<PAGE> 1
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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, 1997
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 August 6, 1997, the registrant had outstanding 11,937,243 shares of
Common Stock.
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PARCPLACE-DIGITALK, INC.
FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (all unaudited)
Condensed Consolidated Balance Sheets 3
as of June 30, 1997 and March 31, 1997
Condensed Consolidated Statements of Operations
for the three months ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
for the three months ended June 30, 1997 and 1996 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 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 12
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
<TABLE>
<CAPTION>
PARCPLACE-DIGITALK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
June 30, March 31,
1997 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,014 $ 7,418
Marketable securities 3,538 5,538
Accounts receivable, net of allowance of $2,419 at
June 30 and $2,309 at March 31 4,042 5,586
Inventories 223 220
Other current assets 806 946
-------- --------
Total current assets 16,623 19,708
Marketable securities 1,500 1,500
Property and equipment:
Property and equipment 5,810 5,797
Less accumulated depreciation (4,325) (4,002)
-------- --------
Net property and equipment 1,485 1,795
Other assets 888 869
-------- --------
Total assets $ 20,496 $ 23,872
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,424 $ 1,219
Accrued compensation 1,022 1,421
Accrued restructuring 856 1,067
Other accrued liabilities 2,870 2,827
Deferred revenue 4,571 5,066
-------- --------
Total current liabilities 10,743 11,600
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value:
Authorized shares - 30,000
Issued and outstanding shares - 11,929 at
June 30 and March 31 12 12
Additional paid-in capital 49,863 49,863
Accumulated deficit (39,931) (37,416)
Cumulative translation adjustment (191) (187)
-------- --------
Total stockholders' equity 9,753 12,272
======== ========
Total liabilities and stockholders' equity $ 20,496 $ 23,872
======== ========
</TABLE>
(See accompanying notes.)
3
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<TABLE>
<CAPTION>
PARCPLACE-DIGITALK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For the three months
ended June 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Net revenues:
License $ 1,782 $ 7,046
Service 3,340 4,502
-------- --------
Total net revenues 5,122 11,548
Cost of net revenues:
License 385 1,644
Service 1,964 2,692
-------- --------
Total cost of net revenues 2,349 4,336
-------- --------
Gross profit 2,773 7,212
Operating expenses:
Sales and marketing 2,565 6,163
Research and development 1,541 2,481
General and administrative 1,282 1,890
-------- --------
Total operating expenses 5,388 10,534
-------- --------
Loss from operations (2,615) (3,322)
Interest and other income (expense), net 117 293
-------- --------
Loss before provision for income taxes (2,498) (3,029)
Provision for income taxes 17 21
======== ========
Net loss $ (2,515) $ (3,050)
======== ========
Net loss per share $ (0.21) $ (0.26)
======== ========
Shares used in computing
net loss per share 11,925 11,600
======== ========
(See accompanying notes)
</TABLE>
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<TABLE>
<CAPTION>
PARCPLACE-DIGITALK, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the three months
ended June 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Operating Activities
Net loss $ (2,515) $ (3,050)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 359 804
Changes in operating assets and liabilities:
Accounts receivable 1,544 3,557
Inventories (3) (82)
Other current assets 141 (216)
Accounts payable and accrued liabilities (152) (1,246)
Accrued restructuring (211) ---
Deferred revenue (495) (6)
-------- --------
Net cash used in operating activities (1,332) (239)
Investing activities
Purchases of property and equipment (13) (1,039)
Proceeds from maturities of marketable securities 2,000 3,502
Purchases of marketable securities --- (8,419)
Increase in other assets (55) (123)
-------- --------
Net cash provided by (used in) investing activities 1,932 (6,079)
Financing activities
Proceeds from issuance of common stock, net of repurchases --- 684
-------- --------
Net cash provided by financing activities --- 684
-------- --------
Effect of exchange rate changes on cash
and cash equivalents (4) (45)
Net increase (decrease) in cash and cash equivalents 596 (5,679)
Cash and cash equivalents at beginning of period 7,418 14,367
======== ========
Cash and cash equivalents at end of period $ 8,014 $ 8,688
======== ========
</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, 1997.
In the opinion of management the accompanying unaudited condensed consolidated
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 three months ended June 30, 1997 are not necessarily indicative
of the results expected for the full fiscal year ending March 31, 1998.
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 been excluded from the
computation as their effect would be antidilutive.
In February 1997, the FAS issued Statement of Financial Accounting Standard No.
128, "Earnings per Share" (FAS 128). The Company is required to adopt FAS 128 in
fiscal 1998 and will restate at that time earnings per share (EPS) data for
prior periods to conform with FAS 128.
The impact of adoption of FAS 128 for the quarter ended June 30, 1998 will not
change primary EPS as presented. The impact of FAS 128 on fully diluted EPS is
not expected to be material as the Company is in a net loss position and options
are antidilutive.
6
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PARCPLACE-DIGITALK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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. Restructuring costs
The Company recorded charges for a restructuring in the third and fourth quarter
of fiscal 1997 totaling $5.2 million of which $4.1 million was paid or expensed
as of March 31, 1997. The Company anticipates $800,000 of the remaining
liability of $1.1 million to be paid during fiscal 1998 and $300,000 to be paid
in fiscal 1999. During the first three months of fiscal 1998, the Company paid
$211,000 in accrued restructuring costs consisting mostly of facility costs.
Such payments will be financed through working capital.
6. Subsequent Events
In July 1997, the Company decided to further reduce its worldwide total
headcount by approximately 25% (from approximately 180 persons). The Company
estimates it will incur a restructuring charge in the quarter ended September
30, 1997, of approximately $3.0 to $4.0 million to cover employee severance
packages, the closing of surplus facilities, and the write-off of excess
computer equipment and office furniture.
In July 1997, the Company's board of directors approved an amendment to the
Company's Certificate of Incorporation to change the name of the Company to
ObjectShare, Inc. The name change will be submitted for stockholder approval at
the Company's annual meeting of stockholders scheduled for September 1997.
7
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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 fully object-oriented
application development tools for use in development of distributed
client/server/web applications. The Company also provides customer support,
training, on-site assistance, and consulting. License revenues are generated
primarily by the Company's VisualWorks, VisualWave, and Distributed Smalltalk
products. These products comprise a family of object-oriented application
development environments based on the Smalltalk programming language. 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.
The Form 10-Q includes a number of forward-looking statements that are subject
to certain risks and uncertainties that could cause the Company's actual
results and financial position to be affected negatively as events unfold in the
market for the Company's products. These events include, but are not limited to,
the risks inherent in the development and marketing or relatively new
technologies and the Company's ability to deliver competitive products, retain
key employees and maintain sufficient sales revenue to fund ongoing research and
development, as well as the risks discussed below under "Factors Affected Future
Results." The Company assumes no obligation to update or revise any such
forward-looking statements to reflect events or circumstances that may arise
after this report is filed, and that may have an effect on the Company's
overall performance.
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 Condensed
Consolidated Statements of Operations, (ii) the gross margins on license and
service revenues and (iii) the percentage changes from the preceding period.
<TABLE>
<CAPTION> Percentage of net revenues
for the three months ended
----------------------------- Percent change of
June 30, 1997 June 30, 1996 dollars amounts
------------- ------------ -----------------
<S> <C> <C> <C>
Net Revenues:
License 35% 61% (75%)
Service 65% 39% (26%)
---- ----
Total net revenues 100% 100% (56%)
Cost of net revenues
License 8% 14% (77%)
Service 38% 23% (27%)
---- ----
To cost of net revenues 46% 37% (46%)
---- ----
Gross Margin 54% 63% (62%)
Operating Expenses:
Sales and marketing 50% 53% (58%)
Research and development 30% 22% (38%)
General and administrative 25% 17% (32%)
---- ----
Total operating expenses 105% 92% (49%)
---- ----
Loss from operations (51%) (29%) (21%)
Interest and other income
(expense), net 2% 3% (60%)
---- ----
Loss before income taxes (49%) (26%) (18%)
Provision for income taxes 0% 0% (19%)
---- ----
Net Loss (49%) (26%) (18%)
Gross Margin
License 78% 77% (74%)
Service 41% 40% (24%)
</TABLE>
8
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Net revenues
Total net revenues for the first quarter of fiscal 1998 were $5.1 million, a
decrease of 56% from the comparable period of fiscal 1997.
License revenues for the first quarter of fiscal 1998 decreased 75% from the
comparable period of fiscal 1997. The decline is attributable to lower sales of
development environments. The Company believes that the decrease in sales of
development environments was largely due to: a slowdown in new product releases
by the Company; resistance regarding the Smalltalk programming language,
correlated to the increasing popularity of Java; difficulties encountered in the
Company's efforts to merge the VisualSmalltalk Enterprise product (acquired in
the merger with Digitalk Inc.) into the VisualWorks product; and a high rate of
turnover among the Company's sales force.
Service revenues for the first quarter of fiscal 1998 decreased 26% from the
comparable period of fiscal 1997. The decrease in the first quarter of fiscal
1998 is closely related to reduced sales of development environments, which
generally drive service revenues, particularly training and a reduction in the
number of available consulting and training personnel in North America.
Cost of revenues
Cost of license revenues is primarily comprised of the production of the
Company's products and related royalties. Cost of license revenues for the first
quarter of fiscal 1998 decreased 77% from the comparable period of fiscal 1997,
due to lower sales of development environments. Cost of license revenues as a
percentage of license revenues for the first quarter of fiscal 1998 was 22%
compared to 23% in the comparable period of fiscal 1997.
Cost of service revenues consists principally of personnel costs for training,
consulting and customer support. Cost of service revenues for the first quarter
of fiscal 1998 decreased by 27% from the comparable period of fiscal 1997,
primarily due to reduced service work force. This cost as a percentage of
service revenues in the first quarter was 59% compared to 60% in the comparable
period of fiscal 1997.
Operating expenses
Sales and marketing expenses consist principally of salaries, commissions,
facility expenses, travel-related expenses, and advertising. These expenses for
the first quarter of fiscal 1998 were $2.6 million representing a decrease of
58% over the comparable period of fiscal 1997. This decrease is primarily due to
lower spending for commissions, reduced staffing as a result of restructurings
and attrition, trade shows, printing and reproduction, and literature. As a
percentage of net revenues, sales and marketing expenses for the first quarter
were 50% compared to 53% in the comparable period of fiscal 1997.
Research and development expenses for the first quarter of fiscal 1998 were $1.5
million, a decrease of 38% over the comparable period of fiscal 1997. This
decrease was primarily due to reduced work force as a result of restructurings
and attrition. As a percentage of net revenues, research and development
expenses for the first quarter of fiscal 1998 were 30% compared to 22% in the
comparable period of fiscal 1997. The Company believes that, while controlling
expenses generally, it must continue to invest in research and development.
9
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General and administrative expenses for the first quarter of fiscal 1998 were
$1.3 million, respectively, a decrease of 32% over the comparable period of
fiscal 1997. The decrease in the first quarter was largely due to decreased
staffing expense from the reductions in work force in fiscal 1997 and subsequent
attrition. As a percentage of net revenues, general and administrative expenses
for the first quarter were 25% compared to 17% in the comparable period of
fiscal 1997. The increase of these expenses on a percentage basis is due to the
fixed nature of certain expenses.
Interest and other income (expense), net
Interest and other income (expense), net was $117,000 in the first quarter of
fiscal 1998 compared with $293,000 in the first quarter of the prior year. This
decrease reflects lower interest income from reduced cash and marketable
securities balances.
Provision for income taxes
Although the Company had a loss for the first quarter of both fiscal 1998 and
fiscal 1997, it provided for foreign and local taxes of $17,000 and $21,000,
respectively.
Factors Affecting Future 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.
10
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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.
The market for application development tools for large-scale client/server/web
computing environment is intensely competitive and the Company expects
competition to continue to increase. The Company's competitors include a broad
range of companies that develop and market tools and languages for software
application development. Many of the Company's current and prospective
competitors have significantly greater financial technical manufacturing and
marketing resources than the Company. Moreover, these companies may produce
additional products competitive with those of the Company and there can be no
assurance that the Company could compete effectively with such products. In
particular, several competitors have introduced entry-level Java-based
application development environments, which may for the near term, satisfy the
requirements of a significant number of corporate users who are beginning to
develop applications in Java.
In July 1997, the Company announced the implementation of further actions, in
addition to the steps taken in the third and fourth quarter of fiscal 1997, 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 ending September 30, 1997, of approximately
$3.0 to $4.0 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 1998. 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.
As a result of the restructurings, the Company has incurred a number of risks
associated with its reduced operating size and capabilities. These risks include
an increased sensitivity to employee turnover, with a greater likelihood that
turnover will have a significant negative effect on the Company's operations,
such as by causing delays in product delivery schedules: a reduced ability to
pursue diversified research and development efforts, particularly for projects
that are not profitable in the near term; and the need for the Company to
effectively manage dramatically changing operations. The confidence of the
Company's customer base may also be affected by the restructurings, to the
extent that such customers may become concerned that the Company may not be able
to deliver on future products plans or to effectively maintain its existing
products. 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
most likely would adversely affect the Company's business and results of
operations.
11
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Liquidity and Capital Resources
As of June 30, 1997, the Company had cash, cash equivalents and marketable
securities of $13.0 million and working capital of $5.9 million compared to
$14.5 million and $8.1 million, respectively, as of March 31, 1997.
The Company used cash for operations of $1.3 million in the first three months
of fiscal 1998, which included a net loss of $2.5 million and a decrease in
accounts payable, accrued liabilities, and deferred revenue of $858,000,
partially offset by a decrease in accounts receivable of $1.5 million and
depreciation and amortization of $359,000. Cash payments for the purchase of
property and equipment in the first three months of fiscal 1998 were $13,000.
As a result of its declining revenues, the Company, in July 1997, announced the
implementation of further actions to reduce operating expenses, as described
above. Although the Company is unable to state whether it has adequate resources
to sustain its present level of operations for any particular period of time,
management believes that its existing balances of cash, cash equivalents, and
marketable securities, in combination with possible further reductions in
operating expenses, would be sufficient to meet its cash requirements for
continuing its core business at least through fiscal 1998.
12
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PART II. OTHER INFORMATION
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 June
30, 1997.
SIGNATURE
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 13, 1997
PARCPLACE-DIGITALK, INC.
By: /s/ RON CLEAR
---------------------------------
Ron Clear
Vice President and Chief Financial
Officer (on behalf of the Registrant
and as principal financial officer)
13
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INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBITS
- ------- --------
27.1 Financial Data Schedule
14
<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
JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,014
<SECURITIES> 5,038
<RECEIVABLES> 6,461
<ALLOWANCES> 2,419
<INVENTORY> 223
<CURRENT-ASSETS> 16,623
<PP&E> 5,810
<DEPRECIATION> (4,325)
<TOTAL-ASSETS> 20,496
<CURRENT-LIABILITIES> 10,743
<BONDS> 0
0
0
<COMMON> 49,875
<OTHER-SE> (191)
<TOTAL-LIABILITY-AND-EQUITY> 20,496
<SALES> 1,782
<TOTAL-REVENUES> 5,122
<CGS> 385
<TOTAL-COSTS> 2,349
<OTHER-EXPENSES> 5,388
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,498)
<INCOME-TAX> 17
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,515)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
