<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
COMMISSION FILE NUMBER 0-25472
VIASOFT, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2892506
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3033 NORTH 44TH STREET, PHOENIX, ARIZONA 85018
(Address of principal executive offices) (Zip Code)
(602) 952-0050
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of April 30, 1998, there were 19,450,883 outstanding shares of Common Stock,
par value $.001 per share, of Viasoft, Inc.
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VIASOFT, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
and June 30, 1997 3
Consolidated Statements of Operations for the
three and nine months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
nine months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
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VIASOFT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
---------------- ---------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 28,838 $ 8,501
Investments, at amortized cost 72,189 12,697
Accounts receivable (less allowance for doubtful accounts
of $615 and $678, respectively) 25,752 21,240
Prepaid expenses and other 5,621 2,954
---------------- ---------------
Total current assets 132,400 45,392
---------------- ---------------
Furniture and equipment: 12,107 8,054
Less: Accumulated depreciation (5,175) (3,775)
---------------- ---------------
Furniture and equipment, net 6,932 4,279
---------------- ---------------
Other assets:
Investments, at amortized cost 5,052 7,377
Intangible assets, net 6,134 4,675
Other 2,422 2,878
---------------- ---------------
Total other assets 13,608 14,930
---------------- ---------------
Total assets $ 152,940 $ 64,601
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,096 $ 2,016
Accrued compensation 3,617 3,309
Accrued income taxes payable 1,933 3,276
Other accrued expenses 12,092 8,709
Deferred revenue 19,697 18,227
---------------- ---------------
Total current liabilities 39,435 35,537
---------------- ---------------
Deferred revenue, recognized after one year 233 230
---------------- ---------------
Other long term liabilities 146 138
---------------- ---------------
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, 48,000,000 shares authorized,
19,386,373 and 17,722,772 shares issued and outstanding at
March 31, 1998 and June 30, 1997, respectively 19 18
Capital in excess of par value 123,870 43,970
Common stock subscriptions receivable (31) (55)
Accumulated deficit (10,265) (14,930)
Cumulative translation adjustment (467) (307)
---------------- ---------------
Total stockholders' equity 113,126 28,696
---------------- ---------------
Total liabilities and stockholders' equity $ 152,940 $ 64,601
================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
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VIASOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Software license fees $14,720 $11,380 $44,928 $24,475
Maintenance fees 7,216 5,716 21,203 14,616
Professional services fees 4,865 6,765 14,827 18,440
Other 4 40 83 129
------------ ------------ ------------ ------------
Total revenues 26,805 23,901 81,041 57,660
------------ ------------ ------------ ------------
Operating expenses:
Cost of software license and
maintenance fees 3,509 1,221 8,031 2,798
Cost of professional services fees 4,203 5,009 13,295 13,479
Sales and marketing 10,989 8,626 30,176 20,946
Research and development 6,600 2,210 12,703 5,062
Write off of in-process research and development 7,240 -- 7,240 26,958
General and administrative 1,892 1,862 5,794 4,482
------------ ------------ ------------ ------------
Total operating expenses 34,433 18,928 77,239 73,725
------------ ------------ ------------ ------------
Income (loss) from operations (7,628) 4,973 3,802 (16,065)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 1,443 249 3,494 979
Interest expense -- 9 (1) (44)
Other income (expense), net (79) (422) (159) (429)
------------ ------------ ------------ ------------
Total other income (expense) 1,364 (164) 3,334 506
------------ ------------ ------------ ------------
Income (loss) before income taxes (6,264) 4,809 7,136 (15,559)
Provision (benefit) for income taxes (2,128) 1,661 2,471 3,921
------------ ------------ ------------ ------------
Net income (loss) ($ 4,136) $ 3,148 $ 4,665 ($19,480)
============ ============ ============ ============
Basic earnings (loss) per common share ($ 0.21) $ 0.18 $ 0.25 ($ 1.14)
============ ============ ============ ============
Weighted average number of common
shares outstanding 19,371 17,458 18,875 17,150
============ ============ ============ ============
Diluted earnings (loss) per common and
common share equivalent ($ 0.21) $ 0.17 $ 0.24 ($ 1.14)
============ ============ ============ ============
Weighted average number of common and
common share equivalents outstanding 19,371 18,337 19,747 17,150
============ ============ ============ ============
</TABLE>
4
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VIASOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 4,665 $(19,480)
-------- --------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Write off purchased in-process research and development (Note 2) 7,240 26,958
Depreciation and amortization 2,468 1,183
Loss on disposal of fixed assets -- 94
Changes in operating assets and liabilities, net of effect of business acquired
(Note 2):
Increase in accounts receivable (4,377) (3,289)
Increase in prepaid expenses and other (3,504) (242)
(Increase)/decrease in other assets 540 (2,528)
Increase/(decrease) in accrued income taxes (1,343) 2,564
Increase/(decrease) in accounts payable and other accrued expenses 1,673 (4,434)
Decrease in accrued compensation 308 1,258
Decrease in deferred revenue 1,345 7,118
-------- --------
Total adjustments 4,350 28,682
-------- --------
Net cash provided by operating activities 9,015 9,202
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (4,219) (1,935)
Cash paid for acquisition of customer list (530) --
Cash paid for business, net of cash acquired (Note 2) (7,314) (10,225)
Purchase of investments (98,549) (22,292)
Investment maturities 42,169 30,923
-------- --------
Net cash used in investing activities (68,443) (3,529)
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 80,648 952
Payments of short term debt (Note 2) -- (4,099)
Payments for offering costs (747) --
Payments received on common stock subscriptions receivable 24 5
Principal payments under equipment lease obligations -- (43)
-------- --------
Net cash provided by (used in) financing activities 79,925 (3,185)
-------- --------
Effect of exchange rate changes on cash (160) (55)
-------- --------
Net increase in cash and cash equivalents 20,337 2,433
Cash and cash equivalents, beginning period 8,501 5,009
-------- --------
Cash and cash equivalents, end of period $ 28,838 $ 7,442
======== ========
Supplemental cash flow information:
Interest paid $ -- $ 3
Income taxes paid 2,375 1,342
Disqualifying dispositions 2,696 1,199
</TABLE>
5
<PAGE> 6
VIASOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1998
(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 ("Viasoft" or 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 or nine month periods ended March 31, 1998 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, 1997.
Earnings per Common Share and Common Share Equivalent
In February, 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share," which supersedes Accounting Principles Board Opinion No.
15, the existing authoritative guidance. SFAS No. 128 is effective for financial
statements for periods ending after December 15, 1997 and requires restatement
of all prior-period earnings per share data presented. The new statement
modifies the calculations of primary and fully diluted earnings per share and
replaces them with basic and diluted earnings per share. The earnings per share
calculations for the three and nine months ended March 31, 1998 and 1997,
respectively, assume the Company had adopted SFAS No. 128 on July 1, 1996.
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.
2. ACQUISITIONS AND LICENSING AGREEMENTS
EraSoft Technologies, Inc. ("EraSoft")
On January 12, 1998, the Company acquired all of the outstanding shares of
capital stock of EraSoft for cash and certain contingent payments pursuant to a
stock purchase agreement with the stockholders of EraSoft. EraSoft developed,
marketed and supported year 2000 assessment and analysis software tools for
desktop computing. EraSoft was founded in 1996 and was headquartered in Calgary,
Alberta, Canada.
6
<PAGE> 7
The aggregate cost of the EraSoft acquisition consisted of the following (in
thousands):
<TABLE>
<S> <C>
Cash $7,795
Assumption of liabilities and acquisition costs 1,926
Additional consideration due 246
-------
Total $9,967
=======
</TABLE>
The terms of the agreement with EraSoft provide for additional consideration to
be paid if the revenue from licenses of EraSoft's products exceeds certain
targeted levels between the date of the acquisition and June 30, 2000. In
addition, the former stockholders of EraSoft will also receive additional
consideration based on revenue from EraSoft products licensed during the period
from the acquisition date to June 30, 2000. Additional consideration will be
paid in cash and recorded as an adjustment to cost in excess of net assets
acquired when earned and will be amortized either using the revenue ratio or
straight-line method through June 30, 2000, whichever results in the greater
amount of amortization during the period.
The acquisition was accounted for as a purchase in accordance with Accounting
Principles Board Opinion Nos. 16 and 17 and, accordingly, the purchased assets
and assumed liabilities were recorded at their estimated fair values at the
acquisition date. The Company received an appraisal of the intangible assets
which indicated that approximately $7.2 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 March 31, 1998. The Company originally estimated that it would need to
spend approximately $1.5 million on product integration to bring the in-process
software products to commercial availability. Viasoft has incurred approximately
$250,000 through March 31, 1998 to integrate a portion of the technology into
the Company's OnMark 2000 product line and bring this initial offering to
commercial availability in the third quarter of fiscal 1998. The Company
intended to use the purchased technology for enhancements to OnMark 2000 and in
other product lines as well, and has now added new initiatives to fully exploit
the value of the purchased technology. As a result, the Company has
significantly increased its estimate of the remaining investment and development
work required to bring the in-process technology to commercial availability in
each of these initiatives to an aggregate of $4.7 million over the next two
years. The Company allocated the aggregate cost of the acquisition as follows
(in thousands):
<TABLE>
<S> <C>
Accounts receivable $ 381
Other assets 540
In-process research and development 7,240
Purchased research and development 1,280
Other intangible assets 526
-------
$9,967
=======
</TABLE>
Other intangible assets consist of assembled workforce ($230,000) and cost in
excess of net assets acquired ($296,000). The assembled workforce and cost in
excess of net assets acquired are being amortized on a straight-line basis over
seven and five year periods, respectively.
Licensing Agreements
As part of the Company's strategy to enter into the desktop and client/server
arena, the Company entered into license agreements with several software
companies in the second quarter of fiscal
7
<PAGE> 8
1998 and January, 1998 for the rights to distribute additional desktop software
tools. The Company made payments to these companies for development of the
software tools in accordance with the Company's requirements as set out in the
agreements. Payments were made based on the effective date of each agreement and
delivery and acceptance of the different versions of the products, all of which
occurred during the Company's fiscal third quarter ended March 31, 1998. The
Company expensed these payments, approximately $3.2 million, as research and
development during the quarter ended March 31, 1998. In addition, the Company
will pay royalties to each software vendor based upon sales activity as set out
in the agreements. With the acquisition of EraSoft, as well as the licensing of
these software tools, the Company launched its year 2000 offering for the
desktop and client/server environments, OnMark 2000, during the third quarter of
fiscal 1998.
Rottger & Osterberg Software-Technik GmbH
On December 5, 1996, the Company acquired all of the outstanding shares of
capital stock of Rottger & Osterberg Software-Technik GmbH ("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 developed, marketed and
supported repository software tools through its Rochade product line, together
with related repository-based services and solutions. R&O was founded in 1976,
was headquartered in Munich, Germany and had operations in Europe and the United
States.
The following pro forma combined condensed statements of operations for the nine
months ended March 31, 1997 give effect to the R&O acquisition as if it had been
consummated as of the beginning of the period:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, 1997
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C>
Total revenues $63,613
Income before income taxes 11,392
Net income 7,473
Earnings per share $ 0.41
</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 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 date 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 large companies and similarly-sized governmental
organizations worldwide. Professional services are provided in conjunction with
software products and are also provided separately to similar-sized
organizations. The Company's products and services are marketed through its
United States sales force, both domestically and in Canada, and through foreign
subsidiaries and independent distributors in other international markets.
The Company licenses software products directly to customers, distributors, and
resellers for resale. The Company recognizes revenue in accordance with
Statement of Position 97-2, "Software Revenue Recognition". Software license
fees are recognized upon delivery and acceptance of the software, receipt of an
executed noncancellable license agreement from the customer, the distributor's
end-user, or reseller 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 on a percentage of completion basis, which is
generally as the related services are provided.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
REVENUES
Total revenues were $26,805,000 for the three months ended March 31, 1998, an
increase of 12% from $23,901,000 for the three months ended March 31, 1997.
Software license fees were $14,720,000 for the three months ended March 31,
1998, an increase of 29% from $11,380,000 for the three months ended March 31,
1997. Software license fees increased as a result of the launch of the OnMark
2000 product line, representing $5,561,000 in license fees, and continued demand
for the Company's mainframe tools to assist in addressing the year 2000 century
date change problem. Software license fees overall increased both domestically
and internationally; however, a large part of the domestic growth was from the
introduction of the OnMark 2000 product line and sales of the Company's
mainframe products decreased from the comparable quarter a year ago. The Company
was disappointed with the software license fees generated from its mainframe
products and is working to improve its sales model and execution.
9
<PAGE> 10
Maintenance fees were $7,216,000 in the three months ended March 31, 1998, an
increase of 26% from $5,716,000 in the three months ended March 31, 1997. The
increase was primarily attributable to new software licenses and increases in
the fees charged for annual maintenance.
Professional services fees were $4,865,000 for the three months ended March 31,
1998, a decrease of 28% from $6,765,000 for the three months ended March 31,
1997. Services revenue decreased due to changes in the Company's business model
for professional services and reductions in revenue recognized from a fixed
price contract. The number and size of services engagements declined as a result
of the Company's focus on selling enablement services, rather than consulting
project services. Consulting project services are large consulting projects
managed by Viasoft that provide full implementation of customer initiatives and
are staffed primarily by Viasoft and subcontracted staff. Enablement services
are solutions, such as ChangeWorks and FastPath 2000, designed by Viasoft to
assist customers in using Viasoft products to address initiatives and are
staffed primarily with customer resources. Also, revenues recognized from a
large, fixed price services engagement have decreased from the same quarter a
year ago. The Company re-evaluated this project in the fourth quarter of fiscal
1997 and determined that the level of effort to complete the engagement was more
than originally estimated, requiring a decrease in the amount of revenue
recognized for that contract going forward. Management believes this project
will be completed by June 30, 1998. The Company is currently evaluating its
overall services business model to determine the most effective mix of
enablement services and consulting projects, from both a revenue generation and
profitability standpoint. Management believes that these factors will continue
to affect revenues and that during this evaluation process and while
implementing changes to the services business model, services revenue will
fluctuate, and may decline on a year over year basis, depending on market demand
and acceptance of the Company's services offerings.
OPERATING EXPENSES
Cost of software license and maintenance fees, which includes royalties, cost of
customer support and packaging and product documentation, was $3,509,000 for the
three months ended March 31, 1998, an increase of 187% from $1,221,000 during
the three months ended March 31, 1997. Gross margins on software license and
maintenance fees decreased to 84% compared to 93% for the three months ended
March 31, 1998 and 1997, respectively. The increase in expense and the reduction
in margins are primarily due to increased royalty expenses for third-party
software. In the third quarter of fiscal 1998, royalty expense to third parties
represented 55% of cost of software license and maintenance fees as compared to
approximately 5% in the same period in fiscal 1997, due primarily to sales of
the OnMark 2000 product line requiring payment of royalties and similar payments
to third parties. Excluding royalties, expenses also increased due to additional
customer support personnel and their related costs, increased salaries and
outside consultants in the customer support area. Management anticipates that
the cost of license and maintenance fees will continue to increase and the gross
margin will continue to decrease year over year due to increased sales of
products requiring royalties to third parties.
Cost of professional services fees, which consists principally of personnel
costs, third-party subcontracting fees, and other costs related to the
professional services business, was $4,203,000 for the three months ended March
31, 1998, a decrease of 16% from $5,009,000 for the three
10
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months ended March 31, 1997. The decrease in expenses is primarily a result of
lower subcontractor costs due to the decrease in services revenues. The overall
gross margin on professional services fees for the three months ended March 31,
1998 was 14% compared to 26% for the three months ended March 31, 1997. The
decrease in margins is a result of the decline in services revenue discussed
above. Also, the Company added resources to the fixed-price contract discussed
above in order to complete the project in time. Management believes that
services margins will continue to decline year over year until this fixed-price
contract is completed and as the re-evaluation of the services business model
proceeds.
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 $10,989,000 for the three
months ended March 31, 1998, an increase of 27% from $8,626,000 for the three
months ended March 31, 1997. This increase is attributable primarily to an
increase in personnel and the associated costs, and increased marketing and
promotion costs, in large part for the launch of OnMark 2000. Additionally,
third party commissions of $344,000 related to sales through existing EraSoft
agents were also incurred in the third quarter of fiscal 1998. The Company is
currently restructuring these agreements to eliminate third party commissions
and move to a more typical reseller arrangement. These increases were partially
offset by a reduction in internal commissions as a result of the revenue mix
being more weighted towards the lower commission, third-party intensive, license
fees. Sales and marketing expenses as a percentage of total revenues increased
to 41% for the three months ended March 31, 1998, compared to 36% for the three
months ended March 31, 1997, due primarily to the increase in personnel and
marketing costs as well as the slow down in license fee growth.
Research and development expenditures consist primarily of personnel costs of
research and development staff and the facilities, computing, benefits and other
administrative costs allocated to such personnel and third-party development
costs. Total expenditures for research and development were $6,600,000 for the
three months ended March 31, 1998, excluding an approximate $7.2 million charge
for in-process research and development in connection with the EraSoft
acquisition (see Note 2), an increase of 199% from $2,210,000, for the three
months ended March 31, 1997. Research and development expenses also include
approximately $3.2 million in charges for the development of certain
technologies included in OnMark 2000 (see Note 2). Excluding these charges,
research and development expenses for the quarter were $3,413,000, an increase
of 54% over the same period in the prior year. This increase is primarily for
additional personnel and the associated costs, as well as general salary
increases, the cost of recruiting qualified personnel, and additional travel. As
a percentage of total revenues, research and development costs were 25% for the
three months ended March 31, 1998 compared to 9% for the same period in fiscal
1997. The increase in research and development cost as a percentage of revenue
is primarily due to the $3.2 million charge discussed above, the increase in
personnel and the cost of recruiting qualified development professionals, as
well as the slowdown in license fee growth.
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<PAGE> 12
General and administrative expenses include the costs of finance and accounting,
legal, human resources, corporate information systems and other administrative
functions of the Company. General and administrative expenses were $1,892,000
for the three months ended March 31, 1998, representing an increase of 2%
compared to $1,862,000 for the three months ended March 31, 1997. This increase
is a result of additional administrative personnel. As a percentage of total
revenues, general and administrative expenses decreased to 7% for the three
months ended March 31, 1998 compared to 8% for the three months ended March 31,
1997 primarily as a result of the increase in revenues.
OTHER INCOME (EXPENSE)
Interest income in the three months ended March 31, 1998 was $1,443,000,
compared to $249,000 in the three months ended March 31, 1997. This was due
primarily to interest income generated from the cash raised from the Company's
secondary offering completed on September 22, 1997. Other expense for the three
months ended March 31, 1998 was $79,000 as compared to $422,000 for the three
months ended March 31, 1997. This improvement was the result of lower foreign
currency exchange losses in fiscal 1998 as compared to fiscal 1997. See "Effects
of Inflation and Foreign Currency Exchange Fluctuations."
PROVISION FOR INCOME TAXES
The Company had an income tax benefit of $2,128,000 for the three months ended
March 31, 1998, as compared to an expense of $1,661,000 for the same period in
1997. The benefit resulted from the losses incurred due to the write-off of
in-process research and development related to the EraSoft acquisition, as well
as the research and development charges for third-party development costs. The
Company's effective tax rate was 34% for the three months ended March 31, 1998,
compared to 35% for the same period in the prior year.
COMPARISON OF NINE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
REVENUES
Total revenues were $81,041,000 for the nine months ended March 31, 1998, an
increase of 41% from $57,660,000 for the nine months ended March 31, 1997.
Software license fees were $44,928,000 for the nine months ended March 31, 1998,
an increase of 84% from $24,475,000 for the nine months ended March 31, 1997.
Software license fees increased both domestically and internationally as a
result of the continued demand for the Company's tools to assist in addressing
the year 2000 century date change problem both for the mainframe and desktop
environments, the increased demand for the Company's software tools to do
non-year 2000 maintenance or transition projects on existing systems, and
software license fees from the sale of the Rochade product line (see Note 2).
Maintenance fees were $21,203,000 in the nine months ended March 31, 1998, an
increase of 45% from $14,616,000 in the nine months ended March 31, 1997. The
increase was due to the
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<PAGE> 13
R&O acquisition, as well as new software licenses, customer system upgrades and
increases in the fees charged for annual maintenance.
Professional services fees were $14,827,000 for the nine months ended March 31,
1998, a decrease of 20% from $18,440,000 for the nine months ended March 31,
1997. Professional services fees have decreased year over year as a result of
the transition to enablement services and the reduced revenue from a fixed-price
services engagement. See discussion of professional services fees in Comparison
of Three Months Ended March 31, 1998 and March 31, 1997.
OPERATING EXPENSES
Cost of software license and maintenance fees was $8,031,000 for the nine months
ended March 31, 1998, an increase of 187% from $2,798,000 during the nine months
ended March 31, 1997. Gross margins on software license and maintenance fees
decreased to 88% compared to 93% for the nine months ended March 31, 1998 and
1997, respectively. The expense increase and margin decrease are primarily due
to additional royalty expenses to third parties. In fiscal 1998, royalty expense
to third parties represents 46% of cost of software license and maintenance fees
as compared to 4% in fiscal 1997. Sales of the OnMark 2000 product line require
payment of royalties to third parties. In addition, increases in customer
support personnel and their related costs, increased salaries and outside
consultants, amortization of the purchased research and development from the R&O
acquisition and increased costs of product documentation as a result of higher
sales volumes and new version releases of existing products contributed to the
increase in expenses. Management anticipates that the cost of license and
maintenance fees will continue to increase and the gross margin will continue to
decrease year over year due to increased sales of products requiring royalties
to third parties.
Cost of professional services fees was $13,295,000 for the nine months ended
March 31, 1998, a decrease of 1% from $13,479,000 for the nine months ended
March 31, 1997. The decrease in expenses is primarily a result of reduced
subcontractor costs and bonuses due to decreased revenues, offset by additional
personnel and their related costs, higher salaries and travel expenses. The
overall gross margin on professional services fees for the nine months ended
March 31, 1998 was 10% compared to 27% for the nine months ended March 31, 1997.
The decrease in margins is a result of the decline in services revenue, and
other factors, discussed above. Also, the Company added resources to the
fixed-price contract discussed above in order to complete the project on time.
Management believes that services margins will continue to decline year over
year as the fixed-price contract is completed and as the re-evaluation of the
services business model proceeds.
Sales and marketing expenses were $30,176,000 for the nine months ended March
31, 1998, an increase of 44% from $20,946,000 for the nine months ended March
31, 1997. This increase is attributable primarily to an increase in personnel,
including the R&O personnel, and the associated costs, higher salaries,
marketing and promotion costs, increased travel, bonuses, increased commissions
as a result of revenue growth, and the cost of recruiting qualified sales and
marketing personnel. Sales and marketing expenses as a percentage of total
revenues was 37% for
13
<PAGE> 14
the nine months ended March 31, 1998, compared to 34% for the nine months ended
March 31, 1997, due primarily to the increase in personnel and marketing costs.
Research and development expenditures were $12,703,000 for the nine months ended
March 31, 1998, an increase of 151% from $5,062,000, excluding approximate
charges of $7.2 million and $27.0 million for in-process research and
development in connection with the EraSoft and R&O acquisitions, in the nine
months ended March 31, 1998 and 1997, respectively. Research and development
expenses in fiscal 1998 include approximately $3.2 million in expense related to
the OnMark 2000 product. See Comparison of Three Months Ended March 31, 1998 and
March 31, 1997 Discussion. Excluding these charges, research and development
costs for the nine months ended March 31, 1998 were $9,516,000, an increase of
88% over the same period in fiscal 1997. These increases resulted from
additional personnel and the associated costs, including EraSoft and R&O's
research and development staffs, as well as general salary increases, and the
cost of recruiting personnel and external consultants. As a percentage of total
revenues, research and development costs were 16% for the nine months ended
March 31, 1998 compared to 9% for the same period in fiscal 1997. The increase
in research and development cost as a percentage of revenue is primarily due to
the $3.2 million in charges noted previously, the increase in personnel, and the
cost of recruiting qualified development professionals.
General and administrative expenses were $5,794,000 for the nine months ended
March 31, 1998, representing an increase of 29% compared to $4,482,000 for the
nine months ended March 31, 1997. This increase is a result of additional
administrative personnel, including R&O personnel, and their related costs,
general salary increases, additional legal fees and travel costs, and
amortization of intangibles related to the R&O and EraSoft acquisitions. As a
percentage of total revenues, general and administrative expenses decreased to
7% for the nine months ended March 31, 1998 compared to 8% for the nine months
ended March 31, 1997 primarily as a result of the increase in revenues.
OTHER INCOME (EXPENSE)
Interest income in the nine months ended March 31, 1998 was $3,494,000, compared
to $979,000 in the nine months ended March 31, 1997. This was due primarily to
interest income generated from the cash raised from the Company's secondary
offering completed on September 22, 1997. Other expense for the nine months
ended March 31, 1998 was $159,000 as compared to an expense of $429,000 for the
nine months ended March 31, 1997, as foreign currency exchange losses decreased
in fiscal 1998. See "Effects of Inflation and Foreign Currency Exchange
Fluctuations."
PROVISION FOR INCOME TAXES
The provision for income taxes was $2,471,000 and $3,921,000 for the nine months
ended March 31, 1998 and 1997, respectively. The Company's effective tax rate
was 35% for the nine months ended March 31, 1998, compared to 36%, excluding the
effect of the nondeductible purchased in-process research and development
charge, for the same period in 1997.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash and cash equivalents and investments of
$106,079,000, representing an increase of $77,504,000 from the total of
$28,575,000 at June 30, 1997. The increase is primarily a result of the
successful completion of the Company's secondary offering of common stock on
September 22, 1997, which raised $76,180,000. The remaining increase is
primarily a result of cash flow from operations.
The Company's net cash provided by operating activities was $9,015,000 and
$9,202,000 for the nine months ended March 31, 1998 and 1997, respectively. Net
cash provided from operations for the nine months ended March 31, 1998 was
composed primarily of net income excluding non-cash charges for the write-off of
purchased in-process research and development for the EraSoft acquisition,
depreciation and amortization, and offset by a decrease in working capital,
primarily from a decrease in accounts receivable and prepaid assets. Net cash
provided by operations for the nine months ended March 31, 1997 was composed
primarily of net loss offset by non-cash charges for the write-off of the
purchased in-process research and development related to the R&O acquisition,
depreciation and amortization, and a net increase in working capital.
The Company's investing activities used cash of $68,443,000 and $3,529,000 in
the nine months ended March 31, 1998 and 1997, respectively. In the nine months
ended March 31, 1998, cash was used for the purchase of investments in excess of
investment maturities, and to a lesser extent, the purchase of EraSoft and
furniture, fixtures equipment and software, as well as for the acquisition of a
customer list for the Company's new direct operation in France. In the nine
months ended March 31, 1997, the primary use of cash was for the purchase of R&O
and to a lesser extent, the purchase of furniture, fixtures and equipment,
offset by investment maturities of exceeding purchases.
The Company's financing activities provided cash of $79,925,000 and used cash of
$3,185,000 in the nine months ended March 31, 1998 and 1997, respectively. In
the nine months ended March 31, 1998, cash was primarily provided by the
completion of the Company's secondary offering net of payments for offering
costs. In the nine months ended March 31, 1997, cash was used primarily for
payment of R&O debt acquired, offset in part by the sale of common stock through
the employee stock purchase plan and the exercise of stock options.
As of March 31, 1998, the Company did not have any material commitments for
capital expenditures. For the remainder of fiscal 1998, the Company anticipates
capital expenditures of approximately $1.1 million, primarily for computer
hardware and software, leasehold improvements for new offices and to update the
Company's communications equipment and systems.
On September 22, 1997, the Company received proceeds in an aggregate amount of
$76,180,000 from a secondary offering of 1,465,000 shares of its common stock.
The Company expects that the proceeds of this offering and existing working
capital, together with cash from operations, will be sufficient to meet its
capital and liquidity needs for the foreseeable future.
15
<PAGE> 16
YEAR 2000 CONSIDERATIONS
The Company has established a formal program to address any potential year 2000
compliance issues relating to its (i) internal operating systems, (ii) products
and (iii) distributors, resellers and vendors. The Company has completed an
assessment of all of its major internal operating systems and is continuing to
monitor any new additions to its internal operating systems for year 2000
compliance. The Company is currently installing a new enterprise-wide accounting
system and an order processing/customer support system, each of which has been
warranted by the vendor to be year 2000 compliant. All of the Company's
internally developed products have been designed and tested to satisfy the
Company's year 2000 specifications. However, the Company has determined that a
small number of the Company's product offerings that include third-party
products have not yet been updated to meet the Company's year 2000 compliance
standards and the Company is continuing to monitor the third party's efforts to
satisfy the Company's year 2000 specifications. The Company is also in the
process of reviewing the status of its distributors, resellers and vendors with
respect to year 2000 compliance. The cost of the Company's year 2000 compliance
program has not had and is not expected to have a material effect on the
Company's results of operations or liquidity. However, there can be no assurance
that the Company will not experience material adverse consequences in the event
that the Company's year 2000 compliance program is not successful or its
distributors, resellers or vendors are unable to resolve their year 2000
compliance issues in a timely manner.
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 (except as described below)
foreign currency fluctuations. Sales made through the Company's foreign
distributors are denominated in U.S. dollars except in Italy and Spain, where
they are denominated in local currency. Sales by the Company's foreign
subsidiaries are principally denominated in the currencies of the countries
where sales are made. The Company experienced losses of approximately $140,000
from foreign currency fluctuations in the nine months ended March 31, 1998. The
Company's unhedged foreign currency exposure at March 31, 1998 consisted of the
following (in thousands):
16
<PAGE> 17
<TABLE>
<CAPTION>
NET SHORT-TERM RECEIVABLES NET RECEIVABLES
(PAYABLES) WITH FOREIGN NET INVESTMENT IN FROM FOREIGN
SUBSIDIARIES FOREIGN SUBSIDIARIES DISTRIBUTORS TOTAL
<S> <C> <C> <C> <C>
Canada $ 605 $ 1,329 $ 1,934
United Kingdom 383 (940) (557)
Australia 906 44 950
Germany (5,638) 15,336 9,698
France 1,493 (396) 1,097
Belgium 438 (322) 116
Netherlands 2 (45) (43)
Mexico 29 (15) 14
Spain --- --- $ 762 762
Italy --- --- 481 481
---------- ------------ ------- ----------
TOTAL ($ 1,782) $14,991 $ 1,243 $14,452
========== ============ ======= ==========
</TABLE>
The Company has not to date sought to hedge the risks associated with
fluctuations in foreign exchange rates. The Company continues to evaluate the
relative costs and benefits of hedging and may seek to hedge these risks in the
future, if appropriate. Gains and losses relating to translation of the
financial statements of the Company's foreign subsidiaries are included as a
separate component of stockholders' equity in the Company's Consolidated
Financial Statements.
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 and Section 21E of the Exchange Act and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. Such
forward-looking statements involve risks and uncertainties and include, but are
not limited to, statements regarding future events and the Company's plans and
expectations. The Company's actual results may differ materially from such
statements. Factors that may cause or contribute to such differences include,
but are not limited to, the Company's dependence on the year 2000 century date
conversion market, both mainframe and desktop, and dependence on its ESW primary
product line, fluctuations in revenues and operating results, fluctuations in
market demand and product mix, the Company's ability to manage changes in its
professional services business and risks associated with a professional services
business, including volatility of workload, ability to successfully manage
consulting projects, proper allocation of resources and hiring, training and
retaining qualified personnel, risks associated with international operations
including longer payment cycles and exchange rate fluctuations, the Company's
ability to manage rapid change in its business and industry, the Company's
ability to 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, the performance of the Company's
distributors, resellers and solution providers, the Company's dependence on key
management and technical personnel and increasing competition to attract skilled
personnel, the adequacy of the Company's program to address year 2000 compliance
17
<PAGE> 18
issues, and general economic and business conditions, as well as factors
discussed elsewhere in this Form 10-Q, in "Factors That May Affect Future
Results" in the Company's Form 10-K for the year ended June 30, 1997 and other
risks detailed from time to time in the Company's filings with the Securities
and Exchange Commission.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
NUMBER DESCRIPTION
11 Computation of Earnings Per Share for the three
and nine month periods ended March 31, 1998
and 1997
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Viasoft, Inc.
Date: May 15, 1998 By /s/ Steven D. Whiteman
----------------------
Steven D. Whiteman
Chief Executive Officer
Date: May 15, 1998 By /s/ Mark R. Schonau
-------------------
Mark R. Schonau
Chief Financial Officer
19
<PAGE> 20
EXHIBIT INDEX
NUMBER DESCRIPTION
11 Computation of Earnings Per Share for the three
and nine month periods ended March 31, 1998
and 1997
27 Financial Data Schedule
<PAGE> 1
VIASOFT, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
EXHIBIT 11
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Common Shares Outstanding, beginning of period 19,358 17,398 17,723 16,719
Effect of Weighting of Shares:
Shares issued in secondary offering -- -- 1,021 --
Shares issued related to R&O acquisition -- -- -- 180
Shares purchased -- -- 15 79
Employee stock options exercised 13 60 116 172
-------- -------- -------- --------
Weighted average number of common shares outstanding 19,371 17,458 18,875 17,150
======== ======== ======== ========
Net income (loss) $ (4,136) $ 3,148 $ 4,665 $(19,480)
======== ======== ======== ========
Earnings (loss) per common share $ (0.21) $ 0.18 $ 0.25 $ (1.14)
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
Common Shares Outstanding, beginning of period 19,358 17,398 17,723 16,719
Effect of Weighting of Shares:
Warrants and employee stock options outstanding -- 879 872 --
Shares issued in secondary offering -- -- 1,021 --
Shares issued related to R&O acquisition -- -- -- 180
Shares purchased -- -- 15 79
Employee stock options exercised 13 60 116 172
-------- -------- -------- --------
Weighted average number of common and common
share equivalents outstanding 19,371 18,337 19,747 17,150
======== ======== ======== ========
Net income (loss) $ (4,136) $ 3,148 $ 4,665 $(19,480)
======== ======== ======== ========
Earnings (loss) per common and common share equivalent $ (0.21) $ 0.17 $ 0.24 $ (1.14)
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 28,838
<SECURITIES> 77,241
<RECEIVABLES> 26,367
<ALLOWANCES> 615
<INVENTORY> 0
<CURRENT-ASSETS> 132,400
<PP&E> 12,107
<DEPRECIATION> 5,175
<TOTAL-ASSETS> 152,940
<CURRENT-LIABILITIES> 39,435
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 113,107
<TOTAL-LIABILITY-AND-EQUITY> 152,940
<SALES> 80,958
<TOTAL-REVENUES> 81,041
<CGS> 21,326
<TOTAL-COSTS> 77,239
<OTHER-EXPENSES> 160
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,493)
<INCOME-PRETAX> 7,136
<INCOME-TAX> 2,471
<INCOME-CONTINUING> 4,665
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,665
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.24
</TABLE>
