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================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 481-9090
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
(Title of class)
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
----- -----
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the closing sale price of the Common
Stock on June 26, 1997, as reported by Nasdaq was $12,331,236. Shares of Common
Stock held by each officer and director and by each person who owns 5% or more
of the outstanding Common Stock have been excluded from this computation in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not a conclusive determination for other purposes. As of June 26,
1997, the registrant had outstanding 11,929,351 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Annual Report to Stockholders for its
fiscal year ended March 31, 1997 (the "1997 Annual Report to Stockholders") are
incorporated by reference in Parts II and IV of this Form 10-K report and parts
of the Registrant's Proxy Statement for its 1997 Annual Meeting of Stockholders
(the "Proxy Statement"), which shall be filed with the Securities and Exchange
Commission within 120 days after the Registrant's fiscal year end, are
incorporated by reference in Part III of this Form 10-K Report.
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PART I
ITEM 1. BUSINESS
1A. GENERAL
ParcPlace-Digitalk, Inc. ("ParcPlace-Digitalk" or the "Company")
develops, markets and supports fully object-oriented application development
tools for use in development of distributed client/server/web applications. The
Company also provides a comprehensive range of services, including customer
support, training and consulting as integral components of a complete solution.
The Company's primary products are VisualWorks, VisualWave and Distributed
Smalltalk, which are application development environments ("ADEs") based on the
Smalltalk programming language. VisualWorks, the Company's primary ADE, provides
a powerful visual programming environment that enables programmers to develop,
deploy and maintain applications ranging from workgroup and departmental
applications to complex enterprise-wide mission-critical client/server
applications. VisualWorks applications are portable across multiple platforms.
VisualWave is an extension of the VisualWorks environment that allows a
VisualWorks application to be enhanced for deployment on the Internet. The
Company's Distributed Smalltalk ("DST") tool set, when used in conjunction with
VisualWorks or VisualWave, provides a proven architecture for developing
mission-critical, enterprise-wide distributed applications. Through its
ObjectShare division, the Company develops, markets and supports Parts for Java,
a visual programming environment based on the Java programming language, and
related tools.
ParcPlace Systems, Inc., which merged with Digitalk, Inc. in
August 1995, to form ParcPlace-Digitalk, was organized in 1988 in cooperation
with Xerox Corporation to commercialize object-oriented technology.
ParcPlace-Digitalk acquired ObjectShare Systems, Inc. in July 1996 and
Polymorphic Software, Inc. in October 1996.
This Form 10-K 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 of
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. The Company will not 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. A more thorough discussion of these factors is presented in Section
1.b "Risk Factors" and elsewhere in this report.
BACKGROUND
OBJECT ORIENTED APPLICATION DEVELOPMENT
Object-oriented application development represents a relatively
new approach to developing software applications. The basic concept of
object-oriented technology is to construct software in terms of objects, which
are independent modules that can be modified independently from each other,
reused in new applications, and reused and extended to create new objects. Thus,
object-oriented technology can offer substantial productivity gains by enabling
programmers to reuse more of their application code in developing new
applications or adding new functionality to existing applications. Because new
functions can be added incrementally without changing existing objects,
applications developed using object-oriented programming are also more easily
maintained without risking the integrity of the entire system. The reusability
of tried-and-tested objects results in higher-quality code and reduced
maintenance requirements. Since independent objects can be combined to form new
objects, a complex system can be created from simpler sub-structures. These
characteristics of object-oriented systems make them well suited for the
complexity of larger-scale systems, such as those needed to support
enterprise-wide mission-critical business applications.
Smalltalk is a pure object-oriented programming language. As a
pure object language, Smalltalk provides all of the intended benefits of object
programming: direct business modeling, an easy-to-learn syntax, rapid
development of new objects, incremental changes to existing objects, and easy
and safe reuse of objects. Such benefits make Smalltalk generally more suitable
to corporate application development than object-based extensions of other
programming languages, such as C++, which is an object-oriented extension of C.
Both C and C++ are too complex and low level to provide a pragmatic solution for
the vast majority of corporate applications. In addition, although the C++
language provides for object orientation, it allows programmers to revert to
procedural programming techniques, thereby potentially limiting the benefits of
object-oriented programming
Smalltalk also has certain advantages over Java, which is being
used primarily for development of Web-based client applications. Smalltalk,
particularly in the Company's implementation, has more extensive class
libraries,
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server capability, and the maturity achieved through testing and deployment in
corporate applications. Java, which has had only limited implementation in
development tools, has not been widely tested or deployed in corporate
applications.
CLIENT/SERVER/WEB COMPUTING
In recent years, many organizations have moved their information
systems from mainframe and mini-computer based architectures to distributed
client/server computing environments. Client/server systems typically consist of
multiple desktop PC and workstation clients linked in a network to one or more
high-performance servers. This computing architecture has several benefits: (i)
client/server computing enables end-users to access and share enterprise-wide
data and applications, (ii) additional clients, servers and other computing
resources can easily be added to the network in cost-effective increments and
(iii) because of the distributed nature of client/sever systems, organizations
can improve the overall effectiveness of their computing resources by
appropriately distributing application logic, processing and data among clients
and servers.
The distribution of functionality among objects and the ability
of objects to communicate with each other makes object-oriented technology
ideally suited for the client/server environment. Client/server architectures
are based upon the distribution of functionality among different computers on a
network and the ability of clients and servers to communicate via
message-passing. Object-oriented technology is based on a similar
message-passing architecture in which objects on clients and servers throughout
a network can easily communicate to comprise an enterprise-wide client/server
application. Distributed computing standards like the Common Object Request
Broker Architecture ("CORBA") enhance communication among objects.
The Internet is a global web of computer networks. This "network
of networks" allows any computer attached to the Internet to talk to any other,
using the Internet Protocol. Much of the recent growth in Internet use by
businesses and individuals has been driven by the emergence of the World Wide
Web (the "Web"), a format for delivering graphical information over the
Internet. The Web, based on a client/server model and a set of standards for
information access and navigation, can be accessed using client "browser"
software that allows non-technical users to exploit the capabilities of the
Internet. As an increasing number of organizations provide their employees with
Web access from their desktops, an opportunity is emerging for internal
information systems and enterprise applications hosted on internal Web servers.
These systems are referred to as the "intranet." An intranet enables
organizations to extend their internal information systems and enterprise
applications to geographically dispersed facilities, remote offices, and mobile
employees using Web browsers and server software.
Client/server/web computing refers to application development and
delivery systems for business software that will operate in both a client/server
environment and on the Internet and/or Intranet without modification or
recompilation.
DISTRIBUTED COMPUTING
Distributed computing is based on the ability to distribute
applications across a network. Early application networks provided simple data
or procedural interfaces among software programs that needed to interact. The
complexity of such a system expands geometrically as the number of discrete
application components in such a system increases. Managing application networks
larger than a single enterprise can be an impossible task unless distributed
components can communicate with each other without the need to understand each
interface in the distributed network of components.
Distributed objects resolve this crucial problem by using
standards that support sending messages to and receiving messages from other
objects regardless of location. Distributed objects can reside on different
machines and on an intranet or the Internet, and they can migrate from one host
to the other, surviving beyond the life of a current host. A majority of
distributed objects adhere to CORBA, a standard for object messaging maintained
by the Object Management Group ("OMG"). The main advantage of CORBA is the
ability to transparently interoperate with other languages that support CORBA.
Messages between objects are converted into language-neutral forms that are
processed by an object request broker ("ORB"), which carries the translated
message from one object to another.
THE PARCPLACE SOLUTION
The Company provides a fully object-oriented software development
environment and related training and consulting services to support the
development of mission-critical, enterprise-wide client/server/web applications.
The Company's strategy has been to offer a complete solution to its customers to
enable them to capitalize on the advantages of object-oriented technology.
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Complete, Integrated Application Development Environment. The
Company believes that customers developing client/server/web or distributed
computing applications require a complete, powerful, robust and extensible
development environment as a foundation for their development efforts.
VisualWorks provides a fully integrated graphical user interface ("GUI")
builder, access to multiple databases, cross-platform portability, true
object-oriented visual programming in the Smalltalk language, and an extensive
library of pre-developed classes and methods that support its environment.
VisualWave, as an extension of VisualWorks, provides the capabilities to develop
applications that are ready to be deployed on the Internet in the familiar
VisualWorks development environment.
Comprehensive Service and Support. The Company believes that
service and support is a critical factor for customer success. The Company
offers comprehensive customer service, training, support, and on-site assistance
and consulting as integral components of its overall customer solution. The
Company's training and consulting personnel assist customers in becoming
productive quickly, setting up a development infrastructure appropriate to
customer requirements and the implementation of object-oriented technology, and
for providing ongoing support of deployed applications and enterprise-wide
distributed computing solutions.
PRODUCTS
The Company offers a line of object-oriented application
development tools for the client/server/web and distributed computing markets.
The Company's primary products are VisualWorks, VisualWave, Distributed
Smalltalk ("DST"), and related products based on the Smalltalk programming
language. This family of object-oriented application development environments
provides the following significant customer benefits:
Improved Information Systems Productivity. The Company's products
are designed to increase the productivity of IS organizations by reducing the
overall effort required to develop and maintain an application.
o Reduced Development Effort. True object-oriented development
environments allow programmers to take advantage of code reuse,
prototyping of partial systems and incremental development. By
fully adhering to the concepts of true object-oriented
programming, the Company's software tools can reduce the time and
resources required to develop an application when compared to
structured programming languages.
o Reduced Maintenance Effort. Because the Company's development
tools allow objects to be developed and tested independently and
applications to be modified by adding new objects incrementally,
applications can be more easily maintained without risking the
integrity of the entire system. In addition, changes made to an
original object are immediately made available to every
application or applications using that object, thereby speeding
maintenance and enhancement.
Enterprise-Wide Capability. The Company's products enable
customers to develop mission-critical applications that operate throughout the
enterprise.
o Portability. The Company's products provide a solution to the
heterogeneous computing environments prevalent in most large
organizations today. Applications written in VisualWorks are
instantly portable across the most commonly used client and
server platforms.
o Scalability. Scalability refers to the size and complexity of
applications that can be developed. The Company's products
provide for the development of fully scalable applications
ranging from workgroup or departmental applications to
enterprise-wide, mission-critical applications deployed on
complex networks with thousands of users in multiple locations.
o Development for Client/Server/Web Computing. The architecture of
the Company's products enables customers to develop applications
for the server, the client, or the Web. The products accommodate
flexibility in computing architectures, and allow the developer
to adjust the distribution of data, presentation and applications
among clients, servers and the Web, depending on the requirements
of the business function being implemented.
o Development for Distributed Computing. By combining the
application development capabilities of VisualWorks and the
distributed component technology of DST, the Company provides a
toolset and architecture for developing mission-critical,
enterprise-wide distributed applications for the Internet. In a
distributed computing architecture, the processing of various
application tasks is distributed across network systems, rather
than being centralized in a specific location. This model of
distribution enables corporations to improve efficiency and
performance of the overall enterprise network by leveraging the
computing power
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of multiple systems for a given task, either with systems that
would be otherwise underutilized or with systems that are
geographically closer to the user.
Following is a description of the Company's products:
VISUALWORKS AND ADD-ON PRODUCTS FOR VISUALWORKS
VisualWorks is a robust application development environment for
corporate developers building client and server applications. It includes these
key features:
o The ParcPlace Smalltalk language and its extensive class library,
and a full set of integrated development tools, providing all the
benefits of true object-oriented programming.
o Instant, zero-cost portability across PC (Windows, Windows NT and
OS/2), UNIX, and Macintosh platforms. VisualWorks' compiler
architecture enables deployment across platforms without any
reprogramming or recompiling.
o A Database Application Creator that allows developers to create
basic database applications without any Smalltalk or SQL
programming. The Database Application Creator includes an
"ObjectLens" that allows developers to combine relational
database systems with object-oriented programming technology for
client and server applications, a "Visual Data Modeler" that
allows developers to manipulate database schemas and
relationships between databases and applications, and other
capabilities for rapid database application development.
o A GUI builder that enables developers to create user interface
specifications using a visual "paint-and-build" approach. The GUI
builder includes a "ChameleonView" feature that lets developers
preview the look of their application on multiple platforms.
o A Reusable Application Framework used to generate a working
prototype application from the user interface specification.
o The ability to develop applications that reside on servers and
run without client user interfaces.
o The capability to perform multi-threading operations.
VisualWorks Advanced Tools provides a variety of specialized
Smalltalk-based tools to optimize applications. These tools include browsers,
allocation and time profilers, a parser compiler, a class reporter, and a
benchmark facility.
VisualWorks Business Graphics is a data presentation tool for
building and incorporating business graphics into applications developed using
VisualWorks.
VisualWorks Database Connect products provide the additional code
necessary to connect VisualWorks to Oracle, Sybase and DB2 relational databases.
Because VisualWorks has an open API for drivers, additional connections can be
made to other databases.
VisualWorks DLL and C Connect provides tools and interfaces that
enable an easier and tighter integration of VisualWorks applications with C
programs. By using these tools, a VisualWorks developer can link VisualWorks
applications to external C code libraries and applications available in today's
open systems environment.
VISUALWAVE
VisualWave Development Environment ("VisualWave") is an
object-oriented development tool for creating applications that operate across
the Web, either on an internal "intranet" or over the Internet. VisualWave
includes the same object-oriented application development features as
VisualWorks but also includes a set of advanced tools for creating a Web
application. End-users can interact with the application through the Web using a
Web "browser" such as Netscape Navigator or Microsoft Internet Explorer
connected to a VisualWave Internet Application Server. Unlike most Web tools,
which provide only for broadcasting of static information or simple interaction
via forms, VisualWave allows end-users to connect through the Web to a dynamic
application, fully integrated with client/server systems. VisualWave offers the
following features:
o Graphical tools that provide automatic generation of the Web
interface and allow developers to incorporate dynamic graphics
into their applications.
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o Session management, enabling a true two-way dialog between the
end-user and the application.
o A personal Web server for testing Web applications before
deployment.
o Support for most Web servers and browsers.
o A full-featured object-oriented application development
environment.
VisualWave Internet Application Server ("VisualWave Server") is
an Internet application server for deploying Web applications developed using
VisualWave. The VisualWave Server provides the ability to relay application
requests from Web servers to VisualWave applications. It can be used with most
available Web servers, including those from Netscape and Microsoft, in a wide
variety of configurations, including both a single Web server interfacing with
multiple VisualWave Servers or multiple Web servers interfacing with one or more
VisualWave Servers. The "Server Console" feature provides complete control over
all aspects of server operation, including application management and network
operations. Applications can be updated using the VisualWave Development
Environment and can be "hot-loaded" into a running server, making them rapidly
available to users.
DISTRIBUTED SMALLTALK ("DST")
Distributed Smalltalk is a powerful development tool for building
multi-tiered distributed applications. Distributed Smalltalk (DST) is designed
to help developers build enterprise-wide solutions for client/server-based
environments. Fully integrated with VisualWorks, DST provides application
frameworks for the development of multi-tiered client/server applications. DST
combines the Common Object Request Broker Architecture (CORBA) implementation,
powerful testing and tuning tools, reusable frameworks, and an open and flexible
architecture in the development of distributed applications.
OTHER PRODUCTS FOR USE WITH VISUALWORKS AND VISUALWAVE
ENVY/Developer for VisualWorks and ENVY/Developer for VisualWave
are component management environments that are fully integrated with the
VisualWorks and VisualWave development environments. ParcPlace-Digitalk is a
reseller of ENVY/Developer, which is provided by a third party. ENVY/Developer
facilitates application development by a group of developers. It also assists
with incremental application development and provides a complete history of an
application's development. The product includes a version control feature that
helps manage the software development process and a configuration management
feature that allows a developer to configure an application by specifying
particular objects to be included.
OBJECTSHARE DIVISION PRODUCTS
Parts for Java was first made available in July 1996. The second
release of Parts for Java is scheduled to ship in June 1997. Parts for Java 2.0
is a visual development environment that furnishes end-to-end productivity in
the creation of distributed Java applets and applications. Parts for Java 2.0
provides an extremely powerful drag-and-drop visual programming environment for
the delivery and maintenance of Internet applications. Parts for Java 2.0 is
intended to be the first Internet Development Environment ("IDE") to ship that
includes full support for JavaBeans. Developers can easily create and consume
industry-standardized Java components with Parts for Java. Parts for Java
includes powerful tools for developing client/server/web solutions: a browser
for browsing and editing source code and class hierarchies; an open tool set for
selecting compilers and other tools; and an editor for creating and maintaining
selecting compilers and other tools, and for creating and maintaining Java
classes. The Company distributes the product through retail sales channels and
over the Web, and to site licenses for corporate customers.
jKit/Grid and jKit/GO support Parts for Java. jKit/Grid is a set
of Java components that provide powerful grid, table and hierarchical to enable
UIs for Java applets and applications. jKit/GO provides a rich Java framework
for graphic objects. jKit/GO lets developers applets and applications go beyond
text, tables, lists, and buttons. With jKit/GO developers can build graphical
applications on a well-designed framework of reusable components, including
graphic objects, tools, and visual handles. jKit/Grid and jKit/GO allow
developers to make applications more visually appealing, more usable, and to
produce them more efficiently.
VISUALSMALLTALK ENTERPRISE
In February 1997, as part of its restructuring effort, the
Company announced that it would not continue to enhance VisualSmalltalk
Enterprise and related products. The Company will continue to provide support to
licensees of VisualSmalltalk Enterprise.
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PROFESSIONAL SERVICES AND SUPPORT
To help ensure successful development of mission-critical
business applications, ParcPlace-Digitalk provides its customers with a full
range of professional services and support. The Company's training programs,
consulting services and technical support complement the Company's
object-oriented application development tools, allowing the Company to provide a
complete solution for corporate application developers seeking the benefits of
object-oriented technology. Charges for training, consulting and support are not
bundled with license fees. As of March 31, 1997 the Company had 26 employees
providing training and consulting services and 12 providing customer support.
In addition to the on-line and printed documentation provided
with its products, Parcplace-Digitalk offers extensive training to its
customers. The Company offers courses focusing on the concepts of
object-oriented programming, as well as courses in the use of the Company's
application development environments, add-on tools, and developer productivity
tools.
For customers requiring experienced object-oriented developers,
the Company offers consulting services. The Company provides both short-term and
long-term project assistance at customer sites to help ensure a project's
success and an accelerated transfer of skills. In addition, the Company offers
ObjectSupport, a technical support service that includes a hotline to technical
support engineers, a newsletter, and an Internet service which allows customers
with support to search for answers to common questions and problems.
STRATEGIC RELATIONSHIPS
ParcPlace-Digitalk has established a number of strategic
relationships with management consultants, system integrators, and computer
system and software providers. The Company believes that its relationships with
other product and service providers for client/server computing will encourage
and reinforce the decision by corporations to entrust their strategic
mission-critical applications to the Company's products. The Company has strived
to establish strategic alliances to make object-oriented technology a clear
choice for large organizations, and to make the ParcPlace-Digitalk Smalltalk
language a standard and safe choice.
Management Consultants and System Integrators. ParcPlace-Digitalk
has marketing, training, reselling and development relationships with leading
management consultants and system integrators that help corporations reengineer
their business models and implement client/server computing solutions. As
facilitators for many customers migrating to client/server architectures and
object-oriented technology, management consultants and system integrators help
to encourage use of the Company's products. In addition, as these service
providers gain experience with object-oriented technology and expand their own
class libraries, they may be able to offer customized solutions to their clients
at prices competitive with prepackaged software solutions. The Company has
strategic relationships with organizations such as: American Management Systems,
Andersen Consulting, Cambridge Technology, Computer Sciences Corporation, Gemini
Consulting, IBM ISSC, SHL Systemhouse and SPL Worldgroup. These relationships
are non-exclusive, are not all subject to written agreements and may be
discontinued at any time.
Computer System and Software Providers. ParcPlace-Digitalk has
established development, marketing and reseller relationships with many computer
system and software providers. These companies have large sales organizations
dedicated to providing companies with the computing hardware and database
technology necessary to migrate to client/server architectures. Because
corporations considering a change to client/server and object-oriented
technologies typically seek counsel from their computer system and software
providers, it is important that these providers are familiar with and understand
the Company's technology and its benefits. In addition, by forming strategic
relationships with these companies, ParcPlace-Digitalk benefits from their
established industry leadership positions, sales presence and technology. The
Company has such relationships with the following companies: Digital, Gemstone,
Hewlett-Packard, IBM, Informix, Mercury Interactive, Object Design, Oracle
Corporation, and Sun Microsystems. These relationships are non-exclusive, are
not all subject to written agreements and may be discontinued at any time.
SALES AND MARKETING
The Company markets its products to large business and
governmental organizations, both domestic and international. To address the
range of sales opportunities, the Company relies on the coordinated efforts of
its direct sales force and system engineering personnel, as well as on
distribution agreements with a limited number of authorized domestic VARs and
resellers. The Company also has international distribution arrangements covering
Europe, Southeast Asia, South America, Australia, South Africa, Israel and the
Pacific Rim. As of March 31,
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1997, the Company's sales and marketing organization consisted of 67 marketing
employees sales employees in the United States and in Canada, the United
Kingdom, France, Germany and Japan.
The Company uses a team sales approach. The direct sales force
focuses on selling to major accounts and provides face-to-face contact with
customers. Sales engineering personnel work with the direct sales force to
perform demonstrations at customer sites and provide pre-sales assistance
including analysis of the customer's technical requirements.
In support of the sales organization, the marketing department
positions, promotes and markets the Company's products. Marketing personnel are
engaged in a variety of activities including public relations, direct marketing,
trade shows, advertising, seminars, newsletters and promotion of customer
success stories through brochures and press placements.
PRODUCT DEVELOPMENT
The Company believes that the timely development of new products
and enhancements to existing products is essential to maintain its competitive
position. Since the founding of the Company and the transfer of certain
technology from Xerox PARC, the Company has developed its products internally
or, in certain instances, has acquired technology from third parties and
consultants. The Company intends to continue to enhance its product lines in
response to technological evolution and customer requirements. The Company
cannot provide any assurances that it will deliver any specific product
enhancements, or that the delivery of such enhancements will be timely or have a
significant affect on product sales.
As of March 31, 1997, the Company's product development staff
consisted of 37 employees. The Company's total expenses for research and
development, including capitalized software development costs, for fiscal years
ending March 31, 1997, 1996 and 1995 were $8.9 million, $10.5 million and $8.6
million, respectively, representing 24%, 21% and 15% of net revenues for each
fiscal period.
EMPLOYEES
As of March 31, 1997, the Company had 169 full-time employees,
consisting of 37 in product development, 67 in sales and marketing, 27 in
finance and administration, 12 in customer support, and 26 in training and
professional services. No employees are covered by any collective bargaining
agreements. The Company believes that its relationships with its employees are
good. The future success of the Company depends in a large part on its ability
to attract and retain qualified personnel. The loss of the services of one or
more of the Company's key employees could have a material adverse effect on the
Company's ability to deliver new products and generate license and associated
revenues, thereby affecting the Company's operating results and financial
condition. The Company maintains competitive compensation, benefits and equity
participation programs. Competition for qualified personnel is intense, and
there can be no assurance that the Company will be able to attract and retain
qualified personnel in the future.
In October 1996, as part of a restructuring to bring its
operating expenses in line with current and projected revenues, the Company
reduced its total headcount by approximately 70 people, including employees and
contractors. In January 1997, the Company decided to further reduce its
worldwide total headcount by approximately 25%. Employees who were terminated in
each reduction in force were selected on the basis of the Company's need to
realign its expenses with revenue. Employees affected by the reductions in force
typically received severance payments based on length of service. In addition to
the reductions in force, the Company has experienced a significant number of
voluntary resignations, particularly among development and sales personnel, for
which the hiring market is extremely competitive.
1B. RISK FACTORS
In addition to the other information set forth in this report,
the following are certain risks that should be considered with regard to the
Company and its common stock.
LACK OF ACCEPTANCE OF SMALLTALK
Sales of the Company's application development tools,
substantially all of which are based on the Smalltalk programming language,
declined in each quarter of fiscal 1997, resulting in a significant year-to-year
decrease in the Company's license revenues. The Company believes that this
trend, which has continued in the first quarter of fiscal 1998, is due in large
part to corporate users' reluctance to make new or additional investments in
Smalltalk-based applications. This reluctance correlates to the perception that
Java will emerge as the leading programming language
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for object-oriented application development, and is compounded by the Company's
operational difficulties throughout fiscal 1997 and its financial results in
recent quarters, which have caused customers to become concerned about the
Company's ability to continue to maintain, support and enhance its product line.
Because the Company is a leading vendor among a small number of vendors
providing Smalltalk-based tools, such concerns exacerbate customer reluctance to
make investments in the Smalltalk programming language generally, and the
Company's products in particular. In addition, use of the Company's
Smalltalk-based products requires organizations to make a substantial investment
in the retraining of programmers, which can be expensive and can reduce the
productivity of programmers during the training period, or to hire experienced
Smalltalk programmers, which are in scarce supply. The Company believes that
Smalltalk continues to provide certain significant advantages over competing
programming languages, but if these advantages are not recognized by corporate
users as having sufficient value to their organizations, the downward trend in
sales of Smalltalk-based application development tools may continue, which would
have a material adverse effect on the Company's results of operations.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company has experienced significant quarterly fluctuations in
operating results and anticipates such fluctuations in the future. Fluctuations
may be caused by numerous factors including, but not limited to, those discussed
above. License revenues in any quarter depend on orders shipped in the quarter.
The Company generally ships orders as received and, as a result, 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 fluctuations in quarterly license revenues. In addition, license
revenues in quarters after a new product release may be affected by the amount
of upgrade revenue, which tends to increase soon after the release of a new
product and then decline rapidly. License revenues may also be affected by
seasonal trends, which may include: relatively lower sales in the summer months
when many businesses experience lower sales; relatively higher sales in December
as many customers complete annual budget cycles; and relatively higher sales in
the Company's last fiscal quarter as a result of efforts to meet sales quotas,
with correspondingly lower sales in the following quarter. 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 derived from licenses versus 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 expected quarter or over the course of the
year. 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 the sole indicator of future
performance, although such comparisons may be useful in establishing an overall
trend in financial results.
RESTRUCTURING
In an effort to bring operating expenses in line with current and
projected revenues, the Company undertook a restructuring in each of the third
and fourth quarters of fiscal 1997. Each restructuring involved a reduction in
the number of employees, the closing of several sales and engineering
facilities, and other related changes. The Company initiated the restructurings
in response to a shortfall in revenues in the second and third quarters of
fiscal 1997 that resulted in a substantial operating loss for each of those
quarters. The Company may have to make further adjustments to the organization
to bring operating costs in line with revenues in the future. Such adjustments
could include additional reductions in headcount, changes in product delivery
schedules and plans, and closing or downsizing of facilities.
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 would 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 product plans or to effectively
maintain its existing products.
8
<PAGE> 10
VOLATILITY OF STOCK PRICE
The market for the Company's common stock is highly volatile. The
trading price of the Company's common stock has been and will likely continue to
be subject to wide fluctuations in response to quarterly variations in the
Company's operating results, announcements of new products or technological
innovations by the Company or its competitors, general market fluctuations, and
other events and factors. Changes in earnings estimates made by brokerage firms
and industry analysts relating to the market in which the Company does business,
or relating to the Company specifically, have in the past resulted and could in
the future result in an immediate and adverse effect on the market price of the
Company's common stock.
NEED FOR CONTINUED ACCEPTANCE OF OBJECT-ORIENTED TECHNOLOGY
The Company currently derives substantially all of its revenue from its product
family of object-oriented application development environments and related
products and services and expects this concentration to continue for the
foreseeable future. As a result, any factor adversely affecting the demand for,
or pricing of, object-oriented application development environments and related
products and services, would have a material adverse effect on the Company's
business and results of operations. In addition, the future success of the
Company's current product family depends upon continued market acceptance of
object-oriented technology, particularly acceptance by corporate users for
mission-critical applications. Because object-oriented technology represents a
fundamental shift in programming methodology, it requires a substantial
investment in the retraining of programmers, which can discourage organizations
from choosing object-oriented tools. Even if organizations choose to make the
investment required to use object-oriented technology, there can be no assurance
that they will choose products based on the Smalltalk language, such as the
Company's products, or that the Company will be successful in the market for
object-oriented application development environments, which is already crowded
with larger and better-funded competitors such as Oracle, IBM, Sun Microsystems
and Symantec. There are a number of potential approaches to implementing object
technology, including the use of languages other than Smalltalk, such as C++,
object extensions of COBOL, Java, object-based third-generation programming
languages ("3GLs"), and other new languages and software tools that may
currently be under development or that may be developed in the future. In
particular, the Company believes that the decrease in sales of its
Smalltalk-based products in fiscal 1997 correlates to the perception among
corporate users that Java will emerge as the leading programming language for
object-oriented application development, which has led to a general decline in
sales of application development tools based on other programming languages.
TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for software for client/server/web computing
environments is characterized by rapidly changing technology, evolving industry
standards, and frequent new product introductions. The Company must continually
update its existing products to keep them current with changing customer needs,
technology, and competitive products. New technologies could render existing
products obsolete. If the Company is unable to enhance its existing products and
introduce new products in response to changing customer requirements, or if such
products are not introduced on a timely basis, fail to receive market
acceptance, or contain significant errors, the Company's business and results of
operations will be materially and adversely affected.
In particular, the market for the Company's products has been
adversely affected by the emergence of Java as the dominant language for
developing web-based client applications. Many of the Company's customers have
chosen to evaluate the capabilities of Java-based products before making
additional investments in the Company's products, which has had a direct adverse
impact on license revenues. Also, the growth of the Internet as a means of
communicating information about competitive products has shortened the average
development cycle for the Company's products and the average life cycle for the
Company's products. This has caused an increase in competition in the market for
the Company's products and a requisite increase in development expenses as the
Company strives to release products on a shorter cycle with significant
additional function. The failure of others to develop or enhance technologies
that are critical to broad public acceptance and use of the Internet may also
affect the Company's ability to market its products for Internet application
development.
9
<PAGE> 11
COMPETITION
The market for application development tools for large-scale
client/server/web computing environments 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, including IBM (whose competing offerings
include a development environment based on Smalltalk and plans to deliver a
Java-based derivative), Borland, Forte, Informix, Microsoft, Oracle, Sun
Microsystems, Sybase and Symantec. 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.
The principal competitive factors affecting the market for the
Company's products include product functionality, quality and reliability, the
timing of product introductions, customer support and price. Based on a
combination of these factors, the Company believes that it will have to
incorporate significant additional function in a relatively short period of time
for its products to remain competitive. There can be no assurance that the
Company will be able to do so or that the Company will be successful in the face
of increasing competition from new products and enhancements introduced by
existing competitors and by new companies entering the market.
The Company believes that competitive pressures in fiscal 1997,
particularly the introduction of new products by competitors, caused delays in
purchase decisions by and in some cases, loss of sales to potential customers,
and increased the pricing pressure faced by the Company. Continuing competitive
pressures from existing and new competitors who offer lower prices or introduce
new products could result in further delays in purchase decisions by or loss of
sales to potential customers or cause the Company to institute price reductions,
any of which would adversely affect the Company's results of operations. In the
first quarter of fiscal 1997, partially in response to competitive pressures,
the Company ceased charging a separate fee for application deployment, which had
typically been charged on a per-copy basis. Because deployment fees contributed
a significant portion of the Company's revenues for the past several years, the
cessation of charging a deployment fee had an adverse effect on the Company's
license revenues.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success depends upon its proprietary technology.
The Company relies on a combination of copyright, trademark and trade secret
laws, confidentiality procedures, and licensing arrangements to establish and
protect its proprietary rights. In addition, the Company currently holds one
patent. As part of its confidentiality procedures, the Company generally enters
into non-disclosure agreements with its employees, distributors and corporate
partners, and limits access to and distribution of its software, documentation
and other proprietary information. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use the
10
<PAGE> 12
Company's products or technology without authorization, or to develop similar
technology independently. In addition, effective protection of intellectual
property rights may be unavailable or limited in certain foreign countries.
The Company provides its products to end-users primarily under
"shrink-wrap" license agreements, which could be held unenforceable in whole or
in part in various jurisdictions. The Company makes a portion of its source code
available to its customers which increases the likelihood of misappropriation or
other misuse of the Company's products.
The Company is not aware that any of its products infringe upon
the proprietary rights of third parties. There can be no assurance, however,
that third parties will not claim such infringement by the Company with respect
to current or future products. The Company expects that software product
developers will increasingly be subject to such claims as the number of products
and competitors in the Company's industry segment grows and the functionality of
products in the industry segment overlaps. Any such claims, with or without
merit, could result in costly litigation or might require the Company to enter
into royalty or licensing agreements. Such royalty or license agreements, if
required, may not be available on terms acceptable to the Company or at all.
DEPENDENCE ON THIRD-PARTY RELATIONSHIPS
In its product offerings, ParcPlace-Digitalk uses certain
products and technologies of various third-party software developers, including
both complete products offered as extensions of the Company's product line and
technology used in the enhancement of internally developed products. Such
products and technologies are obtained from the third-party providers under
contractual license agreements, which in some cases are for limited time periods
and in some cases provide that such licenses may be terminated under certain
circumstances. There can be no assurances that the company will be able to
maintain adequate relations with these third-party providers, that these
third-party providers will commit adequate development resources to maintain
these products and technologies, or that the license agreements that are for
limited time periods will be renewed upon termination. ParcPlace-Digitalk has
established a number of strategic relationships with management consultants,
system integrators, and computer system and software providers. These companies
provide software development, marketing, reselling, and training services that
the Company believes are important to its existing and future business. These
relationships are non-exclusive and may be discontinued at any time.
DEPENDENCE ON KEY PERSONNEL
The Company's future success will depend upon its ability to
attract and retain highly qualified personnel. Loss of key personnel or
inability to hire and retain qualified personnel could have a material adverse
effect on the Company's business and results of operations. During fiscal 1997,
the Company has experienced an increase in the number of voluntary resignations
of employees. 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.
MANAGING A CHANGING BUSINESS; BUSINESS COMBINATIONS
Since its inception, the Company has experienced changes in its
operations which have placed significant demands on the Company's
administrative, operational, and financial resources. The Company's future
performance will depend in part on its ability to effectively respond to and
manage changing business conditions.
The Company completed the acquisition of Objectshare Systems,
Inc., a privately held corporation in the Smalltalk tools add-on products
business, in July 1996. Due to a decrease in demand for such products, which
reflects the decrease in demand for the Company's primary products, the Company
did not receive significant revenues from the acquired Objectshare product line
in fiscal 1997. The Company does not plan to invest additional amounts in
marketing or development of the acquired Objectshare product line. Parts for
Java, which is marketed by the Company's ObjectShare division, was developed by
ParcPlace.
The Company completed the acquisition of Polymorphic Software,
Inc., a privately held corporation in the Smalltalk tools and consulting
business, in October 1996. The Company will not add the Polymorphic products to
its current product list.
The Company may acquire other companies, products, or
technologies in the future. There can be no assurances that these acquisitions
can be effectively integrated, that such acquisitions will not result in costs
and
11
<PAGE> 13
liabilities adversely affecting the Company's results of operations and
financial condition, or that the Company will obtain the anticipated benefits of
such acquisitions.
INTERNATIONAL OPERATIONS
Approximately 32%, 31%, and 15% of the Company's net revenues for
the years ended March 31, 1997, 1996, and 1995, respectively, were attributable
to international sales. The majority of international revenues to date have been
derived from license revenues. International sales are made primarily through
distributors, and are therefore largely dependent on the efforts of these third
parties. Other risks associated with international operations include tariff
regulations and requirements for export licenses, customer or governmental
requirements for local-language versions of products; unexpected changes in
regulatory requirements; longer accounts receivable payment cycles; difficulties
in managing international operations; potentially adverse tax consequences;
economic and political instability; restrictions on repatriation of earnings;
foreign exchange translation and transaction exposure; and the burdens of
complying with a wide variety of foreign laws. In addition, the laws of certain
countries do not protect the Company's products and intellectual property rights
to the same extent as do the laws of the United States. There can be no
assurance that such factors will not have an adverse effect on the Company's
future international sales and, consequently, on the Company's business and
results of operations.
1C. EXECUTIVE OFFICERS
Pursuant to General Instruction G(3) to Form 10-K, the
information regarding executive officers that is otherwise required to be
included in Item 10 is set forth in this Item 1 so that, in reliance on
Instruction 3 to Item 401(b) of Regulation S-K, it need not be included in the
Proxy Statement.
In June 1997, the Company's Board of Directors appointed Eugene
Goda, Ronald Clear and James Smith President and Chief Executive Officer, Chief
Financial Officer, and Senior Vice President of Sales, respectively.
Eugene L. Goda, 61, joined the Company as President and Chief
Executive Officer, and Chairman of the Board, on June 10, 1997. From November
1995 until joining the Company, Mr. Goda was a consultant and private investor.
From October 1991 to October 1995, Mr. Goda served as CEO of Simulation
Sciences, Inc., a software company that develops and markets simulation tools.
From July 1989 to September 1991, he served as CEO of Meridian Software Systems,
a systems software provider. He is also a director of Powerwave Technologies,
Inc.
Ronald J. Clear, 44, joined the Company as Chief Financial
Officer on June 10, 1997. Since 1985, he has served as President of Clear,
Alexander & Associates, a management consulting firm specializing in
recapitalization and turnaround management. From 1983 to 1985, he was Vice
President and CFO of Waubash Computing Systems. From 1982 to 1983, he was CFO of
Russco Industrial.
James H. Smith, 41, joined the Company as Senior Vice President
of Sales on June 10, 1997. From 1995 until joining the Company, he was Executive
Vice President, Chief Operating Officer and a Director of Select Software Tools,
a developer of object-oriented application development tools. From 1994 to 1995,
he was Vice President of Sales at Softlab, a developer of process automation
tools. From 1992 to 1994, he was Vice President of Sales for the western region
at Knowledgeware, a developer of CASE tools. From 1988 to 1992, he was Vice
President of Sales and Marketing at Meridian, a developer of Ada development
tools.
Richard H. Dym, 50, is Vice President of Marketing. He joined the
Company in March 1993 as Vice President of Marketing and served as Vice
President of International Operations from April 1995 through September 1996.
From September 1996 through January 1997, he was Vice President and General
Manager of the ObjectShare Division. From 1992 until 1993, he was General
Manager of the Multimedia Division at Autodesk. From 1987 until 1992, he held a
variety of positions with Ashton-Tate Corporation, serving most recently as
Director of Graphics and Decision Support Products.
Steven G. Harris, 40, joined the Company in October 1996 as Vice
President of Technology Partnerships, and has been Vice President of Development
since January 1997. Mr. Harris was President of Polymorphic Software, Inc.
("Polymorphic"), from its inception in April 1993 until its acquisition by the
Company in October 1997. Polymorphic was a privately held corporation in the
Smalltalk tools and consulting business. From 1983 until March 1993, Mr. held
various positions with Anamet Laboratories, Inc., a systems integration firm,
serving most recently as Manager of Systems Integration and Development.
12
<PAGE> 14
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Sunnyvale,
California in a 30,000 square foot facility, including office space and a
customer training facility, occupied under a lease expiring in July 1997. The
Company also leases facilities and offices in southern California, Illinois, New
Jersey, Oregon, Virginia, France, Germany, Japan, and the United Kingdom. As
part of its restructuring in fiscal 1997, the Company terminated the leases on
several sales and engineering offices and consolidated its headquarters and
manufacturing warehouse facility into a single building in Sunnyvale,
California. The Company believes that its existing facilities will be adequate
to meet its needs through fiscal 1998.
ITEM 3. LEGAL PROCEEDINGS
During the third quarter of fiscal 1997, the Company and its
insurers agreed to settle a 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. Under the terms of
the settlement, a settlement fund of $3.1 million was established, of which
$2,850,000 was paid by the Company's insurers and $250,000 was paid by the
Company. The amount paid by the Company is included in interest and other income
(expense) for the quarter. The settlement was approved by the court in March
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders of
the Company during the fourth quarter of the fiscal year covered by this report.
13
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this item is incorporated by
reference to inside back cover of the Company's 1997 Annual Report to
Stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by
reference to the same-captioned portion of the Company's 1997 Annual Report to
Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated by
reference to the same-captioned portion of the Company's 1997 Annual Report to
Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Ernst & Young LLP, Independent Auditors, the
Consolidated Financial Statements and the related Notes to Consolidated
Financial Statements, and the Quarterly Financial Information of
ParcPlace-Digitalk, Inc. are incorporated by reference to the same-captioned
portions of the Company's 1997 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
14
<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by
this Item is incorporated by reference to the Company's Proxy Statement.
The information concerning the Company's executive officers is in
Item 1 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by
reference to the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by
reference to the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by
reference to the Company's Proxy Statement.
15
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements.
The following consolidated financial statements and supplementary
financial information of ParcPlace-Digitalk, Inc. are
incorporated by reference to the same-captioned portions of the
Company's 1997 Annual Report to Stockholders:
Consolidated Balance Sheets - March 31, 1997 and 1996
Consolidated Statements of Operations - Years Ended March
31, 1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity - Years
Ended March 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows - Years Ended March
31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
Quarterly Financial Information (not covered by the report
of Independent auditors)
The Report of Ernst & Young LLP, Independent Auditors is
incorporated by reference to the same-captioned portion of the
Company's 1997 Annual Report to Stockholders.
The Report of Price Waterhouse LLP, Independent Accountants.
2. Financial Statement Schedules.
The following financial statement schedule should be read in
conjunction with the Consolidated Financial Statements of
ParcPlace-Digitalk, Inc. and is included herein.
Schedule II -- Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated
financial statements or notes thereto.
3. Exhibits.
2.1 (3) -- Conformed Agreement and Plan of Reorganization
by and among the Registrant, Boardwalk Merger
Subsidiary Co., a subsidiary of the Registrant
("Merger Sub"), and Digitalk, Inc.
2.2 (3) -- Agreement of Merger by and between Merger Sub
and Digitalk, Inc. (included as Exhibit A to the
Agreement and Plan of Reorganization filed as
Exhibit 2.1)
3.1 (1) -- Certificate of Incorporation
3.2 (1) -- Bylaws
4.3 (1) -- Specimen of Common Stock Certificate
10.2B* (2) -- Executive Bonus Plan for Fiscal 1996
10.2C* (4) -- Executive Bonus Plan for Fiscal 1997
10.2D* -- Executive Bonus Plan for Fiscal 1998
10.3B* (1) -- 1989 Stock Option Plan
10.3Da*(4) -- 1993 Stock Plan
10.3E* (3) -- 1995 Director Stock Option Plan
10.3F* (4) -- Incentive and Nonstatutory Stock Option Plan
adopted by Digitalk, Inc., in 1992
10.4C* (4) -- 1993 Employee Stock Purchase Plan
10.5 (1) -- Lease Agreement (Sunnyvale, CA) effective March
9, 1992 between the Registrant and New England
Mutual Life Insurance Company, with Amendments
1, 2 and 3
10.10 (1) -- Business Loan Agreement dated October 18, 1991
between the Registrant and Silicon Valley Bank,
together with: Loan Modification Agreement
dated July 15, 1993;
16
<PAGE> 18
Promissory Note dated August 11, 1993; Change in
Terms Agreement dated July 5, 1992; promissory
Note dated October 18, 1991; and Security
Agreement dated May 9, 1990
10.10B (3) -- Loan Modification Agreement dated July 15, 1994,
amending the agreement filed as Exhibit 10.10
10.11* (1) -- Form of Indemnification Agreement between the
Registrant and each of its directors and
executive officers
10.12* (3) -- Form of agreement between the Registrant and
each of its executive officers regarding a
change of control
10.13A -- Agreement for Services between the Registrant
and Eugene L. Goda dated June 10, 1997
10.13B -- Agreement for Services between the Registrant
and Ronald J. Clear dated June 10, 1997
10.13C -- Agreement for Services between the Registrant
and James H. Smith dated June 10, 1997
11.1 -- Statement Regarding Computation of Per Share
Earnings
13.1 -- Portions of Registrant's 1997 Annual Report to
Stockholders incorporated by reference in this
report (to be deemed filed only to the extent
required by the instruction to exhibits for
reports on Form 10-K)
21.1 -- List of Subsidiaries
23.1 -- Consent of Ernst & Young LLP, Independent
Auditors
24.1 -- Power of Attorney
27.1 -- Financial Data Schedule
(1) Incorporated by reference to the same-numbered exhibit to the
Company's Registration Statement on Form S-1 (No. 33-73008)
(2) Incorporated by reference to the same-numbered exhibit to the
Company's Annual Report on Form 10-K for the year ended March 31,
1994
(3) Incorporated by reference to the same-numbered exhibit to the
Company's Annual Report on Form 10-K for the year ended March 31,
1995
(4) Incorporated by reference to the same-numbered exhibit to the
Company's Annual Report on Form 10-K for the year ended March 31,
1996
* Management contract or compensatory plan
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1997.
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(a) 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: June 30, 1997 PARCPLACE-DIGITALK, INC.
By: /s/ EUGENE L. GODA
-------------------------------------------
Eugene L. Goda
President and Chief Executive Officer
POWER OF ATTORNEY
Each individual whose signature appears below hereby appoints
Eugene L. Goda and Ronald J. Clear, and each of them acting individually, his or
her attorneys-in-fact with full power of substitution, for him or her in any and
all capacities, to sign any and all amendments to this report, and to file the
same, with all exhibits thereto and all documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming
signatures as they may be signed by said attorneys to any and all such
amendments.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
PRINCIPAL EXECUTIVE OFFICER:
<S> <C> <C>
/s/ EUGENE L. GODA President and Chief Executive Officer June 30, 1997
- ------------------------------------- and Chairman of the Board
Eugene L. Goda
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ RONALD J. CLEAR Chief Financial Officer June 30, 1997
- -------------------------------------
Ronald J. Clear
ADDITIONAL DIRECTORS:
/s/ JAMES C. ANDERSON Director June 30, 1997
- -------------------------------------
James C. Anderson
/s/ JOHN B. CARRINGTON Director June 30, 1997
- -------------------------------------
John B. Carrington
/s/ JOS C. HENKENS Director June 30, 1997
- -------------------------------------
Jos C. Henkens
/s/ PHILIP C. KANTZ Director June 30, 1997
- -------------------------------------
Philip C. Kantz
</TABLE>
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<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Digitalk, Inc.
In our opinion the statements of income, of stockholders' equity (deficit) and
of cash flows of Digitalk, Inc. (not presented separately herein) present
fairly, in all material respects, the results of its operations and its cash
flows for the year ended March 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. We have not audited the
financial statements of Digitalk, Inc. for any period subsequent to March 31,
1995.
/s/ PRICE WATERHOUSE LLP
July 26, 1995, except for as to Note 8,
which is as of August 29, 1995
Costa Mesa, California
19
<PAGE> 21
PARCPLACE-DIGITALK, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged to Charged to Balance at
beginning costs and net end
of period expenses revenues Deductions* of period
--------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Description
Allowance for Doubtful Accounts:
Year Ended March 31, 1997 $498 $939 $ 0 $479 $958
Year Ended March 31, 1996 533 285 0 320 498
Year Ended March 31, 1995 134 491 0 92 533
Allowance for Sales Returns:
Year Ended March 31, 1997 969 0 1964 1582 1351
Year Ended March 31, 1996 271 0 1600 902 969
Year Ended March 31, 1995 499 0 609 837 271
</TABLE>
* Uncollectible accounts written off, net of recoveries
20
<PAGE> 22
PARCPLACE-DIGITALK, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED MARCH 31, 1997
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exh. No. Description
- -------- -----------
<S> <C>
10.2D -- Executive Bonus Plan for Fiscal 1998
10.13A -- Agreement for Services between the Registrant and Eugene L. Goda
dated June 10, 1997
10.13B -- Agreement for Services between the Registrant and Ronald J. Clear
dated June 10, 1997
10.13C -- Agreement for Services between the Registrant and James H. Smith
dated June 10, 1997
11.1 -- Statement Regarding Computation of Per Share Earnings
13.1 -- Portions of Registrant's 1997 Annual Report to Stockholders
incorporated by reference in this report (to be deemed filed only to
the extent required by the instruction to exhibits for reports on Form 10-K)
21.1 -- List of Subsidiaries
23.1 -- Consent of Ernst & Young LLP, Independent Auditors
24.1 -- Power of Attorney (see signature page of this Form 10-K)
27.1 -- Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10.2D
The FY98 Executive Bonus Plan
o The purpose of the ParcPlace-Digitalk FY98 Executive Incentive Plan (The
"Executive Bonus Plan") is to advance the interests of ParcPlace by
providing incentives and rewards to management personnel who have
contributed materially to the success of the Company, to provide a means
of rewarding outstanding performance and to enable the Company to
maintain a competitive position in attracting and retaining the key
personnel necessary for continued growth and profitability.
o Eligible management personnel for FY98 will be the officers and key
management personnel of ParcPlace who are active, full time employees as
of December 31, 1997.
o The bonus calculation is based on a combination of:
o Company performance determined by Revenues and Profit Before Tax
(After the bonus has been reserved).
o Individual performance as evaluated under a specific set of
management objectives (MBO's). This recognizes the importance of
each individual's contribution to the success of reaching the
Company's objectives.
o Individuals are eligible for bonus awards based on organization
level. Target awards are established as a percent of base salary
for each level according to the following schedule:
<TABLE>
<CAPTION>
Award as a Percent of Base Salary
---------------------------------
Target Maximum
Award Award
----- -----
<S> <C> <C>
President & CEO 50% 125%
Executive Level "A" 30% 75%
Executive Level "B" 20% 50%
Executive Level "C" 10% 25%
</TABLE>
o Incentive Bonus Awards will be made according to the Company's
achievement of its budgeted Revenue and Profit Before Tax. Discretionary
prorated payouts may be made despite under achievement of the fiscal
year target. However, they will be at the sole discretion of the Board
of Directors.
o Based on the annual performance review, a rating of weak ("W"), strong
("S"), or a career year type of performance...exceptional ("E") will be
assigned for each individual's
<PAGE> 2
performance as determined by their manager. The rating will be converted
to a performance rating factor which is then multiplied by the potential
bonus to arrive at the actual bonus for the individual performance
element. However, if you are a weak manager, you will not be eligible
for any bonus despite the company's results. This review will determine
whether you are eligible for the bonus.
o If you are eligible, then 50% of your target award will be based on the
Company's performance, and 50% will be determined by your MBO
performance. MBO performance will be evaluated quarterly and the bonus
paid if appropriate to eligible executives by the end of the month
following the quarter close. Each objective will be evaluated and
partial payments made based on performance.
o The bonus amount for the Company performance element is determined by
the Company performance matrix shown below. The "% Attain" is determined
by the Company's targets for Total Sales (Revenues) and Profit Before
Tax, and is the percent of the target award to be received by all
Executive Bonus participants for the Company Performance element.
- -------------------------------------------------------------------------------
FY98
Incentive Plan Award Formula
----------------------------
<TABLE>
<CAPTION>
Rating: "Weak" "Exceeds" "Exceptional"
% Attain Factor 00.0 1.00 1.25
- -------- ------ ---- ---- ----
<S> <C> <C> <C> <C>
90% .80 00% 80% 100%
100% 1.00 00% 100% 125%
110% 1.20 00% 120% 150%
120% 1.40 00% 140% 175%
130% 1.60 00% 160% 200%
140% 1.80 00% 180% 225%
150% 2.00 00% 200% 250%
</TABLE>
<PAGE> 3
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Example: For a Vice President "B" with a base salary of $100,000; target
bonus of 20% of base; performance rating "Exceeds"; "% Attain"
of 110%.
<S> <C>
Base salary x target bonus percentage $ 20,000
% attain 110%
Look up company performance factor 1.20
Multiply by personal performance factor--"Exceeds" 1.00
Results in Matrix Factor 120%
Eligible Bonus $ 24,000
Company performance yields (50%) $12,000
MBO performance "Generally Positive" $9,000
Total $21,000
</TABLE>
- -------------------------------------------------------------------------------
o The maximum award under the Executive Bonus Plan will be the maximum
shown in the matrix.
o Bonus amounts will be calculated based on the actual salary of the
participant at the end of the fiscal year less previous bonus awards,
and other non-base salary payments. Any quarterly payments will be based
on the individual's then current salary.
o Incentives will be paid on a prorated basis to individuals who were
hired prior to December 31, 1997 but who were not employed throughout
the Fiscal/Bonus Plan period.
o Plan participants must be actively employed on April 30, 1998 (after
fiscal year figures have been verified) in order to receive incentive
bonus payments.
<PAGE> 4
o Bonus payments are considered as regular income for tax purposes and as
such will have the appropriate State and Federal withholding deductions
made by the Company.
o Participation in this Plan for FY 1998 does not guarantee participation
in future incentive plans, profit sharing or bonus plans. Plan
structures and participation will be determined on a year-to-year basis
and the CEO reserves the right to cancel or alter all such plans if
business conditions so dictate.
o This Plan supersedes any previous bonus or incentive plans which may
have been in existence and those plans are null and void with the
issuance of this plan for FY 1998. The only exception is the Vice
President Sales, Vice President Professional Services, and the Vice
President International Operations commission plans.
o The Plan will be modified if revenues and profits are impacted because
of a merger or acquisition. These changes will be made on an as needed
basis. If practical, EPS will be used as a measure as a way to calculate
the effect of the merger on revenues and profits.
<PAGE> 1
Exhibit 10.13A
June 10, 1997
Mr. Eugene L. Goda
11501 Vista Mar Court
Santa Ana, CA 92705
Re: Agreement for Services
Dear Gene:
When executed by you and a duly authorized representative of
ParcPlace/Digitalk, Inc. (the "Company"), this letter will set forth the
agreement (the "Agreement") reached between you and the Company with regard to
your employment.
Term of Employment. The initial term of this Agreement shall
be f or a period of six (6) months commencing on June 10, 1997 and continuing
until the six (6) month anniversary of such commencement date. If, during this
initial term, the Company terminates your employment for any reason other than
"Cause", as hereinafter defined, you shall be entitled to receive an amount
equal to the remaining unpaid compensation for such six (6) month period,
payable in a lump sum at the time of such termination. After the initial six (6)
month term, your employment shall continue for an indefinite period, terminable
by either party (with or without cause) upon giving not less than ninety (90)
days written notice of such termination to the other party. If the Company
terminates your services upon less than ninety (90) days notice (unless for
Cause), you shall be entitled to compensation for the entire ninety (90) day
period, payable in a lump sum at the time of such termination. For the purpose
of this Agreement, "Cause" shall mean conviction of a felony, actions on your
part involving fraud or dishonesty which are intended to result in your material
personal enrichment at the expense of the Company, or repeated willful
violations of specific directions to you from the Company's board of directors
and which have not been cured by you within a reasonable time after written
notice to you specifying the nature of such violations.
Title and Duties. You will be employed by the Company as Chief
Executive Officer, President and Chairman of the Board. You shall use your best
efforts to promote the business and affairs of the Company, and shall discharge
your responsibilities in a diligent and faithful manner,
<PAGE> 2
consistent with sound business practices.
Compensation.
Base Salary. Subject to all customary withholding and other
deductions as may be required by applicable laws, you will be compensated at an
annual rate of Two Hundred Thousand Dollars ($200,000), to be reviewed on each
anniversary of employment at the discretion of the Company.
(b) Discretionary Bonus. During the term hereof, you will be
eligible to receive a discretionary bonus at the discretion of the
Board of Directors.
Benefits.
Medical and Other Benefits. As you become eligible
for them, you will be entitled to receive from the Company those medical, dental
and related benefits which are currently available to the Company's CEO. You
agree that nothing contained in the Agreement shall prevent the Company from
changing insurance carriers or from effecting modifications to or eliminating
such benefits entirely. You will also receive all other benefits to which the
Company's current CEO is entitled.
Stock Options. Subject to the terms and conditions of
the terms of a written stock option agreement to be entered into between you and
the Company, the Company shall grant to you an option (the "Option") to acquire
six hundred fifty thousand (650,000) shares of the Company's common stock (the
"Option Shares"), at a purchase price per share equal to the closing price of a
share of the Company's common stock on the NASDAQ Stock Market on the date
hereof, as reported by The Wall Street Journal. The Option shall vest with
respect to 216,667 Option Shares six (6) months from the date hereof, and
108,333 Option Shares on each three (3) month anniversary date thereafter. In
addition, all of the Option Shares shall vest on an accelerated basis
immediately prior to (i) the dissolution or liquidation of the Company, (ii) the
reorganization, merger or consolidation of the Company with or into one or more
other corporations, (iii) the sale of a majority of the Company's assets in
connection with the distribution of the sales proceeds
<PAGE> 3
therefrom to the stockholders of the Company, or (iv) the acquisition by any
person or entity, or group of affiliated persons or entities, of equity
securities of the Company representing thirty percent (30%) or more of the
aggregate voting power of all outstanding securities of the Company. Your
options shall cease further vesting upon the cessation of your employment by the
Company. Notwithstanding the foregoing, in the event the Company terminates your
employment for other than Cause, then with your and the Company's consent (which
consents will not be unreasonably withheld), you shall serve as an advisor to
the Company, and your options will continue to vest, for a period of eighteen
(18) months following the date hereof (at which time your options shall be fully
vested). Such advisory services shall be on a part time/occasional basis and,
unless otherwise agreed to by the Company, you will not be entitled to
compensation for such advisory work. The Company shall file a Registration
Statement on Form S-8 registering the shares underlying the option with the SEC
and file with the Nasdaq Stock Market a supplemental listing application for
such shares within sixty days from the date of this letter. Your Stock Options
shall have a five (5) year term. In the event your employment with the Company
ceases for any reason, you will have three (3) years to exercise any vested
Option Shares.
Reimbursable Expenses. Subject to your furnishing to
the Company adequate records and other documentary evidence, the Company shall
reimburse you for all reasonable travel and business expenses incurred by you in
carrying out your duties hereunder at either office located in California.
Confidentiality. You agree to sign the Company's
standard form confidentiality agreement.
Waiver and Modification. No provision hereof may be
waived or modified unless in writing and signed by both parties hereto. Waiver
of any one provision herein shall not be deemed to be a waiver of any other
provision herein.
Entire Agreement. Except as set forth in Sections
4(b) and 6 herein, this Agreement contains the sole and entire agreement between
the parties and supersedes all prior oral and written agreements,
understandings, statements and practices between the parties.
<PAGE> 4
Arbitration. Any dispute arising out of this
agreement or your employment by the Company shall be resolved by binding
arbitration with JAMS/Endispute. The prevailing party shall be entitled to
recover his/its reasonable attorneys' fees and costs.
If the foregoing accurately sets forth your understanding as to
the terms of your services, please sign and return the enclosed copy of this
letter.
PARCPLACE/DIGITALK, INC.
By: /s/ PARCPLACE-DIGITALK, INC.
------------------------------
AGREED AND ACCEPTED:
/s/ EUGENE L. GODA
- ---------------------------
Eugene L. Goda
<PAGE> 1
EXHIBIT 10.13B
June 10, 1997
Mr. Ronald J. Clear
3700 Ocean Boulevard
Corona Del Mar, CA 92625
Re: Agreement for Services
Dear Ron:
When executed by you and a duly authorized representative of
ParcPlace/Digitalk, Inc. (the "Company"), this letter will set forth the
agreement (the "Agreement") reached between you and the Company with regard to
your employment.
Term of Employment. The initial term of this Agreement shall
be for a period of six (6) months commencing on June 10, 1997 and continuing
until the six (6) month anniversary of such commencement date. If, during this
initial term, the Company terminates your employment for any reason other than
"Cause", as hereinafter defined, you shall be entitled to receive an amount
equal to the remaining unpaid compensation for such six (6) month period,
payable in a lump sum at the time of such termination. After the initial six
month term, your employment shall continue for an indefinite period, terminable
by either party (with or without cause) upon giving not less than ninety (90)
days written notice of such termination to the other party. If the Company
terminates your services upon less than ninety (90) days notice (unless for
Cause), you shall be entitled to compensation for the entire ninety (90) day
period, payable in a lump sum at the time of such termination. For the purpose
of this Agreement, "Cause" shall mean conviction of a felony, actions on your
part involving fraud or dishonesty which are intended to result in your material
personal enrichment at the expense of the Company, or repeated willful
violations of specific directions to you from the Company's board of directors
and which have not been cured by you within a reasonable time after written
notice to you specifying the nature of such violations.
Title and Duties. You will be employed by the
<PAGE> 2
Company as Vice President and Chief Financial Officer. You shall use your best
efforts to promote the business and affairs of the Company, and shall discharge
your responsibilities in a diligent and faithful manner, consistent with sound
business practices.
Compensation.
Base Salary. Subject to all customary withholding and other
deductions as may be required by applicable laws, Clear Alexander & Associates
will be compensated at an annual rate of One Hundred Sixty Thousand Dollars
($175,000), to be reviewed on each anniversary of employment at the discretion
of the Company.
(b) Discretionary Bonus. During the term hereof, you will be eligible
to receive a discretionary bonus at the discretion of the Board of Directors.
Benefits.
Medical and Other Benefits. As you become eligible for them,
you will be entitled to receive from the Company those medical, dental and
related benefits which are currently available to the Company's CEO. You agree
that nothing contained in the Agreement shall prevent the Company from changing
insurance carriers or from effecting modifications to or eliminating such
benefits entirely. You will also receive all other benefits to which the
Company's current CEO is entitled.
Stock Options. Subject to the terms and conditions of the terms
of a written stock option agreement to be entered into between you and the
Company, the Company shall grant to you an option (the "Option") to acquire one
hundred ninety five thousand (195,000) shares of the Company's common stock (the
"Option Shares"), at a purchase price per share equal to the closing price of a
share of the Company's common stock on the NASDAQ Stock Market on the date
hereof, as reported by The Wall Street Journal. The Option shall vest with
respect to 65,000 Option Shares six (6) months from the date hereof, and 32,500
Option Shares on each three (3) month anniversary date thereafter. In addition,
all of the Option Shares shall vest on an accelerated basis immediately prior to
(i) the dissolution or liquidation of
<PAGE> 3
the Company, (ii) the reorganization, merger or consolidation of the Company
with or into one or more other corporations, (iii) the sale of a majority of the
Company's assets in connection with the distribution of the sales proceeds
therefrom to the stockholders of the Company, or (iv) the acquisition by any
person or entity, or group of affiliated persons or entities, of equity
securities of the Company representing thirty percent (30%) or more of the
aggregate voting power of all outstanding securities of the Company. Your
options shall cease further vesting upon the cessation of your employment by the
Company. Notwithstanding the foregoing, in the event the Company terminates your
employment for other than Cause, then with your and the Company's consent (which
consents will not be unreasonably withheld), you shall serve as an advisor to
the Company, and your options will continue to vest, for a period of eighteen
(18) months following the date hereof (at which time your options shall be fully
vested). Such advisory services shall be on a part time/occasional basis and,
unless otherwise agreed to by the Company, you will not be entitled to
compensation for such advisory work. The Company shall file a Registration
Statement on Form S-8 registering the shares underlying the option with the SEC
and file with the Nasdaq Stock Market a supplemental listing application for
such shares within sixty days from the date of this letter. Your Stock Options
shall have a five (5) year term. In the event your employment with the Company
ceases for any reason, you will have three (3) years to exercise any vested
Option Shares.
Reimbursable Expenses. Subject to your furnishing to the
Company adequate records and other documentary evidence, the Company shall
reimburse you for all reasonable travel and business expenses incurred by you in
carrying out your duties hereunder at either office located in California.
Confidentiality. You agree to sign the Company's standard form
confidentiality agreement.
Waiver and Modification. No provision hereof may be waived or
modified unless in writing and signed by both parties hereto. Waiver of any one
provision herein shall not be deemed to be a waiver of any other provision
herein.
Entire Agreement. Except as set forth in Sections 4(b) and 6
herein, this Agreement contains the sole and
<PAGE> 4
entire agreement between the parties and supersedes all prior oral and written
agreements, understandings, statements and practices between the parties.
Arbitration. Any dispute arising out of this agreement or your
employment by the Company shall be resolved by binding arbitration with
JAMS/Endispute. The prevailing party shall be entitled to recover his/its
reasonable attorneys' fees and costs.
If the foregoing accurately sets forth your understanding as to the
terms of your services, please sign and return the enclosed copy of this letter.
PARCPLACE/DIGITALK, INC.
By: /s/ PARCPLACE-DIGITALK, INC.
--------------------------------
AGREED AND ACCEPTED:
/s/ RONALD J. CLEAR
- --------------------------
Ronald J. Clear
<PAGE> 1
EXHIBIT 10.13C
June 10, 1997
Mr. James H. Smith
25081 Devon
Mission Viejo, CA 92692
Re: Agreement for Services
Dear Jim:
When executed by you and a duly authorized representative of
ParcPlace/Digitalk, Inc. (the "Company"), this letter will set forth the
agreement (the "Agreement") reached between you and the Company with regard to
your employment.
Term of Employment. The initial term of this Agreement shall
be for a period of six (6) months commencing on June 10, 1997 and continuing
until the six (6) month anniversary of such commencement date. If, during this
initial term, the Company terminates your employment for any reason other than
"Cause", as hereinafter defined, you shall be entitled to receive an amount
equal to the remaining unpaid compensation for such six (6) month period,
payable in a lump sum at the time of such termination. After the initial six (6)
month term, your employment shall continue for an indefinite period, terminable
by either party (with or without cause) upon giving not less than ninety (90)
days written notice of such termination to the other party. If the Company
terminates your services upon less than ninety (90) days notice (unless for
Cause), you shall be entitled to compensation for the entire ninety (90) day
period, payable in a lump sum at the time of such termination. For the purpose
of this Agreement, "Cause" shall mean conviction of a felony, actions on your
part involving fraud or dishonesty which are intended to result in your material
personal enrichment at the expense of the Company, or repeated willful
violations of specific directions to you from the Company's board of directors
and which have not been cured by you within a reasonable time after written
notice to you specifying the nature of such violations.
Title and Duties. You will be employed by the
<PAGE> 2
Company as Vice President of Sales Operations. You shall use your best efforts
to promote the business and affairs of the Company, and shall discharge your
responsibilities in a diligent and faithful manner, consistent with sound
business practices.
Compensation.
Base Salary. Subject to all customary withholding and other
deductions as may be required by applicable laws, you will be compensated at an
annual rate of One Hundred Ninety Five Thousand Dollars ($195,000), to be
reviewed on each anniversary of employment at the discretion of the Company.
(b) Discretionary Bonus. During the term hereof, you will be eligible
to receive a discretionary bonus at the discretion of the Board of Directors.
Benefits.
Medical and Other Benefits. As you become eligible for them,
you will be entitled to receive from the Company those medical, dental and
related benefits which are currently available to the Company's CEO. You agree
that nothing contained in the Agreement shall prevent the Company from changing
insurance carriers or from effecting modifications to or eliminating such
benefits entirely. You will also receive all other benefits to which the
Company's current CEO is entitled.
Stock Options. Subject to the terms and conditions of the
terms of a written stock option agreement to be entered into between you and the
Company, the Company shall grant to you an option (the "Option") to acquire four
hundred fifty five thousand (455,000) shares of the Company's common stock (the
"Option Shares"), at a purchase price per share equal to the closing price of a
share of the Company's common stock on the NASDAQ Stock Market on the date
hereof, as reported by The Wall Street Journal. The Option shall vest with
respect to 151,667 Option Shares six (6) months from the date hereof, and 75,833
Option Shares on each three (3) month anniversary date thereafter. In addition,
all of the Option Shares shall vest on an accelerated basis immediately prior to
(i) the dissolution or liquidation of
<PAGE> 3
the Company, (ii) the reorganization, merger or consolidation of the Company
with or into one or more other corporations, (iii) the sale of a majority of the
Company's assets in connection with the distribution of the sales proceeds
therefrom to the stockholders of the Company, or (iv) the acquisition by any
person or entity, or group of affiliated persons or entities, of equity
securities of the Company representing thirty percent (30%) or more of the
aggregate voting power of all outstanding securities of the Company. Your
options shall cease further vesting upon the cessation of your employment by the
Company. Notwithstanding the foregoing, in the event the Company terminates your
employment for other than Cause, then with your and the Company's consent (which
consents will not be unreasonably withheld), you shall serve as an advisor to
the Company, and your options will continue to vest, for a period of eighteen
(18) months following the date hereof (at which time your options shall be fully
vested). Such advisory services shall be on a part time/occasional basis and,
unless otherwise agreed to by the Company, you will not be entitled to
compensation for such advisory work. The Company shall file a Registration
Statement on Form S-8 registering the shares underlying the option with the SEC
and file with the Nasdaq Stock Market a supplemental listing application for
such shares within sixty days from the date of this letter. Your Stock Options
shall have a five (5) year term. In the event your employment with the Company
ceases for any reason, you will have three (3) years to exercise any vested
Option Shares.
Reimbursable Expenses. Subject to your furnishing to the
Company adequate records and other documentary evidence, the Company shall
reimburse you for all reasonable travel and business expenses incurred by you in
carrying out your duties hereunder at either office located in California.
Confidentiality. You agree to sign the Company's standard form
confidentiality agreement.
Waiver and Modification. No provision hereof may be waived or
modified unless in writing and signed by both parties hereto. Waiver of any one
provision herein shall not be deemed to be a waiver of any other provision
herein.
Entire Agreement. Except as set forth in Sections 4(b) and 6
herein, this Agreement contains the sole and
<PAGE> 4
entire agreement between the parties and supersedes all prior oral and written
agreements, understandings, statements and practices between the parties.
Arbitration. Any dispute arising out of this agreement or your
employment by the Company shall be resolved by binding arbitration with
JAMS/Endispute. The prevailing party shall be entitled to recover his/its
reasonable attorneys' fees and costs.
If the foregoing accurately sets forth your understanding as to the
terms of your services, please sign and return the enclosed copy of this letter.
PARCPLACE/DIGITALK, INC.
By: /s/ PARCPLACE-DIGITALK, INC.
--------------------------------
AGREED AND ACCEPTED:
/s/ JAMES H. SMITH
- --------------------------
James H. Smith
<PAGE> 1
Exhibit 11.1
ParcPlace-Digitalk, Inc.
STATEMENTS REGARDING COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Net (loss) income $(22,480) $(10,396) $ 4,564
Accretion on preferred stock 135 340
-------- -------- -------
Net (loss) income applicable to
common shareholders $(22,480) $(10,531) $ 4,224
======== ========= =======
Computations of weighted average
common and common equivalent
shares outstanding:
Weighted average common shares
outstanding* 11,775 10,725 9,688
Common equivalent shares
attributable to:
Stock options and warrants (treasury
stock method)* -- -- 1,312
-------- -------- -------
Shares used in computing net (loss)
income per share 11,775 10,725 11,000
======== ======== =======
Net (loss) income per share $ (1.91) $ (0.98) $ 0.38
======== ======== =======
</TABLE>
*Share amounts reflect August 30, 1995 merger with Digitalk, Inc.
<PAGE> 1
EXHIBIT 13.1
SELECTED CONSOLIDATED FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
For the year
Net revenues................................ $ 37,286 $ 49,610 $55,668 $41,723 $20,433
Income (loss) from operations............... $(23,110) $(11,597) $ 4,257 $ 4,591 $(4,012)
Net income (loss)........................... $(22,480) $(10,396) $ 4,564 $ 4,344 $(4,102)
Net income (loss) per share................. $ (1.91) $ (0.98) $ 0.38 $ 0.44 $ (1.22)
Shares used in computing net income (loss)
per share................................. 11,775 10,725 11,000 9,157 3,366
Growth (decrease) in net revenues........... (24.8)% (10.9)% 33.4% 104.2% 47.4%
Net revenues per employee................... $ 148 $ 146 $ 176 $ 177 $ 127
At year end
Cash, cash equivalents and marketable
securities................................ $ 14,456 $ 28,231 $33,295 $33,595 $ 5,143
Working capital............................. $ 8,108 $ 27,701 $35,368 $32,648 $ 3,379
Total assets................................ $ 23,872 $ 47,302 $54,119 $47,134 $12,922
Long-term debt.............................. $ -- $ -- $ -- $ 357 $ 2,835
Stockholders' equity........................ $ 12,272 $ 33,504 $37,463 $31,508 $ (768)
Number of employees......................... 180 323 356 275 197
Key ratios
Current ratio............................... 1.7 3.0 4.0 4.1 1.5
Return on sales............................. (60.3)% (21.0)% 8.2% 10.4% (20.1)%
Return on average assets.................... (63.2)% (20.5)% 9.0% 14.5% (37.8)%
Return on average stockholders' equity...... (98.2)% (29.3)% 13.2% 28.2% (277.0)%
</TABLE>
ParcPlace-Digitalk, Inc.
1
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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 fiscal 1997 were generated primarily by the Company's VisualWorks,
VisualWave, Distributed Smalltalk and VisualSmalltalk Enterprise products. These
products comprise a family of object-oriented application development
environments based on the Smalltalk programming language. During fiscal 1997,
the Company determined to focus its product development efforts on server and
distributed tools, which will be based on VisualWorks, VisualWave, and
Distributed Smalltalk and to discontinue development of VisualSmalltalk
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.
In fiscal 1996, the Company, formerly ParcPlace Systems, Inc., merged with
Digitalk, Inc. The merger was accounted for as a pooling of interests. The
historical consolidated financial statements of the Company have been restated
to include the financial position of Digitalk for all periods presented.
Net revenues
<TABLE>
<CAPTION>
(In thousands) 1997 CHANGE 1996 Change 1995
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
License $20,148 (36)% $31,667 (3)% $32,521
Service 17,138 (4)% 17,943 (22)% 23,147
------- ------- -------
Net Revenues $37,286 (25)% $49,610 (11)% $55,668
- ------------------------------------------------------
</TABLE>
ParcPlace-Digitalk's fiscal 1997 worldwide net revenues decreased 25% from the
previous fiscal year. This decline was due to a significant decrease in license
revenue and a modest decrease in service revenue.
License revenues fell 36% due 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. License revenues declined each quarter of fiscal 1997. 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; difficulties encountered in the Company's efforts
to merge the VisualSmalltalk Enterprise product into the VisualWorks product; a
high rate of turnover among the Company's sales force; and increased
competition, primarily from IBM and vertical application vendors. In fiscal
1996, license revenues decreased 3%, which the Company believes was primarily
attributable to uncertainties in the marketplace regarding new software
technologies, customer hesitation relating to the merger, and higher than
historical turnover in the Company's sales force.
Service revenues declined 4% due to both reduced demand for training and
consulting, which is largely driven by sales of development environments, and a
reduction in the number of available consulting and training personnel in North
America. These factors were partially offset by increases in international
training and consulting and worldwide support revenues. In fiscal 1996, service
revenues decreased 22% due to the completion of several long-term contracts
during the first half of fiscal 1996 and the completion of another long-term
contract in late fiscal 1995. The completion of long-term consulting engagements
was partially offset by an increase in customer support revenue.
International revenues for fiscal 1997, 1996, and 1995 were $11.9 million, $15.5
million, and $8.4 million, respectively, representing 32%, 31%, and 15%,
respectively, of net revenues. International revenues consist primarily of U.S.
export sales and European training and consulting. The 23% decrease in
international revenues in fiscal 1997 was due to a substantial decline in
revenue in Canada and relatively flat revenue in other international
territories, which the Company attributes to the same factors affecting license
and service revenues discussed above. The 84% increase in international revenues
in fiscal 1996 reflected the Company's increased investments in international
sales and marketing activities, continuing development of the Company's
international distribution channels, and an increase in the number of service
employees in the Company's European offices.
ParcPlace-Digitalk, Inc.
2
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
Cost of net revenues
<TABLE>
<CAPTION>
(In thousands) 1997 CHANGE 1996 Change 1995
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cost of license
revenues $ 5,537 (5)% $ 5,814 10% $ 5,286
Percentage of
license revenues 27.5% 18.4% 16.3%
Cost of service
revenues $10,379 (7)% $11,111 (11)% $12,548
Percentage of
service revenues 60.6% 61.9% 54.2%
Total cost of
revenues $15,916 (6)% $16,925 (5)% $17,834
Percentage of net
revenues 42.7% 34.1% 32.0%
- ------------------------------------------------------
</TABLE>
Cost of net revenues are allocated to either license revenues or service
revenues. Cost of license revenues, which is primarily comprised of the
production of the Company's products and related royalties, is substantially
lower than cost of service revenues, which consists primarily of personnel
costs.
Cost of licenses revenues consists principally of royalties, materials,
packaging and freight, and amortization of capitalized software costs. Cost of
license revenues decreased 5% in fiscal 1997 due to lower sales of development
environments, but increased as a percentage of license revenues due to a
write-off of purchased capitalized software, an increased royalty accrual, a
write-off of obsolete inventory, and the higher cost of sales on Parts for Java,
the Company's first retail product. The cost of revenues in fiscal 1996
increased 10% primarily due to increased sales of the ENVY/Developer product,
which carries a substantial royalty cost.
Cost of service revenues consists principally of personnel, and related costs
for training, consulting and customer support. Overall services headcount and
contract personnel were reduced in fiscal 1997, although international services
headcount increased. Cost of service revenues decreased in fiscal 1996 primarily
due to the reduction of consulting personnel in connection with the completion
of long-term consulting agreements during the first half of fiscal 1996 and at
the end of fiscal 1995.
Operating expenses
<TABLE>
<CAPTION>
(In thousands) 1997 CHANGE 1996 Change 1995
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales and
marketing $19,465 (12)% $21,995 14% $19,286
Percentage of net
revenues 52.2% 44.3% 34.6%
Research and
development $ 8,904 (14)% $10,335 24% $ 8,306
Percentage of net
revenues 23.9% 20.8% 14.9%
General and
administrative $ 7,436 8% $ 6,860 15% $ 5,985
Percentage of net
revenues 19.9% 13.8% 10.8%
Acquired research &
development $ 3,513 -- --
Percentage of net
revenues 9.4%
Restructuring &
merger costs $ 5,162 1% $ 5,092 --
Percentage of net
revenues 13.8% 10.3%
- ------------------------------------------------------
</TABLE>
Operating expenses were generally lower in fiscal 1997 than in fiscal 1996,
primarily because of the Company's reduced work force. In response to declining
revenues, the Company implemented two reductions in the workforce during the
year. Despite these reductions, operating expenses as a percentage of net
revenues were generally significantly higher in fiscal 1997, as the Company made
budgeted and actual expenditures on the basis of revenue expectations that were
not achieved. Operating expenses as a percentage of net revenues were
significantly higher in fiscal 1996 than fiscal 1995, also primarily due to an
increase in budgeted and actual expenditures accompanied by lower than expected
revenues.
Sales and marketing expenses consist principally of salaries, commissions,
travel, facility costs, marketing programs, and advertising. Expenses in fiscal
1997 were lower primarily due to lower spending for commissions, and reduced
marketing expenditures, but as a percentage of net revenues these expenses
increased as a result of other sales expenses, including salaries and
facilities, which are incurred independent from the level of revenues. Sales and
marketing expenses increased in fiscal 1996 primarily due to an increase in
marketing and
ParcPlace-Digitalk, Inc.
3
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
advertising expenses associated with the promotion of several new products
during the year. The Company expanded both the domestic and international sales
forces during fiscal 1996, including purchasing a distributor in France.
Research and development expenditures are mostly personnel related. The
reduction in fiscal 1997 and the increase in fiscal 1996 were primarily due to
changes in the size of the workforce. In fiscal 1997, 1996, and 1995, total
expenditures for research and development, including capitalized software
development costs, were 24%, 21%, and 15%, respectively, of net revenues. The
Company did not capitalize software development costs in fiscal 1997, but
capitalized $200,000, and $300,000 in fiscal 1996 and 1995, respectively.
General and administrative expenses consist of personnel costs for
administration, finance, information systems, human resources, and general
management, as well as professional service expenses. General and administrative
expenses increased in fiscal 1997 primarily due to an increase of bad debt
allowance, legal expenses associated with a securities class action lawsuit, and
an increase in international spending primarily from the French subsidiary.
These factors were partially offset by decreased staffing expense from the
reductions in the work force in the third and fourth quarters. General and
administrative expenses increased in fiscal 1996 primarily due to an increase in
professional services, including costs related to the securities class action
lawsuit, and increased staffing.
Acquired research and development represents charges for software that had not
yet reached technological feasibility under FAS 86. A charge of $646,000 was
taken in connection with the October 1996 acquisition of privately held
Polymorphic Software, Inc. and a charge of $2.9 million was taken in connection
with the July 1996 acquisition of privately held ObjectShare Systems, Inc.
Business combinations
On February 29, 1996, the Company acquired all the assets of AMiGO S.A, a
French-based distributor of the Company's VisualWorks product. The Company made
an initial payment of $688,000 and will be required to make additional payments
of up to $150,000 based on a percentage of the distributor's fiscal revenues
exceeding $1,600,000. The acquisition was accounted for as a purchase. Most of
the purchase price, which includes transaction costs, has been allocated to
intangible assets (included in other assets), which are being amortized over
four years. The results of operations of AMiGO, which have not been material in
relation to those of the Company, are included in the consolidated results of
operations for periods subsequent to the acquisition date.
On July 31, 1996, the Company acquired Objectshare Systems, Inc. (OSI), a
privately held corporation which developed and marketed add-on products for
Smalltalk tools. 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 the Company's common stock. In connection with the
acquisition, the Company recorded intangible assets of $363,000 and charged to
operations $2.9 million for acquired research and development. In connection
with a restructuring of operations later in the fiscal year, the Company charged
to operations the unamortized portion of the intangible assets. The operating
results of OSI have been included in the Company's consolidated results of
operations from the date of acquisition.
On October 1, 1996, the Company acquired Polymorphic Software, Inc. (PSI), a
privately held corporation which developed and marketed Smalltalk tools and
provided related consulting services. 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 recorded intangible assets of
$403,000 and charged to operations $646,000 for acquired research and
development. In connection with the restructuring of operations later in the
fiscal year, the Company charged to operations the unamortized portion of the
intangible assets.
Restructuring and merger related expenses reflect charges recorded in connection
with the restructuring of operations in the third and fourth quarter of fiscal
1997,
ParcPlace-Digitalk, Inc.
4
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
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 the
restructurings, the Company reduced its total headcount by an aggregate of
approximately 130 people, including employees and contractors. These actions
were taken in an effort to reduce the Company's ongoing operating expenses. The
Company recorded restructuring charges in the third and fourth quarter of
approximately $2.2 million and $3.0 million, respectively, to cover severance
benefits, the closing of excess facilities, write-down of acquired intangible
assets related to discontinued products, and the write-down of excess computer
equipment and office furniture. The aggregate savings in operating expenses
attributable to the restructurings is estimated to be $3.3 million per quarter,
although not all of such savings will be immediately recognizable and such
savings may be offset, in part or in their entirety, by other changes in the
Company's operations.
The restructuring charges and related liabilities are summarized below:
<TABLE>
<CAPTION>
Write-downs
and Accrued
Payments Restructuring
Restructuring through March Costs at March
(in thousands) Costs 31, 1997 31, 1997
- ------------------------------------------------------
<S> <C> <C> <C>
Severance
benefits $ 1,994 $1,991 $ 3
Closing of
excess
facilities 863 29 834
Intangible
assets
write-down 764 764 --
Equipment and
furniture
write-down 719 719 --
Other 822 592 230
------------- ------- -------
$ 5,162 $4,095 $1,067
=========== ============= =============
</TABLE>
The Company expects the remaining $1.1 million accrued balance at March 31,
1997, will result in cash expenditures of approximately $800,000 over the next
twelve months and approximately $300,000 for lease payments for closed
facilities in the following year. Such payments will be financed through current
working capital.
The merger-related expenses in fiscal 1996 were $5.1 million. These expenses
consist primarily of severance payments, investment banking and other
professional fees, and other direct costs associated with the merger. As of
March 31, 1997 all the merger related expenses have been paid.
Interest income (expense) and other, net
<TABLE>
<CAPTION>
(In thousands) 1997 CHANGE 1996 Change 1995
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
(expense) and other,
net $725 (44)% $1,303 (6)% $1,385
Percentage of net
revenues 1.9% 2.6% 2.5%
- ------------------------------------------------------
</TABLE>
Interest income (expense) and other, net consists primarily of interest earned
on the Company's cash balances and marketable securities, offset by interest
paid and other expenses. The decrease in fiscal 1997 reflects lower interest
income from reduced cash and marketable securities balances and a payment of
$250,000 for the settlement of the securities class action lawsuit, and other
related legal costs. The decrease in fiscal 1996 was due to lower interest
income from reduced cash and marketable securities balances, partially offset by
a reduction in interest expense relating to maturing equipment lease lines.
Provision for income taxes
<TABLE>
<CAPTION>
(In thousands) 1997 CHANGE 1996 Change 1995
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision for income
taxes $95 (7)% $102 (91)% $1,078
Percentage of net
revenues 0.3% 0.2% 1.9%
Effective tax rate (0.4)% (1.0)% 23.6%
- ------------------------------------------------------
</TABLE>
Although the Company had losses for fiscal year 1997 and 1996, it provided for
foreign and local taxes in the amounts of $95,000 and $102,000 respectively. The
Company's effective tax rate for fiscal 1995 differed from the federal statutory
rate primarily due to the utilization of net operating loss carryforwards and
changes in the valuation allowances on temporary differences, partially offset
by state income taxes in jurisdictions without available net operating loss
carryforwards.
Utilization of these net operating losses and credits may be subject to an
annual limitation due to ownership change constraints provided by the Internal
Revenue
ParcPlace-Digitalk, Inc.
5
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
Code and similar state tax provisions. This annual limitation (if any) would not
be material.
Net income (loss) and net income (loss) per share
<TABLE>
<CAPTION>
(In thousands,
except per
share data) 1997 CHANGE 1996 Change 1995
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(22,480) (116)% $(10,396) (328)% $4,564
Percentage of net
revenues (60.3)% (21.0)% 8.2%
Net income (loss)
per share $ (1.91) $ (0.98) $ 0.38
- ------------------------------------------------------
</TABLE>
Impact of recently issued accounting standards
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.
FAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income attributable to common stockholders by the
weighted average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
However, the SEC rules regarding share issuances, options, and other rights
granted to acquire shares prior to an initial public offering, as stated above,
are still applicable and such amounts are included in both basic and diluted
EPS.
The impact of adoption of FAS 128 for the year ended March 31, 1997 will not
change primary EPS as presented. The impact of Statement 128 of fully diluted
EPS is not expected to be material as the Company is in a net loss position and,
accordingly, options are anti-dilutive.
In 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation", which provides an alternative to APB Opinion No. 25, "Accounting
for Stock Issued to Employees", in accounting for stock-based compensation to
employees. The Company has elected to account for stock-based compensation to
employees in accordance with Opinion 25, providing only pro forma disclosures
required by Statement 123.
Foreign exchange contracts
The Company sells its products to its European customers in local currencies.
The Company enters into forward foreign exchange contracts, with maturities
generally approximate ninety days in duration, primarily to hedge against the
short-term impact of foreign currency fluctuations from invoices denominated in
local currencies. Net foreign currency transaction gains and losses have not
been material.
Liquidity and capital resources
As of March 31, 1997, the Company had cash, cash equivalents, and marketable
securities of $14.5 million, and working capital of $8.1 million. The Company
had a bank line of credit providing for borrowings of up to $5.0 million for
working capital which expired January 1997 and was not renewed upon its
expiration.
Due to its net loss in fiscal 1997 and 1996, the Company used $9.4 million and
$3.5 million, respectively, of cash to fund its operating activities in such
years. The net cash used in operating activities in fiscal 1997 was less than
the net loss, primarily due to a decrease in accounts receivable and
inventories, and an increase in deferred revenue. Accounts receivable decreased
as a result of reduced revenues and payment incentives offered by the Company.
Days sales outstanding were 70 days and 75 days at March 31, 1997 and 1996,
respectively. Inventories consist principally of software and related
documentation and are stated at the lower of cost on a first-in/first-out basis
or market. Net cash used by operating activities in fiscal 1996 was less than
the net loss for the year, primarily due to an increase in deferred revenue, and
a decrease in accounts receivable and inventories.
Proceeds from the Company's investing activities in fiscal 1997 consist of net
proceeds from maturities of marketable securities partially offset by funds used
in business combinations and expenditures for property and equipment. In fiscal
1996, the Company's uses of funds in investing activities consist of net
purchases of marketable
ParcPlace-Digitalk, Inc.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
securities and expenditures for property and equipment. The Company has no
significant capital commitments and currently anticipates that additions to
property and equipment for fiscal 1998 will be approximately $1.0 million.
Financing activities provided cash of $1.3 million and $1.4 million for fiscal
1997 and 1996, respectively. Cash from financing activities in both fiscal years
was derived primarily from the issuance of common stock under the Company's
employee stock plans.
As a result of its declining revenues, the Company, as of June 1997, is
conducting an intensive review of its business prospects and is considering
various alternative courses of action, including but not limited to an
aggressive reduction in operating expenses. 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 an aggressive reduction in operating expenses, would be
sufficient to meet its cash requirements for continuing its core business at
least through fiscal 1998. The Company may from time to time consider the
acquisition of products, technologies, or businesses complementary to its
overall business strategy.
BUSINESS RISKS
The foregoing discussion contains certain forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from the results anticipated in these forward-looking statements as a
result of the factors set forth below and elsewhere in this report.
Lack of acceptance of Smalltalk
Sales of the Company's application development tools, substantially all of which
are based on the Smalltalk programming language, declined in each quarter of
fiscal 1997, resulting in a significant year-to-year decrease in the Company's
license revenues. The Company believes that this trend, which has continued in
the first quarter of fiscal 1998, is due in large part to corporate users'
reluctance to make new or additional investments in Smalltalk-based
applications. This reluctance correlates to the perception that Java will emerge
as the leading programming language for object-oriented application development,
and is compounded by the Company's operational difficulties throughout fiscal
1997 and its financial results in recent quarters, which have caused customers
to become concerned about the Company's ability to continue to maintain, support
and enhance its product line. Because the Company is a leading vendor among a
small number of vendors providing Smalltalk-based tools, such concerns
exacerbate customer reluctance to make investments in the Smalltalk programming
language generally, and the Company's products in particular. In addition, use
of the Company's Smalltalk-based products requires organizations to make a
substantial investment in the retraining of programmers, which can be expensive
and can reduce the productivity of programmers during the training period, or to
hire experienced Smalltalk programmers, which are in scarce supply. The Company
believes that Smalltalk continues to provide certain significant advantages over
competing programming languages, but if these advantages are not recognized by
corporate users as having sufficient value to their organizations, the downward
trend in sales of Smalltalk-based application development tools may continue,
which would have a material adverse effect on the Company's results of
operations.
Fluctuations in quarterly results
The Company has experienced significant quarterly fluctuations in operating
results and anticipates such fluctuations in the future. Fluctuations may be
caused by numerous factors including, but not limited to, those discussed above.
License revenues in any quarter depend on orders shipped in the quarter. The
Company generally ships orders as received and, as a result, 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 fluctuations in quarterly license revenues. In addition, license
revenues in quarters after a new product release may be affected by the amount
of upgrade revenue, which tends to increase soon after the release of a new
product and
ParcPlace-Digitalk, Inc.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
then decline rapidly. License revenues may also be affected by seasonal trends,
which may include: relatively lower sales in the summer months when many
businesses experience lower sales; relatively higher sales in December as many
customers complete annual budget cycles; and relatively higher sales in the
Company's last fiscal quarter as a result of efforts to meet sales quotas, with
correspondingly lower sales in the following quarter. 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 derived from licenses versus 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 expected quarter or over the course of the
year. 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 the sole indicator of future
performance, although such comparisons may be useful in establishing an overall
trend in financial results.
Restructuring
In an effort to bring operating expenses in line with current and projected
revenues, the Company undertook a restructuring in each of the third and fourth
quarters of fiscal 1997. Each restructuring involved a reduction in the number
of employees, the closing of several sales and engineering facilities, and other
related changes. The Company initiated the restructurings in response to a
shortfall in revenues in the second and third quarters of fiscal 1997 that
resulted in a substantial operating loss for each of those quarters. The Company
may have to make further adjustments to the organization to bring operating
costs in line with revenues in the future. Such adjustments could include
additional reductions in headcount, changes in product delivery schedules and
plans, and closing or downsizing of facilities.
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 would 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 product plans or to
effectively maintain its existing products.
Volatility of stock price
The market for the Company's common stock is highly volatile. The trading price
of the Company's common stock has been and will likely continue to be subject to
wide fluctuations in response to quarterly variations in the Company's operating
results, announcements of new products or technological innovations by the
Company or its competitors, general market fluctuations, and other events and
factors. Changes in earnings estimates made by brokerage firms and industry
analysts relating to the market in which the Company does business, or relating
to the Company specifically, have in the past resulted and could in the future
result in an immediate and adverse effect on the market price of the Company's
common stock.
Need for continued acceptance of
object-oriented technology
The Company currently derives substantially all of its revenue from its product
family of object-oriented application development environments and related
products and services and expects this concentration to continue for the
foreseeable future. As a result, any factor adversely affecting the demand for,
or pricing of, object-oriented application development environments and re-
ParcPlace-Digitalk, Inc.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
lated products and services, would have a material adverse effect on the
Company's business and results of operations. In addition, the future success of
the Company's current product family depends upon continued market acceptance of
object-oriented technology, particularly acceptance by corporate users for
missioncritical applications. Because object-oriented technology represents a
fundamental shift in programming methodology, it requires a substantial
investment in the retraining of programmers, which can discourage organizations
from choosing object-oriented tools. Even if organizations choose to make the
investment required to use object-oriented technology, there can be no assurance
that they will choose products based on the Smalltalk language, such as the
Company's products, or that the Company will be successful in the market for
object-oriented application development environments, which is already crowded
with larger and better-funded competitors such as Oracle, IBM, Sun Microsystems
and Symantec. There are a number of potential approaches to implementing object
technology, including the use of languages other than Smalltalk, such as C++,
object extensions of COBOL, Java, object-based third-generation programming
languages ("3GLs"), and other new languages and software tools that may
currently be under development or that may be developed in the future. In
particular, the Company believes that the decrease in sales of its
Smalltalk-based products in fiscal 1997 correlates to the perception among
corporate users that Java will emerge as the leading programming language for
object-oriented application development, which has led to a general decline in
sales of application development tools based on other programming languages.
Technological change and new products
The market for software for client/server/web computing environments is
characterized by rapidly changing technology, evolving industry standards, and
frequent new product introductions. The Company must continually update its
existing products to keep them current with changing customer needs, technology,
and competitive products. New technologies could render existing products
obsolete. If the Company is unable to enhance its existing products and
introduce new products in response to changing customer requirements, or if such
products are not introduced on a timely basis, fail to receive market
acceptance, or contain significant errors, the Company's business and results of
operations will be materially and adversely affected.
In particular, the market for the Company's products has been adversely affected
by the emergence of Java as the dominant language for developing web-based
client applications. Many of the Company's customers have chosen to evaluate the
capabilities of Java-based products before making additional investments in the
Company's products, which has had a direct adverse impact on license revenues.
Also, the growth of the Internet as a means of communicating information about
competitive products has shortened the average development cycle for the
Company's products and the average life cycle for the Company's products. This
has caused an increase in competition in the market for the Company's products
and a requisite increase in development expenses as the Company strives to
release products on a shorter cycle with significant additional function. The
failure of others to develop or enhance technologies that are critical to broad
public acceptance and use of the Internet may also affect the Company's ability
to market its products for Internet application development.
Competition
The market for application development tools for large-scale client/server/web
computing environments 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, including IBM (whose competing offerings include a
development environment based on Smalltalk and plans to deliver a Java-based
derivative), Borland, Forte, Informix, Microsoft, Oracle, Sun Microsystems,
ParcPlace-Digitalk, Inc.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
Sybase and Symantec. 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.
The principal competitive factors affecting the market for the
Company's products include product functionality, quality and reliability, the
timing of product introductions, customer support and price. Based on a
combination of these factors, the Company believes that it will have to
incorporate significant additional function in a relatively short period of time
for its products to remain competitive. There can be no assurance that the
Company will be able to do so or that the Company will be successful in the face
of increasing competition from new products and enhancements introduced by
existing competitors and by new companies entering the market.
The Company believes that competitive pressures in fiscal 1997,
particularly the introduction of new products by competitors, caused delays in
purchase decisions by and in some cases, loss of sales to potential customers,
and increased the pricing pressure faced by the Company. Continuing competitive
pressures from existing and new competitors who offer lower prices or introduce
new products could result in further delays in purchase decisions by or loss of
sales to potential customers or cause the Company to institute price reductions,
any of which would adversely affect the Company's results of operations. In the
first quarter of fiscal 1997, partially in response to competitive pressures,
the Company ceased charging a separate fee for application deployment, which had
typically been charged on a per-copy basis. Because deployment fees contributed
a significant portion of the Company's revenues for the past several years, the
cessation of charging a deployment fee had an adverse effect on the Company's
license revenues.
Intellectual property and other
proprietary rights
The Company's success depends upon its proprietary technology. The Company
relies on a combination of copyright, trademark and trade secret laws,
confidentiality procedures, and licensing arrangements to establish and protect
its proprietary rights. In addition, the Company currently holds one patent. As
part of its confidentiality
ParcPlace-Digitalk, Inc.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
procedures, the Company generally enters into non-disclosure agreements with its
employees, distributors and corporate partners, and limits access to and
distribution of its software, documentation and other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use the Company's products or technology without
authorization, or to develop similar technology independently. In addition,
effective protection of intellectual property rights may be unavailable or
limited in certain foreign countries.
The Company provides its products to end-users primarily under "shrink-wrap"
license agreements, which could be held unenforceable in whole or in part in
various jurisdictions. The Company makes a portion of its source code available
to its customers which increases the likelihood of misappropriation or other
misuse of the Company's products.
The Company is not aware that any of its products infringe upon the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not claim such infringement by the Company with respect to current or
future products. The Company expects that software product developers will
increasingly be subject to such claims as the number of products and competitors
in the Company's industry segment grows and the functionality of products in the
industry segment overlaps. Any such claims, with or without merit, could result
in costly litigation or might require the Company to enter into royalty or
licensing agreements. Such royalty or license agreements, if required, may not
be available on terms acceptable to the Company or at all.
Dependence on third-party
relationships
In its product offerings, ParcPlace-Digitalk uses certain products and
technologies of various third-party software developers, including both complete
products offered as extensions of the Company's product line and technology used
in the enhancement of internally developed products. Such products and
technologies are obtained from the thirdparty providers under contractual
license agreements, which in some cases are for limited time periods and in some
cases provide that such licenses may be terminated under certain circumstances.
There can be no assurances that the company will be able to maintain adequate
relations with these third-party providers, that these third-party providers
will commit adequate development resources to maintain these products and
technologies, or that the license agreements that are for limited time periods
will be renewed upon termination. ParcPlace-Digitalk has established a number of
strategic relationships with management consultants, system integrators, and
computer system and software providers. These companies provide software
development, marketing, reselling, and training services that the Company
believes are important to its existing and future business. These relationships
are non-exclusive and may be discontinued at any time.
Dependence on key personnel
The Company's future success will depend upon its ability to attract and retain
highly qualified personnel. Loss of key personnel or inability to hire and
retain qualified personnel could have a material adverse effect on the Company's
business and results of operations. During fiscal 1997, the Company has
experienced an increase in the number of voluntary resignations of employees.
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.
Managing a changing business; business combinations
Since its inception, the Company has experienced changes in its operations which
have placed significant demands on the Company's administrative, operational,
and financial resources. The Company's future performance will depend in part on
its ability to effectively respond to and manage changing business conditions.
ParcPlace-Digitalk, Inc.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
The Company completed the acquisition of Objectshare Systems, Inc., a privately
held corporation in the Smalltalk tools add-on products business, in July 1996.
Due to a decrease in demand for such products, which reflects the decrease in
demand for the Company's primary products, the Company did not receive
significant revenues from the acquired Objectshare product line in fiscal 1997.
The Company does not plan to invest additional amounts in marketing or
development of the acquired Objectshare product line. Parts for Java, which is
marketed by the Company's ObjectShare division, was developed by ParcPlace.
The Company completed the acquisition of Polymorphic Software, Inc., a privately
held corporation in the Smalltalk tools and consulting business, in October
1996. The Company will not add the Polymorphic products to its current product
list.
The Company may acquire other companies, products, or technologies in the
future. There can be no assurances that these acquisitions can be effectively
integrated, that such acquisitions will not result in costs and liabilities
adversely affecting the Company's results of operations and financial condition,
or that the Company will obtain the anticipated benefits of such acquisitions.
International operations
Approximately 32%, 31%, and 15% of the Company's net revenues for the years
ended March 31, 1997, 1996, and 1995, respectively, were attributable to
international sales. The majority of international revenues to date have been
derived from license revenues. International sales are made primarily through
distributors, and are therefore largely dependent on the efforts of these third
parties. Other risks associated with international operations include tariff
regulations and requirements for export licenses, customer or governmental
requirements for local-language versions of products; unexpected changes in
regulatory requirements; longer accounts receivable payment cycles; difficulties
in managing international operations; potentially adverse tax consequences;
economic and political instability; restrictions on repatriation of earnings;
foreign exchange translation and transaction exposure; and the burdens of
complying with a wide variety of foreign laws. In addition, the laws of certain
countries do not protect the Company's products and intellectual property rights
to the same extent as do the laws of the United States. There can be no
assurance that such factors will not have an adverse effect on the Company's
future international sales and, consequently, on the Company's business and
results of operations.
ParcPlace-Digitalk, Inc.
12
<PAGE> 13
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except share amounts) March 31,
- -------------------------------------------------------------------------------------------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 7,418 $ 14,367
Marketable securities...................................................... 5,538 13,358
Accounts receivable, net of allowances of $2,309 in 1997 and $1,467 in
1996..................................................................... 5,586 12,205
Inventories................................................................ 220 825
Other current assets....................................................... 946 744
-------- --------
Total current assets................................................ 19,708 41,499
Marketable securities........................................................ 1,500 506
Property and equipment:
Computers and other equipment.............................................. 4,630 9,668
Furniture and fixtures..................................................... 652 1,686
Leasehold improvements..................................................... 515 492
-------- --------
5,797 11,846
Accumulated depreciation and amortization.................................. 4,002 8,255
-------- --------
1,795 3,591
Other assets................................................................. 869 1,706
-------- --------
Total assets........................................................ $ 23,872 $ 47,302
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 1,219 $ 2,441
Accrued payroll and related expenses....................................... 1,421 3,093
Accrued restructuring costs................................................ 1,067 --
Other accrued liabilities.................................................. 2,827 2,888
Deferred revenue........................................................... 5,066 5,376
-------- --------
Total current liabilities........................................... 11,600 13,798
Commitments and contingencies................................................ -- --
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares -- 3,000,000
Issued and outstanding shares -- none.................................... -- --
Common stock, $0.001 par value:
Authorized shares -- 30,000,000
Issued and outstanding shares -- 11,929,351 in 1997 and 11,531,682 in
1996.................................................................... 12 12
Additional paid-in capital................................................. 49,863 48,392
Accumulated deficit........................................................ (37,416) (14,871)
Cumulative translation adjustment.......................................... (187) (29)
-------- --------
Total stockholders' equity.......................................... 12,272 33,504
-------- --------
Total liabilities and stockholders' equity.......................... $ 23,872 $ 47,302
======== ========
</TABLE>
See accompanying notes.
ParcPlace-Digitalk, Inc.
13
<PAGE> 14
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except per share amounts) March 31,
- ---------------------------------------------------------------------------------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Net revenues:
License......................................................... $ 20,148 $ 31,667 $ 32,521
Service......................................................... 17,138 17,943 23,147
-------- -------- -------
Total net revenues................................................ 37,286 49,610 55,668
Cost of net revenues:
License......................................................... 5,537 5,814 5,286
Service......................................................... 10,379 11,111 12,548
-------- -------- -------
Total cost of net revenues........................................ 15,916 16,925 17,834
-------- -------- -------
Gross profit...................................................... 21,370 32,685 37,834
Operating expenses:
Sales and marketing............................................. 19,465 21,995 19,286
Research and development........................................ 8,904 10,335 8,306
General and administrative...................................... 7,436 6,860 5,985
Acquired research and development............................... 3,513 -- --
Restructuring and merger-related costs.......................... 5,162 5,092 --
-------- -------- -------
Total operating expenses.......................................... 44,480 44,282 33,577
-------- -------- -------
Income (loss) from operations..................................... (23,110) (11,597) 4,257
Interest and other income (expense), net.......................... 725 1,303 1,385
-------- -------- -------
Income (loss) before provision for income taxes................... (22,385) (10,294) 5,642
Provision for income taxes........................................ 95 102 1,078
-------- -------- -------
Net income (loss)................................................. $ (22,480) $ (10,396) $ 4,564
======== ======== =======
Net income (loss) per share....................................... $ (1.91) $ (0.98) $ 0.38
======== ======== =======
Shares used in computing net income (loss) per share.............. 11,775 10,725 11,000
======== ======== =======
</TABLE>
See accompanying notes.
ParcPlace-Digitalk, Inc.
14
<PAGE> 15
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Cumulative Total
--------------- Paid-in Accumulated Translation Stockholders'
(in thousands) Shares Amount Capital Deficit Adjustment Equity
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 9,405 $ 9 $ 40,217 $ (8,630) $ (88) $ 31,508
Accretion of mandatorily
redeemable preferred stock -- -- -- (340) -- (340)
Exercise of stock options and
warrants, net of repurchases 383 1 378 -- -- 379
Issuance of common stock under
Employee Stock Purchase Plan 79 -- 1,059 -- -- 1,059
Tax benefit from exercise of stock
options -- -- 170 -- -- 170
Translation adjustment -- -- -- -- 123 123
Net income -- -- -- 4,564 -- 4,564
------ ---- ------- -------- ----- --------
Balance at March 31, 1995 9,867 10 41,824 (4,406) 35 37,463
Accretion of mandatorily
redeemable preferred stock -- -- -- (135) -- (135)
Conversion of mandatorily
redeemable preferred stock to
common stock 1,237 1 5,140 -- -- 5,141
Exercise of stock options, net of
repurchases 309 1 491 -- -- 492
Issuance of common stock under
Employee Stock Purchase Plan 119 -- 937 -- -- 937
Translation adjustment -- -- -- -- (64) (64)
Unrealized gain on investments -- -- -- 66 -- 66
Net loss (10,396) (10,396)
------ ---- ------- -------- ----- --------
Balance at March 31, 1996 11,532 12 48,392 (14,871) (29) 33,504
Exercise of stock options, net of
repurchases 196 699 -- -- 699
Issuance of common stock under
Employee Stock Purchase Plan 201 -- 604 -- -- 604
Stock options assumed in business
combinations -- -- 168 -- -- 168
Translation adjustment -- -- -- -- (158) (158)
Unrealized loss on investments -- -- -- (65) -- (65)
Net loss -- -- -- (22,480) -- (22,480)
------ ---- ------- -------- ----- --------
BALANCE AT MARCH 31, 1997 11,929 $ 12 $ 49,863 ($ 37,416) ($ 187) $ 12,272
====== ==== ======= ======== ===== ========
</TABLE>
See accompanying notes.
ParcPlace-Digitalk, Inc.
15
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) Year Ended March 31,
- -----------------------------------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(22,480) $(10,396) $ 4,564
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 3,707 3,000 2,252
Restructuring costs 1,887 -- --
Acquired research and development 3,513 -- --
Changes in operating assets and liabilities:
Accounts receivable 6,379 928 (4,606)
Inventories 441 494 (864)
Other current assets (126) 312 (375)
Accounts payable and accrued liabilities (3,472) 439 712
Accrued restructuring costs 1,067 -- --
Deferred revenue (310) 1702 (22)
-------- -------- --------
Net cash (used in) provided by operating activities (9,394) (3,521) 1,661
INVESTING ACTIVITIES
Business combinations (3,699) (664) --
Maturities of marketable securities 23,239 30,720 23,778
Purchases of marketable securities (16,479) (36,282) (22,587)
Purchases of property and equipment (1,564) (1,789) (3,231)
Increase in other assets (197) (521) (461)
-------- -------- --------
Net cash (used in) provided by investing activities 1,300 (8,536) (2,501)
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of repurchase 1,303 1,429 1,608
-------- -------- --------
Net cash provided by financing activities 1,303 1,429 1,608
Effect of exchange rate changes on cash and cash equivalents (158) (64) 123
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (6,949) (10,692) 891
Cash and cash equivalents at beginning of period 14,367 25,059 24,168
-------- -------- --------
Cash and cash equivalents at end of period $ 7,418 $ 14,367 $ 25,059
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
Conversion of preferred stock to common stock $ -- $ 5,141 $ --
Tax benefit from nonqualified stock option exercises $ -- $ -- $ 170
Accretion of mandatorily redeemable preferred stock $ -- $ 135 $ 340
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ -- $ 13 $ 119
Cash paid for taxes $ 82 $ 118 $ 621
</TABLE>
See accompanying notes.
ParcPlace-Digitalk, Inc.
16
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
ORGANIZATION
ParcPlace-Digitalk, Inc. (the Company), a Delaware corporation, 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.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries in France, Germany, and the United
Kingdom after eliminating all significant intercompany accounts and
transactions.
The financial statements of foreign subsidiaries have been translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation." Gains and losses from translation are recorded
as cumulative translation adjustments in stockholders' equity. The effect of
foreign currency transaction gains and losses on the consolidated statements of
operations is insignificant for all years presented.
As a result of its declining revenues, the Company, as of June 1997, is
conducting an intensive review of its business prospects and is considering
various alternative courses of action, including but not limited to an
aggressive reduction in operating expenses. 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 an aggressive reduction in operating expenses, would be
sufficient to meet its cash requirements for continuing its core business at
least through fiscal 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenue and expenses during each period. Actual
results could differ from those estimates.
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. Investments are classified as held-
to-maturity, trading, or available-for-sale at the time of purchase.
At March 31, 1997 and 1996, all of the Company's debt securities were classified
as available-for-sale and were 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.
Such investments consist of the following:
<TABLE>
<CAPTION>
Fair Market
Value at
(In thousands) March 31,
- ------------------------------------------------------
1997 1996
------ -------
<S> <C> <C>
Cash equivalents:
U.S. treasury securities and
obligations of U.S. government
agencies $1,596 $ 1,994
Corporate debt securities 4,330 998
Other 1,000 2,000
------ -------
Total $6,926 $ 4,992
====== =======
Short-term marketable securities
(maturing through March 1998):
U.S. treasury securities and
obligations of U.S. government
agencies $5,538 $ 5,971
Corporate debt securities -- 4,008
Other -- 3,379
------ -------
Total $5,538 $13,358
====== =======
Long-term marketable securities
(maturing June 1999):
U.S. treasury securities and
obligations of U.S. government
agencies $1,500 $ 506
------ -------
Total $1,500 $ 506
====== =======
</TABLE>
Realized gains and losses from the sale of such investments were not material in
fiscal 1997, 1996 and 1995. At March 31, 1997 and 1996, the estimated fair value
of cash equivalents and marketable securities approximated
ParcPlace-Digitalk, Inc.
17
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cost, and the amount of unrealized gains or losses were not significant.
INVENTORIES
Inventories consist principally of finished goods, which includes software and
related documentation, which are stated at the lower of cost
(first-in/first-out) or market. Inventories include the cost of licenses for
each unit of product manufactured by a third party and distributed by the
Company.
PROPERTY AND EQUIPMENT
Equipment is stated at cost. Depreciation and amortization are computed using
the straight-line method over estimated useful lives of three to five years.
Assets under capital leases are amortized over the shorter of the asset life or
the remaining lease term. Amortization of capital leases is included in
depreciation expense. During the fourth quarter of fiscal 1997, the Company
removed from its consolidated balance sheets $7.6 million of fully depreciated
property and equipment, including $6.6 million of computer and other equipment
and $1.0 million of furniture and fixtures, and in connection therewith the
Company reduced accumulated depreciation by $7.6 million. Property and equipment
is reported on the consolidated balance sheets on the basis of the Company's
purchasing records, with adjustments based on management's estimates of
dispositions and retired equipment, rather than on the basis of a physical
inventory, which has not been performed.
CAPITALIZED SOFTWARE AND PURCHASED SOFTWARE
The Company capitalizes software development costs incurred subsequent to the
time the products reach technical feasibility. All capitalized internally
developed software costs and purchased software costs are amortized to the cost
of revenues on a straight-line basis based on the estimated useful lives of the
products or the ratio of current revenue to the total of current and anticipated
future revenue, whichever is greater. Capitalized internally developed software
and purchased software are stated at the lower of amortized cost or net
realizable value. Capitalized and purchased software are included in other
assets.
For fiscal 1997, 1996, and 1995, software amortization was $1,700,000, $346,000,
and $391,000, respectively. Of the fiscal 1997 amount, $764,000 was charged to
restructuring costs for products that were discontinued, including products that
were acquired in business combinations (see Note 7). Accumulated amortization of
capitalized and purchased software at March 31, 1997, 1996, and 1995 was
$310,000, $110,000, and $628,000, respectively. There is no capitalized software
remaining at March 31, 1997.
STOCK-BASED COMPENSATION
In 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation," which provides an alternative to APB Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for stock-based compensation to
employees. The Company has elected to account for stock-based compensation to
employees in accordance with Opinion 25, providing only pro forma disclosures
required by Statement 123.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants' Statement of Position 91-1 on Software Revenue
Recognition. License revenue is recognized on shipment of product, provided that
no significant vendor obligations remain and that collection of the resulting
receivable is deemed probable by management. Insignificant vendor obligations
are accrued upon recognition of revenue. License revenue also includes revenue
from the sale of software manufactured by a third party. Service revenue
includes training, consulting, and customer support. Revenues from training and
consulting are recognized at the time the service is performed.
Deferred revenue relates primarily to software support contracts sold under
separate arrangements with customers. The term of the software support contracts
is generally one year, and the Company recognizes the associated revenue on a
pro rata basis over the life of the contract.
Potential sales returns are covered by the Company's allowance for sales returns
and doubtful accounts. The Company provides for the costs of warranty when
specific problems are identified. The Company has not experienced significant
warranty claims to date.
ParcPlace-Digitalk, Inc.
18
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company sells its products to various companies across several industries.
The Company performs ongoing credit evaluations of its customers and maintains
an allowance for potential credit losses, which have been within management's
expectations. The Company generally requires no collateral from its customers.
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 is
computed using the weighted average number of shares of common stock outstanding
and dilutive common equivalent shares from outstanding stock options (using the
treasury stock method).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board 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.
FAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income attributable to common stockholders by the
weighted average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The adoption of FAS 128 for the year ended March 31, 1997 will not change
primary EPS as presented. The effect of FAS 128 on diluted EPS is not expected
to be material to the Company.
2. Derivative Financial Instruments
The Company sells its products to its European customers in local currencies.
The Company enters into forward foreign exchange contracts primarily to hedge
against the short-term impact of foreign currency fluctuations from invoices
denominated in foreign currencies. The maturities of the forward foreign
exchange contracts are short-term in nature, generally 90 days. The contracts
are recorded at fair market value as of each balance sheet date. Gains and
losses from these contracts are recorded in interest and other income. At March
31, 1997 and 1996, the Company had contracts to exchange various European
currencies to U.S. dollars in the amounts of $1,009,000 and $905,000,
respectively. The fair value (quoted market price) of these contracts was
$956,000 and $880,000 at March 31, 1997 and 1996, respectively. Net foreign
currency transaction gains and losses have not been material.
3. Commitments
The Company leases its facilities under noncancelable operating leases that
expire through 2000. Rental expense was $1,763,000, $1,765,000, and $1,641,000
for fiscal 1997, 1996, and 1995, respectively. Minimum rental commitments under
all noncancelable leases with an initial term in excess of one year are as
follows: fiscal 1998 -- $909,000; 1999 -- $250,000; 2000 -- $102,000; and
2001 -- $15,000
4. Stockholders' Equity
STOCK OPTION PLANS
The Company has two current stock option plans: the 1993 Stock Plan, which
provides for the grant of stock options to the Company's employees and
consultants, and the 1995 Director Stock Option Plan, which provides for the
grant of stock options to the Company's Directors. The Company also has four
other stock option plans which have terminated but under which stock options
remain outstanding: the 1988 Incentive Stock Option Plan, the 1989 Stock Option
Plan, the Incentive and Nonstatutory Stock Option Plan adopted by Digitalk in
1992 (as to which the Company assumed all outstanding options at the time of the
merger in August 1995), and the 1995 Stock Option/Stock Issuance Plan of
Objectshare Systems, Inc. (as to which the Company assumed all outstanding
options at the time of the acquisition in July 1996). No further options may be
granted under these terminated plans, although shares under options that are
canceled under the 1988 and 1989 plans will be added to shares available for
future option grants under the 1993 Stock Plan. Under the 1988 and 1989 stock
option plans, an optionee may exercise part or all of the options prior to the
stated vesting date, but in the event of the
ParcPlace-Digitalk, Inc.
19
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
termination of employment or consulting services, unvested shares may be
repurchased by the Company at the original purchase price.
Under the 1993 Stock Plan, the vesting and exercise provisions of option grants
are determined by the Board of Directors. As of March 31, 1997, the 1993 Stock
Plan provides for the issuance of incentive stock options and nonqualified stock
options to purchase up to 2,221,206 shares of common stock. In May 1997, the
Board of Directors approved an additional 300,000 shares for this plan. There
were 683,682 shares available for option grants under this plan at March 31,
1997, not including the 300,000 additional shares approved in May.
Under the 1995 Director Stock Option Plan, options are automatically granted to
non-employee Directors. The Director Stock Option Plan provides for the issuance
of nonqualified stock options to purchase up to 200,000 shares of common stock.
There were 112,000 shares available for option grants under this plan at March
31, 1997.
Generally, options granted under the plans vest over a four-year period, subject
to continued service to the Company, although certain grants under the 1995
Director Stock Option Plan vest over a longer period.
Activity under these stock option plans is as set forth below. Options assumed
in the Digitalk merger are included as historically granted, adjusted for the
exchange ratio for the merger. Options assumed in the Objectshare acquisition
are included as assumed in fiscal 1997, adjusted for the exchange ratio for that
merger.
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------
Number of Weighted-
Shares Average
(In Price Price
thousands) Per Share Per Share
- ------------------------------------------------------
<S> <C> <C> <C>
Balance at March 31,
1994 1,808 $0.17--$23.25 $ 2.89
Granted 747 $4.32--$22.75 $ 17.58
Canceled (204) $0.22--$22.00 $ 7.32
Exercised (386) $0.17--$15.50 $ 1.00
---------
Balance at March 31,
1995 1,965 $0.17--$23.25 $ 8.39
Granted 1,781 $6.88--$13.50 $ 9.75
Canceled (959) $0.22--$23.25 $ 14.36
Exercised (319) $0.17--$10.00 $ 1.78
---------
Balance at March 31,
1996 2,468 $0.22--$22.50 $ 7.90
Granted 2,198 $1.50--$13.81 $ 3.97
Assumed
(acquisition) 104 $ 3.21 $ 3.21
Canceled (2,277) $0.22--$22.50 $ 8.10
Exercised (196) $0.22--$ 9.88 $ 3.58
---------
BALANCE AT MARCH 31,
1997 2,297 $0.44--$18.25 $ 4.09
=========
</TABLE>
At March 31, 1997, an aggregate of 3,092,397 shares were reserved for future
issuance under the plans, including 2,296,725 shares subject to outstanding
options and 795,672 available for grant, and not including the 300,000
additional shares approved for the 1993 Stock Plan in May 1997. At March 31,
1997, options to purchase 898,206 shares were exercisable.
In May 1995 and July 1996, the Board of Directors approved stock option
repricing programs pursuant to which employees of the Company (excluding all
executive officers) could elect to exchange their then outstanding employee
stock options for new employee stock options having an exercise price per share
equal to the then fair market value of the common stock, with exercisability
generally prohibited for six months after the exchange. Under the May 1995
repricing, 417,838 options with exercise prices ranging from $10.00 to $22.75
per share were exchanged for options with an exercise price of $9.625 per share.
Under the July 1996 repricing, 747,098 options with exercise prices ranging from
$4.875 to $18.25 per share were exchanged for options with an exercise price of
$4.375 per share. The exchange of all such options is included in grants and
cancellations.
ParcPlace-Digitalk, Inc.
20
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK PURCHASE PLAN
The Company's 1993 Employee Stock Purchase Plan allows eligible employees,
through payroll deductions, to purchase shares of the Company's stock at the
lower of 85% of the fair market value of the stock on the first or last day of a
six-month offering period or such other offering period determined by the Board
of Directors. The plan provides for the issuance of up to 700,000 shares of the
Company's common stock. In fiscal 1997, 1996 and 1995, the Company issued
200,867, 119,042 and 79,261 shares, respectively, under the plan. At March 31,
1997, 399,170 cumulative shares have been issued under the plan.
PRO FORMA INFORMATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-based
Compensation" ("FAS 123") requires use of option valuation models that were not
developed for use in valuing employee stock options and employee stock purchase
plans. Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of the
grant, no compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is required by
FAS 123, and has been determined as if the Company had accounted for its
employee stock purchase plan and employee stock options granted subsequent to
March 31, 1995 under the fair value method of FAS 123. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model for the single option approach with the following assumptions for 1997 and
1996: risk-free interest rate of 7%, volatility factor of the expected market
price of the Company's common stock of 0.9, an expected life of the option of 3
years from the vesting date, and a dividend yield of zero.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options and employee stock purchase plan have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of the Company's
employee stock options and the employee stock purchase plan.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to pro forma net loss over the options' vesting period. The
Company's historical and pro forma information follows (in thousands, except for
net loss per share information):
<TABLE>
<CAPTION>
(In thousands, except per share
data) Year ended March 31,
- ------------------------------------------------------
1997 1996
-------- --------
<S> <C> <C>
Net Loss
Historical $(22,480) $(10,396)
Pro Forma $(24,496) $(12,615)
Net Loss per share
Historical $ (1.91) $ (0.98)
Pro Forma $ (2.08) $ (1.18)
</TABLE>
Because compensation expense is recognized over the vesting period of the
options and because pro forma disclosure is only required commencing with fiscal
1996, the initial effect on pro forma net loss may not be representative of the
effect in future years.
ParcPlace-Digitalk, Inc.
21
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the Company's stock options
outstanding at March 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------------
Number Weighted-Average Weighted- Number Weighted-
Outstanding Remaining Average Exercisable Average
Range of Exercise Price at 3/31/97 Contractual Life Exercise Price at 3/31/97 Exercise Price
- ------------------------ ------------ ---------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$0.44 320,248 5.05 $ 0.44 320,248 $ 0.44
$0.80--$ 1.75 20,262 9.13 $ 1.50 3,762 $ 0.80
$1.81 468,300 9.82 $ 1.81 -- $ --
$2.00--$ 2.75 248,110 8.94 $ 2.52 20,193 $ 2.19
$2.81--$ 4.32 212,862 6.89 $ 3.69 145,336 $ 3.84
$4.37 441,761 8.15 $ 4.38 209,894 $ 4.37
$4.50--$ 4.69 233,500 9.43 $ 4.51 2,387 $ 4.50
$4.87--$10.00 247,682 8.03 $ 8.95 164,263 $ 9.25
$11.50 20,000 8.42 $11.50 9,166 $11.50
$18.25 84,000 7.56 $18.25 22,957 $18.25
--------- -------
$0.44--$18.25 2,296,725 8.13 $ 4.09 898,206 $ 4.14
========= =======
</TABLE>
5. Retirement Plan
The Company has a defined contribution 401(k) plan covering substantially all of
its employees. Participants may elect to contribute up to 20% of their
compensation to this plan (up to the statutory maximum amount). The Company can
make discretionary contributions to the plan determined solely by the Board of
Directors. The Company has made no contributions to the plan to date.
6. Income Taxes
The provisions for income taxes are as follows:
<TABLE>
<CAPTION>
(In thousands) Year ended March 31,
- ------------------------------------------------------
1997 1996 1995
---- ---- ------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ 440
State 40 47 572
Foreign 55 55 66
---- ----
Total $ 95 $102 $1,078
==== ====
</TABLE>
A reconciliation of income tax provision at the U.S. federal statutory rate
(34%) to the income tax provision at the effective tax rate is as follows:
<TABLE>
<CAPTION>
(In thousands) Year ended March 31,
- -----------------------------------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Income taxes computed at
the federal statutory
rate $(7,600) $(3,500) $1,918
Operating losses
(utilized) not utilized 6,405 3,500 (369)
Acquired research and
development costs with
no tax basis 1,195 -- --
State taxes, net of
federal benefit 40 47 442
Valuation of temporary
differences -- -- (803)
Foreign income and
withholding taxes 55 55 66
Research activity credits
utilized -- -- (218)
Alternative minimum tax -- -- 42
------- ------- ------
$ 95 $ 102 $1,078
======= ======= ======
</TABLE>
As of March 31, 1997, the Company has federal and state net operating loss
carryforwards of approximately $29,900,000 and $11,800,000, respectively, that
will expire in the fiscal years 1998 through 2012. The Company also has federal
and state research and experimentation credits of approximately $1,200,000 and
$700,000, respectively, that will expire in the fiscal years 2003 through 2012.
In addition, the Company has a federal foreign tax credit carryforward of
approximately $243,000 that will expire in the fiscal years 1999 through 2002.
Finally, the Company also has federal alternative
ParcPlace-Digitalk, Inc.
22
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minimum tax credit carry forwards of approximately $60,000 that do not expire.
Utilization of these net operating losses and credits may be subject to an
annual limitation due to ownership change constraints provided by the Internal
Revenue Code of 1986 and similar state tax provisions. The annual limitation, if
any, would be immaterial.
Significant components of the Company's deferred income taxes consist of the
following:
<TABLE>
<CAPTION>
(In thousands) March 31,
- ------------------------------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards $ 10,887 $ 2,531 $ 1,182
Allowances for sales
returns 388 388 109
Research credit
carryforwards 1,661 1,623 1,319
Foreign tax credit 243 188 149
Accrued vacation pay 270 270 171
Capitalized research and
development costs -- 45 91
Other individually
immaterial items 331 547 507
------- ------- -------
Total deferred tax assets 13,780 5,592 3,528
Valuation allowance (13,780) (5,592) (3,528)
------- ------- -------
Net deferred tax assets $ -- $ -- $ --
======= ======= =======
</TABLE>
Approximately $700,000 of the deferred tax asset described above (and a similar
amount of valuation allowance) relates to tax benefits of stock option exercises
that may be realized in future years. When realized, these benefits will be
allocated to paid-in capital.
Under Statement of Financial Accounting Standards No. 109, deferred tax assets
and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company has provided a full valuation allowance against
its deferred tax assets due to uncertainties surrounding their realization
resulting from the Company's recent history of operating losses.
The income before provision for income taxes provided by foreign operations was
not material for any period presented. The undistributed earnings of the
Company's foreign subsidiaries was not material at March 31, 1997.
7. Business Combinations
On August 30, 1995, the Company, formerly ParcPlace Systems, Inc. (ParcPlace),
merged with Digitalk, Inc. The merger was accounted for as a pooling of
interests. The Company exchanged 3,499,416 shares of its common stock for all
issued and outstanding shares of Digitalk. In addition, all outstanding options
to purchase Digitalk common stock were assumed by the Company. The aggregate
number of shares issuable upon exercise of such options was 300,584 shares of
the Company's common stock.
The historical consolidated financial statements of the Company for prior
periods have been restated to include the financial position and results of
operations of Digitalk. Components of the consolidated results of operations of
ParcPlace and Digitalk for fiscal 1995 are as follows:
<TABLE>
<CAPTION>
Year ended
March 31,
(In thousands) 1995
- ------------------------------------------------------
<S> <C>
Revenues
ParcPlace $ 39,066
Digitalk 16,602
-------
Total $ 55,668
=======
Net income
ParcPlace $ 3,811
Digitalk 753
-------
Total $ 4,564
=======
</TABLE>
Net revenue and net loss of Digitalk for the period from April 1, 1995 through
August 30, 1995, were approximately $5,300,000 and $(1,394,000), respectively.
Merger-related expenses totaling $5,092,000 are included in the Company's
results of operations for fiscal 1996. As of March 31, 1997 all the merger
related expenses have been paid.
On February 29, 1996, the Company acquired all the assets of AMiGO S.A, a
French-based distributor of the Company's VisualWorks product. The Company made
an initial payment of $688,000 and will be required to make additional payments
of up to $150,000 based on a percentage of the distributor's fiscal revenues
exceeding $1,600,000. The acquisition was accounted for as a purchase. Most of
the purchase price, which includes transaction costs, has been allocated to
intangible assets (included in other assets), which are being amortized over
four years. The results of operations of AMiGO, which have not been material in
relation to those of the
ParcPlace-Digitalk, Inc.
23
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company, are included in the consolidated results of operations for periods
subsequent to the acquisition date.
On July 31, 1996, the Company acquired Objectshare Systems, Inc. (OSI), a
privately held corporation which developed and marketed add-on products for
Smalltalk tools. 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 the Company's common stock. In connection with the
acquisition, the Company recorded intangible assets of $363,000 and charged to
operations $2.9 million for acquired research and development. In connection
with the restructuring of operations (see Note 9), the Company charged to
operations the unamortized portion of the intangible assets. The operating
results of OSI have been included in the Company's consolidated results of
operations from the date of acquisition.
On October 1, 1996, the Company acquired Polymorphic Software, Inc. (PSI), a
privately held corporation which developed and marketed Smalltalk tools and
provided related consulting services. 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 recorded intangible assets of
$403,000 and charged to operations $646,000 for acquired research and
development. In connection with the restructuring of operations (see Note 9),
the Company charged to operations the unamortized portion of the intangible
assets.
8. Litigation
During the quarter ended December 31, 1996, the Company and its insurers agreed
to settle a 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. Under the terms of the
settlement, a settlement fund of $3.1 million was established, of which
$2,850,000 was paid by the Company's insurers and $250,000 was paid by the
Company. The amount paid by the Company is included in interest and other income
(expense) in the consolidated statements of operations. The settlement was
approved by the court in March of 1997.
9. Restructuring Charges and Merger
Related Expenses
Restructuring and merger related expenses reflect charges recorded in connection
with the restructuring of operations in the third and fourth 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 (see Note
7). In the restructurings, the Company reduced its total headcount by an
aggregate of approximately 130 people, including employees and contractors.
These actions were taken in an effort to reduce the Company's ongoing operating
expenses. The Company recorded restructuring charges in the third and fourth
quarters of fiscal 1997 of approximately $2.2 million and $3.0 million,
respectively, to cover severance benefits, the closing of excess facilities,
write-down of acquired intangible assets related to discontinued products, and
the write-down of excess computer equipment and office furniture. The aggregate
savings in operating expenses attributable to the restructurings is estimated to
be $3.3 million per quarter, although not all of such savings will be
immediately recognizable and such savings may be offset, in part or in their
entirety, by other changes in the Company's operations.
The restructuring charges and related liabilities are summarized below:
<TABLE>
<CAPTION>
Accrued
Write-downs and Restructuring
Payments Costs at
Restructuring through March 31,
(in thousands) Costs March 31, 1997 1997
- ------------------------------------------------------
<S> <C> <C> <C>
Severance
benefits $ 1,994 $ 1,991 $ 3
Closing of
excess
facilities 863 29 834
Intangible
assets
write-down 764 764 --
Equipment and
furniture
write-down 719 719 --
Other 822 592 230
------ ------ ------
$ 5,162 $ 4,095 $ 1,067
====== ====== ======
</TABLE>
The Company expects the remaining $1.1 million accrued balance at March 31,
1997, will result in cash expendi-
ParcPlace-Digitalk, Inc.
24
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tures of approximately $800,000 over the next twelve months and approximately
$300,000 for lease payments for closed facilities in the following year. Such
payments will be financed through current working capital.
10. Industry and Geographic
Information
The Company markets its products in the United States and in foreign countries
through its sales personnel, dealers, distributors, and its subsidiaries. Export
sales account for a significant portion of the Company's net revenues and are
summarized as a percentage of net sales by geographic areas as follows:
<TABLE>
<CAPTION>
Year ended March 31,
- ----------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
United States 68% 69% 85%
Export:
Europe 20 16 9
Other international 12 15 6
---- ---- ----
Total 100% 100% 100%
==== ==== ====
</TABLE>
ParcPlace-Digitalk, Inc.
25
<PAGE> 26
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1st 2nd 3rd 4th Total
(In thousands, except per share data) Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL 1997:
NET REVENUES $ 11,548 $ 10,427 $ 8,089 $ 7,222 $ 37,286
GROSS PROFIT $ 7,212 $ 5,525 $ 4,451 $ 4,182 $ 21,370
LOSS FROM OPERATIONS(1) $ (3,322) $ (7,884) $ (6,789) $ (5,115) $(23,110)
NET LOSS PER SHARE $ (0.26) $ (0.65) $ (0.59) $ (0.41) $ (1.91)
SHARES USED IN COMPUTING NET LOSS PER SHARE 11,600 11,775 11,800 11,900 11,775
Fiscal 1996:
Net revenues $ 10,946 $ 10,346 $ 13,572 $ 14,746 $ 49,610
Gross profit $ 6,491 $ 6,193 $ 9,386 $ 10,615 $ 32,685
Income (loss) from operations(2) $ (3,159) $ (8,249) $ (250) $ 61 $(11,597)
Net income (loss) $ (2,152) $ (8,616) $ 64 $ 308 $(10,396)
Net income (loss) per share $ (0.23) $ (0.84) $ 0.01 $ 0.03 $ (0.98)
Shares used in computing net income (loss)
per share 9,850 10,350 11,500 11,625 10,725
</TABLE>
- ---------------
(1) The third and fourth quarter of fiscal 1997 included $2,182,000 and
$2,980,000, respectively, of restructuring costs as described in Note 9 to
the consolidated financial statements. The second and third quarter of
fiscal 1997 included $2,867,000 and $646,000, respectively, of charges for
acquired research and development as described in Note 7 to the consolidated
financial statements.
(2) The second quarter of fiscal 1996 included $5,092,000 of merger-related
expenses as described in Note 7 to the consolidated financial statements.
ParcPlace-Digitalk, Inc.
26
<PAGE> 27
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ParcPlace-Digitalk, Inc.
We have audited the accompanying consolidated balance sheets of
ParcPlace-Digitalk, Inc. as of March 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. In May 1995, the Company merged with Digitalk, Inc., in a
transaction which was accounted for as a pooling of interests. We did not audit
the financial statements of Digitalk, Inc., for the year ended March 31, 1995,
which statements reflect total revenues constituting 30% of the consolidated
financial statement totals for that year. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for Digitalk, Inc., is based solely on the report of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of ParcPlace-Digitalk,
Inc., at March 31, 1997 and 1996, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended March 31,
1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
April 23, 1997,
except for Note 1,
as to which the date is
June 26, 1997
ParcPlace-Digitalk, Inc.
27
<PAGE> 28
DIRECTORS
James C. Anderson,
CEO of Urlysoft Company
John B. Carrington
CEO of Artios, Inc.
Eugene L. Goda,
President, CEO and Chairman of the Board
of Directors of the Company
Jos C. Henkens
General Partner, Advanced Technology Ventures
Philip C. Kantz,
President and CEO of Tab Products, Inc.
EXECUTIVE OFFICERS
Eugene L. Goda,
President, CEO and Chairman of the Board
of Directors
Ronald J. Clear,
Chief Financial Officer
Richard H. Dym,
Vice President of Marketing
Steven G. Harris,
Vice President of Development
James H. Smith,
Vice President of Worldwide Sales
CORPORATE HEADQUARTERS
ParcPlace-Digitalk, Inc.
999 East Arques Avenue
Sunnyvale, CA 94086
Phone 408-481-9090
TRANSFER AGENT
Harris Trust & Savings Bank
P.O. Box A3504
Chicago, IL 60690-3504
Phone 800-554-3406
LEGAL COUNSEL
Wilson, Sonsini, Goodrich & Rosati
Palo Alto, CA
INDEPENDENT AUDITORS
Ernst & Young LLP
San Jose, CA
INVESTOR RELATIONS
For more information, call ParcPlace Investor Relations at 408-720-7539
SEC FORM 10-K
A copy of the Company's Form 10-K is available without charge. To obtain a copy,
write to:
Investor Relations
ParcPlace-Digitalk, Inc.
999 East Arques Avenue
Sunnyvale, California 94086
STOCK AND DIVIDEND INFORMATION
The Company's Common Stock trades on the Nasdaq National Market under the symbol
"PARQ". The following table sets forth for the periods indicated the high and
low sale prices of the Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
- -------------------------------------------------
<S> <C> <C>
Fiscal 1996
First Quarter $15 1/4 $8
Second Quarter $12 1/2 $7 7/8
Third Quarter $12 3/8 $6 5/8
Fourth Quarter $11 1/4 $7 1/2
Fiscal 1997
First Quarter $14 5/8 $8
Second Quarter $ 9 3/8 $3 5/8
Third Quarter $ 4 $2 1/4
Fourth Quarter $ 2 1/2 $1 3/16
</TABLE>
- ------------------------------------------------------
The Company has not paid any dividends since its inception and does not intend
to pay any dividends in the foreseeable future.
At March 31, 1997, there were approximately 280 stockholders of record and an
estimated 3,000 beneficial stockholders of the Company.
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements within the meaning of the
federal securities laws. The Company's actual results could differ materially
from the results anticipated in these forward-looking statements as a result of
the factors set forth under the caption "Business Risks" in "Management's
Discussion and Analysis of Financial Conditions and Results of Operations."
ParcPlace-Digitalk, Inc.
28
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF PARCPLACE-DIGITALK, INC.
ParcPlace Systems GmbH (Germany)
ParcPlace-Digitalk (UK) Limited (England)
ParcPlace Systems FSC, Inc. (Barbados)
ParcPlace-Digitalk S.A. (France)
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of ParcPlace-Digitalk, Inc. of our report dated April 23, 1997,
included in the 1997 Annual Report to Stockholders of ParcPlace-Digitalk, Inc.
Our audits also included the financial statement schedule of
ParcPlace-Digitalk, Inc. listed in Item 14(a). This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 333-09807, No. 333-20779, No. 33-96616, and No.
33-78542) pertaining to the 1995 Stock Option / Stock Issuance Plan ( of
Objectshare Systems, Inc. ), 1993 Stock Plan and 1993 Employee Stock Purchase
Plan of ParcPlace-Digitalk, Inc., 1988 Incentive Stock Option Plan, the 1989
Stock Option Plan, the 1992 Incentive and Nonstatutory Stock Option Plan, and
the 1995 Director Stock Option Plan of ParcPlace-Digitalk, Inc. of our report
dated April 23, 1997, with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K) of ParcPlace-Digitalk, Inc.
/s/ ERNST & YOUNG LLP
San Jose, California
June 30, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-K FOR THE PERIOD ENDING
MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 7,418
<SECURITIES> 7,038
<RECEIVABLES> 7,895
<ALLOWANCES> 2,309
<INVENTORY> 220
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0
0
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</TABLE>
