<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the quarterly period ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to _____________
Commission File Number 0-14686
PYRAMID TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2781589
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3860 N. FIRST STREET, SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 428-9000.
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.
<TABLE>
<CAPTION>
Class Shares Outstanding at January 28, 1994
----- --------------------------------------
<S> <C>
Common Stock, $0.01 par value 13,222,672
</TABLE>
1
<PAGE> 2
PYRAMID TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statement of Income
Three months ended December 31, 1993 and January 1, 1993 3
Condensed Consolidated Balance Sheet
December 31, 1993 and September 30, 1993 4
Condensed Consolidated Statement of Cash Flows
Three months ended December 31, 1993 and January 1, 1993 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
PYRAMID TECHNOLOGY CORPORATION
Consolidated Statement of Income
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
Dec. 31 Jan. 1
1993 1993
------- -------
<S> <C> <C>
Revenues:
Product revenues $43,978 $41,139
Service revenues 16,040 13,964
------- -------
60,018 55,103
Cost of sales:
Cost of products sold 23,167 21,473
Cost of services 11,882 10,930
------- -------
35,049 32,403
Gross profit 24,969 22,700
Operating expenses:
Research and development 6,643 7,352
Sales, marketing, general & administrative 17,441 14,828
------- -------
Total operating expenses 24,084 22,180
------- -------
Operating income 885 520
Interest income 121 190
Interest expense (159) (190)
------- -------
Income before income taxes 847 520
Provision for income taxes 212 52
------- -------
Net income $ 635 $ 468
======= =======
Net income per common and common equivalent share $ 0.05 $ 0.04
======= =======
Shares used in computing net income per
common and common equivalent share 13,584 12,148
======= =======
</TABLE>
See accompanying notes
3
<PAGE> 4
PYRAMID TECHNOLOGY CORPORATION
Condensed Consolidated Balance Sheet
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Dec. 31 Sept. 30
1993 1993
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25,874 $ 31,358
Accounts receivable, net 57,403 51,392
Inventories 37,500 35,712
Prepaid expenses and deposits 11,018 11,873
-------- --------
Total current assets 131,795 130,335
Property and equipment, at cost 97,532 95,273
Less accumulated depreciation and amortization 64,455 60,686
-------- --------
33,077 34,587
Capitalized software development costs 16,360 15,959
Service spare parts and other assets 11,066 10,777
-------- --------
$192,298 $191,658
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,290 $ 20,312
Accrued payroll and related liabilities 6,212 7,043
Accrued commissions 1,489 2,419
Deferred revenue 6,791 7,197
Other accrued liabilities 9,043 8,764
Restructuring accruals 3,584 4,464
Income taxes payable 1,133 1,561
Current portion of long-term debt 2,212 1,795
-------- --------
Total current liabilities 51,754 53,555
Long-term debt 1,888 487
Shareholders' equity:
Common stock 132 132
Additional paid-in capital 155,340 155,078
Accumulated deficit (14,880) (15,514)
Accumulated translation adjustment (1,936) (2,080)
-------- --------
Total shareholders' equity 138,656 137,616
-------- --------
$192,298 $191,658
======== ========
</TABLE>
See accompanying notes
4
<PAGE> 5
PYRAMID TECHNOLOGY CORPORATION
Condensed Consolidated Statement of Cash Flows
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
Dec. 31 Jan. 1
1993 1993
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 635 $ 468
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 7,597 9,030
Changes in:
Accounts receivable, net (6,011) (4,777)
Inventories (1,788) 1,252
Prepaid expenses and deposits and income tax receivable 855 3,210
Accounts payable, accrued liabilities, and other (1,943) (5,749)
------- -------
Net cash provided by (used for) operating activities (655) 3,434
------- -------
Cash flows from investing activities:
Investment in property and equipment (3,337) (3,159)
Increase in capitalized software development costs (2,403) (1,771)
(Increase) decrease in other assets (1,169) 1,879
------- -------
Net cash used for investing activities (6,909) (3,051)
Cash flows from financing activities:
Principal payments on capital lease obligations (546) (451)
Net borrowings under loan agreement 2,364 --
Issuance of common stock, net of repurchases 262 552
------- -------
Net cash provided by financing activities 2,080 101
------- -------
Increase (decrease) in cash and cash equivalents (5,484) 484
Cash and cash equivalents, at the beginning of the period 31,358 26,458
------- -------
Cash and cash equivalents, at the end of the period $25,874 $26,942
======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest $ 159 $ 190
Cash paid for income taxes $ 531 $ 41
</TABLE>
See accompanying notes
5
<PAGE> 6
PYRAMID TECHNOLOGY CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
Basis of presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries after elimination of all significant intercompany
transactions.
While the financial information furnished is unaudited, the statements in this
report reflect all adjustments, consisting of normal recurring accruals, which,
in the opinion of management, are necessary for a fair statement of the results
of operations for the interim periods covered and of the financial condition of
the Company at the dates of the balance sheets. The operating results for the
interim periods presented are not necessarily indicative of the results to be
expected for the entire year.
Certain footnotes normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted.
These financial statements should be read in conjunction with the Company's
audited financial statements and notes thereto for the fiscal year ended
September 30, 1993.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following (in thousands):
<TABLE>
<CAPTION>
Dec. 31 Sept. 30
1993 1993
------- -------
<S> <C> <C>
Raw materials $13,115 $12,236
Work-in-process 16,433 14,517
Finished goods 7,952 8,959
------- -------
$37,500 $35,712
======= =======
</TABLE>
6
<PAGE> 7
PYRAMID TECHNOLOGY CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
Change in Method of Accounting for Income Taxes
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Under
FAS 109, the liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Prior to the adoption of FAS
109, the Company used the liability method under FAS 96. Under FAS 109, future
events can be considered to support recognition of deferred tax assets.
Generally, FAS 96 prohibited consideration of any other future events in
calculating deferred taxes. The cumulative effect of the adoption of FAS 109
was not material.
As permitted by FAS 109, the Company has elected not to restate the financial
statements of any prior years. The effect of the change on net income for the
three months ended December 31, 1993 was not material.
Deferred income taxes reflect tax credit and loss carryforwards and the tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes.
Significant components of the Company's deferred tax liabilities and assets as
of October 1, 1993 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax liabilities:
Capitalized software development costs ($ 7,466)
Deferred tax assets:
Tax credits 6,160
Depreciation 1,738
Restructuring and other reserves 12,400
Loss Carryforwards 2,583
--------
Total deferred tax assets 22,881
--------
Valuation allowance for deferred tax assets (12,892)
--------
Net deferred taxes $ 2,523
========
</TABLE>
Approximately $2,800,000 of the valuation reserve is related to benefits of
stock option deductions which will be allocated directly to additional paid-in
capital when realized.
7
<PAGE> 8
PYRAMID TECHNOLOGY CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
Net income per common and common equivalent share
Net income per common and common equivalent share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the
dilutive shares issuable upon the exercise of stock options using the treasury
stock or modified treasury stock method (whichever applies). For the three
month period ended December 31, 1993, common equivalent shares were computed
using the treasury stock method. For the three month period ended January 1,
1993, no common equivalent shares were included in the computation as the
modified treasury stock method applied and the effect would be anti-dilutive.
<TABLE>
<CAPTION>
Three Months Ended
---------------------
Dec. 31 Jan. 1
(in thousands, except per share amounts) 1993 1993
------ ------
<S> <C> <C>
Average shares outstanding 13,240 12,148
Net effect of dilutive stock options 344 --
------ ------
Shares used in computing net income per
common and common equivalent share 13,584 12,148
Net income $635 $468
Net income per common and common equivalent share $0.05 $0.04
</TABLE>
8
<PAGE> 9
PYRAMID TECHNOLOGY CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto, and with the Company's
audited financial statements and notes thereto for the year ended September 30,
1993.
Results of Operations
Total revenues for the first quarter of fiscal 1994 increased 9% to
$60,018,000 from the first quarter of fiscal 1993 level of $55,103,000. The
increased revenues are principally the result of the Company's Open Data Center
strategy to deliver technology, partnerships, and services to the open systems
data center market, the market acceptance of the MIServer ES products since the
introduction in October 1992, and the October 1993 introduction of its Nile
series.
The growth in product revenues for the first quarter of fiscal 1994 as compared
to the first quarter of fiscal 1993 was primarily attributable to increases in
the Company's direct revenue channels, principally due to increased revenues to
commercial end-user customers in the United States. Direct product revenues as
a percentage of total product revenues were 57% of revenue in the first quarter
of fiscal 1994 compared to 47% in the first quarter of fiscal 1993.
Total revenues from AT&T were $13,700,000 or 23% of total revenue for the first
quarter of fiscal 1994 compared to $7,500,000 or 14% in the first quarter of
fiscal 1993. The increase was attributable to increased shipments in
connection with the Treasury Multiuser Acquisition Contract "TMAC", which was
awarded to AT&T with Pyramid as the major subcontractor. The Company believes,
though, that revenues from AT&T will continue to fluctuate as purchase
quantities vary in connection with "TMAC".
International product revenues as a percentage of total product revenues
were 37% in the first quarter of fiscal 1994 compared to 48% in the first
quarter of fiscal 1993. The dollar value of international revenues decreased
19% from the first quarter of fiscal 1993 to the first quarter of fiscal 1994,
as increases in sales to International Computers Limited (ICL) and
Fujitsu Australia Limited (FAL) were more than offset by sizeable decreases in
sales to Olivetti Systems and Networks (Olivetti), Siemens Nixdorf (SNI),
Hyundai, and the UK direct channel. Included in international revenues were
nonrecurring software license fees of $3,500,000 in the first quarter of fiscal
1994 and $1,400,000 in the first quarter of fiscal 1993. Due to continued weak
economies in many parts of the world, the Company believes that international
revenues for fiscal 1994 may be lower than international revenues for fiscal
1993, which may affect the Company's overall operating results.
Service revenues in the first quarter of fiscal 1994 continued to benefit from
the increasing base of installed Pyramid systems. In June 1992, the Company
announced a North American service agreement with Bull HN Information Systems,
Inc., which has increased the number of support personnel available for on-site
service to Pyramid customers in North America. In March 1993, the Company
entered into a European service agreement with Siemens Nixdorf, which increased
the number of support personnel available for on-site service to Pyramid
customers in Europe. In December 1993, the Company modified an existing
service agreement with Fujitsu Australia, Ltd., which increased the number of
support personnel available for on-site service to Pyramid customers in all of
Australia. Although the Company expects the trend of increasing service
9
<PAGE> 10
revenues to continue in fiscal 1994, there can be no assurance as to the impact
of such an increase on the Company's results, or that such an increase will
actually occur.
Gross profit as a percentage of revenues in the first quarter of fiscal
1994 was 42% compared to 41% in the first quarter of fiscal 1993. The increase
in gross profit was due to increased direct revenues and nonrecurring software
license fees, which historically have yielded higher margins, improved margin on
service revenues and lower manufacturing and service overhead costs resulting
from the fiscal 1992 restructurings. In the future, gross profit as a
percentage of revenues may be adversely affected by a higher mix of indirect
revenues, which historically have higher discounts, a decrease in nonrecurring
software license fees, significant fluctuations in currency exchange rates, and
intensified competitive pressures.
Research and development expenses as a percentage of revenues were 11% in the
first quarter of fiscal 1994 compared to 13% in the first quarter of fiscal
1993. The percentage decrease was principally due to higher revenues in the
first quarter of fiscal 1994 as well as an increase in capitalized software
development costs. In accordance with Statement of Financial Accounting
Standards No. 86, the Company capitalized $2,400,000 of software development
costs in the first quarter of fiscal 1994 compared to $1,800,000 in the first
quarter of fiscal 1993. The Company believes the enhancement of existing
products and the development of new products is essential to maintaining a
competitive position. Accordingly, the Company is committed to a high level of
research and development expenditures. However, because of the inherent
uncertainties of product development projects in the Company's
technology-intensive industry, there can be no assurance that research and
development efforts will result in successful product enhancements or
introductions, or, ultimately in increased revenues. The Company expects total
research and development expenses to increase during fiscal 1994 as the Company
increases the number of its research and development personnel.
Sales, marketing, and general and administrative expenses as a percentage of
revenues were 29% in the first quarter of fiscal 1994 compared to 27% in the
first quarter of fiscal 1993. In absolute dollars, these expenses increased
$2,600,000 from the first quarter of fiscal 1993 to the first quarter of fiscal
1994 due primarily to increases in sales and marketing personnel and commission
expense resulting from higher revenue. The Company expects total sales,
marketing, general and administrative expenses to increase during fiscal 1994
as commission expenses increase with an increase in revenue and as the Company
increases the number of revenue-producing direct sales people and marketing
personnel.
The amount of interest income for the first quarter of fiscal 1994 was $121,000
compared to $190,000 in the first quarter of fiscal 1993. The decrease was a
result of lower average daily cash balances in the first quarter of fiscal 1994
as compared to the year-ago period. The Company intends to continue investing
its available funds in short-term, highly-liquid income producing obligations.
The amount of interest expense for the first quarter of fiscal 1994 was
$159,000 compared to $190,000 in the first quarter of fiscal 1993. The
decrease was due to lower interest rates which were partially offset by a
higher capital lease obligation balance.
The effective income tax rate is expected to remain at 25% for the
remaining quarters of fiscal 1994. However, this rate could change based on the
Company's results during the remainder of fiscal 1994. The expected tax rate of
25% is less than the statutory rate of 34% primarily due to the utilization of
tax credits. Effective October 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109),
which establishes a new method of accounting for income taxes. The effect of
the adoption of FAS 109 on net income in the first quarter of fiscal 1994 was
not material.
10
<PAGE> 11
The Company's agreements with its OEMs and distributors, including its TMAC
agreement through AT&T, do not require minimum purchase quantities and
therefore there can be no assurance that the Company will receive future
revenues under these agreements. A substantial portion of the Company's
revenues in each quarter generally results from shipments during the last month
of that quarter, and principally for that reason, the Company's revenues are
subject to quarterly fluctuations. In addition, the Company establishes its
expenditure-level targets based on expected revenues. If anticipated orders
and shipments in any quarter do not occur when expected, expenditure levels
could be disproportionately high and the Company's operating results for that
quarter could be adversely affected. The Company's operating results may also
be subject to quarterly fluctuations as a result of a number of factors,
including the timing of orders from and shipments to major customers, product
mix, variations in product costs, the mix of revenues, nonrecurring operating
system and manufacturing license fees, increased competition, the ability to
introduce new products on a timely basis, and general economic conditions.
Liquidity and Capital Resources
The Company has financed its operating expenses and working capital needs
primarily through a combination of internally generated cash and cash balances.
Cash and cash equivalents decreased during the quarter from $31,358,000 at
September 30, 1993 to $25,874,000 at December 31, 1993. Net cash used by
operating activities during the first quarter of fiscal 1994 was $655,000
compared to net cash provided by operating activities of $3,434,000 during the
same period of fiscal 1993. The Company's investing activities used $6,909,000
in cash during the first fiscal quarter of 1994 as compared to $3,051,000
during the same period of fiscal 1993. Financing activities provided
$2,080,000 in cash during the first fiscal quarter of 1994 as compared to only
$101,000 during the same period of fiscal 1993.
In July 1993, the Company obtained an $20,000,000 unsecured revolving line of
credit, which expires on July 28, 1994. At December 31, 1993, there were no
borrowings outstanding under the revolving line of credit. For purposes of
hedging its foreign currency exposures, the Company has available a bank
facility which provides up to $20,000,000 in foreign exchange contracts and
expires on March 15, 1994. At December 31, 1993, there was $9,087,000
outstanding under this facility to be settled at the end of January 1994.
During October 1993, the Company entered into a borrowing agreement with a
lending company. The agreement provides for up to $10,500,000 of three year
eligible capital equipment financing at interest rates based on three year
treasury notes for the week preceding each funding date. All fundings must
occur on or before September 30, 1994. At December 31, 1993, $2,364,000 of
equipment had been financed under this agreement. The Company expects to
renegotiate its revolving line of credit and foreign exchange contract
facilities in the upcoming year. Failure to negotiate revisions and/or
extensions of these facilities or to obtain new bank agreements on terms
favorable to the Company could have an adverse impact on its operations and
financial results.
Based upon its current operating plan the Company anticipates that internally
generated funds and cash balances, together with existing credit facilities and
capital leases, will be sufficient to satisfy capital requirements through
fiscal 1994. However, the Company may raise additional capital through debt or
equity financing to take advantage of market opportunities.
11
<PAGE> 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
During the first quarter of fiscal 1994, two shareholder class action
complaints were filed naming as defendants the Company and certain of its
officers and directors, and alleging violations of federal securities laws as
well as a state law fraud claim. The complaints allege that the Company made
false and misleading statements in press releases and other public statements
and that some of the individual defendants traded the Company's common stock on
inside information. The complaints seek an unspecified amount of damages. A
motion for consolidation of the two actions has been filed, to be heard March 4,
1994. The Company denies the allegations in the complaints and intends to
present a vigorous defense to the actions. Although the Company cannot predict
the outcome of the lawsuits at this time, management believes that there are
meritorious defenses to each of the claims made in the complaints.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on January 25, 1994. The following
matters were voted upon at the meeting with the result of the voting being as
shown:
<TABLE>
<CAPTION>
Shares Voted
------------------------------
In Favor Withheld
---------- -----------
<S> <C> <C> <C>
1. Election of five directors of the Corporation
to serve the ensuing year and until their
successors are elected.
Richard H. Lussier 10,804,168 450,256
John S. Chen 10,853,223 671,201
Donald E. Guinn 10,809,126 445,298
Clarence W. Spangle 10,804,168 450,256
George D. Wells 10,808,352 446,072
</TABLE>
<TABLE>
<CAPTION>
Shares Voted
--------------------------------------------
In Favor Opposed Withheld
---------- ---------- ----------
<S> <C> <C> <C> <C>
2. Approval of an amendment of the Amended
1982 Incentive Stock Option Plan to increase
the number of shares reserved for issuance
thereunder by 650,000. 4,833,179 2,414,931 103,374
3. Approval of an amendment of the Amended
and Restated Directors' Option Plan to
increase the number of shares reserved for
issuance thereunder by 60,000, to increase
the annual grant of shares to each outside
director to 6,000, and to change certain terms
of exercise of options under the Plan as
described in Proposal No. 3 in the Proxy
Statement dated December 3, 1993. 5,206,993 1,920,497 117,753
4. Ratification of Ernst & Young as the
independent auditors for the Corporation for
the fiscal year ending September 30, 1994. 11,156,062 35,158 63,204
</TABLE>
12
<PAGE> 13
Item 6. Exhibits and Reports on Form 8-K
a. There are no exhibits required to be filed with this report.
b. There were no reports on Form 8-K filed during the quarter ended
December 31, 1993.
13
<PAGE> 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PYRAMID TECHNOLOGY CORPORATION
Dated: February 11, 1994 By /s/ John S. Chen
---------------------------------------
John S. Chen
President and Chief Operating Officer
Dated: February 11, 1994 By /s/ James J. Nelson
---------------------------------------
James J. Nelson
Vice President, Corporate Controller
(Principal Accounting Officer)
14
