<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 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 30, 1997 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 30, 1997 Common stock, $.01 par value 8,416,512
The index to the Exhibits appears on page 13
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1
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VMARK SOFTWARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 30, 1997
TABLE OF CONTENTS
PAGE NUMBERING IN
SEQUENTIAL NUMBERING SYSTEM
---------------------------
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations
for the three months ended March 30, 1997
and March 31, 1996 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 30, 1997 and March 31, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
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PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
VMARK SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $15,225 $14,733
Accounts receivable - net 11,389 14,860
Income tax receivable 722 771
Prepaid expenses, deferred income taxes and other current
assets 6,092 6,049
------- -------
Total current assets 33,428 36,413
------- -------
Property and equipment - net 13,378 14,205
------- -------
Long-term assets:
Intangible assets - net 3,503 3,667
Other long-term assets 5,880 5,692
------- -------
Total long-term assets 9,383 9,359
------- -------
Total assets $56,189 $59,977
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $1,291 $1,462
Accounts payable, accrued expenses and current portion of
long-term debt 6,900 9,385
Accrued merger, restructuring and exit costs 3,807 5,546
Deferred revenue 5,990 5,738
------- -------
Total current liabilities 17,988 22,131
------- -------
Long-term liabilities:
Obligations under capital leases 8,958 9,015
------- -------
Stockholders' equity 32,199 31,787
Cost of treasury stock (2,956) (2,956)
------- -------
Total stockholders' equity 29,243 28,831
------- -------
Total liabilities and stockholders' equity $56,189 $59,977
======= ========
</TABLE>
3
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VMARK SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 30, March 31,
1997 1996
---- ----
<S> <C> <C>
Revenue:
Software $ 7,242 $ 9,087
Services and other 6,479 8,649
------- -------
Total revenue 13,721 17,736
------- -------
Costs and expenses:
Cost of software 1,048 1,165
Cost of services and other 3,400 4,584
Selling and marketing 5,783 6,712
Product development 1,656 2,487
General and administrative 1,241 1,818
------- -------
Total costs and expenses 13,128 16,766
------- -------
Income from operations
593 970
Other expense-net (101) (100)
------- -------
Income before provision for income taxes 492 870
Provision for income taxes 187 311
------- -------
Net income $ 305 $ 559
======= =======
Net income per common share $ .04 $ .07
======= =======
Weighted average number of common and common
equivalent shares outstanding 8,256 8,352
======= =======
</TABLE>
4
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VMARK SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 30, March 31,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 305 $ 559
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 1,281 1,661
Stock compensation 7 -
Increase in cash from:
Current assets 3,489 2,007
Current liabilities (3,722) (1,477)
------- -------
Cash provided by operations 1,360 2,750
------- -------
Cash flows from investing activities:
Expenditures for property and equipment (252) (720)
Expenditures for intangible assets (300) (197)
Decrease (increase) in cash surrender value of officers' life
insurance and deposits and other (188) 161
------- -------
Cash used in investing activities (740) (756)
------- -------
Cash flows from financing activities:
Sales of common stock 180 581
Repurchase of common stock - (447)
Repayments of line of credit (171) -
Repayments of capital lease and other obligations (57) (72)
------- -------
Cash provided by (used in) financing activities (48) 62
------- -------
Effect of exchange rate changes on cash (80) (36)
------- -------
Increase in cash and equivalents 492 2,020
Cash and equivalents, beginning of period 14,733 12,267
------- -------
Cash and equivalents, end of period $15,225 $14,287
======= =======
</TABLE>
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
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, 1996.
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 and are included in the calculation only if
dilutive.
In March 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share,"
which the Company will adopt in the fourth quarter of 1997. Had SFAS No.
128 been effective for the quarters ended March 30, 1997 and March 31,
1996, reported earnings per share on a pro forma basis would have been as
follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 30, 1997 March 31, 1996
<S> <C> <C>
Basic $ .04 $ .07
Diluted $ .04 $ .07
</TABLE>
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.
6
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4. Litigation
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 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 denied the allegations in its answer to the Complaint and
the proceeding is now in the discovery stage. Based upon its review to
date, management believes that the actions are without merit and plans to
oppose them vigorously.
7
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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
The following table sets forth certain data as a percentage of total revenue for
the three months ended March 30, 1997 and March 31, 1996.
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 30, March 31,
1997 1996
-------- --------
<S> <C> <C>
Revenue:
Software 52.8% 51.2%
Services and other 47.2 48.8
----- -----
Total revenue 100.0 100.0
----- -----
Costs and expenses:
Costs of software 7.6 6.6
Costs of services and other 24.8 25.8
Selling and marketing 42.1 37.8
Product development 12.1 14.0
General and administrative 9.1 10.3
----- -----
Total costs and expenses 95.7 94.5
----- -----
Income from operations 4.3% 5.5%
===== =====
</TABLE>
REVENUE
The Company's total revenue decreased 23% to $13,721,000 in the first quarter of
1997 from $17,736,000 in the first quarter of 1996. The decrease in the first
quarter revenue was due primarily to the Company having exited certain
non-strategic and unprofitable businesses throughout 1996.
Software license revenue for the first quarter of 1997 decreased 20% from the
first quarter of 1996. This decrease is due principally to the elimination of
sales of the Object Studio product line, a decision made in connection with the
repositioning of the Company in December 1996. This decline was partially offset
by the impact of revenue associated with the initial shipments of the Company's
data warehouse product, DataStage, which was released in January 1997. Software
license revenue increased to 53% of total revenue, from 51% in the first quarter
of 1996.
8
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Services and other revenue, consisting of consulting, training, and software
maintenance, decreased 25% to $6,479,000 in the first quarter of 1997, from
$8,649,000 in the first quarter of 1996. This decline is due primarily to the
elimination of Object Studio related consulting and maintenance services and the
disposition of the Company's third-party education businesses. Both of these
actions are a result of the repositioning of the Company mentioned above.
Services and other revenue decreased to 47% of total revenue, from 49% in the
first quarter of 1996.
COST OF SOFTWARE
Cost of software, which consists of amortization of technology licenses and
capitalized software, product royalties, product documentation, packaging, media
and production costs, decreased 10% to $1,048,000 for the first quarter of 1997,
from $1,165,000 for the same period of the prior year. This decrease in cost of
software is due to the write-off of certain intangible assets in connection with
the restructuring and extraordinary charge recorded in December 1996. Cost of
software increased to 14% of license revenue, from 13% in the first quarter of
1996 due to the fixed nature of certain of the costs, as well as an increase in
the sale of products with associated royalties.
COST OF SERVICES AND OTHER
Cost of services and other, which consist of consulting, training, and other
customer support service costs decreased 26% to $3,400,000 for the first quarter
of 1997 as compared to $4,584,000 in the same period of the prior year. This
decrease in costs is due to the elimination of unprofitable service businesses
in December 1996. As a result, the profit margin associated with services and
other revenue has increased when compared to the first quarter of 1996, to 48%
from 47%.
SELLING AND MARKETING
Selling and marketing expenses, which consist primarily of sales organization
costs and marketing programs, decreased 14% to $5,783,000 in the first quarter
of 1997 compared to the same period of the prior year. This decrease is due to
cost savings associated with the discontinued product lines and exited
businesses previously discussed. Selling and marketing expenses as a percentage
of total revenue for the first quarter increased to 42% in 1997 from 38% in
1996. The increase in spending in relation to revenues is due to marketing
activities associated with DataStage. Although first quarter revenue included
the results of initial shipments of DataStage, the more significant revenue
impact is expected to occur in the future.
PRODUCT DEVELOPMENT
Product development expenses, which consist primarily of salaries and related
benefits of development personnel and facility costs, decreased 33% to
$1,656,000 in the first quarter of 1997 as compared to the same period of the
prior year. This decrease in spending is due primarily to cost savings
associated with the development efforts previously dedicated to Object Studio
products. The savings were partially offset by development costs related to
continued DataStage development. Product development expenses as a percentage of
revenue decreased to 12% for the first quarter as compared to 14% for the
comparable period of 1996.
9
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GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 32% to $1,241,000 for the first
quarter of 1997 as compared to the same period of the prior year. The first
quarter decrease was due to a decrease in the bad debt provision, a decrease in
spending related to management information systems, and the elimination of
general and administrative costs associated with the Company's German
subsidiary, which is currently inactive as it had previously sold principally
Object Studio related products and services. General and administrative expenses
as a percentage of revenue were 9% for the first quarter of 1997 as compared to
10% for the comparable period in the prior year.
INCOME TAXES
The Company recorded provisions for income taxes of $187,000 for the first
quarter of 1997 compared to $311,000 for the first quarter of 1996. This
represents an effective tax rate of 38% in 1997 and 36% in 1996. The increase in
the estimated effective tax rate is due to a shift in the mix of expected
earnings in the Company's various taxing jurisdictions.
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 30, 1997 the Company
had $15,225,000 in cash and cash equivalents and $15,440,000 in working capital
($21,430,000 excluding deferred revenue, the satisfaction of which will have no
cash impact). 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
$5,000,000 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. As of March 30, 1997, the
Company's eligible accounts receivable met the required amount to access fully
the line of credit. The Company also has a share repurchase line of credit with
the same bank under which the Company may borrow up to $5,000,000 to be used
solely to make open market repurchases of the Company's common stock. This
facility is subject to the same limitations as the working capital line of
credit. At March 30, 1997, there was $1,291,000 of borrowings outstanding under
the share repurchase line of credit facility. The lines of credit expire in June
1997, at which time the Company intends to negotiate.
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 transferred its rights to certain accounts
receivable to a finance company in exchange for cash payments from the finance
company. Total cash received by the Company in the first quarter of 1997 under
these arrangements was $1,335,000.
10
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RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which will
be effective during the fourth quarter of 1997. SFAS No. 128 will require the
Company to restate all previously reported earnings per share information to
conform with the new pronouncement's requirements.
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 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. Certain of
such risks and uncertainties are set forth below and in Part II of the Company's
Annual Report on Form 10-K for the year ended December 31, 1996. 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.
FACTORS AFFECTING FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a number of
risks, many of which are beyond the Company's control. The following discussion
highlights some of these risks.
The Company's future operating results may vary substantially from period to
period. The timing and amount of the Company's license fee revenues are subject
to a number of factors that make estimation of revenues and operating results
prior to the end of the quarter extremely uncertain. Quarterly fluctuations may
be caused by several factors including but not limited to timing of customer
orders, adjustments of delivery schedules to accommodate customer or regulatory
requirements, timing and level of international sales, mix of products sold, and
timing of level of expenditures for sales, marketing and new product
development. The Company generally ships its products upon receipt of orders and
maintains no significant backlog. The company has experienced a pattern of
recording 60 percent to 80 percent of its quarterly revenues in the third month
of the quarter, with a concentration of such revenues in the last two weeks of
that third month. The Company's operating expenses are based on projected annual
and quarterly revenue levels and a substantial portion of the Company's costs
and expenses, including costs of personnel and facilities, cannot be easily
reduced. As a result, if projected revenues are not achieved in the expected
time frame, the Company's results of operations for that quarter would be
adversely affected. Accordingly, the results of any one period may not be
indicative of the operating results for future periods.
11
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The market price of the Company's common stock is highly volatile. Failure to
achieve revenue, earnings, and other operating and financial results as
forecasted or anticipated by analysts could result in an immediate adverse
effect on the market price of the Company's stock.
The Company currently derives a substantial portion of its total revenue from
its core database product, UniVerse. The Company's future results will depend,
to a significant extent, on continued market acceptance of this product as well
as market acceptance of new products, such as DataStage. Any factor adversely
affecting the market for these products would have a material adverse effect of
the Company's business and financial results.
The market for the Company's products is characterized by ongoing technological
developments and changes in customer requirements and industry standards. If the
Company is unable to develop and introduce new products or enhancements in a
timely manner in response to changing market conditions or customer requirements
or if errors are found in products after commercial shipments, the Company's
business and results of operations will be adversely affected.
Approximately 38% of the Company's total revenue in the quarter ending March
30, 1997 was attributable to international sales made through international
subsidiaries. Because a substantial portion of the Company's total revenue is
derived from such international operations, which are conducted in foreign
currencies, changes in the value of those currencies relative to the United
States dollar may affect the Company's results of operations and financial
position. The Company engages in certain currency-hedging transactions intended
to reduce the effect of fluctuations of foreign currency exchange rates on the
Company's results of operations. However, there can be no assurance that such
hedging transactions will materially reduce the effect of fluctuations on such
results. If, for any reason, exchange or price controls or other restrictions on
the conversion of foreign currencies were imposed, the Company's business could
be adversely affected. Other potential risks inherent in the Company's
international business generally include longer payment cycles, greater
difficulties in accounts receivable collection and the burdens of complying with
a wide variety of foreign laws and regulations.
The market for application development software is intensely competitive. The
Company competes with many companies offering alternative solutions to the needs
addressed by the Company's products. Many of these competitors may have greater
financial, marketing, or technical resources than the Company and may be able to
adapt more quickly to new or emerging technologies and standards or changes in
customer requirements or to devote greater resources to the promotion and sale
of their products than the Company.
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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 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 denied the allegations in its
answer to the Complaint and the proceeding is now in the discovery
stage. Based upon its review to date, management 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
27 Financial Data Schedule
(b) The Company did not file a report on Form 8-K during the
quarter ended March 30, 1997.
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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)
Dated: May 13, 1997 /s/ Peter Gyenes
---------------------------------------
Peter Gyenes
President and Chief Executive Officer
(principal executive officer)
Dated: May 13, 1997 /s/ Charles F. Kane
---------------------------------------
Charles F. Kane
Executive Vice President, Finance
and Chief Financial Officer
(principal finance and accounting
officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APPEARING IN THE FORM 10-Q TO WHICH
THIS SCHEDULE IS AN EXHIBIT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-30-1997
<EXCHANGE-RATE> 1
<CASH> 15,225,000
<SECURITIES> 0
<RECEIVABLES> 13,204,000
<ALLOWANCES> 1,815,000
<INVENTORY> 0
<CURRENT-ASSETS> 33,428,000
<PP&E> 20,597,000
<DEPRECIATION> 7,219,000
<TOTAL-ASSETS> 56,189,000
<CURRENT-LIABILITIES> 17,988,000
<BONDS> 0
0
0
<COMMON> 84,000
<OTHER-SE> 29,159,000
<TOTAL-LIABILITY-AND-EQUITY> 56,189,000
<SALES> 7,242,000
<TOTAL-REVENUES> 13,721,000
<CGS> 1,048,000
<TOTAL-COSTS> 4,448,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 216,000
<INTEREST-EXPENSE> 323,000
<INCOME-PRETAX> 492,000
<INCOME-TAX> 187,000
<INCOME-CONTINUING> 305,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 305,000
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
