<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20059
----------------------------
VMARK SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2818132
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 WASHINGTON STREET 01581-1021
WESTBORO, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 366-3888
----------------------------
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
----- -----
The number of shares outstanding of each of the registrant's classes of
common stock as of:
DATE CLASS OUTSTANDING SHARES
March 31, 1996 Common stock, $.01 par value 8,129,469
The index to the Exhibits appears on page 14
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VMARK SOFTWARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE NUMBERING IN
SEQUENTIAL NUMBERING SYSTEM
----------------------------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1996
and December 31, 1995 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1996 and April 2, 1995 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1996 and April 2, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
VMARK SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $14,287 $12,267
Accounts receivable - net 15,621 15,468
Income tax receivable 913 3,464
Prepaid expenses and other 2,636 2,355
Deferred income taxes - current 3,695 1,749
------- -------
Total current assets 37,152 35,303
------- -------
Property and equipment - net 15,239 15,253
------- -------
Long-term assets:
Intangible assets and software costs 7,325 8,055
- net
Cash surrender value of officers' 1,098 983
life insurance
Deposits and other 262 538
Deferred income taxes - long term 1,385 3,221
------- -------
Total long-term assets 10,070 12,797
------- -------
Total assets $62,461 $63,353
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 0 $ 0
Note payable and current portion of 199 782
long-term debt
Accounts payable and accrued expenses 5,157 6,587
Accrued compensation 1,222 2,002
Accrued merger costs 698 1,286
Deferred revenue 7,232 5,514
Income taxes payable 930 744
------- -------
Total current liabilities 15,438 16,915
------- -------
Long-term liabilities:
Obligations under capital leases 9,175 9,227
Deferred rent 24 44
------- -------
Total long-term liabilities 9,199 9,271
------- -------
Stockholders' equity:
Common stock, $.01 par value 81 81
Additional paid in capital 45,099 44,383
Accumulated deficit (6,650) (7,209)
Cost of treasury stock (447)
Unearned compensation (135)
Cumulative translation adjustment (124) (88)
------- -------
Total stockholders' equity 37,824 37,167
------- -------
Total liabilities and stockholders' equity $62,461 $63,353
======= =======
</TABLE>
3
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<TABLE>
VMARK SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
Three Months Ended
-----------------------
March 31, April 2,
1996 1995
--------- --------
<S> <C> <C>
Revenue:
Software $ 9,087 $10,502
Services and other 8,649 7,374
------- -------
Total revenue 17,736 17,876
------- -------
Costs and expenses:
Costs of software 1,165 1,327
Costs of services and other 4,584 3,655
Selling & marketing 6,712 6,409
Product development 2,487 2,605
General & administrative 1,818 1,574
------- -------
Total costs and expenses 16,766 15,570
------- -------
Income from operations 970 2,306
Other income (expense)-net (100) 76
------- -------
Income before provision for income 870 2,382
taxes
Provision for income taxes 311 869
------- -------
Net income $ 559 $ 1,513
======= =======
Net income per common share $ .07 $ .18
======= =======
Weighted average number of common and
common equivalent shares outstanding 8,352 8,361
======= =======
</TABLE>
4
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<TABLE>
VMARK SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Three Months Ended
---------------------
March 31, April 2,
1996 1995
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 559 $ 1,513
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 1,661 1,706
Deferred income taxes (110) (275)
Increase in cash from:
Current assets 2,117 (356)
Current liabilities (1,477) (373)
------- -------
Cash provided by operations 2,750 2,215
------- -------
Cash flows from investing activities:
Expenditures for property and equipment (720) (1,087)
Expenditures for intangible assets (197) (1,604)
Decrease (increase) in cash surrender
value of officers' life insurance and
deposits and other 161 (188)
------- -------
Cash used in investing activities (756) (2,879)
------- -------
Cash flows from financing activities:
Sales of common stock 581 417
Repurchase of common stock (447)
Proceeds from borrowing under line of credit 150
Repayments of capital lease and other
obligations (72) (128)
------- -------
Cash provided by financing activities 62 439
------- -------
Effect of exchange rate changes on cash (36) 106
------- -------
Increase (decrease) in cash and equivalents 2,020 (119)
Cash and equivalents, beginning of period 12,267 16,017
------- -------
Cash and equivalents, end of period $14,287 $15,898
======= =======
</TABLE>
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
On June 14, 1995, VMARK Software, Inc. (the "Company") merged with Easel
Corporation, a publicly traded company ("Easel"), pursuant to an Agreement
and Plan of Merger and Reorganization (the "Agreement") dated January 27,
1995. Under the terms of the Agreement, Easel merged into the Company and
holders of Easel's common stock exchanged their shares for approximately
1,350,000 shares of the Company's common stock. The merger was accounted
for as a pooling-of-interests and, accordingly, the 1995 consolidated
financial statements have been restated to include the accounts of Easel.
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements and should be read in conjunction with the audited financial
statements included in the Company's Annual Report to Stockholders for the
year ended December 31, 1995.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as
the audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the interim periods presented. The operating results for
the interim periods presented are not necessarily indicative of the results
which would be expected for the full year.
2. Income Per Common Share
Income per common share is computed using the weighted average number of
common and common equivalent shares outstanding during each period
presented. Common stock equivalents consist of stock options converted
using the treasury stock method.
3. Income Taxes
The Company provides for income taxes at the end of each interim period
based on the estimated effective tax rate for the full fiscal year for each
tax reporting corporate entity. Cumulative adjustments to the tax provision
are recorded in the interim period in which a change in the estimated annual
effective rate is determined.
The Company has approximately $16,500,000 of available net operating loss
carryforwards. These carryforwards expire through 2009, in the case of
US-generated losses, and are available indefinitely in the case of
foreign-generated losses, however, the losses cannot be applied against
income generated in a trade or business significantly different from that
which gave rise to the carryforward. Because of US tax regulations
utilization of US losses in any one year will be subject to limitation due
to the Easel merger.
6
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4. Acquisition
In January 1996, the Company's Australian subsidiary, VMARK Asia-Pacific,
purchased FT Technology Institute ("FT"), an education and service
training business based in Sydney, Australia, for approximately $360,000.
The purchase of FT, an established provider of professional education and
training services, further expands the Company's international presence
and enhances the growing and profitable solutions-provider side of the
Company's business. The acquisition was accounted for as a purchase, and
the purchase price was allocated between property and equipment and
intangible assets. Pro forma information is not provided because the
effect of the acquisition is not material to the financial statements
taken as a whole.
5. Litigation
The Company is a defendant, together with certain of its officers, in two
actions filed in October 1995 in the U.S. District Court for the District
of Massachusetts. Those actions have been consolidated through the filing
of a Consolidated Amended Complaint (the "Complaint"). The plaintiffs
allege in the Complaint that the Company and certain of its officers,
during July through October 1995, made certain untrue statements and
failed to disclose certain information regarding the Company's prospective
financial performance in violation of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder and that such statements
and omissions artificially inflated the market prices of the Company's
stock. The plaintiffs purport to bring the actions on behalf of certain
classes of stockholders and seek damages in unspecified amounts. The
Company has filed a motion to dismiss the Complaint for failure to state a
claim, and oral arguments on the motion have not yet been scheduled.
Based upon its review to date, management of the Company believes that the
actions are without merit and plans to oppose them vigorously.
7
<PAGE> 8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
VMARK SOFTWARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
<TABLE>
The following table sets forth certain data as a percentage of
total revenue for the three months ended March 31, 1996.
<CAPTION>
Three Months Ended
-------------------
March 31, April 2,
1996 1995
--------- --------
<S> <C> <C>
Revenue:
Software 51.2% 58.7%
Services and other 48.8 41.3
----- -----
Total revenue 100.0 100.0
----- -----
Costs and expenses:
Costs of software 6.6 7.4
Costs of services and other 25.8 20.4
Selling and marketing 37.8 35.9
Product development 14.0 14.6
General and administrative 10.3 8.8
----- -----
Total costs and expenses 94.5 87.1
----- -----
Income from operations 5.5% 12.9%
===== =====
</TABLE>
REVENUE
The Company's total revenue decreased 1% to $17,736,000 in the
first quarter of 1996 from $17,876,000 in the first quarter of
1995. The decrease in the first quarter revenue was due to a
decrease in the volume of software licenses. Software license
revenue for the first quarter of 1996 decreased 14% from the
first quarter of 1995 and decreased to 51% as a percentage of
total revenue. The decrease in software licenses is due
primarily to a continued decline in sales of Easel-related
products.
8
<PAGE> 9
Services and other revenue, consisting of consulting, training,
and software maintenance continued to experience substantial
growth increasing 17% for the first quarter of 1996 as compared
to the same period in 1995. The increase in services and other
revenue resulted from the continued growth in the Company's
customer maintenance base, as well as an increase in consulting
revenue due to the Company's selling of software combined with
professional services. The Company's sales offerings incorporate
more professional service activities and, as such, it is expected
that total revenues will continue to carry comparatively equal
percentages of licenses and services revenue.
The Company initiated a leasing program during the quarter and
recorded a substantial sale that was financed through this
leasing program. All sales under this program are on a non-
recourse basis. The program facilitates customer purchases
through a third-party financing arrangement and is available to
prospective customers as well as the current customer base.
COSTS OF SOFTWARE
Costs of software, which consist of amortization of technology
licenses and capitalized software, product royalties, product
documentation, packaging, media and production costs, decreased
12% to $1,165,000 for the first quarter of 1996, from $1,327,000
for the same period of the prior year. This decrease in costs of
software is due to reductions in royalties expenses from the
decrease in new licenses sales and a decrease in the amortization
expense of purchased technology licenses.
COSTS OF SERVICES AND OTHER
Costs of services and other, which consist of consulting,
training, and other customer support service costs increased 25%
to $4,584,000 for the first quarter as compared to the same
period of the prior year. This increase in costs is attributable
to the overall increase in activity in the services business.
Costs of services and other as a percentage of services and other
revenue increased to 53% for the first quarter from 50% for the
comparable period in 1995. The profit margin associated with
services and other revenue has decreased slightly for the first
quarter 1996 in comparison to the same period in 1995 due to a
change in the mix of services and other revenue. A higher
percentage of the increase in services and other revenue is
comprised of training and consulting revenue which typically has
a lower profit margin than that derived from customer maintenance
support.
SELLING AND MARKETING
Selling and marketing expenses, which consist primarily of sales
organization costs and marketing programs, increased 5% to
$6,712,000 in the first quarter of 1996 compared to the same
period of the prior year. Selling and marketing expenses as a
percentage of total revenue for the first quarter increased to
38% in 1996 from 36% in 1995. The increases were due primarily
to increased marketing and promotional activities, particularly
in international markets, when compared to the 1% decrease in
quarterly revenue.
9
<PAGE> 10
PRODUCT DEVELOPMENT
Product development expenses, which consist primarily of salaries
and related benefits of development personnel and facility costs,
decreased 5% to $2,487,000 in the first quarter of 1996 as
compared to the same period of the prior year. This decrease in
spending is due primarily to economies of scale being attained
and cost reductions resulting from the merger of the Easel and
VMARK development operations. These expense reductions occurred
mainly in personnel and facility costs. Product development
expenses as a percentage of revenue decreased to 14% for the
first quarter as compared to 15% for the comparable period of
1995.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 16% to $1,818,000
for the first quarter of 1996 as compared to the same period of
the prior year. The first quarter increase was due primarily to
increases in the bad debt provision, legal costs, and facility
charges. The Company also made significant investment in its
internal management information systems in the first quarter of
1996. General and administrative expenses as a percentage of
revenue was 10% for the first quarter of 1996 as compared to 9%
for the comparable period in the prior year.
INCOME TAXES
The Company recorded provisions for income taxes of $311,000 for
the first quarter of 1996 compared to $869,000 for the first
quarter of 1995. This represents an effective tax rate of 36%
for both periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through
sales of equity securities and positive cash flow from
operations. At March 31, 1996 the Company had $14,287,000 in
cash and cash equivalents and $21,714,000 in working capital.
The Company has a working capital line of credit with a bank
under which the Company may borrow, on an unsecured basis, up to
the lesser of $10,000,000 or 80% of eligible accounts receivable,
conditioned upon meeting certain financial covenants, including
maintaining specified levels of quarterly earnings, tangible net
worth, working capital and liquidity. The line of credit also
limits the Company's ability to pay dividends. The Company's
eligible accounts receivable at March 31, 1996 exceeded the
amount necessary to access fully the line of credit. At March
31, 1996, there was no indebtedness outstanding under the line of
credit facility.
The Company believes that its available cash, anticipated cash
generated from operations based upon its operating plan, and
amounts available under its credit facility will be sufficient to
finance the Company's operations and meet its foreseeable cash
requirements at least for the next twelve months.
During the quarter, the Company together with a third-party
leasing company, initiated a leasing program available to current
and potential customers, which will enable customers to obtain
qualified financing. Under the program, customers will be able to
finance purchases through operating and capital leases with a
third-party lessor. All sales under this program are on a non-
recourse basis and will be subject to the Company's normal revenue
recognition policies. During the first quarter of 1996, the first
sale under this program occurred for a total of $1.8 million.
CAUTIONARY STATEMENT
When used anywhere in the From 10-Q and in future filings by the
Company with the Securities and Exchange Commission, in the
Company's press releases and in oral statements made with the
10
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approval of an authorized executive officer of the Company, the words or phrases
"will likely result", "are expected to", "will continue", "is anticipated",
"estimated", "Project", or "outlook" or similar expressions (including
confirmations by an authorized executive officer of the Company of any such
expressions made by a third party with respect to the Company) are intended to
identify "forward-looking statements, which speak only as of the date made. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. Such risks are set forth in Part 1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1995. The Company
specifically declines any obligation to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
11
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant, together with certain of its
officers, in two actions initially filed in October 1995 in the
U.S. District Court in the District of Massachusetts. Those
actions have been consolidated through the filing of a
Consolidated Amended Complaint (the "Complaint"). The plaintiffs
allege in the Complaints that the Company and certain of its
officers, during July through October 1995, made certain untrue
statements and failed to disclose certain information regarding
the Company's prospective financial performance in violation of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-
5 thereunder and that such statements and omissions artificially
inflated the market priced of the Company's stock. The
plaintiffs purport to bring the actions on behalf of certain
classes of stockholders and seek damages in unspecified amounts.
The Company has filed a motion to dismiss the Complaint for
failure to state a claim, and oral arguments on the motion have
not yet been scheduled. Based upon its review to date, management
of the Company believes that the actions are without merit and
plans to oppose them vigorously.
ITEMS 2 - 5 NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement regarding computation of per share earnings.
27 Financial Data Schedule
(b) The Company did not file a report on Form 8-K during the quarter
ended March 31, 1996.
12
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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, thereunto duly authorized.
VMARK Software, Inc.
(Registrant)
/s/ Robert M. Morrill
Dated: May 14, 1996 -------------------------------------
Robert M. Morrill
President and Chief Executive Officer
and Chairman (principal executive
officer)
/s/ Charles F. Kane
Dated: May 14, 1996 ---------------------------------------
Charles F. Kane
Vice President of Finance and
Chief Financial Officer, (principal
accounting officer)
13
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VMARK SOFTWARE, INC.
<TABLE>
EXHIBIT INDEX
<CAPTION>
PAGE NUMBER IN
SEQUENTIAL NUMBERING SYSTEM
---------------------------
<S> <C> <C>
11.1 Statement regarding computation of per share earnings 15
27 Financial Data Schedule 16
</TABLE>
14
<PAGE> 1
Exhibit 11.1
<TABLE>
VMARK SOFTWARE, INC. AND SUBSIDIARIES
COMPUTATION OF INCOME PER COMMON SHARE
(In thousands, except per share data)
(unaudited)
<CAPTION>
Three Months Ended
--------------------
March 31, April 2,
Primary Income Per Common Share 1996 1995
- - ------------------------------- --------- --------
<S> <C> <C>
Weighted Average Number of Common and
Common Equivalent Shares Outstanding:
Common Stock 8,129 7,916
Common equivalent shares resulting
from stock options (treasury
stock method) 223 445
------ ------
Total 8,352 8,361
====== ======
Net income applicable to common stock $ 559 $1,513
====== ======
Income per Common Share $ .07 $ .18
====== ======
Fully Diluted Income Per Common Share
- - -------------------------------------
The effect of full dilution on income
per common share is antidilutive
and therefore is not shown.
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> MAR-31-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 14,287,000
<SECURITIES> 0
<RECEIVABLES> 17,654,000
<ALLOWANCES> 2,033,000
<INVENTORY> 0
<CURRENT-ASSETS> 15,239,000
<PP&E> 24,521,000
<DEPRECIATION> 9,282,000
<TOTAL-ASSETS> 62,461,000
<CURRENT-LIABILITIES> 15,438,000
<BONDS> 0
<COMMON> 81,000
0
0
<OTHER-SE> 37,743,000
<TOTAL-LIABILITY-AND-EQUITY> 62,461,000
<SALES> 9,087,000
<TOTAL-REVENUES> 17,736,000
<CGS> 1,165,000
<TOTAL-COSTS> 16,766,000
<OTHER-EXPENSES> 71,000
<LOSS-PROVISION> 318,000
<INTEREST-EXPENSE> 171,000
<INCOME-PRETAX> 870,000
<INCOME-TAX> 311,000
<INCOME-CONTINUING> 559,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 559,000
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
