<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 DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
COMMISSION FILE NUMBER 0-25472
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 January 31, 1997, there were 17,399,995 outstanding shares of Common
Stock, par value $.001 per share, of VIASOFT, Inc.
<PAGE> 2
VIASOFT, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheets as of December 31, 1996
and June 30, 1996 3
Statements of Operations for the three and
six months ended December 31, 1996 and 1995 4
Statements of Cash Flows for the six
months ended December 31, 1996 and 1995 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
2
<PAGE> 3
VIASOFT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
( in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
------------ --------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,074 $ 5,009
Investments, at amortized cost 8,778 23,795
Accounts receivable (less allowance for doubtful accounts
of $526 and $279, respectively) 25,569 13,335
Prepaid expenses and other 1,998 1,130
------------ --------
Total current assets 45,419 43,269
Furniture and equipment:
Computer equipment 4,053 2,692
Office furniture and equipment 2,002 1,905
Capitalized leased equipment 322 264
------------ --------
Total furniture and equipment 6,377 4,861
Less: Accumulated depreciation (3,350) (2,895)
------------ --------
Furniture and equipment, net 3,027 1,966
------------ --------
Other assets:
Intangible assets, net (Note 2) 6,543 --
Other assets 1,132 1,356
------------ --------
Total other assets 7,675 1,356
------------ --------
Total assets $ 56,121 $ 46,591
============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,167 $ 1,456
Accrued compensation 2,203 1,491
Accrued income taxes payable 2,798 1,824
Acquisition consideration payable (Note 2) 2,000 --
Other accrued expenses 8,079 3,100
Deferred revenue 20,039 9,985
Current maturities of obligations under capital leases 24 25
------------ --------
Total current liabilities 36,310 17,881
------------ --------
Deferred revenue, recognized after one year 295 298
Obligations under capital leases, less current maturities 8 18
Other long term liabilities 222 135
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,
17,398,075 and 16,718,556 shares issued and outstanding at
December 31, 1996 and June 30, 1996, respectively 17 17
Capital in excess of par value 41,407 27,771
Common stock subscriptions receivable (55) (59)
Accumulated deficit (22,122) 506
Cumulative translation adjustment 39 24
------------ --------
Total stockholders' equity 19,286 28,259
------------ --------
Total liabilities and stockholders' equity $ 56,121 $ 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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Software license fees $ 8,381 $ 4,674 $ 13,095 $ 8,275
Maintenance fees 4,853 3,567 8,900 6,879
Professional services fees 6,498 1,984 11,675 3,475
Other 51 32 89 67
-------- -------- -------- --------
Total revenues 19,783 10,257 33,759 18,696
-------- -------- -------- --------
Operating expenses:
Cost of software license and
maintenance fees 953 799 1,577 1,457
Cost of professional services fees 4,549 1,514 8,470 2,978
Sales and marketing 7,152 4,201 12,320 7,865
Research and development 1,725 1,109 2,852 2,045
Write off of purchased in-process
research and development 26,958 -- 26,958 --
General and administrative 1,505 762 2,620 1,525
-------- -------- -------- --------
Total operating expenses 42,842 8,385 54,797 15,870
-------- -------- -------- --------
Income (loss) from operations (23,059) 1,872 (21,038) 2,826
-------- -------- -------- --------
Other income (expense):
Interest income 344 322 730 628
Interest expense (52) (2) (53) (5)
Other income (expense), net (11) (1) (7) (3)
-------- -------- -------- --------
Total other income (expense) 281 319 670 620
-------- -------- -------- --------
Income (loss) before income taxes (22,778) 2,191 (20,368) 3,446
Provision for income taxes 1,406 551 2,260 865
-------- -------- -------- --------
Net income (loss) $(24,184) $ 1,640 $(22,628) $ 2,581
======== ======== ======== ========
Earnings (loss) per common and
common share equivalent $ (1.42) $ 0.10 $ (1.34) $ 0.15
======== ======== ======== ========
Weighted average number of common
and common share equivalents
outstanding 17,045 17,092 16,938 17,082
======== ======== ======== ========
</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>
SIX MONTHS ENDED
DECEMBER 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(22,628) $ 2,581
-------- --------
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 544 340
Loss on disposal of fixed assets 51 --
Changes in operating assets and liabilities, net of effect of business acquired
(Note 2)
Increase in accounts receivable (7,562) (1,171)
(Increase) decrease in prepaid expenses and other (1,654) 151
Increase in accrued income taxes payable 973 564
Increase (decrease) in accounts payable and other accrued expenses (1,736) 320
Increase in accrued compensation 712 103
Increase in deferred revenue 7,882 777
-------- --------
Total adjustments 26,168 1,084
-------- --------
Net cash provided by operating activities 3,540 3,665
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (763) (289)
Cash paid for business acquired, net of cash acquired (Note 2) (10,225) --
Purchase of investments (15,170) (21,973)
Investment maturities 29,948 14,473
-------- --------
Net cash provided by (used in) investing activities 3,790 (7,789)
-------- --------
FINANCING ACTIVITIES:
Payments of short term debt (Note 2) (4,099) --
Principal payments under equipment lease obligations (12) (65)
Proceeds from issuance of common stock 830 455
Payments received on common stock subscriptions receivable 5 174
-------- --------
Net cash provided by (used in) financing activities (3,276) 564
-------- --------
Effect of exchange rate changes on cash 11 1
-------- --------
Net increase (decrease) in cash and cash equivalents 4,065 (3,559)
Cash and cash equivalents, beginning period 5,009 7,680
-------- --------
Cash and cash equivalents, end of period $ 9,074 $ 4,121
======== ========
Supplemental cash flow information:
Interest paid $ 3 $ 5
Income taxes paid $ 1,342 $ 120
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 6
VIASOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996
(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 six month periods ended December 31,
1996 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 the 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
6
<PAGE> 7
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.
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 is payable to the
former stockholders of R&O in February 1997 based on certain financial
performance criteria, which had been met in January 1997. 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 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 No. 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. In order to bring the
in-process software products to commercial availability the Company estimates
that it will 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):
7
<PAGE> 8
<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.
The following unaudited pro forma combined condensed statements of
operations for the six months ended December 31, 1996 and 1995 give effect to
the R&O acquisition as if it had been consummated as of the beginning of each
respective period;
<TABLE>
<CAPTION>
Six months ended Six months ended
December 31, 1996 December 31, 1995
----------------- -----------------
(in thousands)
<S> <C> <C>
Total revenues $39,712 $29,386
Income before income taxes 6,249 4,435
Net income 4,110 3,343
Earnings per share $ 0.23 $ 0.19
</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.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
The Company derives its revenues primarily from software license fees,
software maintenance fees and professional services fees. The Company's software
is licensed primarily to Fortune 1000 companies and similarly sized business and
governmental organizations worldwide. Professional services are provided in
conjunction with software products and are also provided separately to similar
large organizations. 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.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated quarterly
results of operations for each of the six quarters ended December 31, 1996. In
the opinion of management, this quarterly information has been prepared on the
same basis as the Company's annual audited Consolidated Financial Statements and
includes all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the information for the periods presented when read
in conjunction with the Consolidated Financial Statements of the Company and
Notes thereto. The operating results for any quarter are not necessarily
indicative of the results of the full year or any future quarter.
9
<PAGE> 10
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------
FISCAL 1996 FISCAL 1997
----------------------------------------- -------------------
Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees ...... $ 3,602 $ 4,674 $ 3,977 $ 5,571 $ 4,714 $ 8,381
Maintenance fees ........... 3,312 3,567 3,608 3,818 4,047 4,853
Professional services fees . 1,491 1,984 2,748 5,084 5,177 6,498
Other ...................... 35 32 28 26 38 51
-------- -------- -------- -------- -------- --------
Total revenues ......... 8,440 10,257 10,361 14,499 13,976 19,783
-------- -------- -------- -------- -------- --------
Operating expenses:
Cost of software license and
maintenance fees ......... 659 799 683 647 624 953
Cost of professional
services fees ............ 1,464 1,514 1,833 3,214 3,921 4,549
Sales and marketing ........ 3,664 4,201 4,271 6,001 5,168 7,152
Research and development ... 936 1,109 1,030 1,162 1,127 1,725
Writeoff of purchased
in-process research and -- -- -- -- -- 26,958
development (Note 2)
General and administrative . 763 762 1,174 868 1,115 1,505
-------- -------- -------- -------- -------- --------
Total operating expenses 7,486 8,385 8,991 11,892 11,955 42,842
-------- -------- -------- -------- -------- --------
Income (loss) from operations 954 1,872 1,370 2,607 2,021 (23,059)
-------- -------- -------- -------- -------- --------
Other income (expense):
Interest income ............ 306 322 378 344 386 344
Interest expense ........... (3) (2) (4) (2) (1) (52)
Other, net ................. (2) (1) (42) (37) 4 (11)
-------- -------- -------- -------- -------- --------
Total other income ..... 301 319 332 305 389 281
-------- -------- -------- -------- -------- --------
Income (loss) before income
taxes .................... 1,255 2,191 1,702 2,912 2,410 (22,778)
Provision for income taxes ... 314 551 432 546 854 1,406
-------- -------- -------- -------- -------- --------
Net income (loss) ............ $ 941 $ 1,640 $ 1,270 $ 2,366 $ 1,556 $(24,184)
======== ======== ======== ======== ======== ========
Earnings (loss) per common and
common share equivalent .. $ 0.06 $ 0.10 $ 0.07 $ 0.13 $ 0.09 $ (1.42)
======== ======== ======== ======== ======== ========
Weighted average number of
common and common share
equivalents outstanding .. 17,040 17,092 17,278 17,558 17,668 17,045
======== ======== ======== ======== ======== ========
</TABLE>
The Company's revenues and operating results are subject to quarterly and
other fluctuations resulting from a variety of factors, including the effect of
budgeting and purchasing practices of its customers, the length of the customer
evaluation process for Company products, the timing of customer system
conversions, and, to a lesser extent, the Company's sales commission practices,
which are based partly on quarterly incentives and annual quotas, and other
factors. The Company's revenues and results of operations may also be affected
by seasonal trends, which have resulted in higher revenues in the Company's
second and fourth fiscal quarters and lower revenues in its first and third
fiscal quarters. This seasonality is a result of many customers' annual
purchasing and budgetary practices, the Company's sales commission practices,
lower revenues in the summer months (particularly in Europe) when many
businesses make fewer purchases, and other factors. The Company's professional
services revenues tend to fluctuate due to the completion or commencement of
significant projects, which may continue over several quarters, the number of
working days in a quarter and the utilization rate of professional services
personnel. The Company has little or no backlog. Therefore, quarterly revenues
and operating results depend primarily on the volume and timing of orders
received during the quarter, which are difficult to forecast. The Company has
often recognized a substantial portion of its license fees in the last month of
the quarter, frequently in the last week. A significant portion of the Company's
operating expenses is relatively fixed, since personnel levels and other
expenses are based upon anticipated revenues. Because a substantial portion of
these revenues may not be generated until the end of each quarter, the Company
may not be able to reduce spending in response to sales shortfalls or delays.
These factors, many of which are not within the Company's control, can cause
significant
10
<PAGE> 11
variations in operating results from quarter to quarter. The Company believes
that quarter to quarter comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
ACQUISITION OF R&O
On December 5, 1996, the Company acquired all of the outstanding shares of
capital stock of R&O 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. Rochade is based on an open repository software
technology that is designed to help businesses capture, manage, monitor,
disseminate, reuse and change their information technology assets in both
mainframe systems and distributed computing environments. R&O was founded in
1976, is headquartered in Munich, Germany and has operations in Europe and the
United States.
The Company accounted for the R&O acquisition as a purchase and allocated
approximately $27.0 million of the purchase price to in-process research and
development, resulting in a significant charge to the Company's results of
operations in the fiscal quarter ended December 31, 1996. The Company paid $10.8
million in cash and issued approximately 425,000 shares of unregistered Common
Stock valued at $12.8 million to the selling stockholders of R&O pursuant to
Regulation S, subject to certain restrictions imposed under the stock purchase
agreement and applicable securities laws. Additional consideration of $2.0
million is payable to the former stockholders of R&O on February 28, 1997 based
on certain financial performance criteria, which were met in January 1997. 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 will be reflected as an adjustment to cost in
excess of net assets acquired when earned. The Company also assumed
approximately $9.4 million of liabilities and recorded purchase accounting
accruals for severance costs related to the elimination of certain positions,
costs of closing duplicate facilities and other direct costs of the acquisition.
These additional costs totaled approximately $3.8 million. See Note 2 to
Consolidated Financial Statements.
In accordance with the provisions of Accounting Principles Board Opinions
No. 16 and 17, all identifiable assets acquired, including identifiable
intangible assets, were identified and analyzed to determine their fair market
values. 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 and services 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 the quarter
ended December 31, 1996. In order to bring the in-process software products
11
<PAGE> 12
to technological feasibility, the Company estimates that it will need to spend
an additional $2.6 million on product integration and performance improvements.
Identifiable intangible assets other than purchased research and
development consisted of an assembled workforce valued at $800,000 and a
customer list valued at $900,000. The assembled workforce and customer list will
be amortized on a straight-line basis over a seven and eight year period,
respectively. In addition, the Company recorded cost in excess of assets
acquired of $1,519,000, which will be amortized on a straight-line basis over a
five-year period.
The operating results of R&O from the December 5, 1996 acquisition date
through December 31, 1996 are included in the Company's results of operations.
Total revenues of R&O were $19.0 million, $11.8 million and $2.1 million for the
year ended December 31, 1995, the nine month period ended September 30, 1996 and
the period from the acquisition date to December 31, 1996, respectively. R&O's
operating income (loss) was $0.9 million, ($1.6 million) and $0.1 million,
respectively, for the same periods.
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
Revenues. Total revenues were $19,783,000 for the three months ended
December 31, 1996, an increase of approximately 93% from $10,257,000 for the
three months ended December 31, 1995. Software license fees were $8,381,000 for
the three months ended December 31, 1996, an increase of approximately 79% from
$4,674,000 for the three months ended December 31, 1995. Software license
revenues increased both domestically and internationally in the second 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 conversion problem. The increase in
international software license fees was attributable primarily to a 195%
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 United Kingdom and growth in the German market. In
addition, license fees increased approximately $1,156,000 due to the acquisition
of R&O during the quarter. Maintenance fees were $4,853,000 for the second
quarter of fiscal 1997, an increase of 36% from $3,567,000 for the same period
in fiscal 1996. The increase was a result of the R&O acquisition which
contributed $519,000 in maintenance revenue, as well as the Company adding new
software licenses, and, to a lesser extent, customer system upgrades and
increases in the fees charged for annual maintenance. Professional services fees
were $6,498,000 for the second quarter of fiscal 1997, an increase of 228% from
$1,984,000 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 $468,000 in service fees for the quarter.
VIASOFT's Enterprise 2000 solution offerings comprised 79% of the Company's
professional services revenues in the second quarter of fiscal 1997.
12
<PAGE> 13
In order to broaden its distribution channels, the Company established its
Solution/Technology Provider program in fiscal 1996. Under this program, the
Company licenses one or more of its service solutions, principally VIASOFT's
Enterprise 2000(SM) solution offering, to third-party Solution/Technology
Providers for use in service engagements with their own customers in exchange
for license fees and/or royalties. In conjunction with certain services
engagements, the Company leases or licenses certain of its products directly
to the customer of the Solution/Technology Provider. During the second quarter
of fiscal 1997, $1,363,000 or 16% of software license revenue was generated
through this program, representing approximately 7% of total revenues during
the period. Royalty revenues generated by this program were immaterial.
Cost of Revenues. Cost of software license and maintenance fees, which
includes royalties, cost of customer support and product packaging and
documentation, was $953,000 in the second quarter of fiscal 1997, an increase of
19% from $799,000 in the second quarter of fiscal 1996. The increase was
primarily due to additional expenses of $286,000 related to R&O personnel and
costs. Without the R&O costs, these expenses would have decreased to $664,000
for the quarter. Gross margins on software license and maintenance fees improved
to 93% for the second quarter of fiscal 1997 from 90% for the same period in
fiscal 1996. The margin improvement and expense reduction is primarily due to
lower sales through a government market reseller, which reduced external sales
commissions expense in fiscal 1997 compared to fiscal 1996.
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 $4,549,000 for the
three months ended December 31, 1996, an increase of approximately 200% from
$1,514,000 for the three months ended December 31, 1995. 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 R&O of $417,000. The gross margin
on professional services fees improved to 30% in the second quarter of fiscal
1997 compared to 24% 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. The Company anticipates decrease in professional services margins as
it integrates 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 $7,152,000 in the second quarter of fiscal 1997, an increase of
approximately 70% from $4,201,000 in the same period of fiscal 1996. The
increase is attributable primarily to increased personnel, higher salaries,
increased commissions as a result of increased sales, higher travel costs and
bonuses primarily related to the increase in personnel, increased marketing
costs, and an increase in bad debt expense due to the absolute dollar increase
in accounts receivable. The addition of R&O also accounted for $685,000 of this
increase. Sales and marketing expenses as a percentage of total revenues
declined to 36% in the first quarter of fiscal 1997, compared to 41% in the
first quarter of fiscal 1996, due primarily to the increase in revenues.
13
<PAGE> 14
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
$1,725,000 for the three months ended December 31, 1996, excluding an
approximate $27.0 million charge for in-process research and development in
connection with the R&O acquisition, an increase of 59% from $1,109,000 for
the three months ended December 31, 1995. Research and development expense for
the second quarter, excluding this charge, constituted 9% of total revenues
compared to 11% for the same period in fiscal 1996. The increase in expenses
is a result of costs associated with R&O's research and development of
$384,000, as well as general salary increases and additional personnel. The
decrease in costs as a percentage of revenues was due primarily to the increase
in total revenues.
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 $1,505,000 in the second quarter of fiscal
1997, representing an increase of 98% compared to $762,000 in the same period
of fiscal 1996. The increase was primarily due to increased legal fees and
administrative personnel and their related costs, general salary increases,
increased external consulting costs and additional bonuses, as well as
additional costs from R&O of $268,000. As a percentage of total revenues,
general and administrative expenses increased to 8% for the second quarter of
fiscal 1997 from 7% for the second quarter of fiscal 1996.
Other Income (Expense). Interest income in the second quarter of fiscal
1997 was $344,000, compared to $322,000 in the second quarter of fiscal 1996.
This increase was due primarily to an increase in average funds available for
short term investment as a result of cash generated from operations. Interest
expense for the quarter was $52,000, compared to $2,000 for the comparable
period in fiscal 1996 due to debt assumed in the R&O acquisition. This debt was
paid off in December 1996.
Provision for Income Taxes. The provision for income taxes was $1,406,000
and $551,000 in the second quarter of fiscal 1997 and 1996, respectively. The
Company's effective tax rate was 34% in the second quarter of fiscal 1997,
excluding the effect of the nondeductible purchased in-process research and
development charge, compared to 25% in the second 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 SIX MONTHS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
Revenues. Total revenues were $33,759,000 for the six months ended December
31, 1996, an increase of approximately 81% from $18,696,000 for the six months
ended December 31, 1995. Software license fees were $13,095,000 for the six
months ended December 31, 1996, an increase of
14
<PAGE> 15
approximately 58% from $8,275,000 for the six months ended December 31, 1995.
Software license fees increased both domestically and internationally in the
second 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 change
problem. The increase in international software license fees was attributable
primarily to a 129% 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. In addition, license fees
increased due to the acquisition of R&O, which contributed license fees of
$1,156,000. Maintenance fees were $8,900,000 for the first six months of fiscal
1997, an increase of 29% from $6,879,000 for the same period in fiscal 1996. The
increase was due in part to the R&O acquisition, which contributed $519,000 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 $11,675,000 for the first half of
fiscal 1997, an increase of 236% from $3,475,000 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 $468,000 in service fees during the period. VIASOFT's Enterprise
2000(SM) solution offerings comprised 82% of the Company's professional services
revenues in the first six months of fiscal 1997.
In order to broaden its distribution channels, the Company established its
Solution/Technology Provider program in fiscal 1996. Under this program, the
Company licenses one or more of its service solutions, principally VIASOFT's
Enterprise 2000(SM) solution offering, to third-party Solution/Technology
Providers for use in service engagements with their own customers in exchange
for license fees and/or royalties. In conjunction with certain services
engagements, the Company leases or licenses certain of its products directly to
the customer of the Solution/Technology Provider. During the first six months of
fiscal 1997, $2.3 million or 18% of software license fees was generated through
this program, representing approximately 7% of total revenues during the period.
Royalty revenues generated by this program were immaterial.
Cost of Revenues. Cost of software license and maintenance fees was
$1,577,000 for the six months ended December 31, 1996, an increase of 8% from
$1,457,000 during the six months ended December 31, 1995. The increase was
primarily due to additional R&O expenses of $286,000, as a result of the
acquisition. Without the R&O costs, these expenses would have decreased to
$1,291,000. Gross margins on software license and maintenance fees improved to
93% for the first six months of fiscal 1997 from 90% for the same period in
fiscal 1996. The margin improvement and expense reduction is primarily due to
lower sales through a government market reseller, which reduced external sales
commissions expense in fiscal 1997 compared to fiscal 1996, offset by increased
personnel and general salary increases in customer support.
The cost of professional services fees was $8,470,000 for the six months
ended December 31, 1996, an increase of approximately 184% from $2,978,000 for
the six months ended December 31, 1995. 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 R&O of $417,000. The gross margin on professional services
fees improved to 27% during the first six months
15
<PAGE> 16
of fiscal 1997 compared to 14% 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. The Company expects a decrease in professional services
margins as it integrates the R&O professional services organization with its
own operations.
Sales and Marketing. Sales and marketing expenses were $12,320,000 in the
first half of fiscal 1997, an increase of approximately 57% from $7,865,000 in
the same period of fiscal 1996. Of this increase, R&O expenses accounted for
$685,000. Excluding these expenses, the increase is attributable primarily to
increased personnel, higher salaries, increased commissions as a result of
increased sales, higher travel costs and bonuses primarily related to the
increase in personnel, 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 six months of fiscal 1997, compared to 42% in the first six months of
fiscal 1996, due primarily to the increase in revenues.
Research and Development. Total expenditures for research and development
were $2,852,000 for the six months ended December 31, 1996, excluding an
approximate $27.0 million charge for purchased in-process research and
development in connection with the R&O acquisition, an increase of 39% from
$2,045,000 for the six months ended December 31, 1995. The increase in expenses
is a result of costs associated with R&O's research and development, as well as
general salary increases and the addition of personnel. As a percentage of total
revenues, research and development costs were 8% for the six months ended
December 31, 1996 (excluding the purchased in-process research and
development charge discussed above), compared to 11% for the same period in
fiscal 1996.
General and Administrative. General and administrative expenses were
$2,620,000 in the six months ended December 31, 1996, representing an increase
of 72% compared to $1,525,000 in the six months ended December 31, 1995. The
increase was primarily due to additional legal fees and administrative personnel
and their related costs, general salary increases, increased external consulting
costs and additional bonuses, as well as to additional costs from R&O of
$268,000. As a percentage of total revenues, general and administrative expenses
remained constant at 8% for the first six months of fiscal 1997 compared to the
same period in fiscal 1996.
Other Income (Expense). Interest income in the six months ended December
31, 1996 was $730,000, compared to $628,000 in the six months ended December 31,
1995. This increase was due primarily to an increase in funds available for
short term investment as a result of cash generated from operations.
Provision for Income Taxes. The provision for income taxes was $2,260,000
and $865,000 for the six months ended December 1996 and 1995, respectively. The
Company's effective tax rate was 34% in the first six months of fiscal 1997,
excluding the effect of the non-deductible purchased in-process research and
development charge, compared to 25% in the first six months of fiscal 1996. The
Company's effective tax rate was affected by the availability of net operating
loss carryforwards,
16
<PAGE> 17
which were fully utilized in fiscal 1996, and certain tax credit carryforwards,
which were mostly utilized in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996 the Company had cash, cash equivalents and investments
of $17,852,000, representing a decrease of $10,952,000 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.
For the six months ended December 31, 1996, the Company generated cash from
operations of $3,540,000. 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 and loss on disposal of
fixed assets. This was offset by a decrease in working capital.
The Company's investing activities for the first six months of fiscal 1997
provided cash of $3,790,000 as a result of sales or maturities of investments
exceeding the cash used for the purchase of R&O, net of the cash acquired, and
the purchase of investments and furniture, fixtures and equipment. The Company
believes that its current investments will be held to maturity.
The Company's financing activities for the first six months of fiscal 1997
used cash of $3,276,000. 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 December 31, 1996 and $464,000
for the period January 1, 1997 through March 31, 1997. The Company makes 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 November 1996 to allow the Company to carry over any
minimum requirements not met by December 31, 1996 until March 31, 1997, after
which the Company is required to pay any remaining shortfall. Management expects
that the minimum payment requirement will be met.
Anticipated capital expenditures for the remainder of the fiscal year are
approximately $2.5 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
17
<PAGE> 18
January 1997, and payment of $2.0 million is due by February 28, 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 liquidity needs of the Company's operations for the foreseeable future.
The Company plans to file a registration statement in the near future with
respect to an offering of additional Common Stock to finance future growth.
EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
The results of operations of the Company for the periods discussed above
have not been significantly affected by inflation or foreign currency
fluctuations. Sales made through the Company's foreign distributors are
denominated in U.S. dollars except in Italy, where they are denominated in lira.
Sales by the Company's foreign subsidiaries are principally denominated in the
currencies of the countries where sales are made. The Company has not to date
sought to hedge the risks associated with fluctuations in foreign exchange rates
and does not currently plan to do so. Gains or losses relating to translation of
the financial statements of the Company's foreign subsidiaries are included as a
separate component of stockholder's equity in the Company's Consolidated
Financial Statements.
18
<PAGE> 19
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 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 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 and its sale commission practices, the lack
of any backlog; risks associated with international operations; 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, increasing
competition in the year 2000 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 dependence on key management and technical personnel; potential
product liability claims and general economic and business conditions, as well
as those 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 included in this Form 10-Q and other risks detailed from time
to time in the Company's Securities and Exchange Commission filings. The
inclusion of such forward looking information 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.
19
<PAGE> 20
In addition, the Company recently settled a lawsuit in United States
District Court, Phoenix, Arizona, against its former Chief Financial Officer,
Alvin E. Holland, Jr. Mr. Holland was employed by the Company from January 1996
through April 8, 1996, when he was dismissed. In connection with the settlement,
the Company agreed to make a cash payment to Mr. Holland and forgive certain
indebtedness in amounts that the Company was advised by counsel were
considerably less than the amount of anticipated litigation costs. The Company
and Mr. Holland released each other from all outstanding claims in connection
with the settlement. The Company accrued all amounts related to the settlement
in the fiscal quarter ended December 31, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholder on November 15, 1996.
The stockholders of the Company voted on and approved the following proposals:
1. To elect eight directors, each to serve until the next Annual Meeting
of Stockholders and until his successor has been elected and qualified.
2. To approve an amendment to the VIASOFT, Inc. Employee Stock Purchase
Plan, providing for an additional 400,000 shares for issuance under the
Plan.
3. To ratify the selection of Arthur Andersen LLP as independent auditors
of the Company for its fiscal year ending June 30, 1997.
The proposals were approved by the following votes:
1. ELECTION OF DIRECTORS
<TABLE>
<CAPTION>
Name For Withheld
<S> <C> <C>
John J. Barry III 14,131,819 123,499
LeRoy Ellison 14,131,819 123,499
Robert S. Kagle 14,131,819 123,499
Alexander S. Kuli 14,000,499 254,819
J. David Parrish 14,000,499 254,819
Arthur C. Patterson 14,131,819 123,499
Steven D. Whiteman 14,131,819 123,499
Michael A. Wolf 14,131,149 124,169
</TABLE>
2. FOR THE APPROVAL OF AN ADDITIONAL 400,000 SHARES FOR THE EMPLOYEE STOCK
PURCHASE PLAN
<TABLE>
<CAPTION>
For Against Withheld Broker Non-Votes
<S> <C> <C> <C> <C>
13,796,728 311,946 10,388 136,256
</TABLE>
20
<PAGE> 21
3. RATIFY THE SELECTION OF ARTHUR ANDERSEN LLP AS INDEPENDENT AUDITORS
<TABLE>
<CAPTION>
For Against Withheld Broker Non-Votes
<S> <C> <C> <C> <C>
14,223,913 19,713 11,692 -0-
</TABLE>
ITEM 5. OTHER INFORMATION
During the quarter ended December 31, 1996, the Company filed a Report on
Form 8-K dated December 5, 1996 reporting the acquisition of R&O. The following
financial statements and pro forma financial information were unavailable and
omitted from such Form 8-K in accordance with Items 7(a)(4) and 7(b)(2) thereof
and are hereby filed in accordance with Item 5 of Form 10-Q.
(a) Financial Statements of Business Acquired
The following Consolidated Financial Statements of R&O are included on
pages F-1 through F-15 of this Form 10-Q:
Years ended December 31, 1994 and 1995
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1994 and 1995
Consolidated Statements of Operations for each of the two years in
the period ended December 31, 1995
Consolidated Statements of Stockholders' Deficit for two years in
the period ended December 31, 1995
Consolidated Statements of Cash Flows for each of the two years
in the period ended December 31, 1995
Notes to Consolidated Financial Statements
Nine months ended September 30, 1995 (unaudited) and 1996
Consolidated Balance Sheet as of September 30, 1996
Consolidated Statement of Operations for the nine months ended
September 30, 1995 (unaudited) and 1996
Consolidated Statement of Stockholders' Deficit for the nine
months ended September 30, 1996
Consolidated Statement of Cash Flows for the nine months ended
September 30, 1995 (unaudited) and 1996
(b) Pro Forma Combined Financial Data
The following Pro Forma Unaudited Financial Data is included on pages P-1
through P-3 of this Form 10-Q:
Pro Forma Combined Statement of Operations for the year ended June 30,
1996 and for the six months ended December 31, 1996
Notes to Unaudited Pro Forma Combined Financial Statements
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
NUMBER DESCRIPTION
11 Computation of Earnings Per Share for the three and six
month periods ended December 31, 1996 and 1995.
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
During the quarter ended December 31, 1996, the Company filed a
Report on Form 8-K dated December 5, 1996, reporting the acquisition
of R&O. The financial statements and pro forma financial information
required to be included therein were then unavailable and are filed
herewith in Item 5 of this Form 10-Q.
22
<PAGE> 23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rottger & Osterberg Software-Technik GmbH:
We have audited the accompanying consolidated balance sheets of ROTTGER &
OSTERBERG SOFTWARE-TECHNIK GmbH (a German corporation) and subsidiaries as of
December 31, 1994 and 1995 and September 30, 1996, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the years
ended December 31, 1994 and 1995 and for the nine months ended September 30,
1996. 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.
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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rottger & Osterberg
Software-Technik GmbH and subsidiaries as of December 31, 1994 and 1995 and
September 30, 1996, and the results of their operations and their cash flows for
the years ended December 31, 1994 and 1995 and for the nine months ended
September 30, 1996, in conformity with United States generally accepted
accounting principles.
Arthur Andersen LLP
Phoenix, Arizona,
December 5, 1996.
F-1
<PAGE> 24
ROTTGER & OSTERBERG SOFTWARE-TECHNIK GMBH AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
December 31,
--------------------------- September 30,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 259,529 $ 525,171 $ 1,569,721
Accounts receivable (less allowance for doubtful
accounts of $93,330, $201,062 and $381,559,
at December 31, 1994 and 1995 and
September 30, 1996, respectively) 3,360,745 6,953,714 3,579,032
Prepaid expenses and other assets 268,687 81,160 327,151
----------- ----------- -----------
Total current assets 3,888,961 7,560,045 5,475,904
----------- ----------- -----------
PROPERTY AND EQUIPMENT (Note 2):
Computer equipment 2,098,017 2,729,423 2,699,382
Office furniture and equipment 361,623 552,523 466,939
Leasehold improvements 16,116 36,663 35,485
Vehicles 412,247 390,116 241,279
----------- ----------- -----------
Total property and equipment 2,888,003 3,708,725 3,443,085
Less: Accumulated depreciation (1,796,771) (2,406,861) (2,440,987)
----------- ----------- -----------
Property and equipment, net 1,091,232 1,301,864 1,002,098
----------- ----------- -----------
OTHER ASSETS 17,216 10,433 22,281
----------- ----------- -----------
Total assets $ 4,997,409 $ 8,872,342 $ 6,500,283
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Lines of credit (Note 4) $ 774,894 $ 1,484,378 $ 1,154,644
Accounts payable 708,983 484,471 354,924
Accrued compensation 750,995 1,125,154 896,941
Accrued income taxes payable 128,516 72,874 --
Other accrued expenses (Note 6) 832,685 1,576,108 1,251,865
Payables to related parties (Note 6) 339,424 285,587 --
Deferred revenue (Note 2) 812,297 1,476,929 2,119,406
Short-term debt (Note 4) 1,291,322 2,798,181 2,626,739
Current maturities of long-term debt (Note 5) 160,815 143,626 151,889
----------- ----------- -----------
Total current liabilities 5,799,931 9,447,308 8,556,408
----------- ----------- -----------
LONG-TERM DEBT, less current maturities (Note 5) 320,935 180,601 56,751
----------- ----------- -----------
OTHER LONG-TERM LIABILITIES (Note 7) 420,477 322,409 348,071
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)
STOCKHOLDERS' DEFICIT:
Common stock 32,283 32,283 32,283
Accumulated deficit (1,639,806) (1,241,599) (2,441,009)
Cumulative translation adjustment (Note 2) 63,589 131,340 (52,221)
----------- ----------- -----------
Total stockholders' deficit (1,543,934) (1,077,976) (2,460,947)
------------ ----------- -----------
Total liabilities and stockholders' deficit $ 4,997,409 $ 8,872,342 $ 6,500,283
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-2
<PAGE> 25
ROTTGER & OSTERBERG SOFTWARE-TECHNIK GMBH AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------- -----------------------------
1994 1995 1995 1996
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Software license fees $ 6,706,972 $ 12,121,502 $ 7,029,124 $ 5,504,546
Maintenance fees 2,968,525 3,710,260 2,738,758 3,473,663
Professional services fees 2,792,353 2,980,830 2,094,371 2,723,122
Other 93,577 159,660 98,938 139,581
------------ ------------ ------------ ------------
Total revenues 12,561,427 18,972,252 11,961,191 11,840,912
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of software license and maintenance fees 828,873 1,950,741 1,261,516 1,298,605
Cost of professional services fees 1,986,803 3,603,502 2,522,331 3,018,927
Sales and marketing 3,681,982 5,303,680 3,279,612 4,034,906
Research and development 2,681,610 4,305,011 3,324,946 2,876,683
General and administrative 4,020,580 2,860,266 2,083,370 2,211,064
------------ ------------ ------------ ------------
Total operating expenses 13,199,848 18,023,200 12,471,775 13,440,185
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (638,421) 949,052 (510,584) (1,599,273)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 4,091 4,178 2,553 54,934
Interest expense (157,805) (226,398) (141,987) (188,255)
Other income (expense), net 45,362 (289,287) 172,821 533,184
------------ ------------ ------------ ------------
Total other income (expense) (108,352) (511,507) 33,387 399,863
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (746,773) 437,545 (477,197) (1,199,410)
Provision for income taxes -- (39,338) -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (746,773) $ 398,207 $ (477,197) $ (1,199,410)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 26
ROTTGER & OSTERBERG SOFTWARE-TECHNIK GMBH AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Cumulative
Common Accumulated Translation
Stock Deficit Adjustment Total
------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993 $32,283 $ (893,033) $ (20,897) $ (881,647)
Net loss -- (746,773) -- (746,773)
Translation adjustment -- -- 84,486 84,486
------- ----------- --------- -----------
BALANCE, December 31, 1994 32,283 (1,639,806) 63,589 (1,543,934)
Net income -- 398,207 -- 398,207
Translation adjustment -- -- 67,751 67,751
------- ----------- --------- -----------
BALANCE, December 31, 1995 32,283 (1,241,599) 131,340 (1,077,976)
Net loss -- (1,199,410) -- (1,199,410)
Translation adjustment -- -- (183,561) (183,561)
------- ----------- --------- -----------
BALANCE, September 30, 1996 $32,283 $(2,441,009) $ (52,221) $(2,460,947)
======= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 27
ROTTGER & OSTERBERG SOFTWARE-TECHNIK GMBH AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
--------------------------- ---------------------------
1994 1995 1995 1996
------------ ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (746,773) $ 398,207 $(477,197) $(1,199,410)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities-
Depreciation and amortization 439,337 570,814 413,271 387,457
Changes in operating assets and liabilities-
(Increase) decrease in accounts receivable (699,682) (3,592,969) (596,070) 3,374,682
(Increase) decrease in prepaid expenses and
other assets (225,755) 194,310 (452,269) (257,839)
Increase (decrease) in accounts payable,
payables to related parties, accrued
compensation and other accrued expenses 1,007,170 839,233 (364,353) (967,590)
Increase (decrease) in deferred revenue 187,609 664,632 705,351 642,477
Increase (decrease) in accrued income taxes payable (112,806) (55,642) 496,524 (72,874)
Increase in other long-term liabilities 156,061 (98,068) (13,995) 25,662
----------- ----------- --------- -----------
Net cash provided by (used in) operating activities 5,161 (1,079,483) (288,738) 1,932,565
----------- ----------- --------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (760,755) (729,300) (511,305) (149,518)
Disposals of property and equipment, net 1,128 (8,400) 0 (18,065)
----------- ----------- --------- -----------
Net cash used in investing activities (759,627) (737,700) (511,305) (167,583)
----------- ----------- --------- -----------
FINANCING ACTIVITIES:
Proceeds from net borrowings under lines of credit 889,807 709,484 754,367 (329,734)
Proceeds from borrowings under short-term and
long-term debt 603,583 1,392,952 --
Payments on short-term and long-term debt (263,370) (191,996) (128,740) (105,417)
----------- ----------- --------- -----------
Net cash provided by (used in) financing activities 1,230,020 1,910,440 625,627 (435,151)
----------- ----------- --------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (311,943) 172,385 97,278 (285,281)
----------- ----------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 163,611 265,642 (77,138) 1,044,550
CASH AND CASH EQUIVALENTS, beginning of period 95,918 259,529 259,529 525,171
----------- ----------- --------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 259,529 $ 525,171 182,391 $ 1,569,721
=========== =========== ========= ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 132,007 $ 153,009 $ 140,339 $ 168,893
Cash paid for income taxes $ 217,506 $ 60,390 $ 33,685 $ 249,658
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 28
ROTTGER & OSTERBERG SOFTWARE-TECHNIK GMBH AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND SEPTEMBER 30, 1996
(1) SUMMARY OF OPERATIONS:
OPERATIONS
Rottger & Osterberg Software-Technik GmbH (R&O) and its subsidiaries
(collectively, the Company) are engaged in developing, marketing and supporting
middleware software products and related professional services. The Company
conducts its development activities in both Germany and the United States, and
conducts sales activities throughout the world.
On December 5, 1996, the shareholders of the Company completed the sale of all
of the outstanding stock of the Company to VIASOFT, Inc. for an aggregate
purchase price of approximately $28.5 million plus contingent consideration of
up to $4.0 million and the assumption of certain debt.
The market for the Company's product and service offering is intensely
competitive and is characterized by rapid change in technology and the frequent
introduction of new products and services. The future success of the Company
will depend significantly on its ability to enhance and protect its proprietary
technology and to respond to technological change. There can be no assurances
that the Company will be able to respond timely to such technological changes,
or compete successfully in its marketplace. The Company's inability to adapt to
future change and to compete successfully in its marketplace could have a
material adverse effect on the Company's business, results of operations and
financial condition.
(2) SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying Consolidated Financial Statements include the financial
statements of R&O and its two wholly owned subsidiaries, R&O Holdings, Inc. and
R&O (UK) Limited. All significant intercompany balances and transactions have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. In management's
opinion, methodologies used to determine estimates are adequate and consistent
with prior periods.
F-6
<PAGE> 29
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments is determined by the Company
using available market information and valuation methodologies. Considerable
judgment is required in estimating fair values. Accordingly, the estimates may
not be indicative of the amounts the Company could realize in a current market
exchange. The carrying amounts of cash, accounts receivable, accounts payable,
short-term and long-term debt approximate fair value. The fair value of the
Company's long-term debt and short-term debt is estimated using discounted cash
flow analyses, based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainty and matters of
significant judgment, and therefore cannot be determined with precision. Changes
in assumptions could significantly affect these estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
investments with an original maturity of three months or less when purchased to
be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations of
credit risk, as defined by Statement of Financial Accounting Standards No. 105,
Disclosure of Information about Financial Instruments with Off-Balance Sheet
Risk and Financial Instruments with Concentrations of Credit Risk, consist
primarily of trade accounts receivable. The Company's customer base is primarily
Global 5000 and similarly-sized organizations worldwide. The Company does not
require collateral upon delivery of its products.
PRODUCT DEVELOPMENT
Under the criteria set forth in Statement of Financial Accounting Standards No.
86, Accounting for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed, capitalization of software development costs begins upon the
establishment of technological feasibility of the product. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenues, estimated economic product lives and changes in software and
hardware technology. Amounts related to internal software development that could
be capitalized under this statement were immaterial.
FOREIGN CURRENCY TRANSLATION
Financial information relating to R&O and R&O (UK) Limited is reported in
accordance with Statement of Financial Accounting Standards No. 52, Foreign
Currency Translation. The assets and liabilities of R&O and R&O (UK) Limited
have been translated into U.S. dollars at rates of exchange in effect at the
respective balance sheet dates. The revenues, costs and expenses have been
translated at the average exchange rates for each reporting period. The net
foreign currency translation gain (loss) during the years ended December 31,
1994 and 1995 and the nine months ended September 30, 1996, was approximately
$84,486, $67,751, and ($183,561), respectively. The gains or losses resulting
from the translation of the Company's financial statements have been included as
a separate component of stockholders' deficit.
REVENUE RECOGNITION
Revenue is recognized in accordance with Statement of Position 91-1, Software
Revenue Recognition. Accordingly, revenue from software licensing is recognized
when delivery of the software has occurred, a signed noncancelable
F-7
<PAGE> 30
license agreement has been received from the customer and any remaining
obligations under the license agreement are insignificant. Revenue related to
insignificant obligations is deferred and recognized as the obligations are
fulfilled. The Company recognizes sublicense royalties upon delivery of the
software to the end user. Revenue from software license fees related to the
Company's obligation to provide certain post-contract customer support without
charge for the first six months of the license is unbundled from the license fee
at its fair value and is deferred and recognized straight-line over the contract
support period. Revenue from annual or other renewals of maintenance contracts
(including long-term contracts) is deferred and recognized straight-line over
the term of the contract. Revenue from professional services is generally billed
on a time and materials basis. Professional services do not involve significant
customization, modification or production of the licensed software. Such
professional services fees are recognized as the related services are provided.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based upon the estimated
useful lives of the assets ranging from three to ten years.
ACCOUNTING PERIOD
In 1994, R&O changed its year-end from October 31, 1994 to December 31, 1994.
For comparative purposes, R&O restated the 1994 financial results in order to
provide full-year, calendar basis Consolidated Financial Statements.
RECENTLY ISSUED ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which was required to be adopted by the Company in 1996, did not have a material
effect on the Company's financial position or its results of operations upon
adoption.
F-8
<PAGE> 31
(3) INCOME TAXES:
Income taxes have been accounted for in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109). SFAS
No. 109 requires the use of an asset and liability approach in accounting for
income taxes. Deferred tax assets and liabilities are recorded based on the
differences between the financial statement and tax bases of assets and
liabilities and the tax rates in effect when these differences are expected to
reverse.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
----------------------------- -------------
1994 1995 1996
----------- ----------- -------------
<S> <C> <C> <C>
Current:
German $ 111,343 $ 150,039 $ --
United States 98,000 -- --
Deferred benefit (769,924) (166,701) (316,929)
Change in valuation allowance 560,581 56,000 316,929
----------- ----------- -----------
Provision for income taxes $ -- $ 39,338 $ --
=========== =========== ===========
The components of deferred taxes are as follows:
Deferred tax assets:
Accrual-to-cash adjustments, net $ 594,000 $ 470,000 $ 64,000
Tax effect of net operating
loss carryforwards 203,000 271,000 706,000
Deferred revenue 474,416 585,117 848,833
----------- ----------- -----------
Total deferred tax assets 1,271,416 1,326,117 1,618,833
Deferred tax liabilities (272,001) (270,702) (246,489)
----------- ----------- -----------
Net deferred tax asset 999,415 1,055,415 1,372,344
Valuation allowance (999,415) (1,055,415) (1,372,344)
----------- ----------- -----------
Net deferred tax asset $ -- $ -- $ --
=========== =========== ===========
</TABLE>
R&O accounts for German income taxes in accordance with German tax regulations.
The applicable income tax rate is approximately 60% and includes trade tax on
income, corporation tax, as well as a solidarity surcharge. The tax rate of 60%
is based on undistributed earnings. For distributed earnings, the effective tax
rate is approximately 45%. The effective tax rates for R&O Holdings, Inc. and
R&O (UK) Limited are approximately 40% and 33%, respectively.
SFAS No. 109 requires the reduction of deferred tax assets by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax asset will not be realized. As
a result of the losses generated in the nine months ended September 30, 1996 and
the year ended December 31, 1994, a valuation allowance has been established for
the entire net deferred tax asset.
F-9
<PAGE> 32
A reconciliation of the German statutory rate to the Company's effective tax
rate is as follows:
<TABLE>
<CAPTION>
December 31,
--------------- June 30,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate (60)% 60 % (60)%
Foreign taxes (15)% (64)% 34 %
Change in valuation allowance 75 % 13 % 26 %
---- ---- ----
-- % 9% -- %
==== ==== ====
</TABLE>
The Company has U.S. net operating loss carryforwards totaling $1.8 million at
September 30, 1996 which expire through 2011.
(4) LINES OF CREDIT AND SHORT-TERM DEBT:
The Company has lines of credit with banks totaling approximately $1.7 million
at interest ranging from 4.5% to 8.6% per annum. One of the lines of credit
expires May 31, 1997, and the others have no fixed expiration dates. Two of the
lines of credit are unsecured and the other is guaranteed by the Managing
Directors of the Company. The amounts outstanding at December 31, 1994 and 1995
and September 30, 1996 under these lines of credit total $774,894, $1,484,378
and $1,154,644, respectively.
The Company also has short-term borrowings with a bank totaling approximately
$3.9 million at interest ranging from 6% to 7.25% per annum. These borrowings
are renewable each year and are guaranteed by the Managing Directors of the
Company. The amounts outstanding at December 31, 1994 and 1995 and September 30,
1996 under these short-term borrowings total $1,291,322, $2,798,181 and
$2,757,022, respectively.
(5) LONG-TERM DEBT:
Long-term debt at December 31, 1994 and 1995 and September 30, 1996 consists of
the following:
<TABLE>
<CAPTION>
December 31,
---------------------- September 30,
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
IBM Deutschland Kreditbank, interest at
10.90%, payable in monthly installments
of $6,392, maturing in August 1997 $250,387 $177,369 $98,176
Deutsche Bank AG, interest rates ranging from
6.80% to 9.45%, payable in monthly installments
of $4,062, maturing in March 2006 177,254 104,764 78,357
Lombard North Central Plc, interest at 16.675%,
payable in monthly installments of $340,
maturing in August 1997 17,007 13,936 10,545
</TABLE>
F-10
<PAGE> 33
<TABLE>
<CAPTION>
December 31,
------------------------ September 30,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Master Finance, interest at 15.729%, payable in
monthly installments of $720, maturing in March
1997 37,102 28,158 21,562
--------- --------- ---------
Total long-term debt 481,750 324,227 208,640
Less current maturities (160,815) (143,626) (151,889)
--------- --------- ---------
Long-term debt, net of current maturities $ 320,935 $ 180,601 $ 56,751
========= ========= =========
</TABLE>
The long-term debt is secured by computer equipment and automobiles.
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1997 $ 151,889
1998 32,125
1999 3,284
2000 3,284
2001 3,284
Thereafter 14,774
-----------
$ 208,640
===========
</TABLE>
(6) PAYABLES TO RELATED PARTIES AND OTHER ACCRUED EXPENSES:
Payables to related parties consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------- September 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Payables to shareholders $185,676 $201,172 $ --
Payables to managing directors 153,748 84,415 --
-------- -------- -------
$339,424 $285,587 $ --
======== ======== =======
</TABLE>
Payables to shareholders of the Company bore interest at 5.95%, 6.80%, and 7.25%
for the years ended December 31, 1994 and 1995, and for the nine months ended
September 30, 1996, respectively, with related interest expense for the years
ended December 31, 1994 and 1995, and the nine months ended September 30, 1996,
totaling $12,828, $13,989, and $8,188, respectively. These loans were repaid
during the nine months ended September 30, 1996.
Payables to Managing Directors consists of bonuses, travel expenses and other
out-of-pocket expenses. There is no similar payable outstanding at September 30,
1996.
Other accrued expenses include commissions due to third parties, including
Sterling (see Note 8), for commissions due on software license contracts
totaling $-0-, $743,830 and $319,408 at December 31, 1994 and 1995 and September
30, 1996, respectively..
F-11
<PAGE> 34
(7) PENSIONS AND OTHER RETIREMENT BENEFITS:
R&O has non-contributory, unfunded defined benefit pension agreements covering
its two Managing Directors. The pensions are generally paid from the time the
Managing Director retires (at the age of 65) until death. Pension expense
totaled $7,585, $7,401 and $6,148 during the years ended December 31, 1994 and
1995 and the nine months ended September 30, 1996, respectively.
On January 1, 1994, R&O Holdings, Inc. adopted a 401(k) Plan (the Plan) which
covers substantially all of its employees. The Plan allows employees to defer a
percentage of their annual salary. R&O Holdings, Inc. matches 100% of the first
2.5% of employee contributions. Vesting of R&O Holdings, Inc.'s contributions
occurs in 20% increments with 100% vesting after 6 years of service. The
President of R&O Holdings, Inc. is the trustee of the Plan and pays for all
services and expenses. The Company incurred expenses of approximately $30,000,
$50,000 and $35,000 in the years ended December 31, 1994 and 1995 and the nine
months ended September 30, 1996, respectively, for matching contributions and
expenses of the Plan.
(8) COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases office facilities, furniture and equipment under operating
leases with remaining terms of up to ten years. Future minimum lease payments
under non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1997 $ 777,000
1998 630,000
1999 530,000
2000 497,000
2001 316,000
Thereafter 1,199,000
-------------
Total minimum lease payments $ 3,949,000
=============
</TABLE>
Rent expense under non-cancelable operating leases was $491,000, $633,000, and
$477,000 for the years ended December 31, 1994 and 1995 and for the nine months
ended September 30, 1996, respectively.
F-12
<PAGE> 35
LITIGATION
A lawsuit has been filed against R&O Holdings, Inc. whereby a customer is
seeking a refund of $195,000 paid pursuant to a license contract. The Company is
attempting to negotiate a settlement with this customer. Management has recorded
a reserve of $195,000 at September 30, 1996, to cover the Company's estimated
exposure under the lawsuit should the outcome be unfavorable.
AGREEMENTS
On January 1, 1995, the Company entered into a five year agreement with
Reischmann Informatik (RI) granting the Company an exclusive license to
customers that use the Company's Rochade product, to use, sublicense and
distribute RI's products and documentation worldwide. The Company pays RI a
commission ranging from 30% to 50% on all sales of RI products. The commission
is paid monthly after the Company receives payment from the customer. At
December 31, 1994 and 1995 and at September 30, 1996, the payable to RI totaled
$310,000, $491,000 and $47,000 respectively. Royalties expense under this
agreement totaled $349,000, $634,000 and $365,000 for the years ended December
31, 1994 and 1995 and for the nine months ended September 30, 1996,
respectively.
On September 2, 1993, the Company entered into a five-year agreement with
Sterling Software Inc. (Sterling), formerly known as KnowledgeWare, Inc. which
grants Sterling a worldwide right to market, sublicense, use, export, display
and support the Company's "Rochade ADW Package." Under the terms of the
agreement, the Company maintains ownership of the product and will provide
training to Sterling. Sterling is responsible for providing customer
maintenance, however, the Company will provide customer support for severe
problems. Sterling will pay royalties ranging from 22.5% to 50% of current list
prices to the Company for the sale of software products and royalties up to 100%
of annual maintenance fees sold. This agreement was amended in February 1995 to
include all software programs in the Company's Rochade product group, including
those products not owned by the Company, but which the Company has the right to
license to end users and to which the Company has the right to grant to Sterling
a sublicense. This amendment also changed the royalty percentages as follows:
50% of current list price on the sale of the Company products; 40% of current
list price on the sale of the Company products by a reseller; 80% of current
list price on the sale of Third Party Products, as defined; and 64% to 80% of
annual maintenance fees sold. At December 31, 1994 and 1995 and the nine month
period ended September 30, 1996, the receivable from Sterling totaled $444,000,
$866,000 and $291,000 respectively. Total royalty income earned under this
agreement totaled $1,307,000, $2,555,000 and $767,000 for the years ended
December 31, 1994 and 1995 and for the nine months ended September 30, 1996,
respectively.
Pursuant to the terms of a certain sales contract, the Company owes Sterling
commissions totaling $250,000 at December 31, 1995 and September 30, 1996. This
liability is included in other accrued expenses in the accompanying balance
sheet.
The Company has entered into a number of marketing agreements whereby a third
party markets the Company's products in exchange for a fee. These agreements
typically range for one year with annual renewal options.
F-13
<PAGE> 36
(9) SIGNIFICANT CUSTOMERS
The Company derives a significant portion of its total revenue from relatively
few customers. The percentage of total net revenue of customers to whom sales
exceed 10% of total consolidated net revenue were as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended
----------------------- September 30,
1994 1995 1996
---- ---- -------------
<S> <C> <C> <C>
Customer #1 - % 13.3% 5.5%
Customer #2 - % 10.1% - %
</TABLE>
Because of the nature of the Company's business operations, the Company
anticipates that customers that represent more than 10% of total consolidated
net revenue will vary from period to period depending on the placement of orders
by a particular customer or customers in any given period.
(10) FOREIGN OPERATIONS AND GEOGRAPHIC INFORMATION:
Sales and marketing activities related to software license fees, maintenance
fees and professional services fees are conducted in Europe, the United Kingdom
and North America. Revenue and income before provision for income taxes for each
of the periods ended December 31, 1994 and 1995 and for the nine months ended
September 30, 1996, and identifiable assets at December 31, 1994 and 1995 and at
September 30, 1996 are as follows:
<TABLE>
<CAPTION>
For the
Nine Months
Year Ended December 31, Ended
------------------------------ September 30,
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Revenue:
Europe $ 7,617,270 $ 13,098,719 $ 6,344,783
North America 4,628,002 5,102,384 4,683,360
United Kingdom 316,155 771,149 812,769
----------- ------------ ------------
Total revenue $12,561,427 $ 18,972,252 $ 11,840,912
=========== ============ ============
Income (Loss) Before Income Taxes:
Europe $ (54,413) $ 1,719,353 $ (1,424,597)
North America (532,936) (1,194,916) 86,335
United Kingdom (159,424) (86,892) 138,852
----------- ------------ ------------
Income (loss) before income
taxes $ (746,773) $ 437,545 $ (1,199,410)
=========== ============ ============
</TABLE>
F-14
<PAGE> 37
<TABLE>
<CAPTION>
December 31,
-------------------------- September 30,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Identifiable Assets:
Europe $3,513,448 $6,131,732 $2,988,124
North America 1,103,042 2,278,715 2,880,398
United Kingdom 380,919 461,895 631,761
---------- ---------- ----------
Total assets $4,997,409 $8,872,342 $6,500,283
========== ========== ==========
</TABLE>
Revenue generated by German operations from sales to unaffiliated foreign
customers was 23%, 29% and 17% of total revenues in the years ended December 31,
1994 and 1995 and for the nine months ended September 30, 1996, respectively.
F-15
<PAGE> 38
PRO FORMA COMBINED FINANCIAL DATA
The following pro forma financial data of the Company presents the
Company's unaudited pro forma combined statements of operations for the fiscal
year ended June 30, 1996, and the six months ended December 31, 1996.
On December 5, 1996, the Company acquired all of the capital stock of R&O.
The Company paid $10.8 million in cash and issued approximately 425,000 shares
of restricted Common Stock valued at $12.8 million to the selling stockholders
of R&O. Additional consideration of $2.0 million is payable on February 28,
1997. 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. The Company also assumed liabilities of approximately $9.4 million and
recorded other direct costs of approximately $3.8 million related to the
acquisition. The acquisition has been accounted for as a purchase in accordance
with Accounting Principles Board Opinion No. 16. See "Note 2 to Consolidated
Financial Statements," and "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operation -- Acquisition of R&O." The
unaudited pro forma combined statements of operations for the fiscal year ended
June 30, 1996 and the six months ended December 31, 1996 give effect to the R&O
acquisition as if it had been consummated as of the beginning of such respective
period.
P-1
<PAGE> 39
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996 SIX MONTHS ENDED DECEMBER 31, 1996
------------------------------------------------- ------------------------------------------------
Business Pro Forma Pro Forma Business Pro Forma Pro Forma
Historical Acquired Adjustments Combined Historical Acquired Adjustments Combined
---------- ----------- ----------- --------- ------------- ----------- ----------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Software license fees ..... $ 17,824 $11,318 $ - $29,142 $13,095 $2,435 $ - $15,530
Maintenance fees........... 14,305 4,262 - 18,567 8,900 2,147 - 11,047
Professional services fees 11,307 3,448 - 14,755 11,675 1,249 - 12,924
Other...................... 121 169 - 290 89 122 - 211
-------- ------- ------- ------- ------- ------ ------ -------
Total revenues......... 43,557 19,197 - 62,754 33,759 5,953 - 39,712
-------- ------- ------- ------- ------- ------ ------ -------
Operating expenses:
Cost of software license
and maintenance fees .... 2,788 1,787 400 (1) 4,975 1,577 959 167 (1) 2,703
Cost of professional
services fees ........... 8,025 4,214 (221) (2) 12,018 8,470 1,374 (161) (2)(3) 9,683
Sales and marketing ....... 18,137 6,022 (721) (2)(4) 23,438 12,320 2,243 (361) (2)(4) 14,202
Research and development .. 4,237 4,077 (257) (2)(4) 8,057 2,852 (5) 1,511 (254) (2)(3) 4,109
(4)
General and administrative 3,567 2,598 (495) (1)(2) 5,670 2,620 1,311 (501) (1)(2) 3,430
(4) (3)(4)
-------- ------- ------- ------- ------- ------ ------ -------
Total operating expenses 36,754 18,698 (1,294) 54,158 27,839 7,398 (1,110) 34,127
-------- ------- ------- ------- ------- ------ ------ -------
Income (loss) from
operations............... 6,803 499 1,294 8,596 5,920 (1,445) 1,110 5,585
-------- ------- ------- ------- ------- ------ ------ -------
Total other income
(expense)................ 1,257 (308) 227 (6) 1,176 670 (144) 138 (6) 664
-------- ------- ------- ------- ------- ------ ------ -------
Income (loss) before income
taxes.................... 8,060 191 1,521 9,772 6,590 (1,589) 1,248 6,249
Provision for income taxes .. 1,843 - 394 (7) 2,237 2,260 - (121) (7) 2,139
-------- ------- ------- ------- ------- ------ ------ -------
Net income (loss)............ $ 6,217 191 $ 1,127 $ 7,535 $ 4,330 ($1,589) $1,369 $ 4,110
======== ======= ======== ======= ======= ======= ====== =======
Earnings per common
and common share
equivalent .............. $ 0.36 $ 0.42 $ 0.24 $ 0.23
======== ======= ======= =======
Weighted average number of
common and common
share equivalents
outstanding ............. 17,391 425 (8) 17,816 17,831 365 (8) 18,196
======== ======== ======= ======= ====== =======
</TABLE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) To adjust amortization expense to reflect amortization of the cost in
excess of the fair value of net assets acquired over a 5 year period
and for amortization of other identifiable intangible assets over the
appropriate periods.
(2) To adjust payroll and employee benefits for the savings related to the
reduction of duplicate or redundant positions identified by the Company
as part of the acquisition.
(3) To adjust other operating expenses to reflect the reduction in expense
associated with expenditures which would not have been incurred had the
acquisition of R&O occurred at the beginning of the respective periods.
(4) To reflect a reduction in expenses related to excess office space that
would not have been incurred by the Company had the acquisition
occurred at the beginning of the periods presented.
(5) Excludes a charge of approximately $27.0 million for the write-off of
the purchased in-process research and development.
(6) To adjust interest expense to reflect the payoff of R&O debt assumed
in the acquisition, as of the beginning of the periods presented.
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<PAGE> 40
(7) To adjust income taxes to reflect the tax effect of the adjustments
described above.
(8) To adjust weighted average number of common and common share
equivalents outstanding as if the Common Stock issued in connection
with the acquisition of R&O had been outstanding since the beginning
of the periods presented.
The foregoing unaudited pro forma combined financial data should be
read in conjunction with the Consolidated Financial Statements of the Company
and related notes thereto. See "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations" appearing elsewhere
herein.
P-3
<PAGE> 41
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: February 7, 1997 By /s/ Steven D. Whiteman
--------------------------------
Steven D. Whiteman
President
Date: February 7, 1997 By /s/ Mark R. Schonau
--------------------------------
Mark R. Schonau
Chief Financial Officer
<PAGE> 1
Exhibit 11
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
DECEMBER 31 DECEMBER 31
------------------------ ------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS (LOSS) PER SHARE
Common Shares Outstanding, beginning of period 16,812 16,042 16,719 15,950
Effect of Weighting of Shares:
Warrants and employee stock options outstanding -- 938 -- 966
Shares purchased 95 76 47 38
Shares issued related to R&O acquisition 120 -- 60 --
Employee stock options exercised 18 36 112 128
-------- -------- -------- --------
Weighted average number of common and common
share equivalents outstanding 17,045 17,092 16,938 17,082
======== ======== ======== ========
Net income (loss) $(24,184) $ 1,640 $(22,628) $ 2,581
======== ======== ======== ========
Earnings (loss) per common and common share equivalent $ (1.42) $ 0.10 $ (1.34) $ 0.15
======== ======== ======== ========
FULLY DILUTED EARNINGS (LOSS) PER SHARE
Common Shares Outstanding, beginning of period 16,812 16,042 16,719 15,950
Effect of Weighting of Shares:
Warrants and employee stock options outstanding -- 938 -- 966
Shares purchased 95 76 47 38
Shares issued related to R&O acquisition 120 -- 60 --
Employee stock options exercised 18 36 112 128
-------- -------- -------- --------
Weighted average number of common and common
share equivalents outstanding 17,045 17,092 16,938 17,082
======== ======== ======== ========
Net income (loss) $(24,184) $ 1,640 $(22,628) $ 2,581
======== ======== ======== ========
Earnings (loss) per common and common share equivalent $ (1.42) $ 0.10 $ (1.34) $ 0.15
======== ======== ======== ========
</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.
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this registration statement of our report dated August 1, 1996
(except with respect to the stock split discussed in Note 1 and the agreement
with Tadiran Information Systems Ltd. discussed in Note 8 as to which the date
is August 30, 1996) included in VIASOFT Inc.'s Form 10-K for the year ended June
30, 1996; and our report dated December 5, 1996 on the consolidated financial
statements of Rottger & Osterberg Software-Technik GmbH and subsidiaries for the
years ended December 31, 1994 and 1995 and the nine months ended September 30,
1996, and to all references to our firm included in this registration statement.
Phoenix, Arizona,
February 6, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1997
<PERIOD-START> JUL-01-1995 JUL-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<EXCHANGE-RATE> 1 1
<CASH> 4121 9074
<SECURITIES> 20563 8778
<RECEIVABLES> 9858 25569
<ALLOWANCES> 267 526
<INVENTORY> 0 0
<CURRENT-ASSETS> 34974 45419
<PP&E> 4228 6377
<DEPRECIATION> 2584 3350
<TOTAL-ASSETS> 37525 56121
<CURRENT-LIABILITIES> 13468 36310
<BONDS> 0 0
0 0
0 0
<COMMON> 8 17
<OTHER-SE> 23628 19286
<TOTAL-LIABILITY-AND-EQUITY> 37525 56121
<SALES> 18629 33670
<TOTAL-REVENUES> 18696 33759
<CGS> 4435 10047
<TOTAL-COSTS> 15870 54797
<OTHER-EXPENSES> 3 7
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (623) (677)
<INCOME-PRETAX> 3446 (20368)
<INCOME-TAX> 865 2260
<INCOME-CONTINUING> 2581 (22628)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2581 (22628)
<EPS-PRIMARY> 0.15 (1.34)
<EPS-DILUTED> 0.15 (1.34)
</TABLE>
