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UNITED STATES
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 Quarter Ended June 30, 1996
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities
---- Exchange Act of 1934 for the Transition Period from ____ to ____.
COMMISSION FILE NUMBER 0-23132
PARCPLACE-DIGITALK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0143293
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
999 EAST ARQUES AVENUE, SUNNYVALE, CALIFORNIA 94086
(Address of principal executive offices)
(408) 481-9090
(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 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
--- ---
As of July 31, 1996, the registrant had outstanding 11,695,401 shares
of Common Stock.
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PARCPLACE-DIGITALK, INC.
FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1. Condensed Consolidated Financial Statements (all unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1996 and March 31,
1996
Condensed Consolidated Statements of Operations for the three months
ended June 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows for the three months
ended June 30, 1996 and 1995
Notes to Condensed Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PARCPLACE-DIGITALK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,688 $ 14,367
Marketable securities 14,780 13,358
Accounts receivable, net of allowance of $1,505
and $1,467 at March 31 8,648 12,205
Inventories 907 825
Other current assets 960 744
-------- --------
Total current assets 33,983 41,499
Marketable securities 3,935 506
Property and equipment:
Property and equipment 12,885 11,846
Less accumulated depreciation 8,925 8,255
-------- --------
Net property and equipment 3,960 3,591
Other assets 1,695 1,706
-------- --------
Total assets $ 43,573 $ 47,302
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,232 $ 2,441
Accrued compensation 2,140 3,093
Other accrued liabilities 2,804 2,888
Deferred revenue 5,370 5,376
-------- --------
Total current liabilities 12,546 13,798
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value:
Authorized shares - 30,000
Issued and outstanding shares - 11,692 at
June 30 and 11,532 at March 31 12 12
Additional paid-in capital 49,076 48,392
Accumulated deficit (17,987) (14,871)
Cumulative translation adjustment (74) (29)
-------- --------
Total stockholders' equity 31,027 33,504
======== ========
Total liabilities and stockholders' equity $ 43,573 $ 47,302
======== ========
</TABLE>
(See accompanying notes.)
3
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PARCPLACE-DIGITALK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months
ended June 30,
------------------------
1996 1995
-------- --------
<S> <C> <C>
Net revenues:
License $ 7,046 $ 5,888
Service 4,502 5,058
-------- --------
Total net revenues 11,548 10,946
Cost of net revenues:
License 1,644 1,336
Service 2,692 3,119
-------- --------
Total cost of net revenues 4,336 4,455
-------- --------
Gross profit 7,212 6,491
Operating expenses:
Sales and marketing 6,163 5,258
Research and development 2,481 2,654
General and administrative 1,890 1,738
-------- --------
Total operating expenses 10,534 9,650
-------- --------
Loss from operations (3,322) (3,159)
Interest income and other, net 305 326
Interest expense (12) (17)
-------- --------
Loss before provision for income taxes (3,029) (2,850)
Provision (benefit) for income taxes 21 (698)
-------- --------
Net loss $ (3,050) $ (2,152)
======== ========
Net loss per share $ (0.26) $ (0.23)
======== ========
Shares used in computing
net loss per share 11,600 9,850
======== ========
</TABLE>
(See accompanying notes.)
4
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PARCPLACE-DIGITALK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months
ended June 30,
------------------------
1996 1995
--------- --------
<S> <C> <C>
Operating Activities
Net loss $ (3,050) $ (2,152)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 804 716
Changes in operating assets and liabilities:
Accounts receivable 3,557 2,966
Inventories (82) 362
Prepaid expenses and other current assets (216) (475)
Accounts payable and accrued liabilities (1,246) (2,847)
Deferred revenue (6) (193)
-------- --------
Net cash used in operating activities (239) (1,623)
Investing activities
Purchases of property and equipment (1,039) (513)
Proceeds from maturities of marketable securities 3,502 2,530
Purchases of marketable securities (8,419) (10,317)
Increase in deposits and other assets (123) (17)
-------- --------
Net cash used in investing activities (6,079) (8,317)
Financing activities
Principal payments under capital lease obligations -- (84)
Proceeds from issuance of common stock, net of repurchases 684 61
-------- --------
Net cash provided by (used in) financing activities 684 (23)
-------- --------
Effect of exchange rate changes on cash
and cash equivalents (45) (20)
Net decrease in cash and cash equivalents (5,679) (9,983)
Cash and cash equivalents at beginning of period 14,367 25,059
======== ========
Cash and cash equivalents at end of period $ 8,688 $ 15,076
======== ========
</TABLE>
(See accompanying notes.)
5
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PARCPLACE-DIGITALK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by ParcPlace-Digitalk, Inc. (ParcPlace or 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 and Form 10-K for the fiscal year ended March 31,
1996.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentation have been
included. The operating results for the three months ended June 30, 1996
are not necessarily indicative of the results expected for the full fiscal
year ending March 31, 1997.
2. 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.
3. Net Loss per Share
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares have not been
included as their effect is anti-dilutive.
4. Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Short-term marketable securities consist principally of debt instruments
with maturities between three and twelve months. Long-term marketable
securities consist of debt instruments with maturities exceeding twelve
months.
At June 30, 1996, all of the Company's debt securities were classified as
available-for-sale and are carried at fair market value with unrealized
gains and losses recorded in stockholders' equity. Unrealized gains and
losses for the quarter were not material. Cost of securities is based on
the specific identification method.
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5. Litigation
The Company and certain of its officers and directors have been named as
defendants in a securities class action lawsuit filed on October 11, 1995,
in the U.S. District Court for the Northern District of California,
asserting claims under the Securities Exchange Act of 1934. The litigation
is in the early stages of pre-trial discovery. The Company believes that
the claims are without merit and intends to defend the case vigorously.
There can be no assurance, however, that the lawsuit will not cause
management distraction from the operations of the Company or that the
lawsuit will be resolved in a timely or satisfactory manner without
significant costs to the Company.
6. Other Information
On July 31, 1996 ParcPlace acquired privately held Objectshare Systems, Inc
(OSI). This acquisition will be accounted for as a purchase. The Company
paid approximately $3.5 million in exchange for all shares and options of
OSI common stock. The operating results of OSI will be included in the
Company's consolidated results of operations from the date of acquisition.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
ParcPlace develops, markets, and supports object-oriented application
development tools for the client/server/web computing market. The company also
provides customer support, training, on-site assistance, and consulting. The
Company's primary products are VisualWorks, Visual Smalltalk Enterprise,
VisualWave and Distributed Smalltalk. These products comprise a family of
object-oriented application development environments based on the Smalltalk
programming language.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (i) the percentage of
net revenues represented by certain line items in the Company's Consolidated
Condensed Statements of Operations, (ii) the gross margins on license and
service revenues and (iii) the percentage changes from the preceding periods.
<TABLE>
<CAPTION>
Percentage of
net revenues for the three months ended
---------------------------------------
Percent change
June 30, 1996 June 30, 1995 of dollar amounts
------------- ------------- -----------------
<S> <C> <C> <C>
Net Revenues:
License 61% 54% 20 %
Service 39% 46% (11)%
----- -----
Total net revenues 100% 100% 6%
Cost of net revenues:
License 14% 12% 23%
Service 23% 28% (14)%
----- -----
Total cost of net revenues 38% 41% (3)%
----- -----
Gross Margin 62% 59% 11%
Operating Expenses:
Sales and marketing 53% 48% 17%
Research and development 21% 24% (7)%
General and administrative 16% 16% 9%
----- -----
Total operating expenses 91% 88% 9%
----- -----
Loss from operations (29)% (29)% 5%
Interest income and other, net 3% 3% (6)%
Interest expense 0% 0% (30)%
----- -----
Loss before income taxes (26)% (26)% 6%
Provision for income taxes 0% (6)% (103)%
----- ------
Net loss (26)% (20)% 42%
Gross margin:
License 77% 77% 19 %
Service 40% 38% (7)%
</TABLE>
8
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Net revenues
Net revenues for the first quarter of fiscal 1997 were $11.5 million, an
increase of 6% from the first quarter of fiscal 1996.
License revenues for the first quarter of fiscal 1997 increased 20% from the
first quarter of fiscal 1996. This increase reflects the additional revenue
generated by two new products: VisualWave, which the Company introduced in late
December, and Distributed Smalltalk, to which the Company acquired the rights in
the fourth quarter of fiscal 1996. The increase in license revenues for the
first three months of fiscal 1997 was partially offset by a decrease in runtime
license revenues as a result of the Company's elimination of runtime charges for
its VisualWorks product line, as announced early in the quarter, and also by a
reduction in the sale of Visual Smalltalk Enterprise licenses.
Service revenues for the first quarter of fiscal 1997 decreased 11% from the
comparable period of fiscal 1996. The decrease in the first quarter is
attributable to a reduction of consulting revenue, primarily due to a shortage
of consulting personnel and to a decline in Visual Smalltalk Enterprise training
and consulting. This decrease was partially offset by an increase in support
revenue and a slight increase in VisualWorks training revenue compared to the
first quarter of fiscal 1996.
Cost of net revenues
Cost of net revenues consists of cost of license revenues and cost of service
revenues. Cost of license revenues is substantially lower than cost of service
revenues, reflecting the relatively low materials, packaging, and other costs
associated with sales of the Company's software products compared with the
relatively high personnel costs incurred in providing services.
Cost of license revenues consists principally of royalties, materials, packaging
and freight, and amortization of capitalized software development and purchased
software costs. Cost of license revenues for the first quarter of fiscal 1997
increased 23% over the first quarter of fiscal 1996; although as a percentage of
license revenues such cost was constant at 23% for the first quarters of both
fiscal 1997 and 1996.
Cost of service revenues consists principally of personnel costs for training,
consulting and customer support. Cost of service revenues varies based on the
mix of services provided. Cost of service revenues for the first quarter of
fiscal 1997 decreased 14% from the comparable period of fiscal 1996. This
decrease in costs was due to a reduction in outside contractors retained for a
specific long-term consulting project and lower headcount in training and
consulting personnel. These costs as a percentage of service revenues were 60%
in the first quarter of fiscal 1997 and 62% in the first quarter of fiscal 1996.
Operating expenses
Sales and marketing expenses consist principally of salaries, commissions,
advertising, facility expenses, and travel-related expenses. These expenses for
the first quarter of fiscal 1997 were $6.2 million, representing an increase of
17% over the first quarter of fiscal 1996. This increase is primarily due to a
significant expansion in the Company's international sales force, largely due to
salary and benefits for the french distributor acquired in the fourth quarter of
fiscal 1996, as well as fees paid to recruit personnel for the Company's
domestic sales force. In addition, marketing expenses for advertising and
collateral increased as a result of the promotion of several products released
during the last two quarters of fiscal 1996. As a percentage of net revenues,
sales and marketing expenses increased in the first quarter of fiscal 1997 to
53% from
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48% in the comparable period of the prior year due to increased expenses for
advertising, recruiting of domestic sales force, and collateral, without a
corresponding increase in revenues.
Research and development expenses for the first quarter of fiscal 1997 were $2.5
million, a decrease of 7% from the first quarter of fiscal 1996. This decrease
was due to a reduction in the size of the research and development organization
subsequent to the merger with Digitalk in the second quarter of fiscal 1996.
General and administrative expenses for the first quarter of fiscal 1997 were
$1.9 million, an increase of 9% over the first quarter of fiscal 1996. The
increase resulted primarily from an increase in the general allowance for bad
debts, an increase in overhead due to the transition of contract labor to
employees, and an increase in international administrative headcount over the
comparable period in fiscal 1996. These expenses as a percentage of net revenues
were constant at 16% for the first quarters of both fiscal 1997 and 1996.
Interest and other income (expense)
Interest and other income (expense) decreased to $293,000 in the first quarter
of fiscal 1997 from $309,000 in the first quarter of the prior year. The
decrease is primarily a result of reduced cash and marketable securities
balances.
Provision for income taxes
Although the Company had a loss for the first quarter of fiscal 1997, it
provided for foreign and local taxes of $21,000 for the quarter.
LEGAL PROCEEDINGS
The Company and certain of its officers and directors have been named as
defendants in a securities class action lawsuit filed on October 11, 1995, in
the U.S. District Court for the Northern District of California, asserting
claims under the Securities Exchange Act of 1934. The litigation is in the early
stages of pre-trial discovery. The Company believes that the claims are without
merit and intends to defend the case vigorously. There can be no assurance,
however, that the lawsuit will not cause management distraction from the
operations of the Company or that the lawsuit will be resolved in a timely or
satisfactory manner without significant costs to the Company.
FACTORS AFFECTING QUARTERLY RESULTS
The Company has experienced significant quarterly fluctuations in
operating results and anticipates such fluctuations in the future. Quarterly
fluctuations may be caused by numerous factors including but not limited to
those discussed above. The Company generally ships orders as received and, as a
result, typically has little or no backlog. Quarterly revenues and operating
results therefore depend on the volume and timing of orders received during the
quarter, which are difficult to forecast. Historically, the Company has
received a substantial portion of its product orders in the last month of the
quarter, with a concentration of such orders in the last week. Delays in the
receipt of orders can therefore cause significant variations in quarterly
license revenues. In addition, license revenues in quarters after a new product
or upgrade release may be affected by the amount of new product or upgrade
revenue, which tends to increase soon after the release and then decline
rapidly. License revenues may also be affected by seasonal trends. Service
revenues tend to fluctuate as consulting projects, which may continue over
several quarters, are undertaken or completed. Operating results may also
fluctuate due to factors such as the demand for the Company's products, the mix
of products and services, the size and
10
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timing of customer orders, the introduction of new products and product
enhancements by the Company or its competitors, changes in the proportion of
revenues attributable to licenses and to service fees, commencement or
conclusion of significant consulting projects, changes in the level of operating
expenses, and competitive conditions in the industry. Because the Company's
staffing and other operating expenses are based on anticipated revenues,
operating results will be adversely affected if the anticipated level of
revenues is not realized in the applicable budget period. The Company's results
in recent quarters are not necessarily indicative of future results and the
Company believes that period-to-period comparisons of its financial results
should not be relied upon as an indicator of future performance.
The Company's future success will depend to a large extent on growth in market
acceptance of object-oriented technology in general and the Company's
Smalltalk-based products in particular, and will also depend on acceptance of
the Company's products for use in new applications and operating environments
such as the Internet. The market for the Company's products is characterized by
ongoing technological developments, evolving industry standards and rapid
changes in customer requirements. If the Company is unable to develop and
introduce new products or enhancements to existing products 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. In addition, competitive
pressures from existing and new competitors who offer lower prices, provide free
deployment licenses or introduce new products can result in delays in purchase
decisions by, or loss of sales to, potential customers or cause the Company to
institute price reductions, any of which will adversely affect the Company's
results of operations.
The Company believes that to respond to recent changes in the marketplace,
including technological changes and increased competition, it is necessary to
continue to invest in sales and marketing, and research and development.
Accordingly the Company expects that operating expenses in the next several
quarters will continue to be at a higher percentage of total net revenues than
in years prior to fiscal 1996. Competition for qualified personnel, however, is
intense and may intensify. Employee turnover, particularly in technical and
sales positions, is highly disruptive, and the loss of key personnel or
inability to hire and retain qualified personnel will adversely affect the
Company's business.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company had cash and cash equivalents and marketable
securities of $27.4 million and working capital of $21.4 million compared to
$31.1 million and $31.5, respectively, as of June 30, 1995. The Company has a $5
million working capital line of credit which includes a $1 million equipment
line of credit sub-facility. The agreement expires on September 5, 1996, and
there were no borrowings outstanding under this agreement on June 30, 1996.
The Company used cash for operations of $239,000 in the first quarter of fiscal
1997, which included a net loss of $3.1 million, and a decrease in accounts
payable and accrued liabilities of $1.2 million offset by a decrease in accounts
receivable of $3.6 million and amortization and depreciation of $804,000. Cash
payments for the purchase of property and equipment in the first quarter of
fiscal 1997 was $1.0 million compared to $513,000 in the comparable period in
the prior fiscal year.
On July 31, 1996 ParcPlace acquired privately held Objectshare Systems, Inc
(OSI). This acquisition will be accounted for as a purchase. The Company paid
approximately $3.5 million in exchange for all shares and options of OSI common
stock. The operating results of OSI will be included in the Company's
consolidated results of operations from the date of acquisition.
11
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The Company may acquire other products, technologies, or businesses in the
future. Costs and liabilities resulting from such acquisitions, or failure to
effectively integrate such acquisitions, could adversely affect the Company's
business and its results of operations and financial condition.
The Company believes that existing cash balances will be sufficient to satisfy
its currently anticipated cash requirements for the next twelve months.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits:
None.
B) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended June 30,
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.
DATE: August 12, 1996 PARCPLACE-DIGITALK, INC.
By: /s/ Carolyn V. Aver
--------------------------------
Carolyn V. Aver
Vice President and Chief Financial Officer
(on behalf of the Registrant and as
principal financial officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (a) the
financial statements contained in the Company's Form 10-Q for the period ending
June 30, 1996 and is qualified in its entirety by reference to such (b)
financial statements.
</LEGEND>
<CIK> 0000916354
<NAME> PARCPLACE-DIGITALK, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 8,688
<SECURITIES> 18,715
<RECEIVABLES> 10,153
<ALLOWANCES> 1,505
<INVENTORY> 907
<CURRENT-ASSETS> 33,983
<PP&E> 12,885
<DEPRECIATION> 8,925
<TOTAL-ASSETS> 43,573
<CURRENT-LIABILITIES> 12,546
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 31,015
<TOTAL-LIABILITY-AND-EQUITY> 43,573
<SALES> 7,046
<TOTAL-REVENUES> 11,548
<CGS> 1,644
<TOTAL-COSTS> 4,336
<OTHER-EXPENSES> 10,534
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> (3,029)
<INCOME-TAX> 21
<INCOME-CONTINUING> (3,050)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,050)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> .00
</TABLE>
