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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 DECEMBER 31, 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 January 31, 1997, the registrant had outstanding 11,823,636
shares of Common Stock.
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PARCPLACE-DIGITALK, INC.
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (all unaudited)
Condensed Consolidated Balance Sheets
as of December 31, 1996 and March 31, 1996 3
Condensed Consolidated Statements of Operations
for the three and nine months ended December 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended December 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
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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>
December 31, March 31,
1996 1996
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,527 $14,367
Marketable securities 7,538 13,358
Accounts receivable, net of allowance of $2,517 at
December 31 and $1,467 at March 31 8,794 12,205
Inventories 687 825
Other current assets 909 744
-------- --------
Total current assets 24,455 41,499
Marketable securities 1,500 506
Property and equipment:
Property and equipment 13,343 11,846
Less accumulated depreciation 10,821 8,255
-------- --------
Net property and equipment 2,522 3,591
Other assets 1,811 1,706
-------- --------
Total assets $30,288 $47,302
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,951 $ 2,441
Accrued compensation 1,967 3,093
Other accrued liabilities 4,067 2,888
Deferred revenue 5,260 5,376
-------- --------
Total current liabilities 13,245 13,798
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value:
Authorized shares - 30,000
Issued and outstanding shares - 11,814 at
December 31 and 11,532 at March 31 12 12
Additional paid-in capital 49,687 48,392
Accumulated deficit (32,499) (14,871)
Cumulative translation adjustment (157) (29)
-------- --------
Total stockholders' equity 17,043 33,504
-------- --------
Total liabilities and stockholders' equity $30,288 $47,302
======== ========
</TABLE>
(See accompanying notes.)
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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 For the nine months
ended December 31, ended December 31,
--------------------- -----------------------
1996 1995 1996 1995
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
License $ 4,229 $ 9,681 $ 17,145 $ 21,068
Service 3,860 3,891 12,919 13,796
------- ------- -------- --------
Total net revenues 8,089 13,572 30,064 34,864
Cost of net revenues:
License 1,043 1,646 4,763 4,130
Service 2,595 2,540 8,113 8,664
------- ------- -------- --------
Total cost of net revenues 3,638 4,186 12,876 12,794
------- ------- -------- --------
Gross profit 4,451 9,386 17,188 22,070
Operating expenses:
Sales and marketing 4,394 5,529 16,184 15,728
Research and development 2,185 2,406 7,214 7,865
General and administrative 1,833 1,701 6,090 5,043
Acquired research and development 646 --- 3,513 ---
Restructuring and merger costs 2,182 --- 2,182 5,092
------- ------- -------- --------
Total operating expenses 11,240 9,636 35,183 33,728
------- ------- -------- --------
Loss from operations (6,789) (250) (17,995) (11,658)
Interest income (expense) and other, net (100) 339 503 1,031
------- ------ -------- --------
Income (loss) before provision for income taxes (6,889) 89 (17,492) (10,627)
Provision for income taxes 25 25 71 77
======= ======= ======== ========
Net income (loss) $(6,914) $ 64 $(17,563) $(10,704)
======= ======= ======== ========
Net income (loss) per share $ (0.59) $ 0.01 $( 1.50) $ (1.03)
======= ======= ======== ========
Shares used in computing
net income (loss) per share 11,800 11,500 11,725 10,475
======= ======= ======== ========
</TABLE>
(See accompanying notes)
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PARCPLACE-DIGITALK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months
ended December 31,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Operating Activities
Net loss $(17,563) $(10,704)
Adjustments to reconcile net loss to net cash
used in operating activities:
Acquired Research and development 3,513 ---
Depreciation and amortization 3,455 2,234
Changes in operating assets and liabilities:
Accounts receivable 3,411 (854)
Inventories 138 447
Prepaid expenses and other current assets (90) 143
Accounts payable and accrued liabilities (954) 1,432
Deferred revenue (116) 647
-------- --------
Net cash used in operating activities (8,206) (6,655)
Investing activities
Business combinations (3,699) ---
Purchases of property and equipment (1,466) (1,171)
Maturities of marketable securities 21,239 25,544
Purchases of marketable securities (16,479) (31,851)
Additions to capitalized software development costs --- (200)
Decrease (increase) in deposits and other assets (228) 210
-------- --------
Net cash used in investing activities (633) (7,468)
Financing activities
Proceeds from issuance of common stock, net of repurchases 1,127 811
-------- --------
Net cash provided by financing activities 1,127 811
-------- --------
Effect of exchange rate changes on cash
and cash equivalents (128) (48)
Net decrease in cash and cash equivalents (7,840) (13,360)
Cash and cash equivalents at beginning of period 14,367 25,059
-------- --------
Cash and cash equivalents at end of period $ 6,527 $ 11,699
======== ========
</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 consolidated condensed financial statements have
been prepared by ParcPlace-Digitalk, Inc. (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 the accompanying unaudited consolidated
condensed financial statements have been prepared on the same basis as the
audited financial statements and include all recurring adjustments
necessary for a fair presentation of the results of the interim periods
presented. The operating results for the nine months ended December 31,
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 Income (Loss) per Share
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares have been excluded
from the computation as their effect would be antidilutive. Net income per
share, using the treasury stock method, is computed using the weighted
average number of shares of common stock outstanding and dilutive common
equivalent shares from stock options outstanding.
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 December 31, 1996, all of the Company's debt securities were classified
as available-for-sale and are carried at fair market value with any
material unrealized gains and losses recorded in stockholders' equity. The
cost of the securities is based upon the specific identification method.
5. Depreciation and Amortization
The Company has included $419,000 of equipment written off in the October
1996 restructuring in its depreciation and amortization for the quarter
ended December 31, 1996.
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6. Business Combinations
On October 1, 1996, the Company acquired Polymorphic Software, Inc. (PSI),
a privately held corporation in the Smalltalk tools and consulting
business. This acquisition was accounted for as a purchase in which the
Company agreed to pay approximately $1.0 million in cash, of which $700,000
was paid during the quarter, in exchange for all outstanding shares of PSI
common stock. The operating results of PSI are included in the Company's
consolidated results of operations from the date of acquisition. In
connection with the acquisition, the Company has taken a write-off of
$646,000 for acquired research and development in the quarter ended
December 31, 1996.
On July 31, 1996, the Company acquired Objectshare Systems, Inc. (OSI), a
privately held corporation in the Smalltalk tools add-on products business.
The acquisition was accounted for as a purchase in which the Company paid
$3.0 million in cash and assumed options for the purchase of 104,086 shares
of ParcPlace's common stock. In connection with the acquisition, the
Company has taken a write-off of $2.9 million for acquired research and
development in the quarter ended September 30, 1996. The operating results
of OSI have been included in the Company's consolidated results of
operations from the date of acquisition.
7. Litigation
During the quarter ended December 31, 1996, the Company and its insurers
agreed to settle the securities class action lawsuit filed against the
Company and certain of its officers and directors on October 11, 1995, in
the U.S. District Court for the Northern District of California. For its
portion of the settlement, the Company paid $250,000, which is included in
interest income (expense) and other, net for the quarter. The settlement
is subject to final approval of the court, which will be ruled upon at a
settlement hearing scheduled for March 12, 1997. Although the Company
believes that it would have prevailed on the merits if the suit had
proceeded to trial, the Company determined to settle the lawsuit in order
to avoid the expense and distraction of litigation.
8. Restructuring and merger costs
The Company recorded charges for a restructuring in the third quarter of
fiscal 1997 and expenses incurred as a result of the merger of ParcPlace
Systems, Inc. and Digitalk, Inc. (the "Merger") in the second quarter of
fiscal 1996. In October 1996, the Company reduced its total headcount by
approximately 70 people, including employees and contractors. The Company
took this action in an effort to reduce its ongoing operating expenses.
The Company has recorded a restructuring charge in the third quarter
results of $2.2 million, with approximately $1.2 million in actual
disbursements, to cover severance packages, the closing of excess
facilities, and the write-off of excess computer equipment and office
furniture. Merger-related expenses of $5.1 million were incurred by the
Company in the first nine months of fiscal 1996. These expenses consisted
primarily of transactions fees and costs, severance costs, the closing of
duplicated facilities, and the write-off of inventory related to duplicate
product lines incident to the Merger.
7
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9. Subsequent Events
In January 1997, the Company decided to further reduce its worldwide total
headcount by approximately 25%. The Company estimates it will incur a
restructuring charge in the quarter ended March 31, 1997, of approximately
$3.0 million to cover employee severance packages, the closing of surplus
facilities, and the write-off of excess computer equipment and office
furniture.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
ParcPlace-Digitalk 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.
License revenues in the current fiscal year have been generated primarily by
the Company's VisualWorks, VisualWave and Visual Smalltalk Enterprise products.
These products comprise a family of object-oriented application development
environments based on the Smalltalk programming language. The Company has
recently determined to focus its product development efforts on server and
distributed computing tools, which will be based on VisualWorks and VisualWave,
and to discontinue development of Visual Smalltalk Enterprise. In addition,
the Company's Objectshare division offers Parts for Java, a Java-based
component development environment introduced in the second quarter of fiscal
1997.
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 total net revenues for the
----------------------------------------
Percent change
Three months ended Nine months ended of dollar amounts
December 31, December 31, 1996 compared to 1995
------------ ------------ ---------------------
Three Nine
1996 1995 1996 1995 months months
---- ---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues:
License 52 % 71 % 57 % 60 % (56)% (19)%
Service 48 % 29 % 43 % 40 % (1)% (6)%
---- ---- ---- ---
Total net revenues 100 % 100 % 100 % 100 % (40)% (14)%
Cost of net revenues:
License 13 % 12 % 16 % 12 % (37)% 15 %
Service 32 % 19 % 27 % 25 % 2 % (6)%
---- ---- ---- ---
Total cost of net revenues 45 % 31 % 43 % 37 % (13)% (1)%
---- ---- ---- ---
Gross Margin 55 % 69 % 57 % 63 % (53)% (22)%
Operating Expenses:
Sales and marketing 54 % 41 % 54 % 45 % (21)% 3 %
Research and development 27 % 18 % 24 % 23 % (9)% (8)%
General and administrative 23 % 12 % 20 % 14 % 8% 21%
Acquired research and development 8 % 0 % 12 % 0 % n/a n/a
Restructuring and merger costs 27 % 0 % 7 % 15 % n/a (57)%
---- ---- ---- ---
Total operating expenses 139 % 71 % 117 % 97 % 17 % 4 %
---- ---- ---- ---
Income (loss) from operations (84)% (2)% (60)% (34)%
Interest and other income, net (1)% 3 % 2 % 3 %
---- ---- ---- ---
Income (loss) before income taxes (85)% 1 % (58)% (31)%
Provision for income taxes 0 % 0 % 0 % 0 %
---- ---- ---- ---
Net income (loss) (85)% 1 % (58)% (31)%
Gross margin:
License 75 % 83 % 72 % 80 %
Service 33 % 35 % 37 % 37 %
</TABLE>
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Net revenues
Total net revenues for the third quarter and the first nine months of fiscal
1997 were $8.1 million and $30.1 million, respectively, decreases of 40% and
14%, respectively, from the comparable periods of fiscal 1996.
License revenues for the third quarter and the first nine months of fiscal 1997
decreased 56% and 19%, respectively, from the comparable periods of fiscal
1996. The declines are attributable to lower sales of development environments,
and, to a lesser extent, the elimination of runtime license fees partially
offset by sales of new products such as VisualWave, Distributed Smalltalk, and
Parts for Java. The Company believes that the decrease in sales of development
environments was largely due to: resistance regarding the Smalltalk programming
language, correlated to the increasing popularity of Java, a new object
development language rapidly gaining momentum in the marketplace; difficulties
encountered in the Company's efforts to merge the Visual Smalltalk Enterprise
product into the VisualWorks product; and a high rate of turnover among the
Company's sales force.
Service revenues for the third quarter and the first nine months of fiscal 1997
decreased 1% and 6%, respectively, from the comparable periods of fiscal 1996.
The decrease in the third quarter and first nine months of fiscal 1997 is
associated with reduced sales of development environments, which generally
drive service revenues, and a reduction in the number of available consulting
and training personnel in North America, partially offset by the growth of
international training and consulting and an increase in worldwide support
revenues.
Cost of revenues
Cost of license revenues consists principally of royalties, materials,
packaging and freight, and amortization of capitalized software development
costs and purchased software. Cost of license revenues for the third quarter
and first nine months of fiscal 1997 decreased 37% and increased 15%,
respectively, from the comparable periods of fiscal 1996. The third quarter
reduction resulted from lower sales of development environments. The
year-to-date increase was due to a write-off of purchased capitalized software,
an increased royalty accrual on a third-party product sold by the Company, a
write-off of obsolete inventory, and the higher cost of sales on the company's
retail product. Cost of license revenues as a percentage of license revenues
for the third quarter and first nine months of fiscal 1997 was 25% and 28%,
respectively, compared to 17% and 20% in the comparable periods of fiscal 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, with gross margins being generally higher on
long-term time-and-materials consulting projects, and lower on training,
fixed-price and short-term consulting projects. Cost of service revenues for
the third quarter and the first nine months of fiscal 1997 increased by 2% and
decreased by 6%, respectively, from the comparable periods of fiscal 1996. The
increase in costs for the third quarter was due to an increase in international
expenses and a domestic fixed-price contract that experienced overruns. The
reduction in costs for the first nine months was due to a reduction both in
headcount and contract personnel which was partially offset by increases in
international spending. These costs as a percentage of service revenues in
the third quarter and the first nine months of fiscal 1997 were 67% and 63%,
respectively, compared to 65% and 63%, respectively, in the comparable periods
of fiscal 1996.
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Operating expenses
Sales and marketing expenses consist principally of salaries, commissions,
advertising, facility expenses, and travel-related expenses. These expenses
for the third quarter and the first nine months of fiscal 1997 were $4.4
million and $16.2 million, respectively, representing a decrease of 21% and an
increase of 3%, respectively, over the comparable periods of fiscal 1996. The
third quarter decrease is primarily due to lower spending for commissions,
trade shows, staffing, printing and reproduction, and literature. The
year-to-date increase resulted from expansion of the Company's international
sales and marketing presence including the addition of a French subsidiary and
was partially offset by decreases in domestic spending as noted for the third
quarter of fiscal 1997. As a percentage of net revenues, sales and marketing
expenses for the third quarter and first nine months of fiscal 1997 were 54%
compared to 41% and 45%, respectively, in the comparable periods of fiscal
1996.
Research and development expenses for the third quarter and the first nine
months of fiscal 1997 were $2.2 million and $7.2 million, respectively, a
decrease of 9% and 8%, respectively, over the comparable periods of fiscal
1996. These decreases were primarily related to reduced personnel costs,
including salaries and benefits resulting from a reduction in work force in
conjunction with the Digitalk merger, the reduction in work force in the third
quarter of fiscal 1997, and attrition in the first nine months of fiscal 1997.
As a percentage of net revenues, research and development expenses for the
third quarter and first nine months of fiscal 1997 were 27% and 24%,
respectively, compared to 18% and 23%, respectively, in the comparable periods
of fiscal 1996.
General and administrative expenses for the third quarter and the first nine
months of fiscal 1997 were $1.8 million and $6.1 million, respectively, an
increase of 8% and 21%, respectively, over the comparable periods of fiscal
1996. The increase in the third quarter was largely due to an increase of bad
debt allowance as well as legal expenses associated with the securities class
action lawsuit, partially offset by decreased staffing expense from the October
reduction in work force and subsequent attrition. The increase for the first
nine months of fiscal 1997 was due to an increase of bad debt allowance, legal
expenses associated with the securities class action lawsuit, and an increase
in international spending primarily from the French subsidiary, partially
offset by a decrease in North American staffing expense. As a percentage of
net revenues, general and administrative expenses for the third quarter and
first nine months of fiscal 1997 were 23% and 20%, respectively, compared to
13% and 15%, respectively, in the comparable periods of fiscal 1996.
Acquired research and development represents charges for software that has not
yet reached technological feasibility under FAS 86 in the amounts of $646,000
taken in connection with the October 1, 1996, acquisition of privately held
Polymorphic Software, Inc. and $2.9 million taken in connection with the July
31, 1996, acquisition of privately held Objectshare Systems, Inc.
Restructuring and merger costs reflect charges recorded for a restructuring in
the third quarter of fiscal 1997 and expenses incurred as a result of the
merger of ParcPlace Systems, Inc. and Digitalk, Inc. (the "Merger") in the
second quarter of fiscal 1996. In October 1996, the Company reduced its total
headcount by approximately 70 people, including employees and contractors. The
Company took this action in an effort to reduce its ongoing operating expenses.
The Company has recorded a restructuring charge in the third quarter results of
$2.2 million, with approximately $1.2 million in actual disbursements, to cover
severance packages, the closing of excess facilities, and the write-off of
excess computer equipment and office furniture. Merger-related expenses of
$5.1 million were incurred by the Company in the first nine months of fiscal
1996. These expenses consisted primarily of transactions fees and costs,
severance costs, the closing of duplicated facilities, and the write-off of
inventory related to duplicate product lines incident to the Merger.
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Interest income (expense) and other, net
Interest income (expense) and other was a net expense of $100,000 in the third
quarter of fiscal 1997 compared with net interest income of $339,000 in the
third quarter of the prior year. This decrease reflects a payment of $250,000
for proposed settlement of the securities class action lawsuit, other related
legal costs and lower interest income from reduced cash and marketable
securities balances. Interest and other income for the first nine months of
fiscal 1997 was $503,000 in comparison to $1.03 million for the comparable
period a year ago. This decrease was primarily due to reduced cash and
marketable securities balances, the lawsuit and related legal costs, and lower
interest rates during the nine month period.
Provision for income taxes
Although the Company had a loss for the third quarter and the first nine months
of fiscal 1997, it provided for foreign and local taxes of $25,000 and $71,000,
respectively.
LEGAL PROCEEDINGS
During the quarter ended December 31, 1996, the Company and its insurers agreed
to settle the securities class action lawsuit filed against the Company and
certain of its officers and directors on October 11, 1995, in the U.S. District
Court for the Northern District of California. For its portion of the
settlement, the Company paid $250,000, which is included in interest income
(expense) and other, net for the quarter. The settlement is subject to final
approval of the court, which will be ruled upon at a settlement hearing
scheduled for March 12, 1997. Although the Company believes that it would have
prevailed on the merits if the suit had proceeded to trial, the Company
determined to settle the lawsuit in order to avoid the expense and distraction
of litigation.
FACTORS AFFECTING QUARTERLY RESULTS
The Company has experienced significant quarterly fluctuations in operating
results and anticipates such fluctuations in the future. Recent quarters have
been adversely affected by substantially lower license revenues which the
Company attributes to the factors discussed above under "Results of Operations
- - Net Revenues". 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. 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 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.
12
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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
transition from Smalltalk-based products to distributed computing 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 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.
In January 1997, the Company announced the implementation of further actions,
in addition to the steps taken in the third quarter, to reduce costs and
restructure its business, including a further reduction in total headcount of
approximately 25%. The Company estimates it will incur a restructuring charge
in the quarter ended March 31, 1997, of approximately $3.0 million to cover
employee severance packages, the closing of excess facilities, and the
write-off of certain computer equipment and office furniture. While the
Company needs to reduce fixed costs, it also believes that it is necessary to
continue to invest in sales, 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 1997. The Company's future operating results and
financial condition could be adversely affected if the Company is unable to
effectively manage the transition to a new business model and cost structure.
Competition for qualified personnel is intense and has recently intensified in
the Company's geographic and industry segments. The intensifying competition
for qualified personnel, as well as the implementation of the Company's
restructuring actions, have increased the already high difficulty of retaining
and motivating employees. Employee turnover, particularly in technical and
sales positions, is highly disruptive, and high turnover of sales personnel has
adversely affected the Company's revenues. Ongoing high rates of employee
turnover, the loss of key personnel, or an inability to hire qualified
personnel will adversely affect the Company's business and results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash, cash equivalents and marketable
securities of $15.6 million and working capital of $11.2 million compared to
$28.2 million and $27.7 million, respectively, as of March 31, 1996. The
Company has a $5 million secured working capital line of credit. The credit
facility expires September 30, 1997. There were no borrowings outstanding
under this credit facility on December 31, 1996. The Company was not in
compliance with its profitability convenant, which covenant was waived by the
lending institution, as of December 31, 1996.
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The Company used cash for operations of $8.2 million in the first nine months
of fiscal 1997, which included a net loss of $17.6 million (including $3.5
million for acquired research and development in the acquisitions of
Objectshare Systems, Inc. and Polymorphic Software, Inc.) and a decrease in
accounts payable and accrued liabilities of $1 million, partially offset by
depreciation and amortization of $3.5 million and a decrease in accounts
receivable of $3.4 million. Cash paid for business combinations was $3.7
million year-to-date. Cash payments for the purchase of property and equipment
in the first nine months of fiscal 1997 were $1.5 million.
The Company believes that existing cash balances will be sufficient to satisfy
its currently anticipated cash requirements for the next twelve months.
Although the Company has taken measures in the current fiscal year to reduce
operating expenses, the Company expects to continue to incur negative cash
flows from operations in the near term, and there can be no assurance that the
Company will achieve positive cash flows in the future. The Company may from
time to time consider the acquisition of products, technologies, or businesses
complementary to its overall business strategy.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
During the quarter ended December 31, 1996, the Company and its insurers agreed
to settle the securities class action lawsuit filed against the Company and
certain of its officers and directors on October 11, 1995, in the U.S. District
Court for the Northern District of California. For its portion of the
settlement, the Company paid $250,000, which is included in interest income
(expense) and other, net for the quarter. The settlement is subject to final
approval of the court, which will be ruled upon at a settlement hearing
scheduled for March 12, 1997. Although the Company believes that it would have
prevailed on the merits if the suit had proceeded to trial, the Company
determined to settle the lawsuit in order to avoid the expense and distraction
of litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits:
27.1 Financial Data Schedule
B) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended
December 31, 1996.
15
<PAGE> 16
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: February 11, 1997 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)
16
<PAGE> 17
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
Ex-27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Company's Form 10-Q for the period ending
December 31, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 6,527
<SECURITIES> 9,038
<RECEIVABLES> 10,055
<ALLOWANCES> 2,517
<INVENTORY> 687
<CURRENT-ASSETS> 24,455
<PP&E> 13,343
<DEPRECIATION> 10,821
<TOTAL-ASSETS> 30,288
<CURRENT-LIABILITIES> 13,245
<BONDS> 0
0
0
<COMMON> 49,699
<OTHER-SE> (157)
<TOTAL-LIABILITY-AND-EQUITY> 30,288
<SALES> 17,145
<TOTAL-REVENUES> 30,064
<CGS> 4,763
<TOTAL-COSTS> 12,876
<OTHER-EXPENSES> 35,183
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (17,492)
<INCOME-TAX> 71
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,563)
<EPS-PRIMARY> (1.50)
<EPS-DILUTED> (1.50)
</TABLE>
