                                                             
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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                                                                [Download Table]


                 OPEN ENVIRONMENT CORPORATION AND SUBSIDIARIES                    
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                   

                                                   NINE MONTHS ENDED SEPTEMBER 30,
                                                         1996           1995      
                                                    ------------    -----------   
                                                                                  
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:                                    

                                                                [Download Table]

                                          SEPTEMBER 30,        DECEMBER 31,
                                              1996               1995      
                                          -------------------------------  
                                                                           
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  
                                          ===============================  

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.                                                                    

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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.                                     

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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                                                                        
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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)   

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘10-Q’ Filing	Date	First	Last	Other Filings

	12/31/97	11
Filed on:	11/14/96
	11/4/96	1
	10/11/96	6	8	10-K405/A, 10-Q/A
	10/8/96	8	12
For Period End:	9/30/96	1	11
	9/26/96	11
	7/31/96	8
	6/30/96	11		10-Q, 10-Q/A
	5/11/96	8		8-K
	3/31/96	9		10-Q, 10-Q/A
	12/31/95	6	11	10-K405/A
	10/1/95	7
	9/30/95	2	11	10-Q/A
	4/13/95	7
	2/1/95	7
	1/17/94	7
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Open Environment Corp – ‘10-Q’ for 9/30/96

As of: Thursday, 11/14/96 · For: 9/30/96 · Accession #: 927016-96-1740 · File #: 0-25794

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