<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
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)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 94-2892506
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
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 October 29, 1999, there were 18,024,600 outstanding shares of Common
Stock, par value $.001 per share, of Viasoft, Inc.
<PAGE> 2
VIASOFT, INC. AND SUBSIDIARIES
INDEX
<TABLE>
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999
and June 30, 1999 3
Consolidated Statements of Operations for the
three months ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the three
months ended September 30, 1999 and 1998 5
Consolidated Statements of Comprehensive Income for
the three months ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 11
Item 3. Legal Proceedings 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
</TABLE>
2
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VIASOFT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
---- ----
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,894 $ 25,609
Investments, at amortized cost 54,479 55,650
Accounts receivable (less allowance for doubtful accounts
of $651 and $829, respectively) 19,006 23,632
Prepaid expenses and other 5,743 5,966
--------- ---------
Total current assets 103,122 110,857
--------- ---------
Furniture and equipment, net 5,603 6,349
--------- ---------
Other assets:
Investments, at amortized cost 9,351 4,791
Intangible assets, net 3,511 4,232
Long-term deferred tax asset 7,131 7,527
Other 396 413
--------- ---------
Total other assets 20,389 16,963
--------- ---------
Total assets $ 129,114 $ 134,169
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 951 $ 1,012
Accrued compensation 1,928 2,488
Accrued income taxes payable 2,582 2,966
Restructuring reserves 2,329 3,278
Other accrued expenses 8,408 9,949
Deferred revenue 17,296 19,541
--------- ---------
Total current liabilities 33,494 39,234
--------- ---------
Deferred revenue, recognized after one year 129 206
--------- ---------
Other long term liabilities -- 99
--------- ---------
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, 19,456,133 shares issued at both
September 30, 1999 and June 30, 1999, respectively 19 19
Capital in excess of par value 122,694 122,989
Accumulated deficit (15,064) (15,485)
Cumulative translation adjustment (560) (814)
Treasury stock, at cost, 1,505,003 and 1,550,296 shares at
September 30, 1999 and June 30, 1999, respectively (11,598) (12,079)
--------- ---------
Total stockholders' equity 95,491 94,630
--------- ---------
Total liabilities and stockholders' equity $ 129,114 $ 134,169
========= =========
</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
SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Revenue:
Software license fees $ 7,052 $ 9,735
Maintenance fees 8,298 8,293
Professional services fees 3,288 7,288
Other 7 7
-------- --------
Total revenues 18,645 25,323
-------- --------
Operating expenses:
Cost of software license and
maintenance fees 2,667 3,749
Cost of professional services fees 3,744 5,992
Sales and marketing 7,419 11,105
Write-off of purchased in-process research
and development -- 5,013
Research and development 2,334 4,454
General and administrative 2,767 2,662
Restructuring charge -- 4,790
-------- --------
Total operating expenses 18,931 37,765
-------- --------
Income (loss) from operations (286) (12,442)
-------- --------
Other income (expense):
Interest income 1,028 1,369
Interest expense -- --
Other income (expense), net (92) 207
-------- --------
Total other income (expense) 936 1,576
-------- --------
Income (loss) before income taxes 650 (10,866)
Income tax (benefit)/provision 229 (3,799)
-------- --------
Net income (loss) $ 421 $ (7,067)
======== ========
Basic earnings (loss) per common share $ 0.02 $ (0.37)
======== ========
Weighted average number of common shares outstanding 17,939 18,955
======== ========
Diluted earnings (loss) per common and common share
equivalent $ 0.02 $ (0.37)
======== ========
Weighted average number of common and common share
equivalents outstanding 18,414 18,955
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
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VIASOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 421 $ (7,067)
-------- --------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Write-off of purchased in-process research and development -- 5,013
Restructuring charge -- 4,780
Depreciation and amortization 1,525 1,447
Changes in operating assets and liabilities net of effect of business acquired:
Decrease in accounts receivable 4,626 9,572
Decrease in prepaid expenses and other 223 2,852
(Increase) decrease in other assets 407 (3,185)
Decrease in accrued income taxes (384) (4,673)
Decrease in accounts payable and other accrued expenses (2,551) (1,401)
Decrease in accrued compensation (560) (1,535)
Decrease in deferred revenue (2,421) (5,007)
-------- --------
Total adjustments 865 7,863
-------- --------
Net cash provided by operating activities 1,286 796
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (108) (1,297)
Cash paid for business, net of cash acquired -- (6,000)
Purchase of investments (27,332) (7,598)
Investment maturities 23,943 20,701
-------- --------
Net cash (used in) provided by investing activities (3,497) 5,806
-------- --------
FINANCING ACTIVITIES:
Purchase of treasury stock -- (8,880)
Sale of treasury stock 186 241
-------- --------
Net cash provided by (used in) financing activities 186 (8,639)
-------- --------
Effect of exchange rate changes on cash 310 301
-------- --------
Net decrease in cash and cash equivalents (1,715) (1,736)
Cash and cash equivalents, beginning period 25,609 37,809
-------- --------
Cash and cash equivalents, end of period $ 23,894 $ 36,073
======== ========
Supplemental cash flow information:
Income taxes paid $ 28 $ 2,871
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
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VIASOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Net Income (loss) $ 421 $ (7,067)
Other comprehensive income, net of tax
Foreign currency translation adjustments 165 196
------ ---------
Comprehensive income (loss) $ 586 $ (6,871)
====== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
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VIASOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1999
(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 ("GAAP") for interim financial
information and the instructions to Form 10-Q. Accordingly, they do not include
all the information and footnotes required by 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 period ended September 30, 1999 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, 1999.
2. PROPOSED ACQUISITION OF THE COMPANY
On July 15, 1999, Viasoft and Compuware Corporation ("Compuware") announced
the execution of a merger agreement providing for Compuware to acquire Viasoft
through a cash tender offer followed by a merger ("Merger"). As contemplated by
the merger agreement, on July 22, 1999, a wholly-owned subsidiary of Compuware,
CV Acquisition, Inc., offered to purchase all outstanding shares of Viasoft's
Common Stock for $9.00 per share on the terms and conditions of an Offer to
Purchase submitted to the Viasoft shareholders. Following completion of the
tender offer and subject to satisfaction of certain conditions, CV Acquisition,
Inc. will be merged into Viasoft, with Viasoft surviving as a wholly-owned
subsidiary of Compuware. This offer had an original expiration date of August
19, 1999, which subsequently has been extended and now has an expiration date of
November 29, 1999. The expiration date may be further extended by Compuware and
Viasoft.
Consummation of the tender offer is subject to certain conditions, including
the condition that at least a majority of the shares of Viasoft Common Stock
outstanding on a fully diluted basis are tendered and not withdrawn.
Consummation of the tender offer is also subject to the expiration or
termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act. On August 3, 1999, both Viasoft and Compuware received
requests for additional information and documents from the Antitrust Division of
the Department of Justice
7
<PAGE> 8
("DOJ") in connection with its review of the companies' Hart-Scott-Rodino
filings. As a result of these information requests, Compuware extended the
tender offer to allow sufficient time to comply with the information requests
and to allow the DOJ time to complete its investigation.
On October 29, 1999 the DOJ filed a civil antitrust lawsuit against
Compuware and Viasoft in the United States District Court for the District of
Columbia to block the planned acquisition of Viasoft by Compuware. The DOJ
alleged that competition in the mainframe testing/debugging and fault
diagnostic tool markets would be substantially lessened as a result of the
proposed transaction. Compuware and Viasoft extended the tender offer until
November 5, 1999 and again to November 29, 1999 in order to provide additional
time to evaluate and pursue available options in defense of the civil action.
Compuware and Viasoft announced on November 5, 1999, that approximately
14,839,718 shares, or 82%, of the outstanding Viasoft Common Stock had been
validly tendered and not withdrawn pursuant to the tender offer, based upon the
latest count of tendered shares.
Viasoft believes that its business, results of operation, financial
condition and liquidity have been materially adversely affected by the
announcement of the proposed acquisition by Compuware. Relationships with
customers have been adversely affected and revenues from product licenses and
professional services have declined as customers have delayed or reconsidered
purchase decisions. In addition, the Company has experienced significant
employee attrition as a result of the announcement of the Compuware transactions
and the subsequent delays in closing the acquisition. The Company believes that
its business, results of operations, financial condition and liquidity would be
further materially adversely affected if this transaction is not completed
without undue additional delays. In particular, Viasoft believes that its
relationships with its customers and employees would be seriously damaged.
In addition, the merger agreement with Compuware imposes restrictions on
Viasoft's conduct of its business and its ability to take certain actions
without Compuware's consent. These restrictions could have a material adverse
affect on Viasoft's business.
3. ACQUISITION
SHL SYSTEMHOUSE CO. ("SHL")
In July 1998, the Company acquired exclusive worldwide marketing and
development rights to SHL TRANSFORM, a knowledge-driven process management and
productivity software toolset and its integrated process management
methodologies, from the Online Knowledge Group (OKG) of Canadian-based SHL.
Viasoft renamed the product Visual Process. As part of the agreement, the
Company had the option to hire certain employees of SHL in October 1998, had the
option to purchase certain furniture and equipment used by the SHL development
employees and has the exclusive right to remarket the licensed software to SHL's
existing
8
<PAGE> 9
customers. As a result, the agreement was accounted for as a purchase in
accordance with Accounting Principles Board Opinion Nos. 16 and 17.
The aggregate cost of the SHL acquisition consisted of the following (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash........................................... $6,000
Acquisition costs.............................. 886
------
Total.......................................... $6,886
======
</TABLE>
The transaction was structured as a worldwide perpetual source code license
and is exclusive, subject to SHL's retained right to use the technology for its
own internal use and in its consulting business. Viasoft will also pay certain
royalties to SHL based on sales of methodology and training components.
In connection with the acquisition of SHL, the Company received an
independent appraisal of the assets acquired which indicated that approximately
$5.0 million of the acquired intangible assets was in-process research and
development projects that had not yet reached technological feasibility. Other
intangible assets consist of $1.2 million of purchased software and $365,000 of
cost in excess of net assets acquired and $334,000 of assembled workforce. This
allocation to in-process research and development represents the estimated fair
value based on risk-adjusted cash flows related to incomplete projects. A
discount range of 37.5% to 42.5% was used for valuing the in-process research
and development projects. The purchased software, assembled workforce and cost
in excess of net assets acquired are being amortized on a straight-line basis
over five, six and five years, respectively.
The Company originally planned to integrate the Visual Process technology
and methodology into its entire product and service lines to deliver repeatable,
defined business solutions to its customers. The first of two projects was to
migrate all of the Company's existing business solution processes to the process
management toolset. This project was estimated to cost $500,000. The integration
of the Company's existing business solution processes was substantially complete
as of December 31, 1998, and did cost approximately $500,000. The second project
was the re-design, development and testing necessary to migrate the underlying
process management tool from 16-bit architecture to 32-bit architecture in order
to integrate the tool with the Company's existing and planned products. This
project was estimated to cost approximately $2.6 million and to be complete at
the end of calendar 1999.
In connection with the Company's reorganization and change in business
model, the plans for this product were significantly altered. During the fourth
quarter of fiscal 1999, the Company decided to sell the license to the
technology and to discontinue future development on the product. The Company
hired a consulting firm to provide an estimated market value of the product and
to market the product to potential buyers. In addition, the Company wrote down
the intangible assets related to the SHL purchase to their estimated fair market
value, resulting in a charge of approximately $130,000, and reclassified the
assets to current assets. Viasoft has shut
9
<PAGE> 10
down the Visual Process development lab in Toronto, Canada and the remaining
support of Visual Process was moved to its Phoenix office in the second quarter
of fiscal 2000.
4. BUSINESS SEGMENTS
Viasoft operates primarily in three business segments in the software
industry: domestic products, domestic professional services and international
products and professional services. For purposes of these segments, all of the
Americas operations are reported as part of the domestic segment. The Company
evaluates each business segment based upon operating profit. Each business
segment's operating profits do not include an allocation of the cost of license
and maintenance, research and development costs, corporate overhead costs,
write-offs of purchase in-process research and development charges,
restructuring charges and other income. The Company does not evaluate assets and
capital expenditures on a segment basis.
10
<PAGE> 11
Segment information for the three months ended September 30, 1999 and 1998,
is as follows (in thousands):
<TABLE>
<CAPTION>
For the three months ended
September 30,
1999 1998
---- ----
<S> <C> <C>
REVENUES:
Domestic products $ 8,551 $ 11,915
Domestic professional services 2,247 6,246
International products and professional services 7,847 7,162
-------- --------
Total revenues 18,645 25,323
Operating expenses:
Domestic products 2,748 5,139
Domestic professional services 2,543 5,140
International products and professional services 4,709 4,898
Cost of license and maintenance 2,605 3,743
Research and development 2,334 4,453
Corporate overhead 3,992 4,589
-------- --------
Total operating expenses 18,931 27,962
INCOME (LOSS) FROM OPERATIONS, BEFORE WRITE-OFF OF PURCHASED
IN-PROCESS RESEARCH AND DEVELOPMENT, RESTRUCTURING
CHARGES, OR OTHER INCOME
Domestic products 5,803 6,776
Domestic professional services (296) 1,106
International products and professional services 3,138 2,264
Cost of license and maintenance (2,605) (3,743)
Research and development (2,334) (4,453)
Corporate overhead (3,992) (4,589)
-------- --------
TOTAL INCOME (LOSS) FROM OPERATIONS, BEFORE WRITE-OFF OF
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT,
RESTRUCTURING CHARGES, OR OTHER INCOME (286) (2,639)
Write-off of purchased in-process research and development -- (5,013)
Restructuring charges -- (4,790)
Other income 936 1,576
-------- --------
Income (loss) before income taxes $ 650 $(10,866)
======== ========
</TABLE>
The Company operates in one industry segment which includes the
development, marketing and support of business solutions that enable large
organizations worldwide to understand, manage, evolve, reuse, transition and
modernize mission-critical applications that support their fundamental business
processes. These business solutions are provided through integrated software
products and specialized professional consulting services.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Except for historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. Such
forward-looking statements include, but are not limited to, statements regarding
future events and the Company's plans and expectations. The Company's actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
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, 1999 and other
risks detailed from time to time in the Company's filings with the Securities
and Exchange Commission. See "Special Note on Forward-Looking Statements."
OVERVIEW
On July 15, 1999, Viasoft and Compuware announced the execution of a merger
agreement providing for Compuware to acquire Viasoft through a cash tender
offer, subject to the satisfaction of certain conditions. The expiration date of
this offer has been extended to November 29, 1999, in order to provide
additional time to evaluate available options to defend a civil action filed by
the Antitrust Division of the Department of Justice ("DOJ") to block the
acquisition. (See Note 2 to the Consolidated Financial Statements).
Viasoft believes that its business, results of operation, financial
condition and liquidity have been materially adversely affected by the
announcement of the proposed acquisition by Compuware. Relationships with
customers have been adversely affected and revenues from product licenses and
professional services have declined as customers have delayed or reconsidered
purchase decisions. In addition, the Company has experienced significant
employee attrition as a result of the announcement of the Compuware transactions
and the subsequent delays in closing the acquisition. The Company believes that
its business, results of operations, financial condition and liquidity would be
further materially adversely affected if this transaction is not completed
without undue additional delays. In particular, Viasoft believes that its
relationships with its customers and employees would be seriously damaged. See
Note 2 to the Consolidated Financial Statements.
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 Global 5000 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 domestic and international direct sales organizations, through a number of
foreign independent distributors located in Europe, the Far East, South Africa
and Latin America, and through a reseller channel established during fiscal 1998
primarily to sell the OnMark 2000 product line.
12
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Revenue is recognized in accordance with Statement of Position ("SOP") 97-2,
"Software Revenue Recognition" and SOP 98-9 which modifies SOP 97-2 with respect
to certain transactions involving multiple element arrangements. Accordingly,
revenue from software licensing is recognized when delivery of the software has
occurred, a signed non-cancelable license agreement has been received from the
customer or a purchase order from a reseller after receipt of an executed
reseller agreement and any remaining obligations under the license agreement are
insignificant. Revenue from software license fees related to the Company's
obligation to provide certain post-contract customer support without charge for
the first year 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 contracts. Revenues from professional services fees are
recognized generally as related services are provided. Professional services do
not involve significant customization, modification or production of the
licensed software.
RESTRUCTURING
In the first quarter of fiscal 1999, the Company established and began the
implementation of a cost reduction and restructuring plan for the purpose of
aligning expenses with a decrease in forecasted revenues, as the year 2000
market declined, and to allow the business to invest in other products and
service solutions. In April 1999, the Company announced a reorganization of its
operations to transition the business to a solutions-driven model focused on
e-business enablement, and accordingly developed plans to grow its services
business.
As part of the reorganization, the Company increased its investment in its
professional services organization by creating a dedicated sales force and
regionalizing delivery. The domestic sales organization was reorganized to
better support sales of e-business solutions and enhance support of existing
customers. The development organization was realigned to focus on two areas:
developing technology to support e-business enablement services and enhancing
the value of Viasoft core products for existing customers.
In the first quarter of fiscal 1999, the Company took a $4.8 million pre-tax
restructuring charge. This restructuring charge covered $3.1 million for
severance and related costs for a reduction in workforce of approximately 10% of
the Company's 550 employees worldwide; $800,000 for office consolidation costs
including leasehold termination payments and other facility exit costs for
certain offices worldwide which were unrelated to the Company's core business;
and $900,000 for the write down of intangible assets which had become impaired
as determined by a net realizable value test based on future forecasted revenues
The Company took a pre-tax charge of approximately $7.5 million in the
fourth quarter of fiscal 1999 in connection with its April reorganization and
transition to the new business model. This charge related to severance for a
reduction in workforce of approximately 20% of its 500 employees worldwide of
$2.8 million; a write down in accordance with SFAS No. 121 of certain
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long-lived assets based on the net present value of future cash flows of $4.3
million; a write down of certain capitalized software which was determined to be
impaired through a net realizable value test based on future forecasted revenues
of $300,000; and additional facility exit costs of $100,000.
As of September 30, 1999, approximately 182 employees have been separated
from the Company in conjunction with the fiscal 1999 reorganization and
restructuring plans and $4.4 million in severance and related costs had been
paid out or incurred. Approximately $96,000 had been used for office
consolidation costs as of September 30, 1999.
The discussion of results of operations for the three months ended
September 30, 1999 and 1998, below excludes the effect of these restructuring
charges and purchased in-process research and development charges.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
REVENUES
Total revenues were $18,645,000 for the quarter ended September 30, 1999 as
compared to $25,323,000 for the quarter ended September 30, 1998. Software
license fees were $7,052,000 for the quarter ended September 30, 1999, a
decrease of 28% from $9,735,000 in the quarter ended September 30, 1998. The
decrease in software license fees related to customer decisions to postpone or
reconsider purchases due to the proposed acquisition of the Company by Compuware
and, additionally, the slowdown in the worldwide demand for the Company's year
2000 mainframe and desktop software tools. Beginning in late fiscal 1999, OnMark
2000 license revenues began to decline significantly both domestically and
internationally. The Company anticipates that this will accelerate as the year
2000 approaches and that the year 2000 market will be substantially over by
mid-2000. Management believes that license fee revenue will continue to be
adversely affected until the proposed merger with Compuware is completed.
Maintenance fees were $8,298,000 in the quarter ended September 30, 1999
compared to $8,293,000 in the quarter ended September 30, 1998. With the
Company's entry into the desktop software market with the OnMark 2000 product
line, it has experienced that a large number of OnMark customers do not purchase
maintenance services. As a result, the Company has begun to experience erosion
in maintenance revenue growth due to a large percentage of license sales in late
fiscal 1998 and throughout fiscal 1999 being OnMark 2000 licenses. In addition,
in fiscal 1999 and continuing into fiscal 2000, the Company saw instances of
maintenance cancellations that management believes were the result of customers
canceling maintenance after completion of their year 2000 remediation projects.
If, in the future, customers discontinue use of Viasoft products because they
purchased them solely for year 2000 projects, it could have a material adverse
effect on the Company's maintenance revenues.
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<PAGE> 15
Professional services fees were $3,288,000 for the quarter ended September
30, 1999, a decrease of 55% from $7,288,000 in the quarter ended September 30,
1998. In April 1999, the Company announced a reorganization of its operations to
transition to a solutions-driven model focused on e-business enablement, and
accordingly developed plans to grow its services business. Management believed
that the Company could experience weakness in professional services fee revenue
and margins as it transitioned to this new model. In July 1999, the proposed
acquisition of the Company by Compuware was announced. As a result of this
announcement, the Company has not been able to fully implement the planned
transition to a solutions-based model. The decrease in professional services
fee income is a result of customers, both domestically and internationally,
delaying decisions regarding signing new services agreements pending the
outcome of the merger with Compuware as well as the reorganization commenced
in the fourth quarter of fiscal 1999. Management believes that professional
services fee revenue will continue to be adversely affected until the proposed
merger with Compuware is completed.
COST OF REVENUES
Cost of software license and maintenance fees, which includes royalties,
cost of customer support and packaging and product documentation, was $2,667,000
in the quarter ended September 30, 1999, a decrease of 29% from $3,749,000 in
the quarter ended September 30, 1998. Gross margins on software license and
maintenance fees increased to 83% in the quarter ended September 30, 1999
compared to 79% in the quarter ended September 30, 1998. Royalty expenses in the
quarter ended September 30, 1999 decreased 51% over the same period in fiscal
1999, primarily due to the decrease in sales of the OnMark 2000 product line.
All products in the OnMark product line require royalty payments to third
parties. Other factors contributing to the decrease in cost of software license
and maintenance fees and improvement in margins included lower software license
fee revenues, the reduction in the number of customer support personnel
worldwide as a result of the Company's reorganization which commenced in fiscal
1999 as well as the announcement of the Compuware transaction, and lower product
documentation and packaging costs.
Cost of professional services fees, which consists principally of personnel
costs, third-party subcontracting costs, and other costs related to the
professional services business, was $3,744,000 in the quarter ended September
30, 1999, a decrease of 38% from $5,992,000 in the quarter ended September 30,
1998. The decrease in expenses was primarily a result of lower subcontractor
costs in line with the decrease in professional services fee revenues. The gross
margin for professional services was a negative 14% in the quarter ended
September 30, 1999 compared to 18% in the quarter ended September 30, 1998. The
negative margin was a result of the Company' inability to cover the costs of the
overhead in the professional services group due to the decline in professional
services fee revenue in the first quarter of fiscal 2000. The Company
anticipates the continuation of breakeven or negative professional services
margins until the proposed merger with Compuware is completed.
15
<PAGE> 16
SALES AND MARKETING
Sales and marketing expenses, which consist primarily of salaries,
commissions and related benefits and administrative costs allocated to the
Company's sales and marketing personnel, were $7,419,000 in the quarter ended
September 30, 1999, a decrease of 33% from $11,105,000 in the quarter ended
September 30, 1998. Sales and marketing expense as a percentage of total
revenues was 40% in the quarter ended September 30, 1999 and 44% in the quarter
ended September 30, 1998. These decreases are attributable primarily to a
decrease in the number of sales and marketing personnel and their related costs
as a result of attrition due to the Company's reorganization plan which
commenced in fiscal 1999 as well as the announcement of the Compuware
transaction. In addition, bonuses and commissions declined due to the decrease
in license revenues and marketing and promotional costs declined due to the
Company's cost cutting initiatives. Lastly, the Company incurred a $1.0 million
charge for bad debts in the first quarter of fiscal 1999. This charge was not
necessary in fiscal 2000.
RESEARCH AND DEVELOPMENT
Research and development expenditures consist primarily of personnel costs
of the research and development staff and the facilities, computing, benefits
and other administrative costs allocated to such personnel and third-party
development costs. Research and development expenditures were $2,334,000 in the
quarter ended September 30, 1999, compared to $4,454,000 in the quarter ended
September 30, 1998. Research and development expenses decreased 48% year over
year. As a percentage of total revenues, research and development costs
decreased to 13% in the quarter ended September 30, 1999 from 18% for the
quarter ended September 30, 1998. Purchased research and development charges for
third-party products, primarily related to the SHL acquisition and the OnMark
product line, of approximately $1.2 million were made in fiscal 1999. There were
no such expenditures made in the first quarter of fiscal 2000. The decrease in
these third-party charges along with the decrease in development personnel as a
result of the Company's reorganization and the Compuware announcement are the
primary reasons for the decline in both actual research and development expenses
and expenses as a percentage of revenues.
GENERAL AND ADMINISTRATIVE
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 $2,767,000 in the quarter ended September 30, 1999, an increase of 4% from
$2,662,000 in the quarter ended September 30, 1998. This increase is primarily a
result of additional amortization of intangibles related to the EraSoft and SHL
acquisitions offset by savings in personnel costs as a result of attrition due
to the Company's reorganization and the announcement of the Compuware
transaction. As a percentage of total revenues, general and administrative
expenses were 15% in the quarter ended September 30,
16
<PAGE> 17
1999 compared to 11% in the quarter ended September 30, 1998. This increase is
primarily due to the overall decrease in revenues.
OTHER INCOME (EXPENSE)
Other income was $936,000 in the quarter ended September 30, 1999, compared
to $1,576,000 in the quarter ended September 30, 1998. A decline in interest
income due to lower cash balances available for investment as a result of
expenditures for the Company's stock repurchase program and increased foreign
exchange losses incurred due to the dollar strengthening against European
currencies caused the decrease in other income.
INCOME TAX BENEFIT/PROVISION
The Company's income tax provision was $229,000 in the quarter ended
September 30, 1999 compared to a benefit of $3,799,000 in the quarter ended
September 30, 1998. The Company's effective rate for the quarter ended September
30, 1999 was 35% compared to a 35% benefit in the quarter ended September 30,
1998. The benefit in the first quarter of fiscal 1999 was a direct result of
pre-tax losses resulting from the restructuring and in-process research and
development charges incurred.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash equivalents and
investments of $87,724,000, representing a increase of $1,675,000 from the total
of $86,049,000 at June 30, 1999. The increase is primarily from cash generated
from operations.
The Company's net cash provided by operating activities was $1,286,000 and
$796,000 for the quarter ended September 30, 1999 and 1998, respectively. Net
cash provided by operations for the quarter ended September 30, 1999 was
composed primarily of net income and non-cash charges for depreciation and
amortization offset by a net decrease in working capital. Net cash provided from
operations for the quarter ended September 30, 1998 was composed primarily of
non-cash charges for the write-offs of purchased in-process research and
development for the SHL acquisition, restructuring charges, and depreciation and
amortization, offset by a net loss and a net decrease in working capital.
The Company's investing activities used cash of $3,497,000 in the quarter
ended September 30, 1999 and provided cash of $5,806,000 in the quarter ended
September 30, 1998. In the quarter ended September 30, 1999, the primary use of
cash was from investment purchases exceeding maturities. In the quarter ended
September 30, 1998, cash was provided by investment maturities offset by the
purchase of investments, the cash paid to acquire SHL and, to a lesser extent,
business and technology acquisitions and the purchase of furniture, fixtures,
and equipment.
17
<PAGE> 18
The Company's financing activities provided cash of $186,000 and used cash
of $8,639,000 in the quarter ended September 30, 1999 and 1998, respectively. In
the quarter ended September 30, 1999, cash was provided by sales of treasury
stock for stock option exercises. In the quarter ended September 30, 1998, cash
was used to purchase 921,500 shares of treasury stock through the Company's
stock repurchase program.
As of September 30, 1999, the Company did not have any material commitments
for capital expenditures. For the remainder of fiscal 2000, the Company
anticipates capital expenditures of approximately $4.1 million, primarily for
computer hardware and software to continue to update the Company's network
infrastructure for year 2000 compliance and technological changes.
The Company expects that existing working capital, together with cash from
operations, will be sufficient for the foreseeable future to meet its capital
and liquidity needs for existing operations and general corporate purposes.
YEAR 2000 CONSIDERATIONS
The following disclosure is a year 2000 readiness disclosure statement
pursuant to the Year 2000 Readiness and Disclosure Act of 1998.
The Company is aware of the problems associated with the year 2000 date
change and has established and continues to evaluate and update its program to
address any potential year 2000 compliance issues relating to its (i) internal
operating systems, (ii) vendors, facilities and other third parties and (iii)
software products that it licenses to customers.
INTERNAL OPERATING SYSTEMS
Viasoft has completed remediation of all major internal operating and
mission-critical systems and is continuing to assess any new additions to its
internal operating systems for year 2000 compliance. As a result of its initial
year 2000 assessment and because of changing business requirements, Viasoft has
installed new enterprise-wide systems relating to the Company's accounting and
customer relationship management needs, each of which has been warranted by the
vendor to be year 2000 compliant. Installation of both systems was completed by
July 31, 1999. Viasoft completed remediation of its mission critical desktop
year 2000 issues, which included software packages, PC hardware and data files.
The Company utilized its own product suite, OnMark 2000, to assess its desktop
concerns. The assessment and remediation of its desktop systems for year 2000
compliance was completed by October 31, 1999. The Company will continue to scan
all PC hardware and data files to ensure the ongoing integrity of the
remediation efforts. Viasoft expects to continue to receive updated year 2000
compliance information from its vendors until the end of the calendar year,
which may require installation of patches, fixes or new releases of software and
new equipment. If the Company receives a significant number of new releases that
are required to be installed for year 2000 compliance late in the calendar year,
the year 2000 compliant status of its major internal operating and
mission-
18
<PAGE> 19
critical systems could be jeopardized. If the Company's major internal operating
systems are not year 2000 compliant, the Company's business operations would be
materially and adversely affected and the Company may be required to incur
unanticipated expenses to remedy any problems not addressed by these compliance
efforts.
VENDORS, FACILITIES AND OTHER THIRD PARTIES
Viasoft continues to evaluate the year 2000 readiness of its material
vendors, facilities, and other third parties with respect to IT, as well as
non-IT, assets. Viasoft has forwarded questionnaires to many of its material
vendors and other third parties and evaluates the responses on a case-by-case
basis, placing primary emphasis on its vendors providing critical services.
Viasoft has placed the emphasis of its vendor review on its primary vendors,
such as payroll services, computer services, telephone services, financial
services and principal office locations. Where necessary, the Company has
replaced all non-compliant payroll services vendors and telephone systems. If
the Company's material vendors, facilities, or other third parties are not year
2000 compliant, the Company's business operations would be materially and
adversely affected and the Company may be required to incur unanticipated
expenses to remedy any problems.
PRODUCTS
The Company's development of products and technology is accomplished through
(i) in-house development and (ii) acquisition or license from third parties. The
Company continues to evaluate and update its assessment of all of its internally
developed and third-party developed products for year 2000 compliance, and
believes that all of such products have been designed to satisfy the Company's
year 2000 specifications. The Company provides information on its website to
update customers and other interested parties on the year 2000 status of its
software products. In addition, the Company has completed a mailing to all
customers alerting them to the year 2000 problem and referring them to the
Company's website for additional information. As part of its ongoing evaluation,
the Company developed an internal project plan for the re-testing of its
software products pursuant to a methodology designed specifically for the
purpose of detecting year 2000 errors. Actual testing began in March and was
completed in August 1999 for the most current releases of Viasoft products. The
testing of products licensed by Viasoft from third parties for resale to
customers was completed in October 1999. The Company will continue to monitor
and test newly developed or acquired products for year 2000 compliance. In the
event that any of the Company's developed or acquired products are not year 2000
compliant, the Company's sales may decline materially, customers and those with
whom they do business may assert product liability and other claims, and the
Company's business, results of operations and financial condition would be
materially and adversely affected.
19
<PAGE> 20
CONTINGENCY PLANS
Throughout the past quarter, the Company has undertaken contingency planning
in the event that its internal operating systems, vendors, facilities, products,
or any other components of its business operations fail to operate as a
consequence of the year 2000 century date change. As part of this planning
process, the Company has addressed needs such as short term use of backup
equipment or software, developing manual workaround processes, the use of cell
phones and alternate e-mail addresses, and the temporary relocation of key
customer support employees to an alternate self-contained work site. The Company
continues to work on the contingency plan and expects the plan to be approved by
executive management and in effect by November 30, 1999.
BUDGET FOR YEAR 2000 READINESS PROJECT
The Company has budgeted approximately $6.0 million for its year 2000
compliance program and has incurred approximately $4.8 million of these expenses
to date. Costs incurred for year 2000 compliance include internal staff to the
extent they are dedicated to the project, a portion of which is expensed in the
Company's general and administrative expenses line item and the remainder is
expensed in its research and development expenses line item. The Company started
incurring these expenses in 1995, when the Company first began the assessment
and remediation of internally developed products, and expenses are expected to
continue through fiscal year 2000.
The Company reviews its year 2000 compliance budget every quarter and
adjusts for changes in its implementation plan for its internal systems or for
product testing and remediation changes. The budget was reduced approximately
$500,000 during the first quarter of fiscal 2000 as a result of reassessment of
percentage of completion of the Company's testing of its internal products.
The estimated costs of the Company's year 2000 compliance program have not
had and are not expected to have a material effect on the Company's financial
position, 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
vendors, facilities, or other third parties are unable to resolve their year
2000 compliance issues.
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 $73,000
from foreign currency fluctuations in the quarter ended September 30, 1999
compared to a gain of $218,000 in the quarter ended September 30, 1998.
20
<PAGE> 21
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 and comprehensive income in the
Company's Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
On October 29, 1999 the United States Department of Justice ("DOJ") filed a
civil antitrust lawsuit against Compuware and Viasoft in the United States
District Court of the District of Columbia to block the proposed acquisition of
Viasoft by Compuware. The DOJ alleged that competition in the mainframe testing/
debugging and fault diagnostic tool markets would be substantially lessened as a
result of the proposed transaction.
Compuware and Viasoft agreed with the DOJ that it was not necessary to
obtain a temporary restraining order ("TRO") and that Compuware would not accept
the tendered shares until a decision is entered by the court on the DOJ's motion
for a preliminary injunction, or the matter is otherwise resolved. Compuware and
Viasoft are preparing to respond to the complaint and continue to evaluate their
options for responding to the DOJ's action.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, this Form 10-Q contains
express or implied forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby.
Included in such forward-looking statements are those statements in "Year 2000
Considerations" regarding the Company's plans and expectations relating to the
Company's Year 2000 compliance. Additional written or oral forward-looking
statements may be made by the Company from time to time in filings with the
Securities and Exchange Commission, in its press releases, quarterly conference
calls or otherwise. The words "believes", "expects", "anticipates", "intends",
"forecasts", "projects", "plans", "estimates" and similar expressions identify
forward-looking statements. Such statements reflect the Company's current views
with respect to future events and financial performance or operations and speak
only as of the date the statements are made. Such forward-looking statements
involve risks and uncertainties and readers are cautioned not to place undue
reliance on forward-looking statements. 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 affect of the proposed
acquisition by Compuware, the Company's dependence on the year 2000 century date
conversion market, both mainframe and desktop, and dependence on its ESW primary
product line, the volatility of the Company's common stock price, fluctuations
in revenues and operating results, 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 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 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, 1999 and other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission.
21
<PAGE> 22
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. 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. The Company undertakes no
obligation to publicly update, review or revise any forward-looking statements
to reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statements is
based.
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 month
periods ended September 30, 1999 and 1998.
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
22
<PAGE> 23
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: November 12, 1999 By /s/ Steven D. Whiteman
-------------------------------------
Steven D. Whiteman
President
Date: November 12, 1999 By /s/ Mark R. Schonau
-------------------------------------
Mark R. Schonau
Chief Financial Officer
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
<C> <C>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
11 Computation of Earnings Per Share for the
three month periods ended September 30, 1999
and 1998.
27 Financial Data Schedule
</TABLE>
24
<PAGE> 1
VIASOFT, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
EXHIBIT 11
(in Thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
Common Shares Outstanding, beginning of period 17,906 19,321
Effect of Weighting of Shares:
Employee stock options exercised 33 26
Treasury shares -- (392)
-------- --------
Weighted average number of common shares outstanding 17,939 18,955
======== ========
Net income (loss) $ 421 $ (7,067)
======== ========
Earnings (loss) per common share $ 0.02 $ (0.37)
======== ========
DILUTED EARNINGS (LOSS) PER SHARE
Common Shares Outstanding, beginning of period 17,906 19,321
Effect of Weighting of Shares:
Warrants and employee stock options outstanding 475
Employee stock options exercised 33 26
Treasury shares -- (392)
-------- --------
Weighted average number of common and common
share equivalents outstanding 18,414 18,955
======== ========
Net income (loss) $ 421 $ (7,067)
======== ========
Earnings (loss) per common and common share equivalent $ 0.02 $ (0.37)
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS OF THE COMPANY AND ITS SUBSIDIARIES AS OF SEPTEMBER
30, 1999 AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 23,894
<SECURITIES> 54,479
<RECEIVABLES> 19,006
<ALLOWANCES> 651
<INVENTORY> 0
<CURRENT-ASSETS> 103,122
<PP&E> 12,635
<DEPRECIATION> 7,032
<TOTAL-ASSETS> 129,114
<CURRENT-LIABILITIES> 33,494
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 95,472
<TOTAL-LIABILITY-AND-EQUITY> 129,114
<SALES> 18,638
<TOTAL-REVENUES> 18,645
<CGS> 6,411
<TOTAL-COSTS> 18,931
<OTHER-EXPENSES> 936
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,028)
<INCOME-PRETAX> 650
<INCOME-TAX> 229
<INCOME-CONTINUING> 421
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 421
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
