<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
---------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
COMMISSION FILE NUMBER 0-25472
VIASOFT, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2892506
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3033 NORTH 44TH STREET, PHOENIX, ARIZONA 85018
(Address of principal executive offices) (Zip Code)
(602) 952-0050
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of April 30, 1997, there were 17,665,160 outstanding shares of Common Stock,
par value $.001 per share, of VIASOFT, Inc.
<PAGE> 2
VIASOFT, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheets as of March 31, 1997
and June 30, 1996 3
Statements of Operations for the three
and nine months ended March 31, 1997 and 1996 4
Statements of Cash Flows for the nine
months ended March 31, 1997 and 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Consolidated Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
<PAGE> 3
VIASOFT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,442 $ 5,009
Investments, at amortized cost 6,643 23,795
Accounts receivable (less allowance for doubtful accounts
of $418 and $279, respectively) 21,296 13,335
Prepaid expenses and other 1,666 1,130
-------- --------
Total current assets 37,047 43,269
Furniture and equipment:
Computer equipment 4,364 2,692
Office furniture and equipment 2,762 1,905
Capitalized leased equipment 285 264
-------- --------
Total furniture and equipment 7,411 4,861
Less: Accumulated depreciation (3,588) (2,895)
-------- --------
Furniture and equipment, net 3,823 1,966
-------- --------
Other assets:
Investments, at amortized cost 8,354 --
Intangible assets, net (Note 2) 4,908 --
Other assets 3,869 1,356
-------- --------
Total other assets 17,131 1,356
-------- --------
Total assets $ 58,001 $ 46,591
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,276 $ 1,456
Accrued compensation 2,749 1,491
Accrued income taxes payable 3,189 1,824
Other accrued expenses 7,284 3,100
Deferred revenue 19,304 9,985
Current maturities of obligations under capital leases -- 25
-------- --------
Total current liabilities 33,802 17,881
-------- --------
Deferred revenue, recognized after one year 265 298
Obligations under capital leases, less current maturities -- 18
Other long term liabilities 212 135
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares authorized,
no shares issued or outstanding -- --
Common stock, $.001 par value, 24,000,000 shares authorized,
17,458,181 and 16,718,556 shares issued and outstanding at
March 31, 1997 and June 30, 1996, respectively 17 17
Capital in excess of par value 42,727 27,771
Common stock subscriptions receivable (55) (59)
Accumulated deficit (18,971) 506
Cumulative translation adjustment 4 24
-------- --------
Total stockholders' equity 23,722 28,259
-------- --------
Total liabilities and stockholders' equity $ 58,001 $ 46,591
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE> 4
VIASOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Software license fees $ 11,380 $ 3,977 $ 24,475 $ 12,253
Maintenance fees 5,716 3,608 14,616 10,487
Professional services fees 6,765 2,748 18,440 6,223
Other 40 28 129 95
-------- -------- -------- --------
Total revenues 23,901 10,361 57,660 29,058
-------- -------- -------- --------
Operating expenses:
Cost of software license and
maintenance fees 1,221 683 2,798 2,139
Cost of professional services fees 5,009 1,833 13,479 4,812
Sales and marketing 8,626 4,271 20,946 12,136
Research and development 2,210 1,030 5,062 3,075
Write-off of purchased in-process
research and development -- -- 26,958 --
General and administrative 1,862 1,174 4,482 2,699
-------- -------- -------- --------
Total operating expenses 18,928 8,991 73,725 24,861
-------- -------- -------- --------
Income (loss) from operations 4,973 1,370 (16,065) 4,197
-------- -------- -------- --------
Other income (expense):
Interest income 249 378 979 1,005
Interest expense 9 (4) (44) (9)
Other income (expense), net (422) (42) (429) (45)
-------- -------- -------- --------
Total other income (expense) (164) 332 506 951
-------- -------- -------- --------
Income (loss) before income taxes 4,809 1,702 (15,559) 5,148
Provision for income taxes 1,661 432 3,921 1,297
-------- -------- -------- --------
Net income (loss) $ 3,148 $ 1,270 $(19,480) $ 3,851
======== ======== ======== ========
Earnings (loss) per common and
common share equivalent $ 0.17 $ 0.07 $ (1.14) $ 0.22
======== ======== ======== ========
Weighted average number of common
and common share equivalents
outstanding 18,337 17,278 17,149 17,220
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 5
VIASOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(19,480) $ 3,851
-------- --------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Write off in-process research and development (Note 2) 26,958 --
Depreciation and amortization 1,183 506
Loss on disposal of fixed assets 94 7
Compensation expense related to stock plans -- 202
Changes in operating assets and liabilities, net of effect of business acquired
(Note 2)
Increase in accounts receivable (3,289) (1,386)
(Increase) decrease in prepaid expenses and other (242) 97
Increase in accrued income taxes payable 2,564 609
Increase (decrease) in accounts payable and other accrued expenses (4,434) 1,056
Increase in accrued compensation 1,258 221
Increase in deposits and other (2,528) (62)
Increase in deferred revenue 7,118 818
-------- --------
Total adjustments 28,682 2,068
-------- --------
Net cash provided by operating activities 9,202 5,919
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (1,935) (676)
Cash paid for business acquired, net of cash acquired (Note 2) (10,225) --
Purchase of investments (22,292) (34,219)
Investment maturities 30,923 25,675
-------- --------
Net cash used in investing activities (3,529) (9,220)
-------- --------
FINANCING ACTIVITIES:
Payments of short term debt (Note 2) (4,099) --
Principal payments under equipment lease obligations (43) (80)
Proceeds from issuance of common stock 952 616
Purchase of treasury stock -- (28)
Payments received on common stock subscriptions receivable 5 199
-------- --------
Net cash provided by (used in) financing activities (3,185) 707
-------- --------
Effect of exchange rate changes on cash (55) (9)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,433 (2,603)
Cash and cash equivalents, beginning period 5,009 7,680
-------- --------
Cash and cash equivalents, end of period $ 7,442 $ 5,077
======== ========
Supplemental cash flow information:
Interest paid $ 3 $ 9
Income taxes paid 1,342 383
Income tax benefit related to stock plans 1,199 --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 6
VIASOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated Financial Statements include the accounts of VIASOFT, Inc.
and its wholly owned subsidiaries (the "Company") after elimination of all
significant intercompany balances and transactions. The accompanying unaudited
Consolidated Financial Statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q. Accordingly, they do not include all the
information and footnotes required by Generally Accepted Accounting Principles
("GAAP") for complete financial statements. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary for a
fair presentation of the results for the interim periods presented have been
made. The results for the three month or nine month periods ended March 31, 1997
may not necessarily be indicative of the results for the entire year. These
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended June 30, 1996.
Cash and Cash Equivalents and Investments
The Company's policy is to invest cash in excess of operating requirements in
income-producing investments. Temporary cash investments are all highly liquid
investments with maturities of three months or less when purchased and are
considered to be cash equivalents for statement of cash flows purposes.
Investments in commercial paper, banker's acceptances, government-backed
securities, and US Treasury bills, all of which are stated at amortized cost and
approximate fair market value, are classified as "held-to-maturity" in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). Certain
securities were sold prior to maturity in conjunction with the acquisition of
Rottger & Osterberg Software-Technik GmbH ("R&O") (see discussion below) but
were still considered as "held-to-maturity" securities in accordance with SFAS
No. 115.
Earnings (Loss) per Common Share and Common Share Equivalent
Earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of common and common share equivalents assumed
outstanding during the period. Shares issuable upon the exercise of employee
stock options that are considered anti-dilutive are not included in the weighted
average number of common and common share equivalents outstanding. Primary and
fully diluted earnings (loss) per share are considered to be the same in all
periods presented.
On August 16, 1996, the Company's Board of Directors approved a two-for-one
stock split of its outstanding common stock, to be effected in the form of a
stock dividend. Each holder of shares of the Company's common stock of record on
August 30, 1996 received one additional share of common stock for every one
share held. All share and per share information presented in these financial
statements reflects the retroactive effect of this stock dividend.
Recently Issued Accounting Standards
In February, 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" ("SFAS No. 128"), which supersedes Accounting
Principal Board Opinion 15, the existing authoritative guidance. SFAS No. 128
is effective for financial statements for both interim and annual periods
ending after December 15, 1997 and requires restatement of all prior-period EPS
data presented. The new statement modifies the calculations of primary and
fully diluted EPS and replaces them with basic and diluted EPS. The following
table sets forth the proforma effect on net income per common share for the
three and nine months ended March 31, 1997 and 1996, respectively, assuming the
Company had adopted SFAS No. 128 on July 1, 1995:
6
<PAGE> 7
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
1997 1996 1997 1996
------ ------ ------ -----
<S> <C> <C> <C> <C>
Basic .18 .08 (1.14) .24
Diluted .17 .07 (1.14) .22
</TABLE>
2. ACQUISITION
On December 5, 1996, the Company acquired all of the outstanding shares of
capital stock of R&O for cash, common stock and the assumption of certain
liabilities pursuant to a stock purchase agreement with the stockholders of R&O.
R&O develops, markets and supports repository software tools through its Rochade
product line, together with related repository-based services and solutions. R&O
was founded in 1976, is headquartered in Munich, Germany and has operations in
Europe and the United States. The aggregate cost of the R&O acquisition
consisted of the following (in thousands):
<TABLE>
<S> <C>
Cash $10,800
Common stock 12,805
Assumption of liabilities and acquisition costs 13,200
Contingent consideration 2,000
-------
Total $38,805
=======
</TABLE>
The Company issued 425,112 unregistered shares of its Common Stock pursuant
to Regulation S in connection with this transaction, subject to certain
restrictions imposed under the stock purchase agreement and applicable
securities laws. Additional consideration of $2.0 million was paid to the former
stockholders of R&O in February 1997 for meeting certain performance criteria.
The Company has also committed to pay additional cash consideration of $2.0
million (or, at each former R&O stockholder's election, additional shares of
Common Stock with an equivalent market value) if certain financial performance
criteria are met for the period from January 1, 1997 through June 30, 1997. Any
contingent consideration earned was and/or will be reflected as an adjustment to
cost in excess of net assets acquired when earned.
The acquisition has been accounted for as a purchase in accordance with
Accounting Principles Board Opinion Nos. 16 and 17 and, accordingly, the
purchased assets and assumed liabilities were recorded at their estimated fair
values at the acquisition date. The Company received an appraisal of the
intangible assets which indicated that approximately $27.0 million of the
acquired intangible assets was in-process research and development that had not
yet reached technological feasibility. Because there can be no assurance that
the Company will be able to successfully complete the development and
integration of the in-process research and development into its suite of
software products or that the acquired technology has any alternative future
use, the acquired in-process research and development was charged to expense by
the Company in its quarter ended December 31, 1996. At that time, in order to
bring the in-process software products to commercial availability the Company
estimated that it would need to spend an additional $2.6 million on product
integration and performance improvements. See "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations." The
Company allocated the aggregate cost of the acquisition as follows (in
thousands):
<TABLE>
<S> <C>
Accounts receivable $ 4,672
Other assets 1,956
In-process research and development 26,958
Purchased research and development 2,000
Other intangible assets 3,219
-------
$38,805
=======
</TABLE>
Other intangible assets consist of customer list ($900,000), assembled
workforce ($800,000) and cost in excess of net assets acquired ($1,519,000). The
customer list, assembled workforce and cost in excess of net assets acquired are
being amortized on a straight-line basis over eight, seven and five year
periods, respectively.
7
<PAGE> 8
The following unaudited pro forma combined condensed statements of operations
for the nine months ended March 31, 1997 and 1996 give effect to the R&O
acquisition as if it had been consummated as of the beginning of each respective
period:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Total revenues $63,613 $33,066
Income before income taxes 11,392 4,034
Net income 7,473 3,034
Earnings per share $ 0.41 $ 0.17
</TABLE>
The pro forma combined condensed statements of operations exclude the effect
of the approximate $27.0 million charge related to the write-off of purchased
in-process research and development. The unaudited pro forma combined financial
data is provided for illustrative purposes only and is not necessarily
indicative of the combined results of operations that would have been reported
had the R&O acquisition occurred on the dates indicated, nor does it purport to
project the results of operations of the Company for the current year or for any
future period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion contains forward looking statements that involve
risks and uncertainties. Such forward looking statements include, but are not
limited to, statements regarding future trends or events and the Company's plans
or expectations. The Company's actual results could differ materially from those
discussed herein. See "Special Note on Forward Looking Statements," below.
OVERVIEW
The Company derives its revenues primarily from software license fees,
software maintenance fees and professional services fees. The Company's software
is licensed and professional services are provided primarily to Global 5000
companies and similarly sized business and governmental organizations worldwide.
The Company's products and services are marketed through its United States sales
force, both domestically and in Canada and Latin America, and through foreign
subsidiaries and independent distributors in other international markets.
The Company licenses software products directly to customers and to
distributors for resale. Software license fees are recognized upon delivery and
acceptance of the software, receipt of an executed noncancellable license
agreement from the customer or the distributor's end-user and completion of any
significant remaining obligations under the agreement. Revenues from software
licensing related to the Company's obligation to provide certain customer
support are deferred and recognized straight-line over the contract support
period, which is generally one year. Software maintenance contracts are
generally renewable on an annual basis, although the Company also negotiates
long-term maintenance contracts from time to time. Revenues from maintenance
contract renewals are deferred and recognized straight-line over the term of the
contracts. Revenues from professional services fees are recognized as the
related services are provided.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996
Revenues. Total revenues were $23,901,000 for the three months ended March
31, 1997, an increase of approximately 131% from $10,361,000 for the three
months ended March 31, 1996. Software license fees were $11,380,000 for the
three months ended March 31, 1997, an increase of approximately 186% from
$3,977,000 for the three months ended March 31, 1996. Software license revenues
increased both domestically and internationally in the third quarter of fiscal
1997 compared to the same period in fiscal 1996. Domestic license fees continued
to increase as a result of the demand for the Company's tools to assist in
addressing the year 2000 century date conversion problem and to a lesser extent,
for our customer's on-going maintenance on and enhancement of their existing
systems. The increase in international software license fees was attributable
primarily to a 161% improvement in license fees from the Company's direct
operations, excluding R&O, over the same period in the prior year, due primarily
to sales of the Company's year 2000 solutions in the
8
<PAGE> 9
United Kingdom and continued growth in the German market. In addition, license
fees increased approximately $1,790,000 during the quarter due to the
acquisition of R&O. Maintenance fees were $5,716,000 for the third quarter of
fiscal 1997, an increase of 58% from $3,608,000 for the same period in fiscal
1996. The increase was a result of the R&O acquisition which contributed
$1,265,000 in maintenance revenue, as well as new software licenses, and, to a
lesser extent, customer system upgrades and increases in the fees charged for
annual maintenance. Professional services fees were $6,765,000 for the third
quarter of fiscal 1997, an increase of 146% from $2,748,000 for the same period
in fiscal 1996. The Company continued to expand its professional services
business to meet increasing demand for its solution offerings, principally
VIASOFT's Enterprise 2000(SM), and to a lesser extent the addition of R&O, which
contributed $482,000 in service fees for the quarter. VIASOFT's Enterprise 2000
solution offerings comprised 72% of the Company's professional services revenues
in the third quarter of fiscal 1997.
Cost of Revenues. Cost of software license and maintenance fees, which
includes royalties, cost of customer support and product packaging and
documentation, was $1,221,000 in the third quarter of fiscal 1997, an increase
of 79% from $683,000 in the same quarter of fiscal 1996. The increase was
primarily due to additional expenses of $546,000 related to R&O personnel and
costs. Without the R&O costs, these expenses would have decreased to $675,000
for the quarter. Gross margins on software license and maintenance fees improved
to 93% for the third quarter of fiscal 1997 from 91% for the same period in
fiscal 1996. The margin improvement is primarily due to an increased percentage
of software sales and economies of scale in the customer support area.
Cost of professional services fees consists principally of personnel costs,
third party subcontracting fees and other costs related to the professional
services business. The cost of professional services fees was $5,009,000 for the
three months ended March 31, 1997, an increase of approximately 173% from
$1,833,000 for the three months ended March 31, 1996. Expenses incurred for R&O
professional services were $700,000. Excluding these R&O expenses, professional
services expenses increased by 135%. This increase in expenses is a result of
additional personnel hired and their related costs as well as third-party costs
to deliver the Company's solutions in response to increased customer demand,
both domestically and internationally. The gross margin on professional services
fees, excluding R&O declined to 31% in the third quarter of fiscal 1997 compared
to 33% for the same period in fiscal 1996. This margin decline is primarily a
result of VIASOFT's Operation 2000 projects, which are lower margin services,
making up a higher percentage of the third quarter professional services revenue
in fiscal 1997 compared to fiscal 1996. Overall, the Company expects a decrease
in professional services margins as it continues to integrate the R&O
professional services organization with its own operations.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related benefits, and administrative costs allocated
to the Company's sales and marketing personnel. Sales and marketing expenses
were $8,626,000 in the third quarter of fiscal 1997, an increase of
approximately 102% from $4,271,000 in the same period of fiscal 1996. The
addition of R&O accounted for $1,432,000 of this increase. Without the R&O
expense, the percentage increase in sales and marketing expenses was 68%. The
increase is attributable primarily to an increase in personnel and associated
costs including additional salaries, bonuses and travel costs, as well as
general salary increases, increased commissions as a result of revenue growth,
and increased marketing costs. Sales and marketing expenses as a percentage of
total revenues declined to 36% in the third quarter of fiscal 1997, compared to
41% in the third quarter of fiscal 1996, due primarily to the increase in
revenues.
Research and Development. Research and development expenditures consist
primarily of personnel costs of the research and development staff, third party
development costs, and the facilities, computing, benefits and other
administrative costs allocated to the research and development staff. The
Company continues to invest resources in updating its existing and acquired
products through enhancements and new releases, developing new products, and
adding to its product offerings through acquisition of new products and computer
language functionality. Total expenditures for research and development were
$2,210,000 for the three months ended March 31, 1997, an increase of 115% from
$1,030,000 for the three months ended March 31, 1996. Research and development
expense for the third quarter, excluding R&O's research and development costs of
$445,000, increased 71%. The increase in expenses is a result of general salary
increases, additional personnel, and third party development costs. As a
percentage of revenue, research and development costs decreased to 9% for the
third quarter of fiscal 1997 compared to 10% for the same quarter in fiscal
1996, primarily due to the increase in revenues. The Company anticipates that it
will continue to expand its research and development efforts in the future.
9
<PAGE> 10
General and Administrative. General and administrative expenses include the
costs of finance and accounting, human resources, legal services, corporate
information systems and other administrative functions of the Company. General
and administrative expenses were $1,862,000 in the third quarter of fiscal 1997,
representing an increase of 59% compared to $1,174,000 in the same period of
fiscal 1996. Excluding R&O administrative costs of $666,000 for the third
quarter of fiscal 1997 and a one time charge of $350,000 for the same period in
fiscal 1996 related to the change in the Chief Financial Officer position, this
increase was 45%. This increase was primarily due to additional legal fees and
administrative personnel and their related costs, general salary increases, and
additional bonuses. As a percentage of total revenues, general and
administrative expenses decreased to 8% for the third quarter of fiscal 1997
from 11% for the third quarter of fiscal 1996, primarily due to increased
revenues.
Other Income (Expense). Interest income in the third quarter of fiscal 1997
was $249,000, compared to $378,000 in the third quarter of fiscal 1996. This
decrease was due primarily to a decrease in average funds available for short
term investment as a result of cash paid in the R&O acquisition. Other expense
for the quarter was $422,000 compared to $42,000 in fiscal 1996. This was
primarily a result of exchange losses on transactions with the Company's
subsidiaries in Germany and the United Kingdom, which are valued in their local
currencies, as well as certain transactions with its Italian distributor which
are valued in lira. During the quarter, the dollar posted strong gains against
most European currencies.
Provision for Income Taxes. The provision for income taxes was $1,661,000 and
$432,000 in the third quarter of fiscal 1997 and 1996, respectively. The
Company's effective tax rate was 34.5% in the third quarter of fiscal 1997,
compared to 25% in the third quarter of fiscal 1996. The Company's effective tax
rate was affected by the availability of net operating loss carryforwards, which
were fully utilized in fiscal 1996, and certain tax credit carryforwards, which
were mostly utilized in fiscal 1996.
COMPARISON OF NINE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996
Revenues. Total revenues were $57,660,000 for the nine months ended March 31,
1997, an increase of approximately 98% from $29,058,000 for the nine months
ended March 31, 1996. Software license fees were $24,475,000 for the nine months
ended March 31, 1997, an increase of approximately 100% from $12,253,000 for the
nine months ended March 31, 1996. Software license fees increased both
domestically and internationally. Domestic license fees continued to increase as
a result of the demand for the Company's tools to assist in addressing the year
2000 century date change problem. The increase in international software license
fees was attributable primarily to a 239% improvement in license fees from the
Company's direct operations over the same period in the prior year, due
primarily to sales of the Company's year 2000 solutions in the United Kingdom
and growth of the German operations. In addition, license fees increased due to
the acquisition of R&O, which contributed license fees of $2,946,000.
Maintenance fees were $14,616,000 for the first nine months of fiscal 1997, an
increase of 39% from $10,487,000 for the same period in fiscal 1996. The
increase was due in part to the R&O acquisition, which contributed $1,784,000 in
maintenance revenue, with the remainder attributable to new software licenses,
customer system upgrades and increases in the fees charged for annual
maintenance. Professional services fees were $18,440,000 for the first nine
months of fiscal 1997, an increase of 196% from $6,223,000 for the same period
in fiscal 1996 as the Company continued to expand its professional services
business to continue to meet the increasing demand for its solution offerings,
principally VIASOFT's Enterprise 2000(SM), and to a lesser extent the addition
of R&O, which contributed $950,000 in professional services fees during the
period. VIASOFT's Enterprise 2000(SM) solution offerings comprised 78% of the
Company's professional services revenues in the first nine months of fiscal
1997.
Cost of Revenues. Cost of software license and maintenance fees was
$2,798,000 for the nine months ended March 31, 1997, an increase of 31% from
$2,139,000 during the nine months ended March 31, 1996. The increase was
primarily due to additional R&O expenses of $866,000. Without the R&O costs,
these expenses would have decreased to $1,932,000. Gross margins on software
license and maintenance fees improved to 93% for the first nine months of fiscal
1997 from 91% for the same period in fiscal 1996. The expense reduction is
primarily due to lower royalty expense to outside vendors on VIASOFT's products
in fiscal 1997 compared to fiscal 1996.
The cost of professional services fees was $13,479,000 for the nine months
ended March 31, 1997, an increase of approximately 180% from $4,812,000 for the
nine months ended March 31, 1996. The increase in expenses is a result of
additional personnel hired and their related costs as well as third-party costs
to deliver the Company's solutions in response to increased customer demand,
both domestically and internationally, and to a lesser extent, additional
expenses incurred by
10
<PAGE> 11
R&O of $1,117,000. The gross margin on professional services fees, excluding
R&O, improved to 29% during the first nine months of fiscal 1997 compared to 23%
for the same period in fiscal 1996. This margin improvement reflects the
Company's continued focus on improving the management and delivery of its
solution offerings, as well as the increase in professional services fee
revenue. Overall, the Company expects a decrease in professional services
margins as it continues to integrate the R&O professional services organization
with its own operations.
Sales and Marketing. Sales and marketing expenses were $20,946,000 in the
first nine months of fiscal 1997, an increase of approximately 73% from
$12,136,000 in the same period of fiscal 1996. Of this increase, R&O expenses
accounted for $2,117,000. Excluding these expenses sales and marketing expenses
increased 55%. This increase is attributable primarily to an increase in
personnel and the associated costs including, higher salaries, travel and
bonuses, as well as general salary increases, increased commissions as a result
of revenue growth, increased marketing costs, and an increase in bad debt
expense due to the absolute dollar increase in accounts receivable. Sales and
marketing expenses as a percentage of total revenues declined to 36% in the
first nine months of fiscal 1997, compared to 42% in the first nine months of
fiscal 1996, due primarily to the increase in revenues.
Research and Development. Total expenditures for research and development
were $5,062,000 for the nine months ended March 31, 1997, excluding an
approximate $27.0 million charge for purchased in-process research and
development in connection with the R&O acquisition, an increase of 65% from
$3,075,000 for the nine months ended March 31, 1996. The increase in expenses
includes costs associated with R&O's research and development of $828,000.
Excluding cost related to R&O, research and development costs increased 38% as a
result of general salary increases, the addition of personnel and increased
expenses for external service bureau computing costs. As a percentage of total
revenues, research and development costs were 9% for the nine months ended March
31, 1997 (excluding the purchased in-process research and development charge
discussed above), compared to 11% for the same period in fiscal 1996, due
primarily to the increase in revenue.
General and Administrative. General and administrative expenses were
$4,482,000 in the nine months ended March 31, 1997, representing an increase of
66% compared to $2,699,000 in the nine months ended March 31, 1996. The increase
included $954,000 in general and administrative expenses related to R&O.
Excluding those expenses and the one time charge of $350,000 incurred in the
third quarter of fiscal 1996 related to the change in the CFO position, general
and administrative expenses increased 50%. This increase is a result of
additional legal fees and administrative personnel and their related costs,
general salary increases, increased external consulting costs and additional
bonuses. As a percentage of total revenues, general and administrative expenses
were 8% for the first nine months of fiscal 1997 compared to 9% for the same
period in fiscal 1996, due primarily to the increase in revenues.
Other Income (Expense). Interest income in the nine months ended March 31,
1997 was $979,000, compared to $1,005,000 in the nine months ended March 31,
1996. This decrease was due primarily to the decrease in funds available for
short term investment as a result of the R&O acquisition. Other expense for the
nine months ended March 31, 1997 increased to $429,000 as compared to $45,000
for the same period in fiscal 1996 primarily due to exchange losses on
transactions during the third quarter with the Company's subsidiaries in Germany
and the United Kingdom, which are valued in their local currencies, as well as
certain transactions with its Italian distributor which are valued in lira.
Provision for Income Taxes. The provision for income taxes was $3,921,000 and
$1,297,000 for the nine months ended March 1997 and 1996, respectively. The
Company's effective tax rate was 34% in the first nine months of fiscal 1997,
excluding the effect of the non-deductible purchased in-process research and
development charge, compared to 25% in the first nine months of fiscal 1996. The
Company's effective tax rate was affected by the availability of net operating
loss carryforwards, which were fully utilized in fiscal 1996, and certain tax
credit carryforwards, which were mostly utilized in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997 the Company had cash, cash equivalents and investments of
$22,439,000, representing a decrease of $6,365,000 from the total of $28,804,000
at June 30, 1996. This decrease was a result of $10.8 million in cash payments
for the cost of the R&O acquisition as well as payments of R&O debt of
approximately $4.1 million offset by cash generated from operations. For the
nine months ended March 31, 1997, the Company generated cash from operations of
$9,202,000.
11
<PAGE> 12
Net cash generated was composed primarily of net income excluding non-cash
charges for the write-off of the purchased in-process research and development,
depreciation and amortization, a net increase in working capital and loss on
disposal of fixed assets.
The Company's investing activities for the first nine months of fiscal 1997
used cash of $3,529,000 as a result of purchases of investments and the cash
used for the purchase of R&O, net of the cash acquired, and the purchase of
furniture, fixtures and equipment exceeding the sales or maturities of
investments. The Company believes that its current investments will be held to
maturity.
The Company's financing activities for the first nine months of fiscal 1997
used cash of $3,185,000. The cash was used for payment of R&O debt acquired,
offset in part by cash provided from the issuance of common stock upon the
exercise of options.
In January 1996, the Company entered into an agreement with a third party to
provide subcontracting services in support of the Company's professional
services engagements. The agreement sets forth minimum payment commitments of
$1,640,000 for the period January 1, 1996 through March 31, 1997 and $464,000
for the period January 1, 1997 through March 31, 1997. The Company made monthly
payments over the term of the agreement, based upon the number of billable days
worked by the subcontracted consultants at an agreed upon daily rate. The
agreement was amended in March 1997 to allow the Company to pay the remaining
commitment of $345,600 as of February 28, 1997 in three equal installments
through May 31, 1997.
Anticipated capital expenditures for the remainder of the fiscal year are
approximately $1.0 million, including anticipated capital expenditures relating
to the Company's integration of R&O and continued purchases of equipment to
support internal growth. The expenditures are anticipated primarily for
investment in new communication and computer systems as well as additional
computer hardware and software and for furniture, fixtures and equipment.
The Company agreed to make certain contingent payments in connection with the
R&O acquisition if certain financial performance criteria were met. The first of
these criteria was met in January 1997. Payment of $2.0 million was made in
February of 1997. A second and last payment of $2.0 million, if earned, is
payable in August 1997 in cash or, at each of the former R&O stockholders'
election, additional shares of Common Stock with an equivalent market value.
The Company believes that its existing cash and investment balances, together
with cash generated from operations, will continue to be sufficient to meet the
capital and liquidity needs of the Company's operations for the foreseeable
future.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, this Form 10-Q contains
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and the
Company intends that such forward looking statements be subject to the safe
harbors created thereby. Such forward looking statements involve risks and
uncertainties and include, but are not limited to statements regarding future
events and the Company's plans and expectations. The Company's actual results
may differ materially from such statements. Factors that may cause or contribute
to such differences include, but are not limited to the Company's dependence on
the year 2000 century date conversion market and dependence on its ESW primary
product line; the Company's ability to integrate and enhance the technology and
business recently acquired from R&O; fluctuations in revenues and operating
results due to seasonality, the budgeting and purchasing practices of its
customers, the length of the Company's sales cycle, sales commission practices
and seasonality; the lack of any backlog; risks associated with international
operations including longer payment cycles and exchange rate fluctuations; the
Company's ability to manage rapid change in its business and industry; the
Company's ability to manage the growth of its professional business services
business; the Company's ability to enhance existing products and develop or
acquire new products and technology to keep pace with technological developments
and evolving industry standards and to respond to changes in customer needs; the
Company's ability to identify, complete, manage and integrate acquisitions of
businesses, products and technologies; charges, costs and uncertainties related
to acquisitions; intense competition in the Company's markets, increasingly
intense competition in the year 2000 century date conversion market and the
ability of the Company to distinguish itself from its competitors; the
performance of the Company's distributors and members of its Solution/Technology
Provider programs; the Company's
12
<PAGE> 13
dependence on key management and technical personnel; and increasing competition
to attract skilled personnel, particularly in the year 2000 market; potential
product or service liability claims and general economic and business
conditions, as well as factors discussed elsewhere in this Form 10-Q and the
Company's filings with the Securities and Exchange Commission. Although the
Company believes that the assumptions underlying its forward looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in such forward looking
statements will be realized. In addition, the business and operations of the
Company are subject to substantial risks which increase the uncertainties
inherent in the forward looking statements made by the Company. The inclusion of
such forward looking information herein or in other Company statements should
not be regarded as a representation by the Company or any other person that the
future events, plans or expectations contemplated by the Company will be
achieved.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to certain legal proceedings and claims that arise in
the conduct of its business. In the opinion of management, the amount of
liability, if any, as a result of these claims and proceedings is not likely to
have a material effect on the financial condition or results of operations of
the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
NUMBER DESCRIPTION
11 Computation of Earnings Per Share for the three and nine month
periods ended March 31, 1997 and 1996.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed a Form 8-K/A on February 14, 1997 to file the
financial statements and pro forma financial information required by the
Company's Form 8-K filing on December 5, 1996, reporting the acquisition
of R&O.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VIASOFT, INC.
Date: May 14, 1997 By /s/ Steven D. Whiteman
----------------------------------------
Steven D. Whiteman, President
Date: May 14, 1997 By /s/ Mark R. Schonau
----------------------------------------
Mark R. Schonau, Chief Financial Officer
14
<PAGE> 1
VIASOFT, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
EXHIBIT 11
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31 MARCH 31
------------------------- ---------------------------
1997 1996 1997 1996
------- -------- -------- --------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Common Shares Outstanding, beginning of period 17,398 16,192 16,719 15,950
Effect of Weighting of Shares:
Warrants and employee stock options outstanding 878 989 -- 979
Shares purchased -- 3 79 64
Shares issued related to R&O acquisition -- -- 180 --
Treasury stock -- (7) -- (2)
Employee stock options exercised 60 101 172 230
------- -------- -------- --------
Weighted average number of common and common
share equivalents outstanding 18,337 17,278 17,149 17,221
======= ======== ======== ========
Net income $ 3,151 $ 1,270 $(19,477) $ 3,851
======= ======== ======== ========
Earnings per common and common share equivalent $ 0.17 $ 0.07 $ (1.14) $ 0.22
======= ======== ======== ========
FULLY DILUTED EARNINGS PER SHARE
Common Shares Outstanding, beginning of period 17,398 16,192 16,719 15,950
Effect of Weighting of Shares:
Warrants and employee stock options outstanding 878 1,082 -- 1,147
Shares purchased -- 3 79 64
Shares issued related to R&O acquisition -- -- 180 --
Treasury stock -- (7) -- (2)
Employee stock options exercised 60 101 172 230
------- -------- -------- --------
Weighted average number of common and common
share equivalents outstanding 18,336 17,371 17,149 17,389
======= ======== ======== ========
Net income $ 3,151 $ 1,270 $(19,477) $ 3,851
======= ======== ======== ========
Earnings per common and common share equivalent $ 0.17 $ 0.07 $ (1.14) $ 0.22
======= ======== ======== ========
</TABLE>
Note: Shares issuable upon the exercise of employee stock options that are
considered anti-dilutive are not included in the weighted average number of
common and common share equivalents.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1997
<PERIOD-START> JUL-01-1995 JUL-01-1996
<PERIOD-END> MAR-31-1996 MAR-31-1997
<EXCHANGE-RATE> 1 1
<CASH> 5,077 7,442
<SECURITIES> 21,405 14,997
<RECEIVABLES> 10,363 21,296
<ALLOWANCES> 294 418
<INVENTORY> 0 0
<CURRENT-ASSETS> 37,441 37,047
<PP&E> 4,531 7,411
<DEPRECIATION> 2,714 3,588
<TOTAL-ASSETS> 40,069 58,001
<CURRENT-LIABILITIES> 14,407 33,802
<BONDS> 0 0
0 0
0 0
<COMMON> 8 17
<OTHER-SE> 25,246 23,705
<TOTAL-LIABILITY-AND-EQUITY> 40,069 58,001
<SALES> 28,963 57,531
<TOTAL-REVENUES> 29,058 57,660
<CGS> 6,951 16,277
<TOTAL-COSTS> 24,861 73,725
<OTHER-EXPENSES> 45 429
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (996) (935)
<INCOME-PRETAX> 5,148 (15,559)
<INCOME-TAX> 1,297 3,921
<INCOME-CONTINUING> 3,851 (19,480)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,851 (19,480)
<EPS-PRIMARY> 0.22 (1.14)
<EPS-DILUTED> 0.22 (1.14)
</TABLE>
