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
For the quarterly period ended July 31, 1999
- -------- TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period ________ to _________
Commission file number 1-111898
JETFORM CORPORATION
(exact name of registrant as specified in its charter)
Canada N/A
(state or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
560 Rochester Street
Ottawa, Ontario K1S 5K2, Canada
(Address of principal executive offices)
(613) 230-3676
Registrant's telephone number (including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of the issuer's Common Shares outstanding
on September 03, 1999: 19,449,732
<PAGE>
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets as at July 31, 1999, and 3
April 30, 1999
Consolidated Statements of Operations for the three month 4
periods ended July 31, 1999 and July 31, 1998
Consolidated Statements of Comprehensive Income for the 5
month periods ended July 31, 1999 and July 31, 1998
Consolidated Statements of Cash Flows for the three month 6
periods ended July 31, 1999 and July 31, 1998
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
This Quarterly Report on Form 10-Q ("Report"), contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933.
Discussions containing such forward-looking statements may be found in Item 2 of
Part I and Item 1 of Part II hereof, as well as within this Report generally. In
addition, when used in the Report, the words "believes", "anticipates",
"expects", and similar expressions are intended to identify forward-looking
statements. Such statements are subject to a number of risks and uncertainties.
Actual results in the future could differ materially from those described in the
forward-looking statements as a result of changes in technology, changes in
industry standards, new product introduction by competitors, increased
participation in the enterprise software market by major corporations and other
matters set forth in this Report. The Company does not undertake any obligation
to publicly release the results of any revisions to these forward-looking
statements that may be made to reflect any future events or circumstances.
<PAGE>
JETFORM CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands of Canadian dollars except share amounts)
July 31, April 30,
1999 1999
-------- ---------
ASSETS
Current assets
Cash and cash equivalents..................... $ 43,450 $ 47,262
Accounts receivable (Note 2).................. 27,395 29,274
Term accounts receivable (Note 2)............. 12,708 13,486
Unbilled receivables.......................... 4,745 3,455
Inventory..................................... 1,050 1,139
Investment tax credits recoverable............ 1,310 1,310
Prepaid expenses and deferred charges......... 3,521 3,727
Asset held for sale .......................... -- 3,417
---------- ----------
94,179 103,070
Term accounts receivable (Note 2)............. 4,183 6,090
Investment tax credits recoverable............ 3,514 3,218
Convertible debenture......................... 2,625 --
Fixed assets (Note 3)......................... 18,093 18,620
Other assets (Note 3)......................... 25,396 25,871
========== ==========
$147,990 $156,869
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.............................. $ 6,199 $ 7,874
Accrued liabilities........................... 14,961 15,656
Unearned revenue.............................. 11,724 12,463
Term loan (Note 4)............................ 9,998 --
Current portion of Delrina
obligation (Note 5)........................... 15,869 22,023
---------- ----------
58,751 58,016
Deferred income taxes (Note 6)................ 171 164
Accrued liabilities Note 7)................... 2,842 3,225
Term loan (Note 4)............................ -- 9,998
Delrina obligation (Note 5)................... -- 536
---------- ----------
61,764 71,939
---------- ----------
Shareholders' equity
Capital stock (Issued and outstanding
-- 19,442,201 Common Shares and 450,448
Preference Shares at July 31, 1999;
19,421,428 Common Shares and 450,448
Preference Shares at April 30, 1999) ......... 247,259 247,119
Cumulative translation adjustment............. 734 (1,052)
Deficit....................................... (161,767) (161,137)
----------- ----------
86,226 84,930
----------- ----------
$ 147,990 $ 156,869
=========== ==========
(the accompanying notes are an integral part
of these consolidated financial statements)
<PAGE>
JETFORM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands of Canadian dollars except share and per share amounts)
Three Months Ended July 31,
--------------------------------------
1999 1998
---------- ----------
Revenues
Product................................ $ 11,938 $ 21,869
Service................................ 11,110 10,773
---------- ----------
23,048 32,642
---------- ----------
Costs and expenses
Cost of product......................... 2,111 1,938
Cost of service......................... 3,390 4,196
Sales and marketing..................... 11,464 12,275
General and administrative.............. 2,570 2,577
Research and development................ 3,742 3,356
Depreciation and amortization........... 2,535 2,779
Gain on sale of assets.................. (1,813) --
---------- ----------
23,999 27,121
---------- ----------
Operating income (loss) ................ (951) 5,521
Interest and other income............... 497 1,243
---------- ----------
Income (loss) before taxes.............. (454) 6,764
Provision for income taxes (Note 6)..... 176 1,023
========== ==========
Net income (loss)....................... $ (630) $ 5,741
========== ==========
Basic income (loss) per share
Net income (loss) per share............. $ (0.03) $ 0.29
Weighted average number of shares....... 19,878,424 19,732,706
Fully diluted income (loss) per share
Net income (loss) per share............. $ (0.03) $ 0.28
Weighted average number of shares....... 19,878,424 20,700,487
(the accompanying notes are an integral part
of these consolidated financial statements)
<PAGE>
JETFORM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands of Canadian dollars)
Three months ended July 31,
-----------------------------------
1999 1998
--------------- --------------
Net income (loss)....................... $ (630) $ 5,741
Other comprehensive income (loss):
Cumulative translation adjustment....... 1,786 --
=============== ==============
Comprehensive income (loss)............. $ 1,156 $ 5,741
=============== ==============
(the accompanying notes are an integral part of
these consolidated financial statements)
<PAGE>
JETFORM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of Canadian dollars)
Three Months Ended July 31,
--------------------------------------
1999 1998
---------------- ----------------
Cash provided from (used in):
Operating activities
Net income (loss)....................... $ (630) $ 5,741
Items not involving cash:
Depreciation and amortization.......... 3,542 3,419
Deferred income taxes.................. 7 (96)
Other non cash items................... (839) --
Net change in operating components
of working capital..................... 3,198 (8,784)
--------------- ----------------
5,278 280
---------------- ----------------
Investing activities
Purchase of fixed assets................ (1,169) (1,781)
Increase in other assets................ (1,371) (1,604)
---------------- ----------------
(2,540) (3,385)
---------------- ----------------
Financing activities
Proceeds from issuance of shares........ 140 2,064
Repayment of Delrina obligation......... (6,690) (13,752)
---------------- ----------------
(6,550) (11,688)
---------------- ----------------
Decrease in cash and cash
equivalents............................ (3,812) (14,793)
Cash and cash equivalents, beginning
of period.............................. 47,262 91,604
---------------- ----------------
Cash and cash equivalents, end of
period................................ $ 43,450 $ 76,811
================ ================
(the accompanying notes are an integral part of these
consolidated financial statements)
<PAGE>
JETFORM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
These consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States
("U.S. GAAP"), and include all assets, liabilities, revenues and expenses of
JetForm Corporation ("JetForm") and its wholly-owned subsidiaries: JetForm
Corporation (a Delaware corporation), JetForm Pacific Pty Limited ("JetForm
Pacific"), JetForm Scandinavia AB ("JetForm Nordic"), JetForm France SA
("JetForm France"), JetForm UK Limited ("JetForm UK"), JetForm Deutschland GmbH
("JetForm Germany"), JetForm Technologies Limited ("JetForm Ireland"), and Why
Interactive Inc. ("Why Interactive"). Why Interactive was sold to a third party
effective May 1, 1999. JetForm and its wholly-owned subsidiaries are
collectively referred to herein as the "Company." The unaudited interim
consolidated financial statements reflect all adjustments which are, in the
opinion of the Company's management, necessary to a fair statement of results
for these interim periods.
2. ACCOUNTS RECEIVABLE
Accounts receivable and term accounts receivable are net of an allowance
for doubtful accounts of $1.8 million at July 31, 1999 and $1.9 million at April
30, 1999.
The Company records revenues from irrevocable commitments to purchase
products which do not conform to the Company's customary trade terms at the
amount receivable less deemed interest ("Term Accounts Receivable"). The Company
uses a discount rate equal to its current net cost of borrowing at the time the
revenue is recorded. For the three months ended July 31, 1999, the average
discount rate used was 4.5%. Under an irrevocable commitment to purchase product
the customer commits to pay a minimum amount over a specified period of time in
return for the right to use or resell up to a specific number of copies of a
delivered product.
The Company records Term Accounts Receivable as non-current to the extent
that management estimates payment will be received more than one year from the
balance sheet date. Payment of these Term Accounts Receivable is generally due
the earlier of: (i) delivery of the Company's products by the customer to its
customers or end users; and (ii) specific dates in the license agreement
("Minimum Payment Dates"). As at July 31, 1999 and April 30, 1999 total Term
Accounts Receivable with Minimum Payment Dates exceeding one year were
approximately $4.2 million and $6.1 million, respectively.
The Company's customer base consists of large numbers of geographically
diverse customers dispersed across many industries. As a result, concentration
of credit risk with respect to trade receivables is not significant.
JETFORM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. FIXED ASSETS AND OTHER ASSETS
The Consolidated Balance Sheet includes the following amounts:
July 31, 1999 April 30, 1999
----------------- ----------------
(in thousands of Canadian dollars)
Accumulated depreciation and
amortization included in fixed
assets $ 17,732 $ 16,027
================= ================
Accumulated amortization
included in other assets $ 19,446 $ 17,600
================= ================
4. FINANCIAL INSTRUMENTS AND CREDIT FACILITIES
The Company has entered into receivables purchase agreements with third
party purchasers. Under the agreements, the Company has the option to sell
certain accounts receivable on a recourse basis. The purchasers have recourse in
the event of a trade dispute as defined in the receivables purchase agreements
and upon the occurrence of other specified events. As at July 31, 1999 and April
30, 1999, the outstanding balance of accounts receivable sold under these
agreements were approximately US$7.0 million and US$6.9 million, respectively.
The Company believes that none of the receivables sold are at risk of recourse.
The Company has a committed $20 million credit facility with the Royal Bank
of Canada. The credit facility is made up of (i) a $10 million term facility
which bears interest at a rate of 1.5% over the bankers acceptance rate of the
Bank from time to time and is payable on June 30, 2000; and (ii) a $10 million
revolving line of credit which bears interest at the prime rate of the Bank from
time to time. As at July 31, 1999, the Company had drawn down the $10 million
term loan facility and fixed the interest rate until October 18, 1999 at 6.24%.
The Company had no borrowings against its revolving line of credit as at July
31, 1999. The Company has granted as collateral for the $20 million credit
facility a general security agreement over JetForm's assets, including a pledge
of the shares of certain subsidiaries.
JetForm hedges its U.S. dollar net asset or liability position to reduce
its exposure to currency fluctuations. To achieve this objective, JetForm
primarily enters into foreign exchange forward contracts with major Canadian
chartered banks, and therefore, does not anticipate non-performance by these
counterparties. JetForm does not enter into foreign exchange forward contracts
for speculative or trading purposes. Gains and losses on these forward exchange
contracts are recognized and included in income as realized and offset against
foreign exchange gains and losses on the underlying net asset or liability
position. As at July 31, 1999, JetForm had a foreign exchange forward contract
outstanding to sell $10 million U.S. dollars at $1.5034 per U.S. dollar. As at
July 31, 1999, the approximate fair value of this forward contract was nil .
5. DELRINA OBLIGATION
On September 10, 1996, the Company acquired certain assets, including title
to intellectual property, related to the forms software group (the "Delrina
Assets") of Delrina Corporation ("Delrina"), a subsidiary of Symantec
Corporation of Cupertino, California, USA.
JETFORM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Under the asset purchase agreement, the Company will make unequal quarterly
payments to Delrina, from September 27, 1996 to June 27, 2000. On February 12,
1998, the Company and Delrina re-negotiated certain terms of the Delrina Asset
Purchase Agreement whereby the Company agreed to accelerate payment of its
obligation in consideration for a reduction in the effective interest rate,
resulting in a reduction in imputed interest charges. In addition, the amended
agreement provided that the Company may issue its Common Shares to Delrina in
satisfaction of a portion of its payment obligations provided that: (i) the
total market value of the Company's Common Shares held by Delrina immediately
following such issuance does not exceed US$14.0 million; and (ii) the Company
continues to meet certain registration requirements in respect of such issued
Common Shares. As at July 31, 1999, the Company believes that Delrina held no
Common Shares of the Company.
The current estimated fair value of the Delrina obligation is approximately
the same as that recorded in these consolidated financial statements.
6. INCOME TAXES
As at July 31, 1999, the Company had net deferred tax assets of $56.8
million, the principle components of which were temporary differences associated
with the acquisition of in process research and development and operating loss
carry forwards. The Company believes sufficient uncertainty exists regarding the
realizability of this net deferred tax asset such that a valuation allowance of
49.2 million has been applied.
7. PROVISION FOR RESTRUCTURING COSTS
On March 17, 1999, the Corporation announced a restructuring plan directed
at reducing costs. The key restructuring actions included:
- Consolidation of management responsibilities and reduction in headcount.
- Closure of redundant facilities.
- Reduction in the carrying value of certain capital assets primarily
related to past acquisitions.
- Cancellation of certain commitments and other costs.
<PAGE>
The following table summarizes the activity in the provision for
restructuring costs during the three months ended July 31, 1999:
Employee Total
Termination Facilities Other Provision
------------- ----------- ---------- -----------
Balance, April 30, 1999.. $ 4,077 $ 2,878 $ 519 $ 7,474
Cash payments............ (1,222) (280) (56) (1,558)
========== =========== ========== ===========
Balance, July 31, 1999... $ 2,855 $ 2,598 $ 463 $ 5,916
========== =========== ========== ===========
========== =========== ========== ===========
Long term balance......... $ 375 $ 2,135 $ 332 $ 2,842
========== =========== =========== ===========
During the three months ended July 31, 1999 the Company made cash payments
of approximately $1.6 million relating to the provision for restructuring costs
recorded in fiscal year 1999. This included
JETFORM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
$1.2 million in salary continuance for terminated employees, $280,000 in
rent for the Company's vacant office space in Toronto and the UK, and $56,000 in
other miscellaneous costs.
8. SEGMENTED INFORMATION
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief decision maker in deciding how to allocate resources and
assessing performance. The Company's chief decision maker is the Chief Executive
Officer.
The Company's reportable segments include Product, Consulting, and Customer
Support. The Product segment engages in business activities from which it earns
license revenues from the Company's E-Process software products. The Consulting
segment earns revenues from assisting customers in configuring, implementing and
integrating the Company's products and when required, customizing products and
designing automated processes to meet the customers specific business needs as
well as providing all necessary training. The Customer Support segment earns
revenues through after sale support for software products as well as providing
software upgrades under the Company's maintenance and support programs.
The Company evaluates performance based on the contribution of each
segment. The Product segment costs include all costs associated with selling
product licenses, consulting services, and customer support. The costs of the
Consulting and Customer Support segments include all costs associated with the
delivery of the service to the customer. Inter-segment revenues as well as
charges such as depreciation and amortization, interest expense, and overhead
allocations are not included in the calculation of segment profit. The Company
does not use a measure of segment assets to assess performance or allocate
resources. As a result, segment asset information is not presented.
<PAGE>
The following table sets forth, on a comparative basis for the periods
indicated, the Company's segmented information:
Three months ended July 31,
----------------------------------------------
1999 1998
------------------- ---------------------
Product
Revenues $ 11,938 $ 21,869
Costs 8,916 10,037
------------------- ---------------------
Contribution 3,022 11,832
------------------- ---------------------
Consulting
Revenues $ 5,775 $ 6,012
Costs 2,418 3,473
------------------- ---------------------
Contribution 3,357 2,539
------------------- ---------------------
Customer Support
Revenues $ 5,335 $ 4,761
Costs 748 723
------------------- ---------------------
Contribution 4,587 4,038
------------------- ---------------------
Total contribution 10,966 18,409
Research and development (3,742) (3,356)
Other expenses (9,988) (9,532)
Gain on sale of assets 1,813 --
=================== =====================
Operating income (loss) $ (951) $ 5,521
=================== =====================
JETFORM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
9. RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income" and
SOP 98-5 "Reporting Costs of Start-up Activities".
In December 1998, the American Institute of Certified Public Accountants
(AICPA) issued SOP 98-9 "Modification of SOP 97-2, Software Revenue Recognition,
With Respect to Certain Transactions". The adoption of SOP 98-9 has not had a
material impact on the Company's results of operations and financial position.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities and is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued SFAS No.137 which delays the
effective date of SFAS 133 until fiscal years beginning after June 15, 2000.
Although the impact of SFAS 133 on the Company's financial disclosures is not
known at this time, the Company will adopt SFAS 133 during the year ending April
30, 2001.
10 THE YEAR 2000
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date sensitive systems may recognize the
Year 2000 as 1900 or some other date, resulting in errors when information using
Year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 issue may be experienced before, on, or after
January 1, 2000, and if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 issue affecting the
Company, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's results of operations and of its
liquidity and capital resources should be read in conjunction with the
information contained in the accompanying Unaudited Consolidated Financial
Statements and related Notes thereto, together with management's discussion and
analysis of financial condition and results of operations contained in the
Company's Report on Form 10-K for the fiscal year ended April 30, 1999. The
following discussion provides a comparative analysis of material changes for the
three months ended July 31, 1999 and 1998, in the financial condition and
results of operations of the Company and its wholly-owned subsidiaries: JetForm
Corporation (a Delaware corporation), JetForm Pacific, JetForm Nordic, JetForm
France, JetForm UK, JetForm Germany, JetForm Ireland, and Why Interactive. Why
Interactive was sold to a third party effective May 1, 1999.
Results of Operations
The Company's revenues and operating results have varied substantially from
period to period. With the exception of its consulting services operation, the
Company has historically operated with little backlog of orders because its
software products are generally shipped as orders are received. The Company
records product revenue from packaged software and irrevocable commitments to
purchase products when persuasive evidence of an arrangement exists, the
software product has been shipped, there are no significant uncertainties
surrounding product acceptance, the fees are fixed and determinable, and
collection is considered probable. As a result, product revenue in any period is
substantially dependent on orders booked and shipped in that period and on the
receipt of irrevocable commitment license agreements. Product revenue is
difficult to forecast due to the fact that the Company's sales cycle, from
initial trial to multiple copy licenses, varies substantially from customer to
customer. As a result, variations in the timing of product sales can cause
significant variations in operating results from period to period.
The following table sets forth, on a comparative basis for the periods
indicated, the components of the Company's product margin, service margin, and
product and service margin:
Three months ended July 31,
---------------------------------------------------
1999 1998
--------------------- -------------------
(in thousands of Canadian dollars)
Product revenue.............. $11,938 100% $21,869 100%
Cost of product.............. 2,111 18% 1,938 9%
========= ====== ========== =======
Product margin............... $ 9,827 82% $19,931 91%
========= ====== ========== =======
Service revenue............... $11,110 100% $10,773 100%
Cost of service............... 3,390 31% 4,196 39%
======== ====== ========== =======
Service margin................ 7,720 69% $ 6,577 61%
======== ====== ========== =======
Total revenues................ $23,048 100% $32,642 100%
Cost of product and service... 5,501 24% 6,134 19%
-------- ------ --------- --------
Product and service $17,547 76% $26,508 81%
margin....................... ======== ====== ========= ========
The following table presents, for the periods indicated, consolidated statement
of operations data expressed as a percentage of total revenues:
Three months ended July 31,
---------------------------
1999 1998
-------- --------
Revenues
Product .......................... 52% 67%
Service .......................... 48% 33%
-------- --------
100% 100%
Costs and expenses
Cost of product ................... 9% 6%
Cost of service ................... 15% 13%
Sales and marketing ............... 50% 38%
General and administrative ........ 11% 8%
Research and development .......... 16% 10%
Depreciation and amortization ..... 11% 9%
Gain on sale of assets ............ (8%) --
-------- --------
104% 83%
-------- --------
Operating income (loss) ........... (4%) 17%
Interest and other income ........ 2% 4%
-------- --------
Income (loss) before taxes ....... (2%) 21%
Provision for income taxes ........ (1%) (3%)
-------- --------
Net income (loss) ................. (3%) 18%
======== ========
The following table provides details of product revenue by geographic segment
and within North America, by distribution channel:
Three months ended July 31,
Increase
1999 1998 (Decrease)
-------- -------- ----------
(in thousands of Canadian dollars)
Product revenue by region
North America ............................. $ 6,159 $ 15,558 (60%)
Europe .................................... 4,756 4,834 (2%)
Rest of World ............................. 1,023 1,477 (31%)
-------- --------
$ 11,938 $ 21,869 (45%)
======== ========
Product revenue by channel in North America
End Users ................................. $ 2,606 $ 8,887 (71%)
Reseller and OEM .......................... 3,553 6,671 (47%)
-------- --------
$ 6,159 $ 15,558 (60%)
======== ========
Three Months Ended July 31, 1999 Compared to Three Months Ended July 31, 1998
Revenues
Total Revenues. Total revenues decreased 29% to $23.0 million for the three
months ended July 31, 1999 from $32.6 million for the three months ended July
31, 1998. Total revenues consisted of 52% product revenue and 48% service
revenue for the three months ended July 31, 1999.
Product Revenue. Product revenue decreased 45% to $11.9 million for the
three months ended July 31, 1999 from $21.9 million for the three months ended
July 31, 1998. Product revenue derived from North America, Europe and Rest of
World represented 52%, 40%, and 8%, respectively, of product revenue for the
three months ended July 31, 1999 as compared to 71%, 22% and 7%, respectively,
of product revenue for the three months ended July 31, 1998.
The Company attributes the decrease in product revenue primarily to
external market factors including the Year 2000 issue, a shift towards Internet
based solutions from traditional client/server solutions, and the emergence of
new competitors selling pre-packaged solutions.
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date sensitive systems may recognize the
Year 2000 as 1900 or some other date, resulting in errors when information using
Year 2000 dates is processed. As a result, the Company's primary customer base,
large financial services organizations and government agencies, who are deeply
affected by the Year 2000 problem due to their reliance on computer systems,
have focused their information technology resources on ensuring Year 2000
readiness. This has dramatically impacted the Company's ability to sell
enterprise wide licenses to these customers. The Company expects that the Year
2000 issue will have a continuing impact on product sales for its fiscal year
2000.
The Company also experienced a shift of focus by its customers to
Internet-based solutions from more traditional client/server solutions and the
emergence of new competitors selling pre-packaged solutions. The Company has
developed a comprehensive strategy to address both the market for Internet-based
solutions and prepackaged applications which will be implemented in fiscal year
2000. However, there can be no assurance that revenue derived from this strategy
will be sufficient to offset the potential decrease in revenue from the
Company's client/server products.
Product revenue derived from North America decreased 60% to $6.2 million
for the three months ended July 31, 1999 from $15.6 million for the three months
ended July 31, 1998. Reseller and OEM sales, which represented 58% of North
American product revenue, decreased 47% to $3.6 million for the three months
ended July 31, 1999 from $6.7 million for the three months ended July 31, 1998.
Product revenue from end users, which represented 42% of North American product
revenue, decreased 71% to $2.6 million for the three months ended July 31, 1999
from $8.9 million for the three months ended July 31, 1998. The Company
attributes the decrease in Reseller and OEM and End User revenue to the Year
2000 issue, a shift towards Internet based solutions from traditional
client/server solutions, and the emergence of new competitors selling
pre-packaged solutions. In addition, for the three months ended July 31, 1998
product revenue from end users included revenue from one large license agreement
which accounted for 33% of such revenue.
Product revenue derived from Europe decreased 2% to $4.7 million for the
three months ended July 31, 1999 from $4.8 million for the three months ended
July 31, 1998.
Product revenue derived from Rest of World decreased 31% to $1.0 million
for the three months ended July 31, 1999 from $1.5 million for the three months
ended July 31, 1998, primarily as a result of decreased license revenue from
Australia.
Service Revenue. Service revenue increased 3% to $11.1 million for the
three months ended July 31, 1999 from $10.8 million for the three months ended
July 31, 1998. For the three months ended July 31, 1999 maintenance and support
revenue increased 11% to $5.3 million from $4.8 million for the three months
ended July 31, 1998. The Company's consulting revenue decreased 4% to $5.8
million for the three months ended July 31, 1999 from $6.0 million for the three
months ended July 31, 1998. For the three months ended July 31, 1998 consulting
revenue included $1.4 million of revenue from Why Interactive which was sold on
May 1, 1999. Excluding revenue from Why Interactive, consulting revenue
increased 25%.
Costs and Expenses
Costs and expenses are comprised of cost of product, cost of service, sales
and marketing, general and administrative, research and development,
depreciation and amortization and other expenses. Cost of product consists of
third party commissions, the cost of disks, manuals, packaging, freight, royalty
payments to vendors whose software is bundled with certain JetForm products and
amortization of deferred product development costs. Cost of service includes all
costs of providing technical support, training, consulting, custom forms
development and application development services. Sales and marketing expenses
are principally related to salaries and commissions paid to sales and marketing
personnel. Research and development expenses include personnel and occupancy
costs as well as the costs of software development, testing, product management,
quality assurance and documentation. Depreciation and amortization includes
depreciation of fixed assets and amortization of other assets, and goodwill and
distribution rights relating to various acquisitions.
Total Costs and Expenses. Total costs and expenses were $24.0 million for
the three months ended July 31, 1999, a decrease of 12% from $27.1 million for
the three months ended July 31, 1998.
Cost of Product. Cost of product increased 9% to $2.1 million for the three
months ended July 31, 1999 from $1.9 million for the three months ended July 31,
1998, primarily as a result of increased amortization of deferred development
costs. For the three months ended July 31, 1999 total deferred costs charged to
cost of product was $1.0 million compared to $640,000 for the three months ended
July 31, 1998. The product margin decreased to 82% for the three months ended
July 31, 1999, from 91% for the three months ended July 31, 1998 due to lost
economies of scale resulting from the decrease in product revenue.
Cost of Service. Cost of service decreased 19% to $3.4 million for the
three months ended July 31, 1999 from $4.2 million for the three months ended
July 31, 1998 primarily as a result of the sale of Why Interactive. The service
margin increased to 69% for the three months ended July 31, 1999 from 61% for
the three months ended July 31, 1998 primarily as a result of the sale of Why
Interactive which had lower margins than other services.
Costs of Product and Service. Costs of product and service decreased 21% to
$5.5 million for the three months ended July 31, 1999, from $6.1 million for the
three months ended July 31, 1998. Product and service margin decreased to 76%
for the three months ended July 31, 1999 from 81% for the three months ended
July 31, 1998.
Sales and Marketing. Sales and marketing expenses decreased 7% to $11.5
million for the three months ended July 31, 1999 from $12.3 million for the
three months ended July 31, 1998, primarily as a result of the Company's
restructuring in fiscal year 1999.
General and Administrative. General and administrative expenses remained
flat at $2.6 million for both the three months ended July 31, 1999 and 1998. As
a percentage of total revenues, general and administrative expenses increased to
11% from 8% for the three months ended July 31, 1999 and 1998, respectively.
Research and Development. Research and development expenses increased 12%
to $3.7 million for the three months ended July 31, 1999 from $3.4 million for
the three months ended July 31, 1998, primarily due to an increase in the number
of employees and related costs. During both the three months ended July 31, 1999
and 1998, the Company capitalized approximately $900,000 of software development
costs. Research and development expenses were 16% of revenue for the three
months ended July 31, 1999 and 10% for the three months ended July 31, 1998.
Depreciation and Amortization. Depreciation and amortization expense
decreased 9% to $2.5 million for the three months ended July 31, 1999 from $2.8
million for the three months ended July 31, 1998 primarily as a result of the
write down of certain intangible assets in the fourth quarter of fiscal year
1999.
Operating Income (Loss). Operating loss was $951,000 for the three months
ended July 31, 1999, compared to operating income of $5.5 million for the three
months ended July 31, 1998.
Interest and Other Income (expense). Interest and other income decreased to
$497,000 for the three months ended July 31, 1999, from $1.2 million for the
three months ended July 31, 1998 primarily due to decreased cash and cash
equivalents available for investing.
Provision for Income Taxes. The Company recorded a provision for taxes of
$176,000 for the three months ended July 31, 1999, compared to a provision for
income taxes of $1.0 million for the three months ended July 31, 1998. As at
July 31, 1999, the Company had a net deferred tax asset of approximately $56.8
million, the principle components of which were temporary differences associated
with the acquisition of in process research and development and operating loss
carry forwards. The Company believes sufficient uncertainty exists regarding the
realizability of this net deferred tax asset such that a valuation allowance of
$49.2 million has been provided.
Liquidity and Capital Resources
As at July 31, 1999, and April 30, 1999, the Company had $43.5 million and
$47.3 million of cash and cash equivalents respectively. During the three months
ended July 31, 1999, the Company's cash and cash equivalents decreased by $3.8
million, primarily as a result of a payment to Delrina of US$4.9 million ($7.5
million).
Operations
The Company decreased its investment in the non-cash operating components
of working capital during the three months ended July 31, 1999, by approximately
$3.2 million, primarily due to decreases in accounts receivable and assets held
for resale which were offset by decreases in accounts payable and accrued
liabilities.
The Company purchased approximately $1.2 million of fixed assets in the
three months ended July 31, 1999. The purchases of fixed assets included
leasehold improvements, furniture and office equipment, computer hardware and
software. During the three months ended July 31, 1999, the Company increased its
investment in other assets by $1.4 million primarily related to capitalized
development costs.
During the three months ended July 31, 1999, the Company generated cash of
approximately $140,000 relating to participation in the Company's stock purchase
plan.
Accounts Receivable and Term Accounts Receivable
Total accounts receivable decreased to $44.3 million at July 31, 1999, from
$50.3 million at April 30, 1999. Term accounts receivable, which are accounts
receivable with payment dates exceeding the Company's customary trade terms,
decreased by $2.7 million to $16.9 million, for the three months ended July 31,
1999 from $19.6 million on April 30, 1999. Term accounts receivable primarily
arise from the recording of revenue from irrevocable commitments to purchase
licenses ("Irrevocable Commitment Licenses").
Under an Irrevocable Commitment License, a customer commits to pay a
minimum amount over a specified period of time in return for the right to use or
resell up to a specific number of copies of a delivered product. The amount of
revenue recorded is the amount of the minimum commitment over the term of the
license, less deemed interest for that part of the license term that is beyond
the Company's customary trade terms.
Payments under Irrevocable Commitment Licenses are generally received from
the customer on the earlier of (i) installation of the Company's products by the
customer or delivery to its customers or end users and (ii) specified minimum
payment dates in the license agreement. Amounts by which revenues recorded
exceed payments received are recorded as accounts receivable. Payments that are
expected beyond the Company's customary trade terms are recorded as term
accounts receivable. Payments that are expected to be received more than one
year from the balance sheet date, are recorded as non-current term accounts
receivable. Total license fees over the term of the Irrevocable Commitment
License may be greater than the minimum commitment initially recorded as
revenue. Revenues from installations or sales of the Company's products in
excess of the minimum commitment are recorded by the Company as and when they
are reported by the customer.
Delrina Obligation
On September 10, 1996, the Company acquired certain assets, including title
to intellectual property, related to the forms software group (the "Delrina
Assets") of Delrina Corporation ("Delrina"), a subsidiary of Symantec
Corporation of Cupertino, California, USA.
Under the asset purchase agreement, the Company will make unequal quarterly
payments to Delrina, from September 27, 1996 to June 27, 2000. On February 12,
1998, the Company and Delrina re-negotiated certain terms of the Delrina Asset
Purchase Agreement whereby the Company agreed to accelerate payment of its
obligation in consideration for a reduction in the effective interest rate,
resulting in a reduction in imputed interest charges. In addition, the amended
agreement provided that the Company may issue its Common Shares to Delrina in
satisfaction of a portion of its payment obligations provided that: (i) the
total market value of the Company's Common Shares held by Delrina immediately
following such issuance does not exceed US$14.0 million; and (ii) the Company
continues to meet certain registration requirements in respect of such issued
Common Shares. As at July 31, 1999, the Company believes that Delrina held no
Common Shares of the Company.
During the three months ended July 31, 1999, the Company made cash payments
of US$4.9 million ($7.5 million) in satisfaction of its obligation to Delrina.
As at July 31, 1999, the next four scheduled quarterly payments totaled US$10.3
million.
Financial Instruments and Credit Facility
The Company has entered into receivables purchase agreements with third
party purchasers. Under the agreements, the Company has the option to sell
certain accounts receivable on a recourse basis. The purchasers have recourse in
the event of a trade dispute as defined in the receivables purchase agreements
and upon the occurrence of other specified events. As at July 31, 1999 and April
30, 1999, the outstanding balance of accounts receivable sold under these
agreements were approximately US$7.0 million and US$6.9 million, respectively.
The Company believes that none of the receivables sold are at risk of recourse.
The Company has a committed $20 million credit facility with the Royal Bank
of Canada. The credit facility is made up of (i) a $10 million term facility
which bears interest at a rate of 1.5% over the bankers acceptance rate of the
Bank from time to time and is payable on June 30, 2000; and (ii) a $10 million
revolving line of credit which bears interest at the prime rate of the Canadian
Bank from time to time. As at July 31, 1999, the Company had drawn down the $10
million term loan facility and fixed the interest rate until October 18, 1999 at
6.24%. The Company had no borrowings against its revolving line of credit as at
July 31, 1999. The Company has granted as collateral for the $20 million credit
facility a general security agreement over JetForm's assets, including a pledge
of the shares of certain subsidiaries.
JetForm hedges its U.S. dollar net asset position to reduce its exposure to
currency fluctuations. To achieve this objective, JetForm primarily enters into
foreign exchange forward contracts with major Canadian chartered banks, and
therefore, does not anticipate non-performance by these counterparties. JetForm
does not enter into foreign exchange forward contracts for speculative or
trading purposes. Gains and losses on these forward exchange contracts are
recognized and included in income as realized and offset against foreign
exchange gains and losses on the underlying net asset or liability position. As
at April 30, 1999, JetForm had a foreign exchange forward contract outstanding
to sell $10 million U.S. dollars at $1.5034 per U.S. dollar. As at July 31,
1999, the approximate fair value of this forward contract was nil.
Provision for Restructuring Costs
On March 17, 1999, the Corporation announced a restructuring plan directed
at reducing costs. The key restructuring actions included:
- Consolidation of management responsibilities and reduction in headcount.
- Closure of redundant facilities.
- Reduction in the carrying value of certain capital assets primarily
related to past acquisitions.
- Cancellation of certain commitments and other costs.
The following table summarizes the activity in the provision for
restructuring costs during the three months ended July 31, 1999:
Employee Total
Termination Facilities Other Provision
-------------- ----------- ----------- -----------
Balance, April 30, 1999..... $ 4,077 $ 2,878 $ 519 $ 7,474
Cash payments .............. (1,222) (280) (56) (1,558)
======= ======= ======= =======
Balance, July 31, 1999...... $ 2,855 $ 2,598 $ 463 $ 5,916
======= ======= ======= =======
Long term balance .......... $ 375 $ 2,135 $ 332 $ 2,842
======= ======= ======= =======
During the three months ended July 31, 1999 the Company made cash payments
of approximately $1.6 million relating to the provision for restructuring costs
recorded in fiscal year 1999. This included $1.2 million in salary continuance
for terminated employees, $280,000 in rent for the Company's vacant office space
in Toronto and the UK, and $56,000 in other miscellaneous costs.
The Year 2000
What is commonly known as the Year 2000 issue arises because many
computerized systems use two digits rather than four to identify a year. Date
sensitive systems may recognize the Year 2000 as 1900 or some other date,
resulting in errors when information using Year 2000 dates is processed. The
effect of the Year 2000 issue may be experienced before, on, or after January 1,
2000, and, if not addressed, the impact on operations and financial reporting
may range from minor errors to significant systems failure which could affect an
entity's ability to conduct normal business operations.
The Company recognizes the need to ensure its operations will not be
adversely impacted by software failures caused by the advent of the Year 2000.
To address the Year 2000 issues, the Company commenced a program which entailed
a comprehensive review of its software products, internal financial and
operational systems, and the Company's suppliers.
The Company has reviewed all its major products and believes that the
majority of the current versions are Year 2000 compliant. Certain products which
are not currently Year 2000 compliant are in the process of being upgraded to
include Year 2000 compliance. The Company has made available information on its
Year 2000 product compliance on its Web site http://www.jetform.com.
With respect to the Company's internal systems, the Company has identified
internal hardware and software systems that could be affected by the Year 2000
date change. The Company is taking preventive measures in those cases where
systems have been found not to be Year 2000 compliant either by replacing those
systems or upgrading to compliant versions offered by suppliers. All costs
associated with modifying the existing internal use computer software will be
expensed as incurred.
The Company is contacting its major suppliers and is not aware of any Year
2000 compliance issues that would impact its normal business operations.
However, there can be no assurance that the systems of its major suppliers and
other service providers on which the Company relies will not be adversely
impacted by software failures caused by the advent of the Year 2000.
The Company expects to implement successfully the systems and programming
changes necessary to address the Year 2000 issues with respect to its products
and internal systems and does not believe that the cost of such actions will
have a material adverse effect on its financial condition or results of
operations. However, the risks from the inability of the Company's software
products or internal systems to properly function in the Year 2000 could result
in increased warranty costs, customer satisfaction issues, inability to ship
products, potential lawsuits, and other costs and liabilities resulting from
business interruptions. To the extent possible, the Company will be developing
contingency plans designed to allow continued operation in the event of failure
of the Company's or third parties' systems.
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
During the three months ended July 31, 1999, the Company did not file any
reports on Form 8-K.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
JetForm Corporation
September 3, 1999 By: /s/ John B. Kelly
- --------------------------------- ---------------------------------------
Date John B. Kelly
President and Chief Executive Officer and
Director
September 3, 1999 By: /s/ Jeffrey McMullen
- --------------------------------- -----------------------------------------
Date Jeffrey McMullen
Vice President, Finance and
Chief Financial Officer
