<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 April 1, 1994
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)
<TABLE>
<S> <C>
DELAWARE 94-2781589
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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>
<S> <C>
Class Shares Outstanding at April 29, 1994
----------------------------- ------------------------------------
Common Stock, $0.01 par value 13,432,626
</TABLE>
1
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PYRAMID TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statement of Operations
Three and six months ended April 1, 1994 and April 2, 1993 3
Condensed Consolidated Balance Sheet
April 1, 1994 and September 30, 1993 4
Condensed Consolidated Statement of Cash Flows
Six months ended April 1, 1994 and April 2, 1993 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
PYRAMID TECHNOLOGY CORPORATION
Consolidated Statement of Operations
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ -----------------------
April 1 April 2 April 1 April 2
1994 1993 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product revenues $ 30,195 $43,373 $ 74,173 $ 84,512
Service revenues 16,353 14,651 32,393 28,615
-------- ------- -------- --------
46,548 58,024 106,566 113,127
Cost of sales:
Cost of products sold 20,900 21,479 44,066 42,952
Cost of services 13,049 11,703 24,931 22,633
-------- ------- -------- --------
33,949 33,182 68,997 65,585
Gross profit 12,599 24,842 37,569 47,542
Operating expenses:
Research and development 7,008 7,455 13,651 14,807
Sales, marketing, general & administrative 18,948 15,817 36,389 30,645
-------- ------- -------- --------
Total operating expenses 25,956 23,272 50,040 45,452
-------- ------- -------- --------
Operating income (loss) (13,357) 1,570 (12,471) 2,090
Interest income 151 172 272 362
Interest expense (196) (142) (355) (332)
-------- ------- --------- --------
Income (loss) before income taxes (13,402) 1,600 (12,554) 2,120
Provision for income taxes 2,571 160 2,783 212
-------- ------- -------- --------
Net income (loss) $(15,973) $ 1,440 $(15,337) $ 1,908
======== ======= ======== ========
Net income (loss) per common and
common equivalent share $ (1.19) $ 0.12 $ (1.14) $ 0.16
======== ======= ======== ========
Shares used in computing net income (loss)
per common and common equivalent share 13,403 12,258 13,494 12,203
======== ======== ======== ========
</TABLE>
See accompanying notes
3
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PYRAMID TECHNOLOGY CORPORATION
Condensed Consolidated Balance Sheet
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
April 1 September 30
1994 1993
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,256 $ 31,358
Accounts receivable, net 49,026 51,392
Inventories 37,681 35,712
Prepaid expenses and deposits 9,290 11,873
--------- ---------
Total current assets 115,253 130,335
Property and equipment, at cost 100,936 95,273
Less accumulated depreciation and amortization 68,107 60,686
--------- ---------
32,829 34,587
Capitalized software development costs 16,955 15,959
Service spare parts and other assets 12,775 10,777
--------- ---------
$ 177,812 $ 191,658
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,356 $ 20,312
Accrued payroll and related liabilities 6,113 7,043
Accrued commissions 1,346 2,419
Deferred revenue 9,907 7,197
Other accrued liabilities 9,966 8,764
Restructuring accruals 3,111 4,464
Income taxes payable 1,592 1,561
Current portion of long-term debt 2,023 1,795
--------- ---------
Total current liabilities 51,414 53,555
Long-term debt 2,162 487
Shareholders' equity:
Common stock 134 132
Additional paid-in capital 156,765 155,078
Accumulated deficit (30,853) (15,514)
Accumulated translation adjustment (1,810) (2,080)
--------- ---------
Total shareholders' equity 124,236 137,616
--------- ---------
$ 177,812 $ 191,658
========= =========
</TABLE>
See accompanying notes
4
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PYRAMID TECHNOLOGY CORPORATION
Condensed Consolidated Statement of Cash Flows
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------------------------
April 1 April 2
1994 1993
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (15,337) $ 1,908
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 15,531 16,785
Changes in:
Accounts receivable, net 2,366 (10,942)
Inventories (1,969) (1,670)
Prepaid expenses and deposits and income tax receivable 2,583 3,705
Accounts payable, accrued liabilities, and other (1,953) (1,215)
--------- ---------
Net cash provided by operating activities 1,221 8,571
--------- ---------
Cash flows from investing activities:
Investment in property and equipment (8,018) (7,246)
Increase in capitalized software development costs (5,178) (3,764)
(Increase) decrease in other assets (3,719) 2,013
--------- ---------
Net cash used for investing activities (16,915) (8,997)
Cash flows from financing activities:
Principal payments on long-term debt (1,247) (736)
Borrowings under loan agreement 3,150 --
Issuance of common stock, net of repurchases 1,689 1,855
--------- ---------
Net cash provided by financing activities 3,592 1,119
--------- ---------
Increase (decrease) in cash and cash equivalents (12,102) 693
Cash and cash equivalents, at the beginning of the period 31,358 26,458
--------- ---------
Cash and cash equivalents, at the end of the period $ 19,256 $ 27,151
======== =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 355 $ 332
Cash paid for income taxes $ 560 $ 65
</TABLE>
See accompanying notes
5
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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>
April 1 September 30
1994 1993
------- ------------
<S> <C> <C>
Raw materials $16,703 $12,236
Work-in-process 12,451 14,517
Finished goods 8,527 8,959
------- -------
$37,681 $35,712
======= =======
</TABLE>
Related Party Transactions
During the second quarter of fiscal 1994, a senior executive of a major
customer and vendor of the Company was elected to the Company's board of
directors. The related party accounted for approximately 11% of the Company's
revenue during the second quarter of fiscal 1994. Additionally, the Company
has contracted with the related party to perform consulting services totaling a
minimum of $7,000,000 per year over a nine year period. At April 1, 1994, the
Company had an account receivable balance of $9,100,000 from the related party
and owed the related party $550,000 for consulting services rendered.
Line of Credit
In July 1993, the Company obtained a $20,000,000 line of credit. To date,
there have been no borrowings under the line of credit. At April 1, 1994, the
Company was in violation of certain financial requirements of the line of
credit and obtained a waiver from the bank. The waiver provides the Company
the ability to borrow the lesser of $10,000,000 or an amount computed based on
a borrowing base formula. Amounts borrowed under the line of credit are
secured by the Company's accounts receivable. The line of credit, which
expires on October 31, 1994, requires the maintenance of certain financial
ratios and sets limitations on the Company in regards to other indebtedness,
guarantees, encumbrances, mergers, consolidations, sale and leaseback of
assets, equity distributions, annual capital expenditures and capital software
levels.
6
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PYRAMID TECHNOLOGY CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
Net income (loss) per common and common equivalent share
Net income (loss) 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 and
six month periods ended April 1, 1994, no common equivalent shares were
included in the computation of net loss per share as their effect would be
anti-dilutive. For the three and six month periods ended April 2, 1993, no
common equivalent shares were included in the computation as the modified
treasury stock method applied and the effect would be anti-dilutive.
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
April 1 April 2
1994 1993
--------- -------
<S> <C> <C>
Average shares outstanding 13,403 12,258
Net effect of dilutive stock options -- --
--------- -------
Shares used in computing net income (loss) per
common and common equivalent share 13,403 12,258
Net income (loss) $ (15,973) $ 1,440
Net income (loss) per common and common
equivalent share $ (1.19) $ 0.12
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
------------------------------
April 1 April 2
1994 1993
--------- -------
<S> <C> <C>
Average shares outstanding 13,494 12,203
Net effect of dilutive stock options -- --
--------- -------
Shares used in computing net income (loss) per
common and common equivalent share 13,494 12,203
Net income (loss) $ (15,337) $ 1,908
Net income (loss) per common and common equivalent share $ (1.14) $ 0.16
</TABLE>
7
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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 second quarter and first six months of fiscal 1994
decreased 20% and 6% to $46,548,000 and $106,566,000 from the second quarter
and first six months of fiscal 1993 levels of $58,024,000 and $113,127,000.
The decrease in product revenues for the second quarter and first six months of
fiscal 1994 as compared to the second quarter and first six months of fiscal
1993 was primarily attributable to the decline in business with traditional OEM
partners as well as decreases in direct product revenues from that of a year
ago. Also contributing to the decrease in product revenues was the lengthening
of sales cycles experienced in selling larger, more sophisticated systems to
Fortune 1000 class companies. Direct product revenues were $21,103,000 or 70%
of total product revenues for the second quarter of fiscal 1994 compared to
$24,683,000 or 57% in the second quarter of fiscal 1993, and $46,104,000 or 62%
of total product revenues for the first six months of fiscal 1994 compared to
$44,184,000 or 52% in the first six months of fiscal 1993.
Total revenues from AT&T were $6,539,000 or 14% of total revenues for the
second quarter of fiscal 1994 compared to $12,689,000 or 22% in the second
quarter of fiscal 1993, and $20,272,000 or 19% of total revenues for the first
six months of fiscal 1994 compared to $20,169,000 or 18% in the first six
months of fiscal 1993. The decrease for the quarter was attributable to
decreased 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 that revenues from AT&T will continue to
fluctuate as purchase quantities vary in connection with "TMAC".
International product revenues were $11,989,000 or 40% of total product
revenues for the second quarter of fiscal 1994 compared to $18,925,000 or 44%
in the second quarter of fiscal 1993, and $28,068,000 or 38% of total product
revenues for the first six months of fiscal 1994 compared to $38,736,000 or 46%
in the first six months of fiscal 1993. The dollar value of international
product revenues decreased 37% from the second quarter of fiscal 1993 to the
second quarter of fiscal 1994, as increases in Australian sales were more than
offset by sizeable decreases in sales to Olivetti, Siemens Nixdorf, Hyundai,
and Sharp. Included in international revenues were nonrecurring software
license fees of $1,400,000 and $4,900,000 in the second quarter and first six
months of fiscal 1994 and $1,800,000 and $3,200,000 in the second quarter and
first six months of fiscal 1993. Due to continued weak economies in many parts
of the world, the Company believes that international revenues for the last
half of fiscal 1994 will be lower than international revenues for the last half
of fiscal 1993, which may affect the Company's overall operating results.
Service revenues for the second quarter and first six months 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.
8
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PYRAMID TECHNOLOGY CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Gross profit as a percentage of revenues in the second quarter and first six
months of fiscal 1994 was 27% and 35% compared to 43% and 42% in the second
quarter and first six months of fiscal 1993. The decrease in gross profit was
due to the decrease in revenues experienced during the second quarter of fiscal
1994 in relation to fixed costs. 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, which historically have yielded higher margins, significant
fluctuations in currency exchange rates, and intensified competitive pressures.
The Company believes that gross profit as a percentage of revenue for the last
half of fiscal 1994 will be lower than the percentage for the last half of
fiscal 1993, which may affect the Company's overall operating results.
Research and development expenses as a percentage of revenues were 15% and 13%
in the second quarter and first six months of fiscal 1994 compared to 13% in
both the second quarter and first six months of fiscal 1993. The percentage
increase was principally due to lower revenues in the second quarter of fiscal
1994 which was somewhat offset by an increase in capitalized software
development costs. In accordance with Statement of Financial Accounting
Standards No. 86, the Company capitalized $2,775,000 and $5,178,000 of software
development costs in the second quarter and first six months of fiscal 1994
compared to $1,993,000 and $3,764,000 in the second quarter and first six
months of fiscal 1993. The Company believes the enhancement of existing
products and the development of new products is essential to maintaining a
competitive marketing 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.
Sales, marketing, and general and administrative expenses as a percentage of
revenues were 41% and 34% in the second quarter and first six months of fiscal
1994 compared to 27% in both the second quarter and first six months of fiscal
1993. In absolute dollars, these expenses increased $3,131,000 and $5,744,000
from the second quarter and first six months of fiscal 1993 to the second
quarter and first six months of fiscal 1994 due primarily to increases in sales
and marketing personnel and to termination costs for reducing the number of
general and administrative personnel in the second quarter of fiscal 1994. The
Company expects total sales, marketing, general and administrative expenses to
increase during the remainder of fiscal 1994 as commission expenses increase
with the increase in cumulative revenue and as the Company increases the number
of revenue-producing direct sales people and marketing personnel to enhance the
Company's direct sales capacity.
The amount of interest income for the second quarter and first six months of
fiscal 1994 was $151,000 and $272,000 compared to $172,000 and $362,000 in the
second quarter and first six months of fiscal 1993. The decrease was primarily
a result of lower average daily cash balances in the second quarter and first
six months of fiscal 1994 as compared to the year-ago periods. The Company
intends to continue investing its available funds in short-term, highly-liquid
income producing obligations. The amount of interest expense for the second
quarter and first six months of fiscal 1994 was $196,000 and $355,000 compared
to $142,000 and $332,000 in the second quarter and first six months of fiscal
1993. The increase was due to a higher level of capital lease and loan
obligations. The Company expects interest expense to increase during the
remainder of fiscal 1994.
9
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PYRAMID TECHNOLOGY CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The income tax provision for the second quarter and first six months of fiscal
1994 includes a $2,523,000 charge for a write-off of the Company's deferred tax
assets. For the remainder of fiscal 1994, it is anticipated that the Company
will be reporting minimal amounts of income tax liability and the effective tax
rate is expected to be less than 10%. 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 fiscal
1994 was not material.
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 $25,874,000 at
December 31, 1993 to $19,256,000 at April 1, 1994. Net cash provided by
operating activities during the first six months of fiscal 1994 was $1,221,000
as compared to $8,571,000 during the same period of fiscal 1993. The Company's
investing activities used $16,915,000 in cash during the first six months of
fiscal 1994 as compared to $8,997,000 during the same period of fiscal 1993.
Financing activities provided $3,592,000 in cash during the first six months of
fiscal 1994 as compared to $1,119,000 during the same period of fiscal 1993.
In July 1993, the Company obtained a $20,000,000 line of credit. To date,
there have been no borrowings under the line of credit. At April 1, 1994, the
Company was in violation of certain financial requirements of the line of
credit and obtained a waiver from the bank. The waiver provides the Company
the ability to borrow the lesser of $10,000,000 or an amount computed based on
a borrowing base formula. Amounts borrowed under the line of credit are
secured by the Company's accounts receivable. The line of credit, which
expires on October 31, 1994, requires the maintenance of certain financial
ratios and sets limitations on the Company in regards to other indebtedness,
guarantees, encumbrances, mergers, consolidations, sale and leaseback of
assets, equity distributions, annual capital expenditures and capital software
levels. 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 April 1, 1994, $3,150,000 of
equipment had been financed under this agreement. 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.
10
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PYRAMID TECHNOLOGY CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Based upon its current operating plan, the Company anticipates that internally
generated funds and cash balances, together with existing financing
arrangements, 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.
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. The
motion for consolidation of the two actions has been continued, to be heard on
June 24, 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 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
April 1, 1994.
11
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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: May 12, 1994 By /s/ Kent L. Robertson
------------------------------
Kent L. Robertson
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
Dated: May 12, 1994 By /s/ James J. Nelson
------------------------------
James J. Nelson
Vice President,
Corporate Controller
(Principal Accounting Officer)
12
