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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________
Commission File Number: 0-26212
PURE ATRIA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3141575
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1309 SOUTH MARY AVENUE, SUNNYVALE, CALIFORNIA 94087
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (408) 720-1600
---------------------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE PER SHARE
---------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes x No
--- ---
As of March 14, 1997, there were 42,803,204 shares of the Registrant's
Common Stock outstanding and the aggregate market value of such shares held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on March 14, 1997) was approximately
$421,290,000. Shares of Common Stock held by each executive officer and director
and by each entity that owns 5% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
CERTAIN SECTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1996 ARE INCORPORATED BY REFERENCE IN PARTS II
AND IV OF THIS FORM 10-K TO THE EXTENT STATED HEREIN. ALSO, CERTAIN SECTIONS OF
THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD ON MAY 9, 1997 ARE INCORPORATED BY REFERENCE IN PART III
OF THIS FORM 10-K TO THE EXTENT STATED HEREIN.
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PART I
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ITEM 1. BUSINESS.
This Business section and other parts of this 10-K contain forward-looking
statements that involve risk and uncertainties. Pure Atria's actual results may
differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed below, in "CERTAIN ADDITIONAL RISKS" and separately
in "PURE ATRIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
BACKGROUND
Pure Atria Corporation ("Pure Atria") develops, markets and supports a
comprehensive, integrated suite of software products that are designed to
improve the software development process and enable the production of reliable,
high-quality software. Pure Atria's products, which include ClearCase, Purify,
ClearDDTS and Performix, comprise a family of tools for use from initial
software development through quality assurance and deployment. These products
are designed to control the software development process, improve software
reliability, reduce development and testing cost, shorten time-to-market and
increase the predictability of software development cycles.
Pure Atria's products are sold directly by telephone and field sales
personnel in North America, Europe, Australia and Japan and through distributors
in these regions and numerous other countries. Pure Atria's products are used by
information systems departments that develop software to support internal
operations, engineering departments that develop software as a component of a
manufactured product and independent software vendors that develop software for
resale.
RECENT DEVELOPMENTS
Effective as of January 31, 1997, Pure Atria acquired Integrity QA
Software, Inc. ("Integrity") through the merger of Integrity with and into a
wholly owned subsidiary of Pure Atria. In connection with the Integrity
acquisition Pure Atria issued 1,124,956 shares of Pure Atria common stock ("PASW
Common Stock") and paid $13,357,500 for all of the outstanding capital stock of,
and the assumption of the outstanding stock options of, Integrity. Integrity is
developing a suite of software testing applications and tools designed to
automatically detect software defects and assist development teams in removing
bugs from their products.
Effective as of January 9, 1997, Pure Atria sold certain technology and
assets relating to the PureTestExpert product ("PTE") to Silicon Valley
Networks, Inc. ("SVN"), in exchange for which SVN issued 1,800,000 shares of its
Common Stock (approximately 9% of its capital stock on a fully diluted basis) to
Pure Atria and agreed to make certain payments to Pure Atria based on net
revenues recognized by SVN from sales of PTE.
In August 1996, Pure Software, Inc. ("Pure") and Atria Software, Inc.
("Atria") effected a strategic combination of the two companies through the
merger of a wholly-owned subsidiary of Pure with and into Atria, after which the
combined company changed its name to Pure Atria Corporation. In connection with
this combination, Pure issued 1.544615 shares of Pure common stock for each
outstanding share of Atria common stock in a transaction accounted for as a
pooling of interests. The combined company also assumed all outstanding options
to purchase Atria common stock. Atria developed, marketed and supported software
that facilitates the management of complex software development, enhancement and
maintenance.
PRODUCTS
Competitive pressures on organizations to deliver more sophisticated
products and services and to operate more efficiently have increased demand for
large, complex, technology-based solutions. Software has become an increasingly
critical component of technology-driven products and services, and the
functional requirements of software have increased significantly. The complex
and unpredictable nature of software development drives the requirements for
Software Development Automation ("SDA") products. These products must facilitate
the efficient management of complex software development, provide early
detection of problems in software, track and coordinate software changes and
related information across multiple groups and automate complex test suites.
Pure Atria's products are designed to address the
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needs of developers, quality assurance professionals and managers at each stage
of the software development process. Pure Atria's products include the
following:
CLEARCASE PRODUCT FAMILY (ClearCase, ClearCase MultiSite, ClearCase Attache
and ClearGuide)
Provides comprehensive software configuration management, including version
control, workspace management, build management and process control.
PURIFY
Locates a broad range of software errors related to memory usage, enabling
developers to identify errors earlier in the development process.
PERFORMIX (formerly called PurePerformix)
Load-tests client/server applications and World Wide Web applications to
assess multi-user quality, performance and scalability.
CLEARDDTS
Provides change request management to track and record defect and
enhancement request information.
QUANTIFY
Locates performance bottlenecks, allowing developers to remove software
instructions that slow overall operation.
PURECOVERAGE
Identifies which lines of code have been tested, verifying that each
software application is fully tested before release.
PURELINK
Accelerates the software build process by reducing link time by relinking
only the portions of a software program that have changed since the last
link.
SALES AND MARKETING
Pure Atria sells its products to software development and quality assurance
professionals within a variety of organizations, such as telecommunications,
aerospace, financial services and transportation companies, independent software
vendors and consultants.
Pure Atria markets and distributes its products worldwide through a direct
sales force, which is a combination of telesales, field sales and sales
engineers, and, to a lesser extent, through indirect channels such as Value
Added Resellers ("VARs"), System Integrators ("SIs"), Original Equipment
Manufacturers ("OEMs") and distributors. As of December 31, 1996, Pure Atria's
direct sales force numbered 270 sales, management, technical and administrative
employees worldwide, of which 154 were located in North America and 116 were
located overseas. To support its worldwide sales force, Pure Atria conducts a
variety of programs intended to market and position its suite of software
quality products. These programs include advertising, direct mail,
telemarketing, public relations, product seminars, electronic newsletters, web
pages and training sessions for sales personnel. Promotional offers and bundles
are designed to convert individual sales into multi-product sales. Due to the
technical complexity of Pure Atria's products, Pure Atria also maintains a staff
of pre-sales support engineers as part of the direct sales force.
In North America, Pure Atria currently markets and distributes its products
primarily through its direct sales force with offices throughout the United
States and in Canada. Pure Atria also has operations in Europe and Japan. Pure
Atria's European headquarters is in The Netherlands, with additional sales
offices located in France, Germany, Sweden and the
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United Kingdom. Pure Atria has a Japanese subsidiary, which is based in Tokyo,
and sells product both directly and through business partners throughout Japan.
Pure Atria has also recently established an office in Australia.
In addition, Pure Atria's sales and marketing organization is complemented by
international distributors in Europe and the Pacific Rim and by its
relationships with VARs, SIs and OEMs in North America. These distributors and
OEMs license certain of Pure Atria's products at a discount for relicensing, and
may provide training, support, and consulting services to their end-users. Pure
Atria receives a fee for the support and maintenance Pure Atria provides these
distributors, SIs, VARs and OEMs.
CUSTOMER SUPPORT
Because many of Pure Atria's customers depend on Pure Atria's products to
support development of complex, large-scale applications on which the success of
their organizations may depend, a high level of customer service and technical
support is critical. A majority of Pure Atria's customers currently have
maintenance agreements that entitle them to product upgrades, as well as
technical support and training. Pure Atria's customer support operations in
Sunnyvale, California, Lexington, Massachusetts and Hoofddorp, The Netherlands,
provide telephone support coverage for a total of 18 hours a day among these
sites, in addition to 24-hour e-mail, facsimile, bulletin board and World Wide
Web access. Pure Atria also provides customer support from its office in Tokyo,
Japan. Distributors and OEMs generally offer first-level customer support to
their end-user customers and rely on Pure Atria for any additional support as
needed.
Pure Atria also offers comprehensive training programs to customers. Training
is offered at in-house facilities at Pure Atria's headquarters and at various of
its other offices. Other training, usually provided at the customer site, is
available on request. Pure Atria also provides consulting services to assist
customers in the customization, integration and implementation of Pure Atria's
products.
RESEARCH AND DEVELOPMENT
Pure Atria believes that its future success will depend in large part on its
ability to maintain and enhance its current product line, develop new products,
maintain technological competitiveness and meet an expanding range of customer
requirements. Pure Atria's research and development organization is divided into
product development teams consisting of development engineers, quality assurance
professionals and technical writers. In addition to product development, Pure
Atria's research and development organization is responsible for exploring new
directions and applications of the core technologies, migrating new technologies
into the existing product lines and maintaining strong relationships outside
Pure Atria both within industry and in academia. Pure Atria uses all of its own
products to improve the quality of its software and to improve its software
development process. In addition, Pure Atria has an internal tools group that
develops new tools for improving software quality and process automation for
internal use.
Since inception, Pure Atria has made substantial investments in product
development and related activities. As of December 31, 1996, Pure Atria's
research and development organization consisted of 178 full-time employees.
Currently, over one-third of research and development resources are dedicated to
development of new products or the porting of existing products into new
platforms. Pure Atria maintains its products on a number of Unix platforms.
Further, Pure Atria recognizes that substantial development activity occurs on
platforms other than Unix, particularly Windows 95 and Windows NT, and is
dedicating significant engineering resources to address the needs of developers
on those platforms.
Software products as complex as Pure Atria's are subject to delay and there
can be no assurance that Pure Atria will not encounter difficulties that could
delay or prevent the successful and timely development, introduction and
marketing of these products. In addition, because the market for these tools is
an emerging market, there can be no assurance that these products will achieve
any significant degree of market acceptance. Failure to release these products
in a timely manner and on a cost-effective basis, or failure of these products
to achieve any significant degree of market acceptance, could have a material
adverse effect upon Pure Atria's business, operating results and financial
condition. Pure Atria expects to continue to enhance its existing products,
develop new products and augment its product base through acquisitions. During
1996, 1995 and 1994, research and development expenses were $22.8 million,
$15.5 million and $9.5 million, or 17%, 18% and 22% of total revenues,
respectively. Historically, Pure Atria has expensed its product costs as
incurred. Pure Atria anticipates that it will continue to commit substantial
resources to research and development in the future.
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COMPETITION
The market for automated software quality tools is intensely competitive and
subject to rapid technological change, and Pure Atria faces a variety of
competition with respect to its products.
Pure Atria faces indirect competition from its existing and potential
customers, many of which internally design and develop their own software
quality tools for their particular needs and may therefore be reluctant to
purchase products offered by independent vendors such as Pure Atria. As a
result, Pure Atria must educate prospective customers as to the advantages of
Pure Atria's products versus internally developed software quality systems.
Pure Atria also experiences direct competition with respect to a number of its
products, both from utilities commonly bundled with versions of operating
systems and from stand-alone product offerings. For example, versions of Unix
are commonly bundled with utilities (such as SCCS and RCS) that provide version
control, which is part of the functionality provided by ClearCase. Some system
vendors, such as Sun Microsystems, Inc. ("Sun") already have products, such as
Workshop, that provide features that could compete with Purify or other of Pure
Atria's products if offered on a stand-alone basis. There can be no assurance
that Sun, which has a license to some of Pure Atria's patents, will not
introduce products that compete with products of Pure Atria.
CenterLine's TestCenter product competes with Purify and PureCoverage. Pure
Atria's Performix product competes directly with products of GUI testing
vendors, including Mercury Interactive Corporation and SQA, Inc., which has
been acquired by Rational Software, Inc. ("Rational"), in the area
of load testing.
Companies offering products competitive with ClearCase in the Unix marketplace
include Sun, which offers TeamWare, IBM, which offers Configuration
Management/Version Control ("CMVC"), Computer Associates ("CA") through its
acquisition of LEGENT Corporation, which offers the Endeavor WSX product, and
Platinum through its acquisition of Softool Corp., which markets CCC Harvest. In
addition, there are several smaller, privately-held companies that market
competitive products, including Continuous Software Corporation, which markets
Continuous/CM. Those companies that are publicly-held generally have
significantly greater financial, technological and marketing resources than Pure
Atria.
Other companies have offered version control or configuration management
products outside the Unix market. The primary companies in this category are CA,
Intersolv and Microsoft. CA has a large installed base of its configuration
management product on IBM mainframes. Intersolv has a large installed base of
DOS and Windows software developers. In 1994, Microsoft acquired OneTree
Software, which offers a version control product. These companies have
significantly greater financial, technological and marketing resources than Pure
Atria. There can be no assurance that Pure Atria will be able to compete
effectively with them.
Pure Atria expects additional competition from other established and emerging
companies. Digital Equipment Corporation has spun-off an independently operated
subsidiary, TracePoint Technology, Inc., which has stated that it intends to
produce development tools and compete against Pure Atria. Many of Pure Atria's
current and potential competitors have longer operating histories, significantly
greater financial, technical and marketing resources, greater name recognition
and a larger installed customer base than Pure Atria. In addition, any of these
established competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, and to devote greater
resources to the development, promotion and sale of their products than Pure
Atria. Furthermore, because there are relatively low barriers to entry in the
software industry, Pure Atria expects additional competition from other
established and emerging companies that may choose to enter the market by
developing products that compete with those offered by Pure Atria or by
acquiring companies, businesses, products or product lines that compete with
Pure Atria. It is also possible that alliances among competitors may emerge and
rapidly acquire significant market share. For example, Microsoft and Rational
have entered into a business alliance involving the transfer of certain
technology, technology cross licensing, joint development projects and joint
marketing programs involving products that could address the same or similar
markets as those addressed by Pure Atria's existing products, and by the product
suite under development by the Company's Integrity Product Group. Pure Atria
also believes that competition will increase as a result of software industry
consolidation.
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There can be no assurance that Pure Atria's current or potential competitors
will not develop or acquire products comparable or superior to those developed
by Pure Atria, combine or merge to form significant competitors or adapt more
quickly than Pure Atria to new technologies, evolving industry trends and
changing customer requirements. Increased competition could result in price
reductions, reduced margins or loss of market share, any of which could
materially adversely affect Pure Atria's business, operating results and
financial condition. There can be no assurance that Pure Atria will be able to
compete successfully against current and future competitors or that competitive
pressures faced by Pure Atria will not have a material adverse effect on its
business, operating results and financial condition. If Pure Atria is unable to
compete successfully against current and future competitors, Pure Atria's
business, operating results and financial condition will be materially adversely
affected.
PATENTS AND PROPRIETARY RIGHTS
Pure Atria relies on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
its technology. Pure Atria also believes that factors such as the technological
and creative skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are essential to
establishing and maintaining a technology leadership position.
Pure Atria holds several U.S. patents and has additional pending patent
applications on file at the U.S. Patent and Trademark Office. Pure Atria also
has corresponding foreign patent applications pending. Pure Atria's issued
patents begin expiring in the year 2010. There can be no assurance that any
patent owned by Pure Atria will not be invalidated, circumvented or challenged,
that the rights granted thereunder will provide competitive advantages to Pure
Atria or that any of Pure Atria's pending or future patent applications, whether
or not being currently challenged by applicable governmental patent examiners,
will be issued with the scope of the claims sought by Pure Atria, if at all.
Furthermore, there can be no assurance that others will not develop technologies
that are similar or superior to Pure Atria's technology or design around the
patents owned by Pure Atria.
The source code for Pure Atria's proprietary software is protected both as a
trade secret and as an unpublished copyrighted work. Despite these precautions,
it may be possible for a third party to otherwise obtain and use Pure Atria's
products or technology without authorization or to develop similar technology
independently. In addition, effective copyright and trade secret protection may
be unavailable or limited in certain foreign countries. Pure Atria generally
enters into confidentiality or license agreements with its employees,
distributors and customers and limits access to and distribution of its
software, documentation and other proprietary information. Nevertheless, there
can be no assurance that the steps taken by Pure Atria will prevent
misappropriation of its technology.
Despite Pure Atria's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of Pure Atria's products or to obtain and
use information that Pure Atria regards as proprietary. Policing unauthorized
use of Pure Atria's products is difficult, and while Pure Atria is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In selling its products, Pure
Atria relies on "shrink wrap" licenses that are not signed by licensees and,
therefore, may be unenforceable under the laws of certain jurisdictions. In
addition, the laws of some foreign countries do not protect Pure Atria's
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that Pure Atria's means of protecting its proprietary
rights will be adequate or that Pure Atria's competitors will not independently
develop similar technology or design around patents owned by Pure Atria.
Pure Atria expects that software product developers will be increasingly
subject to infringement claims as the number of products and competitors in Pure
Atria's industry segment grows and the functionality of products in different
industry segments overlaps. There can be no assurance that infringement or
invalidity claims (or claims for indemnification resulting from infringement
claims) will not be asserted against Pure Atria or that any such assertions will
not materially adversely affect Pure Atria's business, operating results and
financial condition. Any such claims, whether with or without merit, could be
time-consuming to defend against, result in costly litigation and diversion of
resources, cause product shipment delays or require Pure Atria to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to Pure Atria or at all. In
the event of a
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successful claim of product infringement against Pure Atria and
failure or inability of Pure Atria to license the infringed or similar
technology, Pure Atria's business, operating results and financial condition
could be materially adversely affected.
Pure Atria also relies on certain software that it licenses from third
parties, including software that is integrated with internally developed
software and used in Pure Atria's products to perform key functions. There can
be no assurance that these third-party software licenses will continue to be
available to Pure Atria on commercially reasonable terms. The loss of or
inability to maintain any of these software licenses could result in delays or
reductions in product shipments until equivalent software could be developed,
identified, licensed and integrated, which would adversely affect Pure Atria's
business, operating results and financial condition.
EMPLOYEES
As of December 31, 1996, Pure Atria had a total of 659 employees, of which 543
were based in the United States and 113 were based overseas. Of the total, 308
were engaged in sales and marketing, 106 were in customer support, 178 were in
research and development and 67 were in administration and finance. Pure Atria's
success depends in significant part upon the continued service of its key
technical and senior management personnel and its continuing ability to attract
and retain highly qualified technical, sales and managerial personnel.
Competition for such personnel is intense and there can be no assurance that
Pure Atria will be able to retain its key technical, sales and managerial
employees or that it will be able to attract, assimilate or retain other highly
qualified technical, sales and managerial personnel in the future. None of Pure
Atria's employees is represented by a labor union. Pure Atria has not
experienced any work stoppages and considers its relations with its employees to
be good.
CERTAIN ADDITIONAL RISKS
Pure Atria's business, financial condition and operating results can be
impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause Pure Atria's actual results to vary
materially from recent results or Pure Atria's anticipated future results.
Actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain risk factors, including those set
forth below and elsewhere herein.
Uncertainties Relating to a Strategy of Mergers and Acquisitions, and the
Integration of Combined and Acquired Companies
As part of its efforts to enhance its market position and grow its business
in an increasingly competitive environment, Pure Atria has addressed, and
expects to continue to address, the need to develop new products through
combinations with or the acquisition of other companies, including the
combination of Pure Software Inc. and Atria Software, Inc. in August, 1996 (the
"Pure Atria Combination"), and the acquisitions of QualTrak Corporation in March
1995, Performix, Inc. in November 1995, and Integrity QA Software, Inc. in
January 1997 (the "Acquisitions" and, with the Pure Atria Combination, the
"Merger Transactions"). The Merger Transactions involve numerous risks,
including difficulties in the assimilation of the operations, technologies and
products of the combined or acquired companies, the diversion of management's
attention from other business concerns, risks of entering markets in which Pure
Atria has no or limited direct prior experience and where competitors in such
markets have stronger market positions, the disruption of key research and
development, marketing or sales efforts, and the potential loss of key employees
of the combined or acquired companies.
There can be no assurance that Merger Transactions or future business
combinations or acquisitions can be effectively integrated, that such
transactions will not result in costs or liabilities that could materially and
adversely affect Pure Atria's business, operating results and financial
condition, or that Pure Atria will obtain the anticipated or desired benefits of
such transactions.
Achieving the anticipated benefits of a merger or acquisition will depend
in part upon whether the integration of a combined or acquired company's
business is accomplished in an efficient and effective manner, and there can be
no assurance that this will occur. Moreover, the successful combination or
acquisition of companies in the high technology industry may be more difficult
to accomplish than in other industries. Combining a merged or acquired company
with Pure Atria requires, among other things, integration of the companies'
respective product offerings and coordination of
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their sales and marketing and research and development efforts. There can be no
assurance that such an integration can be accomplished smoothly or successfully.
The difficulties of such integration may be increased by the necessity of
coordinating geographically separated organizations, the complexity of the
technologies being integrated, and the necessity of integrating personnel with
disparate business backgrounds and combining two different corporate cultures.
The integration of operations following a merger or acquisition requires the
dedication of management resources that may distract attention from the day-to-
day business of Pure Atria, and may disrupt key research and development,
marketing or sales efforts. The inability of management to successfully
integrate the operations of any company that Pure Atria may combine with or
acquire could have a material adverse effect on the business, operating results
and financial condition of Pure Atria. In addition, as commonly occurs with
mergers of technology companies, during the pre-merger and integration phases,
aggressive competitors may undertake initiatives to attract customers and to
recruit key employees through various incentives.
Pure Atria has incurred significant one time charges associated with each
of the Merger Transactions. There can be no assurance that Pure Atria will not
incur additional material charges in subsequent quarters to reflect additional
costs associated with the Merger Transactions.
There can be no assurance that the present and potential customers of Pure
Atria and the combined or acquired companies will continue their current buying
patterns without regard to the past and future combinations and acquisitions.
Any significant delay or reduction in orders could have a material adverse
effect on the near-term business and results of operations of Pure Atria.
Risks Associated with Expansion into New Markets; Emerging Market for SDA
Products
Pure Atria expects to introduce new products and expand its product
offerings in the client/server development environments. Broad market
acceptance of Pure Atria's existing and yet to be released products in new
markets, including acceptance in markets characterized by greater usage of the
Windows and Windows NT operating systems, is critical to Pure Atria's future
success. Although Pure Atria has adapted certain of its products to the Windows
and Windows NT operating systems, Pure Atria's products have historically been
licensed for use principally on certain versions of the Unix operating system.
There can be no assurance that Pure Atria will be successful in marketing and
selling products developed for the Windows NT operating system, particularly in
markets in which Pure Atria has not traditionally promoted or sold its products.
Pure Atria believes that factors affecting the ability of Pure Atria's
products to achieve broad market acceptance include: product performance, price,
ease of adoption, displacement of existing approaches and adaptation to rapid
technological change and competitive product offerings. There can be no
assurance that Pure Atria will be able to respond promptly and effectively to
the challenges of technological change and its competitors' innovations in these
new markets, or that Pure Atria will be able to achieve the necessary market
acceptance, or compete effectively, in these new markets.
Although demand for Pure Atria's products has grown in recent years, the
market for SDA products is still emerging and any future growth depends upon
continued market acceptance of such products. Historically, Pure Atria has been
required to establish new product markets by educating prospective customers as
to the advantages of its products. Pure Atria expects that new product markets
will need to be established for its future products, which will require
significant sales and marketing resources. There can be no assurance that Pure
Atria will be successful in establishing markets for its products, that the
markets for such products will continue to grow, or that developers will adopt
such products for the development and testing of their software. If the market
for Pure Atria's products fails to grow or grows more slowly than Pure Atria
currently anticipates, or if Pure Atria is unable to establish product markets
for its new products, Pure Atria's business, operating results and financial
condition would be materially adversely affected.
Dependence on Unix Operating System
Although Pure Atria has adapted certain of its products to other operating
systems, Pure Atria's products have historically been licensed for use
principally on certain versions of the Unix operating system. The revenues of
Pure Atria have been primarily attributable to Unix related products and
services. Any factor adversely affecting the demand for, or the use of, the
Unix operating system that would require changes to Pure Atria's products would
have a material adverse effect upon the business, operating results and
financial condition of Pure Atria. In addition, any changes to the
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underlying components of the Unix operating system that would require changes to
the products of Pure Atria would materially adversely affect Pure Atria if it
were not able to successfully develop or implement such changes in a timely
fashion.
Pure Atria expects that it will, in the future, introduce enhanced versions
of current products, as well as versions of current products that are ported to
different Unix platforms or developed for use on platforms other than Unix.
Products that are ported to additional platforms or developed for use on
platforms other than Unix entail significant technical risks. Relative to other
software products, a number of Pure Atria's products are difficult to port
across different Unix platforms and Pure Atria's products may require
significant development efforts for use on platforms other than Unix. There can
be no assurance that Pure Atria will be successful in developing, introducing
and marketing product enhancements, new products, or versions of existing
products for other Unix platforms or platforms other than Unix on a timely
basis, if at all, or that it will not experience difficulties that could delay
or prevent the successful development, introduction or marketing of these
products, or that its new products and product enhancements will adequately meet
the requirements of the marketplace and achieve market acceptance.
Rapid Technological Change; New Product Delays; Risk of Product Defects
The software market is characterized by ongoing technological developments,
evolving industry standards and rapid changes in customer requirements. The
introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable. Pure Atria's future business, operating results and financial
condition will depend on its ability to enhance its existing products, develop
new products that address the increasingly sophisticated needs of its customers,
develop products for additional platforms and respond to technological advances
and emerging industry standards and practices. Delays in the commencement of
commercial shipments of new products or enhancements may result in customer
dissatisfaction and delay or loss of product revenues, and the announcement of
new products may cause customers to defer purchases of existing products. If
Pure Atria is unable, for technological or other reasons, to develop and
introduce new products, or enhancements of existing products, in a timely manner
in response to changing market conditions or customer requirements, or if new
versions of existing products do not achieve market acceptance, Pure Atria's
business, operating results and financial condition will be materially adversely
affected.
Software products as complex as those offered by Pure Atria may contain
undetected errors or failures when first introduced or as new versions are
released. Although Pure Atria has not experienced material adverse effects
resulting from any software errors in any recent years, there can be no
assurance that, despite testing internally or by current or potential customers,
errors will not be found in new products after commencement of commercial
shipments, resulting in loss of or delay in market acceptance, which could have
a material adverse effect upon Pure Atria's business, operating results and
financial condition. Further, because Pure Atria relies on its own products to
detect errors in its software, any such errors could make it more difficult to
sell Pure Atria's products in the future.
Fluctuations in Quarterly Results; Future Operating Results Uncertain
Pure Atria's quarterly operating results have in the past and may in the
future fluctuate significantly depending on factors such as demand for its
products, the size and timing of orders, the number, timing and significance of
new product announcements by it and its competitors, its ability to develop,
introduce and market new and enhanced versions of its products on a timely
basis, the level of product and price competition, changes in operating
expenses, changes in average selling prices and product mix, changes in its
sales incentive strategy, sales personnel changes, the mix of direct and
indirect sales, product returns and general economic factors, among others.
Pure Atria's products are typically shipped shortly after orders are received,
and consequently, order backlog at the beginning of any quarter typically
represents only a small portion of the quarter's expected revenues. Pure Atria
has routinely received and may continue to routinely receive a substantial
portion of its orders in the last month of a quarter, with these orders
frequently concentrated in the last weeks or days of a quarter. Because product
revenues in any quarter are substantially dependent on orders booked and shipped
in that quarter, revenues for any future quarter are not predictable with any
significant degree of accuracy. Product revenues are also difficult to forecast
because the market for Pure Atria's products is rapidly evolving and Pure
Atria's sales cycle, from initial evaluation to multiple license purchases and
the provision of support services, may vary substantially from customer to
customer.
Pure Atria's operating expenses are based on anticipated revenue levels and
a high percentage of expenses are relatively fixed in the short run.
Consequently, variations in the timing of revenue recognition can cause
significant
8
<PAGE>
fluctuations in operating results from quarter to quarter and may result in
unanticipated quarterly earnings, shortfalls or losses. Operating results may be
disproportionately affected by an unanticipated decline in revenue for a
particular quarter because a relatively small amount of Pure Atria's expenses
will vary with its revenue in the short run. As a result, Pure Atria believes
that period-to-period comparisons of Pure Atria's results of operations are not
and will not necessarily be meaningful and should not be relied upon as any
indication of future performance. Due to all of the foregoing factors, it is
likely that in some future quarter Pure Atria's operating results will be below
the expectations of public market analysts and investors. In such event, the
price of Pure Atria's Common Stock would likely be materially adversely
affected. Although Pure Atria has experienced growth in revenues in recent
years, there can be no assurance that, in the future, Pure Atria will sustain
revenue growth or remain profitable on a quarterly or annual basis.
Management of Growth; Dependence on Key Personnel
Pure Atria has recently experienced a period of significant growth that has
placed strain upon its management systems and resources. In the future, Pure
Atria will be required to continue to improve its financial and management
controls, reporting systems and procedures on a timely basis and expand, train
and manage its employee work force. There can be no assurance that Pure Atria
will be able to effectively manage such growth. Its failure to do so would have
a material adverse effect upon its business, operating results and financial
condition. Competition for qualified sales, technical and other qualified
personnel is intense, and there can be no assurance that Pure Atria will be able
to attract, assimilate or retain additional highly qualified employees in the
future. If Pure Atria is unable to hire and retain such personnel, particularly
those in key positions, its business, operating results and financial condition
would be materially adversely affected. Pure Atria's future success also
depends in significant part upon the continued service of its key technical,
sales and senior management personnel. The loss of the services of one or more
of these key employees could have a material adverse effect on its business,
operating results and financial condition. Additions of new and departures of
existing personnel, particularly in key positions, can be disruptive and can
result in departures of existing personnel, which could have a material adverse
effect upon Pure Atria's business, operating results and financial condition.
In particular, Integrity's development efforts, and the successful introduction,
marketing and selling of its new product, will be substantially dependent on the
efforts of its technical and managerial staff. Loss of any of these key
personnel could limit the ability of Pure Atria to successfully bring
Integrity's new product suite to market, and thereby have a material adverse
effect on the business and results of operations of Pure Atria.
International Sales; Currency Fluctuations
International sales represented approximately 30%, 28% and 19% of Pure
Atria's total revenues for the years ended December 31, 1996, 1995 and 1994,
respectively. Pure Atria believes that continued profitability will require
additional expansion of sales in foreign markets. This expansion has required
and will continue to require significant management attention and financial
resources and could adversely affect Pure Atria's operating margins. In order
to increase international sales in subsequent periods, Pure Atria must establish
additional foreign operations, hire additional personnel and recruit additional
international resellers. To the extent that Pure Atria is unable to expand
international sales in a timely and cost-effective manner, its business,
operating results and financial condition could be materially adversely
affected. In addition, there can be no assurance that Pure Atria will be able
to maintain or increase international market demand for its products.
Pure Atria's international sales are currently denominated in either U.S.
or local currency and it currently does not engage in any hedging activities.
Although exposure to currency fluctuations to date has not been significant,
there can be no assurance that fluctuations in the currency exchange rates in
the future will not have a material adverse impact on Pure Atria's business,
operating results and financial condition, even if Pure Atria adopts a hedging
strategy. Additional risks inherent in Pure Atria's international business
activities include unexpected changes in regulatory requirements, tariffs and
other trade barriers, costs of localizing products for foreign countries, lack
of acceptance of localized products in foreign countries, longer accounts
receivable payment cycles, difficulties in collecting payment, difficulties in
managing international operations, potentially adverse tax consequences
including repatriation of earnings, reduced protection for intellectual
property, the burdens of complying with a wide variety of foreign laws, and the
effects of high local wage scales and other expenses. There can be no assurance
that such factors will not have a material adverse effect on Pure Atria's future
international sales and, consequently, Pure Atria's business, operating results
and financial condition.
Volatility Of Stock Prices
9
<PAGE>
The market for Pure Atria's Common Stock is highly volatile, and could be
subject to wide fluctuations in response to quarterly variations in operating
and financial results, announcements of technological innovations or new
products by Pure Atria or its competitors, changes in prices of Pure Atria's or
its competitors' products and services, changes in product mix, changes in
revenue and revenue growth rates for Pure Atria as a whole or for individual
geographic areas, product units, products or product categories, as well as
other events or factors. Statements or changes in opinions, ratings, or
earnings estimates made by brokerage firms or industry analysts relating to the
market in which Pure Atria does business or relating to Pure Atria specifically
have resulted, and could in the future result, in an immediate and adverse
effect on the market price of Pure Atria's Common Stock. Statements by
financial or industry analysts regarding the extent of the dilution in Pure
Atria's net income per share resulting from the Merger Transactions and the
extent to which such analysts expect potential business synergies to offset such
dilution can be expected to contribute to volatility in the market price of Pure
Atria's Common Stock. In addition, the stock market has from time to time
experienced extreme price and volume fluctuations which have particularly
affected the market price for the securities of many high-technology companies
and which often have been unrelated to the operating performance of these
companies. These broad market fluctuations may adversely affect the market
price of Pure Atria's Common Stock.
ITEM 2. PROPERTIES.
----------
Pure Atria's principal administrative, sales, marketing, support and research
and development facility is located in a building providing approximately 54,000
square feet of available space in Sunnyvale, California. The leases on such
office space expire in 1997, 1999 and 2002. Pure Atria has recently entered into
a lease for approximately 101,000 square feet of office space in Cupertino,
California, which will expire in 2006; this space is expected to become Pure
Atria's principal administrative, sales, marketing, support and research and
development facility by May 1997. Pure Atria leases approximately 87,000 square
feet of office space in Lexington, Massachusetts, pursuant to leases expiring in
2000 and 2001. Pure Atria leases approximately 7,000 square feet of office space
in Hoofddorp, The Netherlands; approximately 2,000 square feet of office space
in Tokyo, Japan; and additionally has leases for a number of other office sites.
The Hoofddorp and Tokyo leases expire between 1997 and 2002. Pure Atria believes
that suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS.
-----------------
Litigation has been necessary in the past, and may be necessary in the future,
to enforce Pure Atria's patents and other intellectual property rights, protect
Pure Atria's trade secrets, determine the validity and scope of the proprietary
rights of others or defend against claims of infringement or invalidity. The
litigation between Pure Atria and Platinum Technology, Inc. ("Platinum"),
described in more detail below, was resolved in February 1997 with a settlement
including submittal of a consent judgement in Pure Atria's favor. The
settlement provides for Platinum to stop selling licenses for the products that
were the subject of the lawsuit, and for current licensees of those products to
be entitled to a free swap/upgrade to Purify for Unix. The submitted consent
judgement includes a dismissal of the anti-trust claims against Pure Atria,
affirms the validity and enforceability of the patents in question, and enjoins
Platinum from granting any further licenses to Sentinel II/Memory Advisor 4.2,
and from releasing any new versions other than error corrections and support for
new versions of the currently supported operating systems.
The history of the litigation is as follows: on March 1995, Pure Atria
brought suit against AIB Software Corporation ("AIB") in the U.S. District Court
for the Northern District of California, asserting that AIB's Sentinel II
product infringes one of Pure Atria's patents and seeking injunctive relief and
damages; the complaint was later amended to also assert that AIB's Sentinel II
product infringes another of Pure Atria's patents. AIB responded by filing suit
against Pure Atria in the U.S. District Court for the Eastern District of
Virginia for Declaratory Judgment of noninfringement, invalidity and
unenforceability of Pure Atria's U.S. Pat. Nos. 5,193,180 and 5,335,344 and
seeking $1,000,000 in compensatory and $10,000,000 in punitive damages under
U.S. copyright law and various Virginia trade secret and computer laws. These
claims were later transferred to the Northern District of California. On
September 29, 1995, a motion by Pure Atria for summary judgment, or dismissal in
the alternative, on AIB's copyright law and various Virginia trade secret and
computer law claims was granted in Pure Atria's favor. On September 25, 1996,
Pure Atria also brought suit against Platinum, the parent company of AIB, in the
U.S. District Court for the Northern District of California, asserting that
Platinum's selling of Memory Advisor (another name for AIB's Sentinel II
product), and Platinum's use of the Memory Advisor product to make other
products, infringed Pure Atria's patents, and seeking damages and an injunction
against further sales of the Memory Advisor product and other products Platinum
made through the use of the
10
<PAGE>
Memory Advisor Product. Platinum also sought counterclaims against Pure Atria
along substantially the same lines as those sought by AIB, and both Platinum and
AIB entered counterclaims against Pure Atria alleging antitrust violations. As
discussed above, these claims have all been resolved in Pure Atria's favor.
Pure Atria has incurred and may in the future incur significant costs
with respect to the prosecution and defense of these and other claims, which
costs if material or not offset by payments received from adverse parties could
have a material adverse effect on Pure Atria's business, operating results and
financial condition. In addition, such litigation may expose Pure Atria to new
claims that it may not have anticipated, and competitors may resort to
litigation that it may not have anticipated. In the event of an adverse ruling
in any intellectual property litigation that now exists or might arise in the
future, Pure Atria might be required to discontinue the use of certain
technology, cease the sale and support of infringing products, expend
significant resources to develop non-infringing technology or license the
infringed technology or similar technology. Although patent and intellectual
property disputes in the software area have often been settled through
licensing, cross-licensing or similar arrangements, costs associated with such
arrangements may be substantial. There can be no assurance, however, that under
such circumstances, a license would be available under commercially reasonable
terms or at all. Any litigation involving Pure Atria, whether as plaintiff or
defendant, regardless of the outcome, may result in substantial costs and
expenses to Pure Atria and significant diversion of effort by Pure Atria's
technical and management personnel. In addition, there can be no assurance that
litigation, either instituted by or against Pure Atria, will not be necessary to
resolve issues that may arise from time to time in the future with other
competitors. Any such litigation could have a material adverse effect upon Pure
Atria's business, operating results and financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
EXECUTIVE OFFICERS OF THE COMPANY
- ---------------------------------
The executive officers of the Company and their ages, as of March 1, 1997
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Reed Hastings................ 36 President and Chief Executive Officer
Chuck Bay.................... 39 Vice President, Finance, Chief Financial Officer, and Secretary
David Barrett................ 40 Vice President, Worldwide Sales
W. Geoffrey Stein............ 38 Vice President and General Counsel
</TABLE>
The Company's executive officers are appointed by, and serve at the
discretion of, the Board of Directors. Each executive officer is a full time
employee of the Company. There is no family relationship between any executive
officer or director of the Company.
MR. HASTINGS has since October 1991 been President and Chief Executive
Officer and a director of Pure Atria, which he founded. From October 1990 to
September 1991, Mr. Hastings was initially a full-time employee and later a
part-time consultant at ADAPTIVE, Inc., a manufacturer of high speed
communication switching products.
MR. BAY has been Vice President, Finance, and Chief Financial Officer of
Pure Atria since January 1995, and Secretary since March 1995. Prior to
August 1996, Mr. Bay had also served as General Counsel of Pure Atria since
January 1995. From April 1994 to January 1995, Mr. Bay held various positions
with Software Alliance Corporation, a software development and integration
company, most recently as President and Chief Operating Officer. From April
1993 to April 1994, Mr. Bay held various positions with Spatial Technology,
Inc., a software development company, most recently as President and Chief
Financial Officer. From April 1989 to April 1993, Mr. Bay held various
positions, including Treasurer, of NeXT Computer, Inc., a software development
company.
MR. BARRETT has been Vice President, Worldwide Sales, since January 1997.
From March 1996 to January 1997 Mr. Barrett served as Vice President of sales,
marketing and service at Nets, Inc. From June 1984 to March 1996 Mr.
11
<PAGE>
Barrett held a variety of senior sales and marketing executive positions with
Lotus Development Corporation, most recently Vice President of Field Sales and
Services; this period includes an initial period during which Mr. Barrett headed
worldwide sales at Graphics Communications, Inc., which was acquired by Lotus.
Prior to Lotus Mr. Barrett held several field sales management positions at
Harris/Lanier Corporation.
MR. STEIN has served as Vice President and General Counsel of Pure Atria
since August 1996. From September 1995 to August 1996, Mr. Stein was General
Counsel of Atria Software, Inc. From August 1992 to August 1995, Mr. Stein held
a variety of positions in the Lotus Development Corporation legal department.
From September 1988 to August 1992, Mr. Stein was an attorney at the law firm of
Hutchins, Wheeler & Dittmar.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
---------------------------------------------------------------------
The information required by this item is incorporated by reference to the
section entitled Corporate Information on the inside back cover of the Company's
1996 Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA.
-----------------------
The information required by this item is incorporated by reference to the
section entitled Selected Financial Data on page 15 of the Company's 1996 Annual
Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS.
---------------------
The information required by this item is incorporated by reference to the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages 16 through 22 of the Company's 1996 Annual
Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
The information required by this item is incorporated by reference to the
Consolidated Financial Statements, related notes thereto and Report of
Independent Auditors on pages 23 through 38 of the Company's 1996 Annual Report
to Stockholders. The Company's Annual Report to Stockholders is not deemed filed
as part of this report on form 10-K except for those parts thereof specifically
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
--------------------
In March 1995, the Board of Directors authorized the Company to retain KPMG
Peat Marwick LLP as its independent auditors and replace Coopers & Lybrand
L.L.P. The reports of Coopers & Lybrand for the years ended September 30, 1992,
1993 and 1994 contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or application of
accounting principles. During the years ended September 30, 1993 and 1994 and
through the date of dismissal, there were no disagreements with Coopers &
Lybrand L.L.P. on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to their satisfaction, would have caused them to make reference to the
subject matter of the disagreements in connection with their report.
12
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
-----------------------------------------------
The information required by this item concerning the Company's directors is
incorporated by reference to the information set forth in the section entitled
"Election of Directors--Nominees" in the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of the Company's fiscal year ended December 31, 1996, except that
the information required by this item concerning the executive officers of the
Company is incorporated by reference to the information set forth in the section
entitled "Executive Officers of the Company" at the end of Part I of this Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the section entitled
"Executive Officer Compensation" in the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of the Company's fiscal year ended December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------------------------------------------------------------
The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Security Ownership of Management
and Certain Beneficial Owners" in the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of the Company's fiscal year ended December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the sections entitled "Employment Contracts" and "Pure Atria Certain
Relationships and Related Transactions" in the Company's Proxy Statement for the
1997 Annual Meeting of Stockholders to be filed with the Commission within 120
days after the end of the Company's fiscal year ended December 31, 1996.
13
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
---------------------------------------------------------------
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements. The following consolidated financial
--------------------
statements of the Company and the Report of Independent Auditors are
incorporated by reference to pages 23 through 38 of the Company's
1996 Annual Report to Stockholders:
Report of KPMG Peat Marwick LLP, Independent Auditors
Consolidated Balance Sheets--December 31, 1996 and 1995
Consolidated Statements of Operations--Years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Redeemable Convertible Preferred Stock
and Stockholders' Equity--Three year period ended December 31, 1996
Consolidated Statements of Cash Flows--Years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedule. The following financial statement
----------------------------
schedule of the Company for the three years ended December 31, 1996
and filed as part of this Form 10-K should be read in conjunction
with the Consolidated Financial Statements, and related notes
thereto, of the Company.
Report of KPMG Peat Marwick LLP, Independent Auditors S-1
Schedule II Valuation and Qualifying Accounts S-2
Schedules other than those listed above have been omitted since they
are either not required, not applicable, or the information is
otherwise included.
3. Exhibits: See Item 14(c) below.
--------
(b) Reports on Form 8-K. Report on Form 8-K dated February 18, 1997 filed
-------------------
with respect to the acquisition of Integrity QA Software, Inc. by the
Company on January 31, 1997.
(c) Exhibits. The exhibits listed on the accompanying index to exhibits
--------
immediately following the financial statement schedules are filed as
part of, or incorporated by reference into, this Form 10-K.
(d) Financial Statement Schedules. See Item 14(a) above.
-----------------------------
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized on this 27th day of
March 1996.
PURE ATRIA CORPORATION
By: /s/ CHUCK BAY
-----------------------------------------
Chuck Bay
Vice President, Finance, Chief Financial
Officer, and Secretary
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Reed Hastings and Chuck Bay and each of
them, jointly and severally, his attorneys-in-fact, each with full power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each said attorneys-in-fact or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ----------------------------- -------------------------------- --------------
<S> <C> <C>
/s/ PAUL LEVINE Chairman of the Board March 27, 1997
- -----------------------------
Paul Levine
/s/ REED HASTINGS Director, President and Chief March 27, 1997
- ----------------------------- Executive Officer (principal
Reed Hastings executive officer)
/s/ CHUCK BAY Vice President, Finance, Chief March 27, 1997
- ----------------------------- Financial Officer, and
Chuck Bay Secretary (principal financial
and accounting officer)
/s/ AKI FUJIMURA Director March 27, 1997
- -----------------------------
Aki Fujimura
/s/ DAVID A. LITWACK Director March 27, 1997
- -----------------------------
David A. Litwack
/s/ LOUIS J. VOLPE Director March 27, 1997
- -----------------------------
Louis J. Volpe
/s/ THOMAS A. JERMOLUK Director March 27, 1997
- -----------------------------
Thomas A. Jermoluk
Director March 27, 1997
- -----------------------------
Larry W. Sonsini
</TABLE>
15
<PAGE>
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors
Pure Atria Corporation:
Under date of January 21, 1997, except as to Note 2, which is as of February 3,
1997, we reported on the consolidated balance sheets of Pure Atria Corporation
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, redeemable convertible preferred stock and
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996, as contained in the 1996 annual report to
stockholders. These consolidated financial statements and our report thereon
are incorporated by reference in the December 31, 1996 annual report on Form 10-
K. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in the index under Item 14(a)2. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
San Jose, California
January 21, 1997, except as to Note 2,
which is as of February 3, 1997
S-1
<PAGE>
SCHEDULE II
PURE ATRIA
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged to Charged Balance
beginning costs and to other at end of
Description of year expenses accounts Deductions year
- ----------- ----------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts and returns $838 2,380 ---- (1,177) $2,041
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts and returns $592 829 ---- (583) $838
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts and returns $312 442 ---- (162) $592
</TABLE>
S-2
<PAGE>
PURE ATRIA CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1996
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT DESCRIPTION PAGE NUMBER
------------------- -----------
<S> <C>
2.1 Agreement and Plan of Reorganization between Registrant and Integrity
QA Software, Inc. ("Integrity") dated as of November 17, 1996 (which is
incorporated herein by reference to Registrant's Registration Statement
on Form S-4, Registration No. 333-19319).
2.2 Agreement and Plan of Reorganization among Registrant and QualTrak
Corporation, dated February 17, 1995 (which is incorporated herein by
reference to Registrant's Registration Statement on Form S-1,
Registration No. 33-93254 ("Registrant's 1995 S-1").
2.3 Agreement and Plan of Reorganization, dated as of October 19, 1995, by
and among Pure Software Inc., a Delaware corporation, Performix, Inc.,
a Maryland corporation, and Empower Acquisition Corp., a California
corporation (which is incorporated herein by reference to Registrant's
Current Report on Form 8-K filed December 5, 1995).
2.4 Agreement of Merger filed on November 21, 1995 between Empower
Acquisition Corp and Performix, Inc. (which is incorporated herein by
reference to Registrant's Current Report on Form 8-K filed December 5,
1995).
2.5 Agreement and Plan of Reorganization dated as of June 6, 1996 among
Registrant, CST Acquisition Corporation and Atria Software, Inc. (which
is incorporated herein by reference to Registrant's Current Report on
Form 8-K filed June 14, 1996).
3.1 Restated Certificate of Incorporation of Registrant, as filed November
21, 1995 (which is incorporated herein by reference to Registrant's
Annual Report on Form 10-K filed March 29, 1996 ("Registrant's 1996 10-
K")).
3.2 Bylaws of the Registrant (which is incorporated herein by reference to
Registrant's 1995 S-1).
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Second Amended and Restated Investors' Rights Agreement among
Registrant and the investors and the founders named therein, dated
March 17, 1995 (which is incorporated herein by reference to
Registrant's 1995 S-1).
4.3 Amendment to the Series A Stock Purchase Agreement among Registrant and
the investors named therein, dated March 17, 1995 (which is
incorporated herein by reference to Registrant's 1995 S-1).
4.4 Specimen Common Stock Certificate (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.1+ Form of Indemnification Agreement entered into between the Registrant
and its officers and directors (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.2+ The Registrant's 1992 Stock Option/Stock Issuance Plan (which is
incorporated herein by reference to Registrant's 1995 S-1).
10.3+ The Registrant's 1995 Stock Option Plan, as amended (which is
incorporated herein by reference to Registrant's 1995 S-1).
10.4+ The Registrant's Employee Stock Purchase Plan (which is incorporated
herein by reference to Registrant's 1995 S-1).
</TABLE>
<PAGE>
10.5+ The Registrant's Management by Objective Incentive Program (which is
incorporated herein by reference to Registrant's 1995 S-1).
10.6 Office Lease, dated July 28, 1992, between Registrant and De Anza and
Amendments to the Office Lease between Registrant and De Anza, dated
January 15, 1993 and March 31, 1995 (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.7* Letter of agreement between Registrant and Empower K.K., dated November
17, 1994 (which is incorporated herein by reference to Registrant's
1995 S-1).
10.8* Internal Use Source License Agreement between Registrant and ParcPlace
Systems, Inc., dated January 12, 1994 (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.9* Developer Program Terms and Conditions between Registrant and Silicon
Graphics, Inc. and First Addendum thereto, dated June 20, 1994 (which
is incorporated herein by reference to Registrant's 1995 S-1).
10.10* Wind/U Software License Agreement between Bristol Technology Inc. and
Registrant, dated January 9, 1995 (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.11*+ Loan Agreement between Registrant and David E. Anderson, dated April
17, 1995 (which is incorporated herein by reference to Registrant's
1995 S-1).
10.12 Form of Shrinkwrap License Agreements (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.13 License Agreement between Registrant and CenterLine Software Inc.,
dated August 8, 1994 (which is incorporated herein by reference
Registrant's 1995 S-1).
10.14 Credit Terms and Conditions with Addendum, between Registrant Imperial
Bank and Promissory Note issued by Registrant thereunder, as amended,
dated March 3, 1994 (which is incorporated herein by reference to
Registrant's 1995 S-1).
10.15* Security and Loan Agreement and ancillary documents thereto, between
Registrant and Imperial Bank (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.16* Settlement and License Agreement between Registrant and Microsystems,
Inc., dated July 27, 1995 (which is incorporated herein by reference
to Registrant's 1995 S-1).
10.17+ Stock Option Agreements dated as of June 6, 1996 between and Atria
Software, Inc. (which is incorporated herein by reference to
Registrant's Current Report on Form 8-K filed June 14, 1996).
10.18+ Pure Atria Corporation Employee Retention Policy (which is
incorporated herein by reference to Registrant's Registration
Statement on Form S-4, Registration No. 333-08695).
10.19 Office Lease dated October 2, 1996 between Registrant and Tandem
Computers Incorporated (which is incorporated herein by reference to
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996 ("Registrant's 1996 Q3 10-Q").
10.20 Office Lease dated September 23, 1996 between Atria Software, Inc. and
Advent Realty Limited Partnership (which is incorporated herein by
reference to Registrant's 1996 Q3 10-Q).
10.21+ Letter Agreement dated August 26, 1996 between the Registrant and Aki
Fujimura (which is incorporated herein by reference to Registrant's
1996 Q3 10-Q).
10.22 Amendment to Office Lease dated September 23, 1996, between Atria
Software, Inc. and Advent Realty Limited Partnership (which is
incorporated herein by reference to Registrant's 1996 Q3 10-Q).
10.23+ Letter Agreement dated December 31, 1996 between the Registrant and
Paul Levine.
11.1 Computation of Pro Forma Net Income (Loss) Per Share.
13.1 Annual Report to Stockholders for Year Ended December 31, 1996 (to be
deemed filed only to the extent required by the instructions to
exhibits for reports on Form 10-K).
21.1+ Subsidiaries of the Registrant.
<PAGE>
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
24.1+ Power of Attorney (included in page 16).
27.1 Financial Data Schedule
* Confidential treatment has been previously granted for certain portions of
these exhibits.
+ Indicates management compensatory plan, contract or arrangement.
<PAGE>
Exhibit 10.23
December 31, 1996
Mr. Paul Levine
22 Clarke Street
Lexington, MA 02173
Re: Termination of Employment Relationship
Dear Mr. Levine,
This letter will constitute an agreement between you and Pure Atria Corporation
("Pure Atria") regarding your resignation from Pure Atria and transition to your
role as an independent director of the company. This agreement replaces any
existing employment or termination agreements that may already be in place.
During the course of your employment with Pure Atria you have been involved with
all aspects of the business of the former Atria Software, Inc. ("Atria") and
have had direct access to information, much of which is confidential and
proprietary to Pure Atria. You have also been uniquely instrumental in the
operations of the Atria which was recently combined with the former Pure
Software Inc. to become Pure Atria.
Accordingly, for good and valuable consideration, the adequacy of which is
acknowledged, the parties agree as follows:
1. Employment Termination Date. Effective as of the date of this letter (the
---------------------------
"Termination Date") you will no longer be an employee of Pure Atria. This
will not effect your service to the company as a member of its Board of
Directors, which you have indicated to the company you intend to continue
for a minimum period of one year following the Termination Date. . As you
may be aware, the terms of the stock option plans under which your options
were issued consider service on the Board of Directors to be service to the
Company for the purposes of the plans, and your options will continue to
vest while you serve as a director in accordance with the plans and your
option agreements.
2. Compensation and Benefits. In connection with the termination of your
-------------------------
employment with the company, you will receive the following payments and
benefits:
(i) You will be paid your base salary, $80,000 in variable
compensation, and any accrued but unused vacation or other paid
time off, owed to you through to the Termination Date.
(ii) You will be paid an additional lump sum severance payment of
$390,000.
<PAGE>
(iii) Pure Atria shall, at its expense, continue your coverage on Pure
Atria's medical and dental insurance plans until the Termination
Date, pursuant to provisions of the Consolidated Omnibus Budget
Reconciliation Act (COBRA) of 1985, and subject to the completion
of the appropriate form by you. Thereafter you may continue, at
your own expense, medical insurance coverage to the extent
permitted by COBRA.
3. Required Deductions. The payments and benefits under Section 2 shall be
-------------------
paid or credited net of any applicable withholding taxes which Pure Atria
is required to deduct under any applicable federal, state or local law.
4. Non-Solicitation Provisions. While Pure Atria agrees that it is acceptable
---------------------------
for you to participate in unsolicited discussions about the employment
options of past and present employees of Pure Atria, you agree that, for a
period of one year following the Termination Date (the "Restriction
Period"), you will not, directly or indirectly:
(i) solicit the services of any person who is then or has within the
past six months been an employee of Pure Atria (but excluding
individuals who terminated their employment pursuant to a
termination agreement with Pure Atria),
(ii) induce or attempt to induce any employee of Atria or Pure Atria
to terminate his/her employment with, or otherwise cease his/her
relationship with, Pure Atria, or
(iii) in any way encourage or promote any employee to terminate or
cease his/her employment with Pure Atria.
5. Non-Competition Provisions. You agree that, during the Restriction Period,
--------------------------
you will not, directly or indirectly, as an employee, consultant, agent,
officer, joint venturer, stockholder, investor, or in any other capacity
(other than as an independent, outside director, as an affiliate, employee,
or partner of or consultant to an investor or venture firm or partnership,
or as the holder of not more than five percent of the combined voting power
of the outstanding stock):
(i) provide any services of any kind to Continuus Software Corp.,
Rational Software Corporation, Segue Software, Inc., SQA Inc.,
Platinum Technology Inc., Intrinsa Corporation, Intersolv, Inc.,
Mercury Interactive, Parasoft Corporation, Centerline Software,
Inc. NuMega Technologies, Inc., StratosWare Corporation, Abraxas
Software, Inc., SQL Software Ltd., or MainSoft Corporation;or any
other business in its pursuit of the development, marketing,
distribution or re-sale of products directly competitive with any
products for sale or under development at Pure Atria as of the
Termination Date, in any state within the United States, or in
any state or province within any other country (or, if any such
country is not divided into states or provinces, within the
country itself) in which Pure Atria develops, supports, markets,
distributes or re-sells its products during the Restriction
Period.
2
<PAGE>
6. Inventions Agreements. This letter agreement does not effect your
---------------------
obligations under, and you continue to be subject to, and any agreement
entered into with Atria Software, Inc. or Pure Atria regarding the
assignment or other transfer of intellectual property.
7. Restrictions Reasonable. You acknowledge that the area of business Pure
-----------------------
Atria engages in is highly competitive, that the confidential information
and the goodwill of Pure Atria in the marketplace are among their most
valuable assets, which you have uniquely helped to develop and maintain in
the course of your service to Pure Atria, and that Pure Atria has relied on
your willingness to restrict your ability to compete with Pure Atria in
agreeing to the provisions of Sections 4 and 5 above. You represent and
warrant that your skills and abilities and your financial resources are and
will be sufficient to permit you to maintain a satisfactory livelihood
during the Restriction Period notwithstanding the restrictions set forth
herein. Accordingly, you agree that the restrictions contained in this
letter agreement are reasonable and that such restrictions will not cause
you undue hardship.
8. Confidentiality and Related Terms. You agree that all financial terms and
---------------------------------
conditions of this letter agreement shall be held confidential by you and
shall not be publicized or disclosed to any person (other than an immediate
family member, legal counsel or financial advisor, provided that any such
individual to whom disclosure is made agrees to be bound by these
confidentiality obligations), business entity or government agency (except
as mandated by state or federal law). The foregoing restrictions will not
apply to information that has been publicly released by Pure Atria.
9. Remedies. It is specifically understood and agreed that (i) the
--------
restrictions imposed on you under this letter agreement are necessary for
the protection of the business and goodwill of Pure Atria, and are
reasonable for such purpose, (ii) any breach of the provisions of this
letter agreement is likely to result in irreparable injury and substantial
and irrevocable damage to Pure Atria, and (iii) any remedy at law alone
will be an inadequate remedy for such breach. Accordingly, you agree that,
in addition to any other remedy it may have, Pure Atria, shall be entitled
to enforce the specific performance of this letter agreement by you and to
obtain both temporary and permanent injunctive relief (to the extent
permitted by law), without the necessity of proving actual damages.
10. Severability and Interpretation. The provisions of this letter agreement
-------------------------------
are severable, and the invalidity of any provision hereof shall not affect
the validity of any other provisions hereof. Not withstanding any other
provision of this letter agreement, in the event that any court of
competent jurisdiction shall determine that any provision of this letter
agreement or the application thereof is unenforceable because of the
duration of such provision or the scope thereof, the parties hereto agree
that said court in making such determination shall have the power to reduce
the duration and scope of such provision to the extent necessary to make it
enforceable, and that letter agreement in its reduced form shall then be
valid and enforceable to the full extent permitted by law. If any
restriction set forth in Section 4 or 5 is found by any court of competent
jurisdiction to be unenforceable because it extends for too long a period
of time or over too great a range of activities or in too broad a
geographic area, it shall be interpreted to extend only over the maximum
period of time, range of activities or geographic area as to which it may
be enforceable.
3
<PAGE>
11. Successors and Assigns. This letter agreement shall bind and inure to the
----------------------
benefit of the parties hereto and any and all successors and assigns of
Pure Atria; your obligations under this letter agreement are personal,
unassignable and may be performed only by you.
12. Captions and Headings. Captions and headings in this letter agreement are
---------------------
for convenience of reference and do not define or limit any term in this
letter agreement.
13. Waiver of Rights; Amendment. No delay or omission by a party to this
---------------------------
letter agreement in exercising any right under this letter agreement will
operate as a waiver of that or any other right. A waiver or consent given
by any party to this letter agreement on any one occasion is effective only
in that instance and will not be construed as a bar to or waiver of any
right on any other occasion. This letter agreement may not be modified or
amended except in writing, signed by both parties.
14. Notices. Notices under this letter agreement shall be sent to the parties
-------
at respective addresses above by certified mail, return receipt requested,
by overnight courier service, or by personal delivery, and will be deemed
effective upon receipt. Notices to Atria and Pure Atria, shall be sent to
the attention of the General Counsel. Postage, delivery and other charges
must be paid by the sender. A party may change its address for notice by
written notice complying with the requirements of this section.
Pure Atria Corporation
By:
_______________________
Name:
Title:
My agreement with the above terms is signified by my signature below.
Furthermore, I acknowledge that neither Pure Atria, nor any of its respective
agents or representatives have made any representations inconsistent with the
terms or effects of this letter agreement, and that I have read this letter
agreement carefully, understand its terms and effects, and am voluntarily
executing it.
Signed
_________________________________
4
<PAGE>
EXHIBIT 11.1
PURE ATRIA CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET LOSS AND PRO FORMA NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------
DECEMBER 31,
------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net Loss $(6,657)
=======
Pro forma net income (loss) (2) $(4,246) $ 5,132
======= =======
Weighted average number of common
shares outstanding................... 39,921 33,706 24,077
Weighted average number of preferred
shares outstanding on an as if
converted basis...................... -- 3,829 9,289
Number of common stock equivalents
as a result of stock options
outstanding using the treasury stock
method............................... -- -- 2,317
Number of common shares issued and
stock options granted in accordance
with Staff Accounting Bulletin
No. 83 (3)........................... -- 65 711
------- ------- -------
Shares used in per share computation 39,921 37,600 36,394
======= ======= =======
Per share amounts $ (0.17) $ (0.11) $ 0.14
======= ======= =======
- -----------------
</TABLE>
(1) This exhibit presents the primary and fully diluted per share computations.
There is no material difference in the per share amounts when applying
either method.
(2) Pro forma net income (loss) includes a provision for income taxes as if
Performix, Inc. ("Performix") had been a C corporation, fully subject to
federal and state income taxes. Prior to its acquisition by the Company,
Performix had elected S corporation status for income tax purposes and,
consequently, historical results as they relate to Performix do not include
a provision for income taxes.
(3) Common shares issued by the Company during the twelve months immediately
preceding the initial public offering date plus the number of common
equivalent shares which were issued during the same period pursuant to the
grant of stock options (using the treasury stock method and offering price)
have been included in the calculation of common equivalent shares pursuant
to Securities and Exchange Commission Staff Accounting Bulletin No. 83.
<PAGE>
EXHIBIT 13
<TABLE>
<CAPTION>
(In thousands, except share data) Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data(1):
Revenues $132,495 $ 84,185 $42,758 $21,187 $ 8,413
Gross margin 118,113 76,320 38,776 19,338 7,405
In-process research and development -- 11,600 -- -- --
Merger and integration 35,255 2,961 -- -- --
Income (loss) from operations (7,965) (563) 5,927 1,590 456
Income (loss) before income taxes (4,296) 1,841 6,762 1,729 553
Net income (loss) (6,657) (3,522) 5,427 1,646 223
Net income loss per share (0.17)
Pro forma net income (loss)(2) (4,246) 5,132
Pro forma net income (loss) per share(2) (0.11) 0.14
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(In thousands) December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data(1):
Cash, cash equivalents and short-term investments $ 97,377 $ 78,534 $42,532 $ 8,253 $ 7,085
Working capital 75,683 65,024 35,869 7,251 7,172
Total assets 153,950 110,074 54,716 15,234 9,912
Long-term obligations -- -- -- -- --
Total stockholders' equity (deficit) 90,198 75,855 32,980 (87) (1,602)
</TABLE>
(1) See Note 2 of Notes to Consolidated Financial Statements regarding the
acquisition of Atria Software, Inc., QualTrak Corporation, and Performix,
Inc.
(2) See Note 1 of Notes to Consolidated Financial Statements regarding the pro
forma net income (loss) and the pro forma net income (loss) per share
related to Performix, Inc.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
The following table sets forth, as a percentage of total revenues, consolidated
statements of operations data for the periods indicated. In view of the
Company's significant growth, the Company believes that period-to-period
comparison of its financial results should not be relied upon as an indication
of future performance.
<TABLE>
<CAPTION>
Year ended December 31,
- -------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Product 71% 74% 75%
Maintenance and other 29 26 25
- -------------------------------------------------------------------
Total revenues 100 100 100
Cost of revenues:
Product 2 2 2
Maintenance and other 9 7 7
- -------------------------------------------------------------------
Total cost of revenues 11 9 9
- -------------------------------------------------------------------
Gross margin 89 91 91
Operating expenses
Sales and marketing 43 46 45
Research and development 17 18 22
General and administrative 8 9 10
In-process research and development -- 14 --
Merger and integration 27 4 --
- -------------------------------------------------------------------
Total operating expenses 95 91 77
- -------------------------------------------------------------------
Income (loss) from operations (6) -- 14
Other income 3 2 2
- -------------------------------------------------------------------
Income (loss) before income taxes (3) 2 16
Income tax expense 2 6 3
- -------------------------------------------------------------------
Net income (loss) (5)% (4)% 13%
- -------------------------------------------------------------------
</TABLE>
Revenues
Pure Atria's revenues are derived from license fees for its software products,
from software maintenance fees and from other sources. Product revenues are
derived from product licensing fees. Maintenance and other revenues are derived
from software maintenance, training and consulting fees and from royalties for
technology licenses. Fees for maintenance, training and consulting are generally
billed separately from licenses for Pure Atria's products. Pure Atria recognizes
revenue in accordance with the provisions of American Institute of Certified
Public Accountants Statement of Position No. 91-1, Software Revenue Recognition.
Product revenues from software licenses are recognized upon shipment to an end-
user if collection is probable and remaining vendor obligations are
insignificant. Product returns and sales allowances are estimated and provided
for at the time of sale. Maintenance revenues from ongoing customer support and
product upgrades are recognized ratably over the term of the related maintenance
agreement. Payments for maintenance fees are generally received in advance and
are nonrefundable. Revenues for training and consulting are recognized when the
services are performed. Revenues from royalties for technology licenses are
recognized when earned and when collection is probable.
Total revenues were $132.5 million, $84.2 million and $42.8 million in 1996,
1995 and 1994, respectively, representing increases of 57% from 1995 to 1996 and
97% from 1994 to 1995. Total revenues increased primarily due to increased unit
sales of software licenses and increased maintenance, training and consulting
fees resulting from a larger installed base. Pure Atria distributes its products
primarily through its direct sales force and continues to expand its
international operations, particularly in Europe and Asia Pacific.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Product Revenues -- Revenues from product licenses were $93.4 million, $62.1
million and $32.1 million in 1996, 1995 and 1994, respectively. This represents
increases of 50% from 1995 to 1996 and 94% from 1994 to 1995. For the years
1996, 1995 and 1994, product revenues as a percentage of total revenues were
71%, 74% and 75%, respectively. Substantially all of the period-to-period growth
in product revenues was due to higher unit sales of software licenses resulting
from an increase in the number of direct sales personnel worldwide and product
line expansion through the release of new products, releases of new versions of
existing products, and expansion of the platforms supported for Unix based
products. Product line expansion that contributed to product revenue increases
include: the release of Purify and a new version of ClearCase, for the Microsoft
Windows NT operating system in 1996; the release of PureDDTS 3.2, the first new
version of PureDDTS since the acquisition of QualTrak Corporation (QualTrak),
PureDDTS WebTracker, ClearCase 2.1 for UNIX and the original version of
ClearCase for the Microsoft Windows NT operating system, and ClearCase Attache
in 1995.
Maintenance and Other Revenues -- Maintenance and other revenues were $39.1
million, $22.1 million and $10.7 million in 1996, 1995 and 1994, respectively,
representing increases of 77% from 1995 to 1996 and 106% from 1994 to 1995. For
the years 1996, 1995 and 1994, maintenance and other revenues as a percentage of
total revenues were 29%, 26% and 25%, respectively. The growth in maintenance
and other revenues was primarily attributable to a larger installed base
requiring incrementally more maintenance, training and consulting support.
International Revenues -- International revenues accounted for approximately
30%, 28% and 19% of total revenues in 1996, 1995 and 1994, respectively. The
increases in international revenues as a percentage of total revenues were
primarily due to the increase in the number of direct international sales and
marketing personnel and the expansion of operations in the international market.
Substantially all of the company's international sales were generated by its
operations in Europe, Japan and Australia, with a majority of international
sales from Europe. Pure Atria intends to continue increasing the number of
direct sales and marketing personnel, particularly within Europe and Asia.
Pure Atria expects that international revenues will increase as a percentage of
total revenues as the Company continues its penetration of international
markets, and believes that continued growth and profitability will require
further expansion of sales in these markets; however, future growth in
international sales and operations are subject to risks and uncertainties. Some
of the factors that could adversely affect such growth are: the imposition of
government controls, export license requirements and restrictions, political and
economic conditions and instability, trade restrictions, changes in tariffs and
taxes, risks of acceptance of non-localized products and costs of localizing
products for foreign countries, reduced protection for intellectual property
rights, difficulties in staffing and managing international operations, and high
local wage scales and other operating costs and expenses. A majority of Pure
Atria's international sales are denominated in foreign currencies and
accordingly, Pure Atria is subject to foreign currency exchange risk. Pure Atria
has not engaged in foreign currency hedging activities, but is considering a
hedging strategy for the future. However, there can be no assurance that
currency fluctuations will not have a materially adverse affect on the Company's
operating results even if the Company adopts a hedging strategy, including,
without limitation, reductions in the company's reported revenues (which are
denominated in United States dollars) in the event of a decrease in the value of
currencies in key international markets.
Cost of Revenues
Cost of Product Revenues -- Cost of product revenues, consisting primarily of
the cost of product packaging and documentation that is shipped to customers,
was $2.6 million, $1.9 million and $0.8 million in 1996, 1995 and 1994,
respectively, representing 3% of the related product revenues during each
period. Cost of product revenues in absolute dollars increased 38% from 1995 to
1996 and 127% from 1994 to 1995. The increase in dollar amount was primarily due
to the higher volume of products shipped and the amortization of certain
intangible assets capitalized in connection with the 1995 acquisition of
QualTrak.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Cost of Maintenance and Other Revenues -- Cost of maintenance and other
revenues, consisting primarily of costs incurred in providing telephone support,
product upgrades, and training and consulting to customers was $11.7 million,
$6.0 million and $3.1 million in 1996, 1995 and 1994, respectively, representing
30%, 27% and 29% of the related maintenance and other revenues for each
respective year. Cost of maintenance and other revenues increased 97% from 1995
to 1996 and 90% from 1994 to 1995. The increase in dollar amount was primarily
due to the increase in the number of customer support, training and consulting
personnel and related overhead costs necessary to support a larger installed
product base and expanded product line. Pure Atria believes that the cost of
maintenance and other revenues will increase in dollar amount in the future.
Operating Expenses
Sales and Marketing -- Sales and marketing expenses, consisting primarily of
salaries, commissions, bonuses for sales and marketing personnel and promotional
expenses were $57.8 million, $39.1 million and $18.9 million, or 44%, 46% and
44% as a percentage of total revenues, in 1996, 1995 and 1994, respectively. The
dollar increase in sales and marketing expenses for all periods is primarily
attributable to the domestic and international expansion of Pure Atria's sales
force, related travel expenses and increased marketing activities, including
trade shows, seminars and promotional expenses. Pure Atria believes that sales
and marketing expenses will increase in dollar amounts in the future as Pure
Atria continues to expand its sales and marketing staff.
Research and Development -- Research and development expenses, consisting
primarily of salaries, benefits and related costs, were $22.8 million, $15.5
million and $9.5 million, or 17%, 18% and 22% as a percentage of total revenues,
in 1996, 1995 and 1994, respectively. This represents an increase of 47% from
1995 to 1996 and 63% from 1994 to 1995. The dollar increase in research and
development expense was primarily due to increased staffing and associated
support for software engineers required to expand and enhance Pure Atria's
product line as well as the support of existing products. Pure Atria believes
that research and development expenses will continue to increase in absolute
dollar amounts in the future.
General and Administrative -- General and administrative expenses, consisting
primarily of the corporate, finance, legal and administrative expenses of the
Company, were $10.3 million, $7.8 million and $4.5 million, or 8%, 9% and 10% as
a percentage of total revenues, in 1996, 1995 and 1994, respectively. The dollar
increase in general and administrative expenses for all periods was primarily
due to increased staffing and associated expenses necessary to build an
infrastructure to support the Company's growth as well as increased costs
associated with being a public company. General and administrative expenses as a
percentage of revenues have decreased for all periods as the result of increased
revenue growth and economies of scale.
In-Process Research and Development -- In March 1995, Pure Atria acquired
QualTrak Corporation ("QualTrak") for a purchase price of $11.9 million, of
which $10.1 million was allocated to in-process research and development and
expensed at the time of acquisition. Additionally, in the third quarter of 1995,
Pure Atria recorded a $1.5 million dollar charge related to the acquisition of
technology that was incorporated into the release of a client/server change
request management product. The Company anticipates that in the first quarter of
1997 that it will record a charge currently estimated at $46.0 million for in-
process research and development in connection with the acquisition of Integrity
QA Software, Inc.
Merger and Integration -- In the third quarter of 1996, Pure Atria recorded a
charge of $35.3 million related to the combination of Pure Software Inc.
("Pure") and Atria Software, Inc. ("Atria"). This charge included direct
transaction costs of $8.3 million, and $27.0 million associated with integrating
the operations of both companies. Included in integration charges were $16.6
million in severance costs and other compensation expenses, $6.0 million in
redundant facility costs, computer and other equipment write-offs and contract
termination costs, and $4.4 million in other related costs. There can be no
assurance that Pure Atria will not incur additional charges associated with the
merger or that management will be successful in its efforts to integrate the
operations of the two companies. Merger-related expenses of $3.0 million were
also recorded during the year ended December 31, 1995 in connection with the
acquisition of Performix, Inc. ("Performix").
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Other Income
Other income consists of the net effect of interest income, interest expense and
miscellaneous income and expense items. Other income was $3.7 million, $2.4
million and $0.8 million for 1996, 1995 and 1994, respectively. The increase in
other income for each period primarily resulted from interest income generated
from higher average cash balances due to the receipt of proceeds from initial
public offerings and higher cash generated from operations.
Income Taxes
Pure Atria incurred income tax expense of $2.4 million, $5.4 million and $1.3
million in the years ended 1996, 1995, and 1994, respectively. The actual tax
rates differ from the statutory rate primarily due to certain nonrecurring
charges incurred in connection with acquisitions in both 1995 and 1996 which are
not fully deductible for tax purposes, state income taxes, tax exempt interest
and research credits. See Note 9 of Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
Since inception, Pure Atria has financed its operations primarily through the
sale of stock and cash generated from operations. In August 1995, Pure completed
its initial public offering and received net proceeds of approximately $30.4
million. Additionally, Atria completed its initial public offering
(collectively, with Pure's initial public offering, the "IPOs") in May 1994 and
received proceeds of approximately $21.4 million. Pure Atria expects to use the
remaining proceeds from these offerings for general corporate purposes,
including working capital. A portion of these proceeds may also be used for the
acquisition of businesses, products and technologies that are complementary to
those of Pure Atria. Pending such uses, these proceeds are invested in short
term investments as discussed below. Prior to these IPOs, Pure Atria was funded
by cash provided by operations.
Cash and cash equivalents totaled $17.4 million at December 31, 1996 compared to
$24.3 million at December 31, 1995. The decrease in cash and cash equivalents
was primarily due to increased investment of the Company's excess funds in both
taxable and tax-exempt short-term investments and capital additions related to
the expansion of operations, offset by cash proceeds from the issuance of common
stock. As of December 31, 1996, and 1995, Pure Atria had short-term investments
of $80.0 million, and $54.2 million, respectively, with a maturity date of
greater than three months from the date of purchase. The increase in short-term
investments, as stated above, is primarily due to the increased investment of
the Company's excess funds in both taxable and tax-exempt short-term
investments.
For the year ended December 31, 1996, Pure Atria incurred a net loss of $6.7
million which included non-recurring charges of $35.3 million. Net cash provided
by operations for the year ended December 31, 1996 of $22.7 million consisted
principally of a net loss, adjusted for depreciation and amortization, non-
recurring charges, deferred revenue and accruals required for merger and
integration expenses, partially offset by growth in accounts receivable and an
increase in deferred tax assets. The increase in accounts receivable reflects an
increase in Days Sales Outstanding ("DSO"), as well as increased revenue levels.
Pure Atria believes that DSO may increase as Pure Atria expands into new
markets, international revenues increase, a greater percentage of orders are
received later in the quarter, and the customer base expands. For the year ended
December 31, 1995, Pure Atria incurred a net loss of $3.5 million which included
non-recurring charges of $14.6 million. Net cash provided by operations for the
year ended December 31, 1995 of $18.8 million consisted principally of a net
loss, adjusted for depreciation and amortization, the non-recurring charges and
deferred revenue, partially offset by growth in accounts receivable and an
increase in deferred tax assets.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In the year ended December 31, 1996, Pure Atria used cash of $11.5 million for
the purchase of property and equipment. The purchases of property and equipment
were primarily for computer hardware and software to support Pure Atria's
growing employee base. In the year ended December 31, 1995, Pure Atria used cash
of $8.2 million for the purchase of property and equipment, $1.6 million in
connection with the acquisition of QualTrak and $1.5 million in connection with
the purchase of technology incorporated in a client/server change request
management product. Pure Atria expects that the rate of purchases of property
and equipment will remain constant or increase as the Company's employee base
increases.
In the year ended December 31, 1996, net cash of $8.3 million was provided by
financing activities, primarily from the issuance of common stock through both
the exercise of stock options and the employee stock purchase plan. Net cash
provided by financing activities in the year ended December 31, 1995 was $29.3
million and consisted primarily of sale of common stock in connection with
Pure's initial stock offering, partially offset by S corporation distributions
to Performix shareholders.
As of December 31, 1996, Pure Atria had working capital of $75.7 million,
compared to $65.0 million at December 31, 1995. Pure Atria does not have a bank
line of credit. Pure Atria believes that its current cash balances, short-term
investments, and anticipated cash flow from operations will be sufficient to
meet its working capital and capital expenditure requirements for at least the
next twelve months.
From time to time, Pure Atria evaluates acquisitions of businesses, products and
technologies that complement Pure Atria's business. Pure Atria has no present
understandings, commitments or agreements with respect to any material
acquisitions of other businesses, products or technologies. Any such
transactions, if consummated, may use a portion of Pure Atria's working capital
or require the issuance of additional debt or equity instruments.
Forward-Looking Statements and Factors That May Affect Future Results
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Annual Report contain forward-looking
statements that are based on current expectations, estimates and projections
about the industries in which Pure Atria operates, management's beliefs and
assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions ("Future Factors") which
are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. Pure Atria undertakes no obligation to update publicly any forward-
looking statements, whether as a result of new information, future events or
otherwise.
The following discussion highlights some of these risks and other factors that
may affect future results.
Although demand for Pure Atria's products has grown in recent years, the market
for software tools is still emerging and any future growth depends upon
continued market acceptance of these tools. Broad market acceptance of Pure
Atria's products, including acceptance in markets characterized by greater usage
of the Windows and Windows NT operating systems, is critical to Pure Atria's
future success. Pure Atria believes that factors affecting the ability of Pure
Atria's products to achieve broad market acceptance include: product
performance, price, ease of adoption and the ability to displace existing
approaches. The application development software industry is extremely
competitive and is subject to rapid technological change, frequent new product
introductions and evolving domestic and international industry standards, any or
all of which may render existing products and services obsolete. To be
successful in the future, Pure Atria must respond promptly and effectively to
the challenges of technological change and its competitors' innovations by
continually enhancing its current products and developing new products on a
timely basis. In addition, Pure Atria expects that new product markets will need
to be established for its future products, which will require significant sales
and marketing resources. Pure Atria expects to confront new competitors as it
introduces new products and expands into new markets.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain current and potential competitors of Pure Atria are more established,
benefit from greater market recognition and have substantially greater
financial, development and marketing resources than Pure Atria. Competitive
pressures or other factors, including entry into new markets, may result in
significant price erosion that could have a material adverse effect on Pure
Atria's results of operations. If the market for software tools fails to grow,
or grows more slowly than Pure Atria anticipates, or if Pure Atria is unable to
establish product markets for its new products, Pure Atria's business, operating
results and financial condition would be materially affected.
Pure Atria believes that an increasing portion of its revenues will come from
products designed for use on the Windows and Windows NT operating system
("Windows Operating Systems"). As a result, the company has begun to estimate
the percentage of sales attributable to products adapted for use on Windows
Operating Systems. However, Pure Atria does not require a separate license for
the Windows Operating Systems version of its ClearCase product or to use the
Windows Operating Systems version of the Performix client component.
Accordingly, these estimates are subject to substantial variance from actual
results.
Pure Atria believes that its success will depend in large part on the success of
its Windows Operating Systems based products. Although Pure Atria has adapted
certain of its products to the Windows Operating Systems, the company's products
have historically been designed for use on certain UNIX operating systems. There
can be no assurance that Pure Atria will be successful in marketing its products
for the Windows Operating Systems, or that its products adapted for use on the
Windows Operating Systems will gain the necessary market acceptance.
Pure Atria's quarterly operating results have in the past and may in the future
fluctuate significantly depending on factors such as demand for Pure Atria's
products, the size and timing of orders, the number, timing and significance of
new product announcements by Pure Atria and its competitors, the ability of Pure
Atria to develop, introduce and market new and enhanced versions of Pure Atria's
products on a timely basis, the level of product and price competition, changes
in operating expenses, changes in average selling prices and product mix,
changes in Pure Atria's sales incentive strategy, sales personnel changes, the
mix of direct and indirect sales, product returns and general economic factors,
among others. Pure Atria's products are typically shipped shortly after orders
are received, and consequently, order backlog at the beginning of any quarter
typically represents only a small portion of that quarter's expected revenues.
Pure Atria has routinely received and may continue to routinely receive a
substantial portion of its orders in the last month of a quarter, with these
orders frequently concentrated in the last weeks or days of a quarter. Because
product revenues in any quarter are substantially dependent upon orders booked
and shipped during that quarter, revenues for any future quarter are not
predictable with any significant degree of accuracy. Product revenues are also
difficult to forecast because the markets for the company's products are rapidly
evolving and Pure Atria's sales cycle, from initial evaluation to multiple
license purchases and the provision of support services, may vary substantially
from customer to customer. Because Pure Atria's operating expenses are based on
anticipated revenue levels and a high percentage of expenses are relatively
fixed in the short term, variations in the timing of revenue recognition can
cause significant fluctuations in operating results from quarter to quarter and
may result in unanticipated quarterly earnings' shortfalls or losses. In such an
event the price of Pure Atria Common Stock would likely be materially adversely
affected.
Additional risks and uncertainties that may affect actual results are set forth
in the section entitled "Certain Additional Risks" in the Company's Form 10-K
for the year ended December 31, 1996, as well as in other SEC Reports filed by
Pure Atria.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<TABLE>
<CAPTION>
Selected Unaudited Quarterly Operating Results
(In thousands, except share data) Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
1996 1996 1996 1996 1995 1995 1995 1995
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $37,780 $ 34,092 $31,993 $28,630 $25,496 $22,950 $19,474 $16,265
Gross margin 33,119 30,380 28,798 25,816 23,107 20,752 17,591 14,870
In-process research and
development - - - - - 1,500 - 10,100
Merger and integration - 35,255 - - 2,961 - - -
Income (loss) from operations 9,038 (28,300) 6,228 5,069 1,535 2,445 2,978 (7,521)
Income (loss) before income taxes 10,230 (27,392) 7,036 5,830 2,318 3,078 3,539 (7,094)
Net income (loss) 6,585 (21,731) 4,638 3,851 (506) 2,284 2,532 (7,832)
Net income (loss) per share 0.15 (0.54) 0.10 0.09
Pro forma net income (loss)(1) (506) 1,959 2,354 (8,053)
Pro forma net income (loss)
per share(1) (0.01) 0.05 0.06 (0.22)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements regarding pro forma
net income (loss) and pro forma net income (loss) per share.
22 Pure Atria Corporation and Subsidiaries
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except share data) December 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 17,363 $ 24,294
Short-term investments 80,014 54,240
Accounts receivable, net of
allowances of $2,041 and $838 in 1996 and 1995 29,478 16,613
Prepaid expenses and other current assets 3,526 1,876
Deferred tax assets 9,054 2,220
- -----------------------------------------------------------------------------
Total current assets 139,435 99,243
Property and equipment, net 12,974 8,314
Other assets, net 1,541 2,517
- -----------------------------------------------------------------------------
Total assets $ 153,950 $110,074
=============================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,802 $ 1,846
Accrued payroll and related expenses 8,987 5,722
Accrued merger and integration expenses 15,371 1,887
Other accrued expenses and liabilities 10,003 7,460
Deferred revenue 24,281 13,945
Income taxes 1,308 3,359
- -----------------------------------------------------------------------------
Total current liabilities 63,752 34,219
- -----------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.0001 par value; 2,000,000
shares authorized; no shares issued and outstanding - -
Common stock; $.0001 par value; 80,000,000 shares authorized;
40,908,423 and 39,086,379 shares issued and outstanding in
1996 and 1995 4 4
Additional paid-in capital 99,847 78,162
Cumulative translation adjustment (831) (146)
Accumulated deficit (8,822) (2,165)
Total stockholders' equity 90,198 75,855
- -----------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 153,950 $110,074
=============================================================================
</TABLE>
See accompanying Notes To Consolidated Financial Statements.
Pure Atria Corporation and Subsidiaries 23
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(In thousands, except per share data) Year ended December 31,
- ----------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Product $ 93,437 $ 62,133 $ 32,077
Maintenance and other 39,058 22,052 10,681
- ----------------------------------------------------------------------------------------
Total revenues 132,495 84,185 42,758
- ----------------------------------------------------------------------------------------
Cost of revenues:
Product 2,643 1,909 841
Maintenance and other 11,739 5,956 3,141
- ----------------------------------------------------------------------------------------
Total cost of revenues 14,382 7,865 3,982
- ----------------------------------------------------------------------------------------
Gross margin 118,113 76,320 38,776
- ----------------------------------------------------------------------------------------
Operating expenses:
Sales and marketing 57,757 39,063 18,934
Research and development 22,794 15,468 9,465
General and administrative 10,272 7,791 4,450
In-process research and development - 11,600 --
Merger and integration 35,255 2,961 --
- ----------------------------------------------------------------------------------------
Total operating expenses 126,078 76,883 32,849
- ----------------------------------------------------------------------------------------
Income (loss) from operations (7,965) (563) 5,927
Other income 3,669 2,404 835
- ----------------------------------------------------------------------------------------
Income (loss) before income taxes (4,296) 1,841 6,762
Income taxes 2,361 5,363 1,335
- ----------------------------------------------------------------------------------------
Net income (loss) $ (6,657) $ (3,522) $ 5,427
=======================================================================================
Net loss per share $(0.17)
======================================================
Pro forma net income (loss) per share:
Income before income taxes, as reported $ 1,841 $ 6,762
Pro forma income taxes 6,087 1,630
- ----------------------------------------------------------------------------------------
Pro forma net income (loss) $ (4,246) $ 5,132
========================================================================================
Pro forma net income (loss) per share $(0.11) $0.14
========================================================================================
Shares used in per share computations 39,921 37,600 36,394
========================================================================================
</TABLE>
See accompanying Notes To Consolidated Financial Statements.
24 Pure Atria Corporation and Subsidiaries
<PAGE>
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE STOCK AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Redeemable Retained Total
convertible Additional Cumulative earnings stock-
preferred stock Common stock paid-in translation (accumulated holders'
--------------------------------------
(In thousands) Shares Amount Shares Amount capital adjustment deficit) equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993 5,331 $8,564 14,054 $ 1 $257 $ -- $ (345) $ (87)
Conversion of Atria
preferred stock (809) (6,167) 8,959 1 6,166 -- -- 6,167
Issuance of Pure Series C
redeemable convertible
preferred stock 1,536 4,070 -- -- -- -- -- --
Atria initial public offering -- -- 6,085 1 21,401 -- -- 21,402
Exercise of stock options -- -- 683 -- 202 -- -- 202
Income tax benefit related to
option plans -- -- -- -- 170 -- -- 170
Distributions to stockholders -- -- -- -- -- -- (300) (300)
Purchase of treasury stock -- -- (21) -- (1) -- -- (1)
Net income -- -- -- -- -- -- 5,427 5,427
- ----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1994 6,058 6,467 29,760 3 28,195 -- 4,782 32,980
Issuance of Pure Series D
redeemable convertible
preferred stock 788 9,706 -- -- -- -- -- --
Pure initial public offering -- -- 2,000 -- 30,396 -- -- 30,396
Conversion of Pure
preferred stock (6,846) (16,173) 6,846 1 16,172 -- -- 16,173
Exercise of stock options -- -- 532 -- 530 -- -- 530
Income tax benefit related to
option plans -- -- -- -- 800 -- -- 800
Currency translation
adjustment -- -- -- -- -- (146) -- (146)
Distributions to stockholders -- -- -- -- -- -- (1,800) (1,800)
Reclassification of
undistributed
S corporation earnings -- -- -- -- 1,625 -- (1,625) --
Stock issued under stock
purchase plan -- -- 44 -- 453 -- -- 453
Purchase of treasury stock -- -- (96) -- (9) -- -- (9)
Net loss -- -- -- -- -- -- (3,522) (3,522)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 -- -- 39,086 4 78,162 (146) (2,165) 75,855
Exercise of stock options -- -- 1,647 -- 5,777 -- -- 5,777
Stock issued under stock
purchase plan -- -- 175 -- 2,800 -- -- 2,800
Income tax benefit related to
option plans -- -- -- -- 8,950 -- -- 8,950
Stock compensation expense -- -- -- -- 4,158 -- -- 4,158
Currency translation
adjustment -- -- -- -- -- (685) -- (685)
Net loss -- -- -- -- -- -- (6,657) (6,657)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 -- -- 40,908 $ 4 $99,847 $ (831) $(8,822) $ 90,198
==================================================================================================================================
</TABLE>
See accompanying Notes To Consolidated Financial Statements.
Pure Atria Corporation and Subsidiaries 25
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) Year ended December 31,
- --------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,657) $ (3,522) $ 5,427
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 5,628 3,192 1,814
Noncash merger and integration costs 6,645 331 --
Tax benefit of stock option exercises 8,950 800 170
In-process research and development -- 11,600 --
Changes in operating assets and liabilities:
Accounts receivable (13,699) (9,250) (2,625)
Prepaid expenses and other current assets (1,733) (766) (307)
Deferred tax assets (6,765) (2,236) (682)
Accounts payable 1,990 622 615
Accrued payroll and related expenses 3,171 3,784 985
Accrued merger and integration expenses 13,484 1,887 --
Other accrued expenses 3,351 4,001 1,841
Deferred revenue 10,347 6,025 4,101
Income taxes (2,052) 2,295 813
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 22,660 18,763 12,152
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment, net (11,505) (8,212) (3,251)
Other assets 74 (395) (118)
Acquisitions, net of cash acquired -- (3,137) --
Proceeds from the sale of short-term investments 148,490 59,711 10,966
Purchases of short-term investments (174,404) (92,078) (33,007)
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (37,345) (44,111) (25,410)
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Bank borrowings -- -- 250
Repayments of bank borrowings and capital leases (321) (298) (93)
S Corporation distributions to stockholders (1,800) (300)
Proceeds from issuance of common stock 8,577 31,370 21,603
Proceeds from issuance of redeemable convertible
preferred stock -- -- 4,070
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 8,256 29,272 25,530
- --------------------------------------------------------------------------------------------------------
Effect of currency exchange rate changes on cash (502) (155) --
- --------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (6,931) 3,769 12,272
Cash and cash equivalents at beginning of year 24,294 20,525 8,253
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 17,363 $ 24,294 $ 20,525
========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid:
Income taxes $ 3,306 $ 4,517 $ 843
Noncash investing and financing activities:
Conversion of redeemable preferred stock $ -- $ 16,173 $ 6,167
Redeemable convertible preferred stock issued in
connection with acquisition of QualTrak
Corporation $ -- $ 9,706 $ --
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes To Consolidated Financial Statements.
26 Pure Atria Corporation and Subsidiaries
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Pure Atria Corporation (the Company) develops, markets and supports a
comprehensive, integrated suite of software products that enables the production
of reliable, high-quality software and improves the software development
process.
Basis of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash Equivalents and Short-Term Investments - The Company considers all highly
liquid instruments with an original maturity of 90 days or less at time of
purchase to be cash equivalents. All of the Company's short-term investments are
classified as available-for-sale and are recorded at cost, which approximates
fair value.
Property and Equipment - Property and equipment are stated at cost, net of
accumulated depreciation and amortization and are depreciated over their
estimated useful lives of three to seven years. Leasehold improvements are
recorded at cost and amortized over the lesser of their useful lives or the term
of the related leases.
Revenue Recognition - The Company's revenues are derived from license fees for
its software products, from software maintenance fees, and from other sources.
Product revenues are derived from product licensing and sublicensing fees.
Maintenance and other revenues are derived from software maintenance, training
and consulting fees and from royalties for technology licenses. The Company
recognizes revenue in accordance with the provisions of the American Institute
of Certified Public Accountants' Statement of Position No. 91-1, Software
Revenue Recognition. Product revenues from the sale of software licenses are
recognized upon shipment to an end user if collection is probable and remaining
vendor obligations are insignificant. Sublicense fee revenue from sales through
distributors and other resellers is recognized in the period in which the
sublicense is reported to the Company. Product returns and sales allowances are
estimated and provided for at the time of sale. Maintenance revenues from
ongoing customer support and product upgrades are recognized ratably over the
term of the maintenance agreement. Payments for maintenance fees are generally
received in advance and are nonrefundable. Revenues from training and consulting
are recognized when the services are performed. Revenues from royalties on
technology licenses are recognized when earned and when collection is probable.
Use of Estimates - Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Research and Development Costs - Research and development costs are charged to
operations as incurred. To date, the Company has not capitalized software
development costs after technological feasibility has been established as such
costs incurred subsequent to the establishment of technological feasibility have
not been material.
Income Taxes - The Company records income taxes using the asset and liability
method. Deferred assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
Concentrations of Credit Risk - Financial instruments potentially exposing the
Company to a concentration of credit risk principally consist of cash and cash
equivalents, short-term investments, and accounts receivable.
Pure Atria Corporation and Subsidiaries 27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and cash equivalent balances consist of deposits with major commercial
banks, the maturity of which is under three months from date of purchase. Short-
term investments are placed with high quality financial, government, or
corporate institutions. These investments typically bear minimal risk. The
diversification of risk for the investment portfolio is consistent with the
Company's policy to ensure safety of principal and to maintain liquidity.
The Company sells its products to companies in the software development industry
(end users) and, to a lesser extent, distributors, who remarket the product to
end users. The Company maintains reserves for potential credit losses, but
historically has not experienced any significant losses related to individual
customers or groups of customers in any particular industry or geographic area.
No single customer accounted for 10% or more of total revenues for all periods
presented.
Foreign Currency Translation - The functional currency of the Company's foreign
subsidiaries is their local currency. Accordingly, all assets and liabilities
are translated at the current exchange rate at the end of the period and income
and expense accounts are translated at the average rates in effect during the
period. Adjustments arising from translation of these subsidiaries' financial
statements are reflected as a separate component of stockholders' equity.
Realized and unrealized exchange gains or losses from transaction adjustments
are reflected in operations and are not material.
Per Share Computations - Pro forma net income (loss) per share is computed using
pro forma net income (loss) and is based on the weighted average number of
shares outstanding of common stock and redeemable convertible preferred stock,
on an "as if converted" basis, and dilutive common equivalent shares from
stock options using the treasury stock method. In accordance with certain
Securities and Exchange Commission (SEC) Staff Accounting Bulletins, such
computations for periods preceding the initial public offerings (IPO) include
all common and common equivalent shares issued within the 12 months preceding
the IPO dates as if they were outstanding for all prior periods presented using
the treasury stock method and the IPO prices.
Pro forma net income (loss) includes a provision for income taxes as if
Performix, Inc. (Performix) had been a C corporation, fully subject to federal
and state income taxes. Prior to its acquisition by the Company, Performix had
elected S corporation status for income tax purposes and, consequently,
historical results as they relate to Performix do not include a provision for
income taxes.
Net loss per share is computed using the weighted average number of shares
outstanding of common stock. Net income per share is computed using the weighted
average number of shares outstanding and dilutive common stock equivalents
outstanding during the period. Dilutive common stock equivalents consist of
common stock issuable using the treasury stock method.
Accounting for Stock-Based Compensation - The Company recognizes compensation
expense related to stock-based compensation plans using the intrinsic value
method.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of - The
Company adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of, on January 1, 1996. SFAS No. 121 requires long-
lived assets to be evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of the assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or the fair value less costs
to sell. The adoption of SFAS No. 121 did not have a material effect on the
Company's consolidated results of operations.
Reclassifications - Certain amounts in the financial statements for the years
ended December 31, 1995 and 1994 have been reclassified to conform with the 1996
classifications.
28 Pure Atria Corporation and Subsidiaries
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Business Combinations
Poolings of Interest - On August 26, 1996, the Company acquired Atria Software,
Inc. (Atria), a publicly held company that develops, markets, and supports
software that facilitates the management of complex software development,
enhancement, and maintenance. Pursuant to the acquisition, all of the shares of
outstanding common stock of Atria were exchanged for 22,238,806 shares of the
Company's common stock. In addition, each outstanding option or right to
purchase Atria common stock under Atria's various stock option and purchase
plans were assumed by the Company and became an option or right to purchase the
Company's common stock after giving effect to the 1.544615 exchange ratio. For
income tax purposes, Atria was acquired in a tax free reorganization.
On November 21, 1995, the Company acquired Performix, a provider of
client/server load and performance testing tools. Pursuant to the acquisition,
all of the shares of outstanding common stock of Performix were exchanged for
1,591,475 shares of the Company's common stock. All options to purchase
Performix common stock then outstanding were assumed by the Company. Each
assumed option continues to have, and is subject to, the same terms and
conditions set forth in the respective option agreement applicable to such
option immediately prior to the date of acquisition, subject to adjustment of
the number of shares and exercise price thereof to reflect the exchange ratio of
Performix shares for the Company's shares. For income tax purposes, Performix
was acquired in a tax free reorganization. Performix was an S corporation for
federal income tax purposes prior to its acquisition. Upon acquisition, the S
corporation status terminated resulting in a one-time deferred tax expense of
approximately $650,000. Also, in connection with the acquisition, the Company
incurred approximately $2,200,000 of costs which are not deductible for income
tax purposes.
These acquisitions were accounted for as poolings of interest, and accordingly,
the Company's consolidated financial statements and notes thereto have been
restated to include the financial position and results of Atria and Performix
for all periods presented.
Separate results of operations for the period prior to the acquisitions of Atria
and Performix are as follows:
<TABLE>
<CAPTION>
Six months Nine months
ended ended
(In thousands) Year ended December 31, June 30, September 30,
- ------------------------------------------------------------------------------
1995 1994 1996 1995
- ------------------------------------------------------------------------------
(Unaudited)
---------------------------
<S> <C> <C> <C> <C>
Revenues:
Pure $44,042 $18,186 $31,625 $25,319
Atria 40,143 20,765 28,998 27,842
Performix -- 3,807 -- 5,528
- ------------------------------------------------------------------------------
Combined $84,185 $42,758 $60,623 $58,689
- ------------------------------------------------------------------------------
Net income (loss):
Pure $(8,695) $ 1,270 $ 1,945 $(8,132)
Atria 5,173 3,380 2,432 3,212
Performix -- 777 -- 1,904
- ------------------------------------------------------------------------------
Combined $(3,522) $ 5,427 $ 4,377 $(3,016)
- ------------------------------------------------------------------------------
</TABLE>
Purchases - On March 17, 1995, the Company acquired QualTrak Corporation
(QualTrak), a provider of quality assurance software tools. Pursuant to the
acquisition, all of the shares of outstanding common stock of QualTrak and
options therefor were exchanged for 822,363 shares of the Company's Series D
redeemable convertible preferred stock or options therefor and $2,000,000 in
cash or the right to receive cash.
Pure Atria Corporation and Subsidiaries 29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The acquisition was accounted for as a purchase with the results of QualTrak
included from the acquisition date. The total purchase price of $11,904,000 was
assigned to the fair value of the net assets acquired, including $543,000 to the
net tangible assets acquired, $10,100,000 to in-process research and
development, $591,000 to goodwill, $420,000 to purchased software, and $250,000
to a royalty arrangement. The value of the in-process research and development
was charged to operations on the acquisition date. Goodwill, purchased software
and prepaid royalties are amortized on a straight-line basis over 5 years, 18
months, and 3 years, respectively. For income tax purposes, QualTrak was
acquired in a tax free reorganization.
The following summary prepared on an unaudited pro forma basis combines the
consolidated results of operations as if QualTrak had been acquired as of the
beginning of the periods presented:
<TABLE>
<CAPTION>
(In thousands, except per share data) Year ended December 31,
- ----------------------------------------------------------------------------------------
1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $84,844 $46,000
Pro forma net income before nonrecurring charge 5,770 5,007
Pro forma net income before nonrecurring charge per share 0.14 0.13
- ----------------------------------------------------------------------------------------
</TABLE>
The pro forma results exclude the $10,100,000 nonrecurring charge for in process
research and development resulting from the acquisition. The pro forma results
are not necessarily indicative of what would have occurred if the acquisition
had been in effect for the periods presented. In addition, they are not intended
to be a projection of future results and do not reflect any synergies that might
be achieved from combined operations.
During the quarter ended September 30, 1995, the Company recorded a pre-tax
charge of $1,500,000 for in-process research and development in connection with
the acquisition of technology. This technology is incorporated in a
client/server change request management product that tracks defects and
enhancement requests throughout the software lifecycle. The Company began
shipping this product in the first quarter of 1996.
On February 3, 1997, the Company completed the acquisition of Integrity QA
Software, Inc. (Integrity), a provider of quality assurance software tools. Each
outstanding share of Integrity Series A preferred stock was converted into a
right to receive (i) $6.50 in cash and (ii) that fraction of a share of the
Company's common stock obtained by dividing $6.50 by the average of the closing
prices of the Company's common stock as quoted on the Nasdaq National Market for
the five trading days immediately preceding the closing date of the acquisition.
Each outstanding share of Integrity common stock was converted into a right to
receive that fraction of a share of the Company's common stock obtained by
dividing $6.3254 by the average of the closing prices of the Company's common
stock as quoted on the Nasdaq National Market for the five trading days
immediately preceding the closing date of the acquisition. Each outstanding
warrant to purchase shares of Integrity Preferred Stock and each outstanding
option to purchase Integrity Common Stock was assumed by the Company after
giving effect to the applicable exchange ratio. During the first quarter of
1997, the Company anticipates recording a charge to operations currently
estimated at $46,000,000 for in-process research and development associated with
this acquisition.
3. Short-Term Investments
The Company's portfolio of short-term investments consisted of the following:
<TABLE>
<CAPTION>
(In thousands) December 31,
- ----------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
US treasury and agency obligations $35,760 --
Auction rate securities-municipal obligations 17,300 $ 8,000
Auction rate securities-preferred stock 11,975 25,400
Debt securities-municipal obligations 9,483 20,840
Corporate debt securities 5,496 --
- ----------------------------------------------------------------------------------------
$80,014 $54,240
========================================================================================
</TABLE>
30 Pure Atria Corporation and Subsidiaries
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All short-term investments as of December 31, 1996 and 1995, are classified as
available-for-sale and have maturities of less than one year. Such investments
are recorded at cost, which as of December 31, 1996 and 1995 approximated market
value. Unrealized gains or losses on available-for-sale securities were
immaterial for the years ended December 31, 1996 and 1995.
4. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(In thousands) December 31,
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment $17,761 $10,281
Furniture and office equipment 4,225 2,872
Leasehold improvements 1,447 957
Construction in progress 1,216 --
- -------------------------------------------------------------------------------
24,649 14,110
Less accumulated depreciation and amortization 11,675 5,796
- -------------------------------------------------------------------------------
$12,974 $ 8,314
===============================================================================
</TABLE>
5. Accrued Merger and Integration Expenses
On August 26, 1996, the Company acquired Atria (see Note 2) and initiated a plan
to combine the operations of the two companies. During the third quarter of
1996, the Company recorded a $35,255,000 charge to operating expenses related to
merger and integration costs.
Merger costs consist principally of transaction fees for investment bankers,
attorneys, accountants, financial printing, and other related charges.
Integration costs include severance and other employee related charges,
elimination of redundant facilities, write-off of excess property and equipment
and certain intangible assets, and other professional fees.
<TABLE>
<CAPTION>
Severance
and other Asset write-offs
Transaction employee and lease
(In thousands) costs related charges cancellations Other Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provision recorded at acquisition $ 8,319 $16,538 $ 5,998 $ 4,400 $ 35,255
Change in estimate -- 960 (560) (400) --
Noncash write-offs -- (4,018) (1,987) (640) (6,645)
Cash payments (7,709) (2,856) (550) (2,124) (13,239)
- -----------------------------------------------------------------------------------------------------------------------
Accrued as of December 31, 1996 $ 610 $10,624 $ 2,901 $ 1,236 $ 15,371
=======================================================================================================================
</TABLE>
Severance and Other Employee Related Charges - As a result of the merger,
certain technical support, customer service, distribution, sales, marketing, and
administrative functions were combined and reduced. Approximately 20 employees
were terminated as a result of this activity. Affected employees had received
notification of their termination by September 30, 1996 and final assignments
are expected to be completed by March 31, 1997. The Company committed to pay
noncontingent retention bonuses and commissions and these costs have been
included in the accrual. In addition, certain employees received accelerated
vesting on their options for which a compensation charge of $4,018,000 was
recorded.
Pure Atria Corporation and Subsidiaries 31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Asset Write-offs and Lease Cancellations - The Company has consolidated
duplicate offices in Europe and will relocate the North American headquarters to
a larger facility. The accrual includes lease payments resulting from the
planned closure of these facilities that are expected to continue through the
lease term or penalties associated with early termination of the leases. Certain
intangibles that will have no benefit to the combined operations were written
off. Redundant property and equipment were either disposed of during the third
quarter or written down to its estimated net realizable value.
Other - Other consists of incurred costs associated with communication of the
merger to the employees and costs associated with exiting offices in Europe,
discontinuance of the Pure Vision product line and termination of a European
distributor. Payments associated with these activities are expected to be
expended through the first quarter of 1997.
6. Commitments and Contingencies
The Company has operating leases for its corporate headquarters, field sales
offices and certain office equipment that expire at various dates through 2007.
In October 1996, the Company entered into an operating lease for approximately
101,000 square feet of office space in Cupertino, California. The term of the
lease is ten years and contains two five-year options to renew. Future minimum
lease payments under these noncancelable leases as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
- ---------------------------
1997 $ 5,246
1998 4,991
1999 4,455
2000 3,196
2001 2,842
Thereafter 10,692
- ---------------------------
</TABLE>
As of December 31, 1996, the Company had letters of credit outstanding in the
amount of $250,000 and $3,000,000 guaranteeing certain rental payments at its
office locations in Lexington, Massachusetts and Cupertino, California,
respectively.
Rent expense was $3,655,000, $2,010,000, and $1,148,000, for the years ended
December 31, 1996, 1995, and 1994, respectively.
7. Stockholders' Equity
Redeemable Convertible Preferred Stock - Prior to July 1995, Pure was authorized
to issue 6,600,000 shares of redeemable convertible preferred stock of which
6,057,456 shares were issued and outstanding. Pure had 2,000,000 shares of
Series A issued and outstanding, 2,521,875 shares of Series B issued and
outstanding, and 1,535,581 shares of Series C issued and outstanding. Each
outstanding share of preferred stock automatically converted into one share of
common stock upon the closing of Pure's IPO in August 1995.
Atria had 55,834 shares of Series A issued and outstanding and 753,408 shares of
Series B issued and outstanding as of December 31, 1993. Each outstanding share
of preferred stock automatically converted at a rate of 77.070 and 6.178 shares
of common stock for each share of Series A and B preferred stock, respectively,
upon the closing of Atria's IPO in 1994.
1992 Stock Option/Stock Issuance Plan - On October 15, 1992, the Company's Board
of Directors approved the 1992 Stock Option/ Stock Issuance Plan (the Plan).
Options granted under the Plan may be either incentive stock options or
nonstatutory stock options, as designated by the Board of Directors. The Plan
expires 10 years after adoption. Stock issued under the plan was subject to
repurchase upon termination of employment. The
Pure Atria Corporation and Subsidiaries 32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company's repurchase right generally lapses for 25% of the shares granted one
year from the date of the grantee's date of hire ratably over the next 36 months
for the remaining shares.
The Plan provides that (i) the exercise price of an incentive stock option will
be no less than the fair market value of the Company's common stock at the date
of grant; (ii) the option exercise price per share for a nonstatutory stock
option shall not be less than 85% of the fair market value; and (iii) the
exercise price of an incentive stock option for an optionee who possesses more
than 10% of the total combined voting power of all classes of stock shall not be
less than 110% of the fair market value; all as determined by the Company's
Board of Directors. One year from the date of grant, 25% of the options granted
vest. The remaining balance vests ratably over the next 36 months of continuous
service.
1995 STOCK OPTION PLAN - In May 1995, the Company adopted the 1995 Stock Option
Plan (1995 Plan) to succeed the Plan. Under the 1995 Plan, 3,449,329 shares of
common stock have been reserved for issuance. Beginning in 1996, an additional
number of shares will be reserved on the first trading day of calendar years
1996, 1997, and 1998 equal to 5% of the number of shares of common stock
outstanding on the last day of the preceding calendar year. Under the 1995 Plan,
employees (including officers) and independent consultants may be granted
nonstatutory options to purchase common stock at an exercise price of not less
than 85% of the fair market value at the date of the grant and/or incentive
stock options at an exercise price of no less than the fair market value at the
date of grant.
The 1995 Plan is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee determines which eligible individuals are
to receive option grants, the number of shares subject to each such grant, the
status of any granted option as either an incentive option or a nonstatutory
option under the federal tax laws, the vesting schedule to be in effect for each
option grant and the maximum term for which each granted option is to remain
outstanding.
The Company's Board of Directors may amend or modify the 1995 Plan at any time.
The 1995 Plan will terminate on May 15, 2005, unless terminated sooner by the
Board of Directors.
Under the 1995 Plan, each individual serving as a nonemployee director received
on the date of the IPO and each individual who first joins the Board of
Directors as a nonemployee director on or after the effective date of the 1995
Plan, received at that time, an automatic option grant for 15,000 shares of the
Company's common stock. In addition, at each annual stockholders' meeting,
beginning in 1996, each nonemployee director will automatically be granted at
that meeting, a stock option to purchase 5,000 shares of common stock, provided
such individual has served on the Board of Directors for at least 6 months prior
to such meeting. Each option has an exercise price equal to the fair market
value of the common stock on the automatic grant date and a maximum term of 10
years, subject to earlier termination following the optionee's cessation of
Board of Directors service. The option is immediately exercisable for all of the
shares but the shares are subject to repurchase at original cost. With respect
to the 15,000 share option grant, the right lapses and the optionee vests in a
series of 4 equal annual installments over the optionee's period of Board of
Directors service, beginning one year from the grant date. With respect to each
5,000 share option grant, the right lapses and the option vests in full on the
first anniversary of such option's date of grant. However, vesting of the shares
will automatically accelerate upon (i) an acquisition of the Company by merger,
consolidation or asset sale; (ii) a hostile take-over of the Company effected by
tender offer for more than 50% of the outstanding voting stock or proxy contest
for Board of Directors membership; or (iii) the death or disability of the
optionee while serving as a Board of Directors member.
In the event that more than 50% of the Company's outstanding voting stock were
to be acquired pursuant to a hostile tender offer, each grant to nonemployee
directors, which has been outstanding for at least six months, may be
surrendered to the Company in return for a cash distribution from the Company
based upon the tender offer price per share of common stock at the time subject
to the surrendered option.
Pure Atria Corporation and Subsidiaries 33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes stock option transactions under all plans for the years
ended December 31:
<TABLE>
<CAPTION>
Outstanding options
-------------------------------
Shares Weighted
available Number of average
for grant shares exercise price
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances, December 31, 1993 3,040,184 2,939,933 $ 0.25
Additional shares reserved 2,471,384 -- --
Atria options retired (1,547,164) -- --
Options granted (1,983,552) 1,983,552 1.84
Options exercised -- (683,383) 0.32
Options canceled 150,420 (150,420) 0.28
- -------------------------------------------------------------------------
Balances, December 31, 1994 2,131,272 4,089,682 1.01
Additional shares reserved 1,285,354 -- --
Atria options retired (54,602) -- --
Options granted (2,170,214) 2,170,214 11.78
Options exercised -- (531,739) 1.00
Options canceled 406,562 (406,562) 2.18
- -------------------------------------------------------------------------
Balances, December 31, 1995 1,598,372 5,321,595 5.37
Additional shares reserved 3,340,734 -- --
Atria options retired (246,426) -- --
Options granted (5,236,376) 5,236,376 26.08
Options exercised -- (1,646,893) 3.51
Options canceled 805,262 (805,262) 20.51
- -------------------------------------------------------------------------
Balances, December 31, 1996 261,566 8,105,816 $17.56
=========================================================================
</TABLE>
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices As of 12/31/96 Contractual Life Exercise Price As of 12/31/96 Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.06 - $0.60 1,355,922 6.6 $ 0.19 1,353,922 $ 0.19
$ 0.65 - $9.43 1,395,859 7.5 $ 4.53 1,314,707 $ 4.25
$10.00 - $21.69 1,418,284 9.1 $20.20 765,377 $19.62
$21.73 - $23.63 346,959 9.3 $23.04 48,862 $21.93
$24.00 - $24.00 1,458,242 10.0 $24.00 447 $24.00
$24.75 - $40.25 2,130,550 9.4 $30.07 422,455 $29.99
- ------------------------------------------------------------------------------------------------------------------------------------
$ 0.06 - $40.25 8,105,816 8.6 $17.55 3,903,770 $ 8.85
====================================================================================================================================
</TABLE>
At December 31, 1996 and 1995, the number of options exercisable was 3,903,770
and 3,881,191, respectively, and the weighted-average exercised price of those
options was $8.85 and $1.52, respectively.
34 Pure Atria Corporation and Subsidiaries
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Purchase Plan - The Company's Employee Stock Purchase Plan (the
1995 Purchase Plan) was adopted by the Company's Board of Directors on May 16,
1995, and approved by the stockholders on July 17, 1995. The Company has
reserved 300,000 shares of common stock for issuance under the 1995 Purchase
Plan. The 1995 Purchase Plan provides for 24-month offerings with purchases
occurring at six-month intervals, commencing on the effective date of the
Company's IPO. The 1995 Purchase Plan is administered by the Compensation
Committee of the Board of Directors. The price of stock purchased under the 1995
Purchase Plan is the lower of the fair market value of the common stock on the
first day of the 6-month purchase period in which the participant first joined
the plan or on the applicable semi-annual purchase date. The 1995 Purchase Plan
will terminate in June 2005.
Pro Forma Fair Value Information - The Company applies APB Opinion No. 25 in
accounting for its stock option plans and accordingly, no compensation cost has
been recognized for its stock options in the financial statements, except to the
extent that stock has been issued before all the services are performed or to a
third party. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's net loss would have been increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(In thousands, except for per share data) Year ended December 31,
- -----------------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
Pro forma net loss $(12,973) $(4,290)
Pro forma net loss per share (.32) (.11)
- -----------------------------------------------------------------------------------
</TABLE>
The per share weighted-average fair value of stock options granted during 1996
and 1995 was $13.36 and $5.83 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: 1996--
expected volatility 0.5--expected dividend yield 0.0%, risk-free interest rate
of 6.2%, and an expected life of 5 years; 1995--expected volatility 0.5--
expected dividend yield 0.0%, risk-free interest rate of 6.4%, and an expected
life of 5 years.
Pro forma net loss reflects only options granted in 1996 and 1995. Therefore,
the full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net loss amounts presented above
because compensation costs is reflected over the options' vesting period of 4
years and compensation costs for options granted prior to January 1, 1995 is not
considered.
9. Income Taxes
Income taxes consisted of the following:
<TABLE>
<CAPTION>
(In thousands) Year ended December 31,
- -------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (1,422) $ 5,684 $ 1,410
State 166 1,108 370
Foreign 177 7 67
---------------------------------
(1,079) 6,799 1,847
---------------------------------
Deferred:
Federal (5,478) (1,923) (587)
State (32) (313) (95)
---------------------------------
(5,510) (2,236) (682)
---------------------------------
Charge in lieu of taxes
attributable to employee
stock plans 8,950 800 170
$ 2,361 $ 5,363 $ 1,335
================================
</TABLE>
Pure Atria Corporation and Subsidiaries 35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets (liabilities) were as follows:
(In thousands) December 31,
- -------------------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowances and accrued expenses $5,692 $2,266
Research credits 733 --
State taxes 125 118
Net operating loss carryforward 981 --
Deferred revenue 1,523 543
Accounts receivable -- (649)
Prepaid expenses -- (58)
Net deferred tax assets--current 9,054 2,220
Long-term deferred tax asset--property, equipment and intangibles 846 915
- -------------------------------------------------------------------------------------------------------
Net deferred tax assets $9,900 $3,135
- -------------------------------------------------------------------------------------------------------
</TABLE>
Management believes that it is more likely than not that the results of future
operations will generate sufficient taxable income to realize the net deferred
tax asset.
Income tax expense differs from the amounts computed by applying the statutory
income tax rate of 34% to pre-tax income (loss) as a result of the following:
<TABLE>
<CAPTION>
(In thousands) Year ended December 31,
- -------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate $(1,461) $ 626 $2,299
State income taxes, net of federal benefit 276 621 203
Performix earnings during S corporation status -- (605) (264)
Nondeductible acquisition-related charges 4,678 4,790 --
Performix acquired deferred tax liability -- 649 --
Research and development credits (295) (469) (615)
Tax exempt interest income (881) (393) (145)
Other permanent differences 44 181 256
Reduction in valuation allowance -- (37) (399)
- -------------------------------------------------------------------------------------------------
$ 2,361 $5,363 $1,335
=================================================================================================
</TABLE>
As of December 31, 1996, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $2.4 million and $3.7
million respectively, which expire between 2001 and 2011. As of December 31,
1996, the Company had research credit carryforwards for federal tax purposes of
approximately $0.7 million which expire between 2008 and 2011.
36 Pure Atria Corporation and Subsidiaries
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Foreign Operations
Foreign operations consisted of the following:
<TABLE>
<CAPTION>
(In thousands) Year ended December 31,
- -------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
United States $104,621 $ 70,183 $41,689
Europe 24,464 10,512 1,069
Asia Pacific 3,410 3,490 ---
- -------------------------------------------------------------------------------------------------------
Consolidated $132,495 $ 84,185 $42,758
=======================================================================================================
Income (loss) from operations:
United States $(16,886) $ 971 $ 5,865
Europe 8,399 (1,205) 62
Asia Pacific 522 (329) ---
- ------------------------------------------------------------------------------------------------------
Consolidated $ (7,965) $ (563) $ 5,927
======================================================================================================
Identifiable assets:
United States $137,603 $100,516 $54,235
Europe 13,634 7,817 481
Asia Pacific 2,713 1,741 ---
- ------------------------------------------------------------------------------------------------------
Consolidated $153,950 $110,074 $54,716
======================================================================================================
</TABLE>
United States revenue includes export sales of approximately $12,595,000,
$10,172,000, and $7,426,000 in the years ended December 31, 1996, 1995 and 1994,
respectively. Export sales have been made primarily to customers in Europe,
Australia, Canada and Latin America.
Pure Atria Corporation and Subsidiaries 37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Pure Atria Corporation:
We have audited the accompanying consolidated balance sheets of Pure Atria
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, redeemable convertible preferred stock
and stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pure Atria
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
San Jose, California
January 21, 1997, except as to Note 2
which is as of February 3, 1997
38 Pure Atria Corporation and Subsidiaries
<PAGE>
CORPORATE INFORMATION
Corporate Headquarters
18880 Homestead Road
Sunnyvale, California 95014
408-863-9900 TEL
800-353-7873 TEL
408-863-4120 FAX
North American Sales Offices
Ontario, Canada
California
Colorado
Florida
Georgia
Illinois
Massachusetts
Missouri
New Jersey
New York
North Carolina
Pennsylvania
Texas
Virginia
Washington
International Sales Offices
Australia
France
Germany
Japan
Sweden
The Netherlands
United Kingdom
Pure Atria, the Pure Atria logo, Purify, ClearCase, ClearCase Multisite,
ClearCase Attache, ClearGuide, Quantify, PureCoverage, Performix, PureLink
and ClearDDTS are trademarks of Pure Atria in the United States and in other
countries.
Registrar and Transfer Agent
U.S. Stock Transfer Corporation
1745 Gardena Avenue, Suite 200
Glendale, California 91204
Auditors
KPMG Peat Marwick LLP
50 West San Fernando Street
San Jose, California 95113
Corporate Attorneys
Wilson, Sonsini,
Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Investor Relations
18880 Homestead Road
Sunnyvale, California 95014
408-863-9900
-----------------------------
This Annual Report contains forward-looking statements. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify these
forward-looking statements. These forward looking statements reflect
management's best judgment based on factors currently known, involve risks and
uncertainties, including uncertainties relating to the successful development
and market acceptance of the company's products, and other risks detailed from
time to time in the Company's SEC reports, including the Report on form 10-K
for the year ended December 31, 1996. Actual results may vary materially.
Market for Common Stock
The Company's common stock is traded on the NASDAQ National Market under the
symbol PASW. The following table sets forth, for the periods indicated, the
range of high and low sales prices since the Company completed its initial
public offering on August 2, 1995:
<TABLE>
<CAPTION>
Quarter Ended High Low
- ------------- ------ -----
<S> <C> <C>
Sept. 30, 1995 $43.75 $27.75
Dec. 31, 1995 $39.75 $31.50
Mar. 31, 1996 $37.00 $24.50
June 30, 1996 $42.25 $32.4375
Sept. 30, 1996 $38.50 $19.75
Dec. 31, 1996 $38.125 $22.875
</TABLE>
The trading price of the Company's common stock is subject to wide fluctuations
in response to quarterly variations in operating results, announcements of
technological innovations or new products by the Company or its competitors, as
well as other events or factors. In addition, the stock market has from time to
time experienced extreme price and volume fluctuations that have been unrelated
to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Company's common
stock.
Holders of Record
On March 14, 1997, there were approximately 500 holders of record of Pure Atria
Corp. common stock.
Dividends
The Company's present policy is to reinvest earnings in future operations and
the Company does not anticipate paying cash dividends in the foreseeable future.
Annual Meeting
The annual meeting of shareholders will be held May 9, 1997 at 10:00 a.m. at
Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California
94304
<PAGE>
EXHIBIT 21.1
The following entities are subsidiaries of the Registrant:
Pure Atria Software Ltd. (Canada)
K.K. Pure Atria (Japan)
Pure Atria Software Pty. Ltd. (Australia)
Pure Atria Software GmbH (Germany)
Pure Atria Software Sarl (France)
Pure Atria Software Ltd. (United Kingdom)
Pure Atria Software A.B. (Sweden)
QualTrak, Inc. (California)
Integrity QA Software, Inc. (Delaware)
<PAGE>
EXHIBIT 23.1
CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statements
(Nos. 33-95290, 33-80067 and 33-97236) on Form S-8 of Pure Atria Corporation of
our report dated January 21, 1997, except as to Note 2, which is as of February
3, 1997, relating to the consolidated balance sheets of Pure Atria Corporation
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, redeemable convertible preferred stock and
stockholders equity, and cash flows for each of the years in the three year
period ended December 31, 1996, and the related schedule, which reports appear
or are incorporated by reference in the December 31, 1996 annual report on Form
10-K of Pure Atria Corporation.
/s/ KPMG PEAT MARWICK LLP
San Jose, California
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 17,363,000
<SECURITIES> 80,014,000
<RECEIVABLES> 29,478,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 139,435,000
<PP&E> 12,974,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 153,950,000
<CURRENT-LIABILITIES> 63,752,000
<BONDS> 0
0
0
<COMMON> 4,000
<OTHER-SE> 99,847,000
<TOTAL-LIABILITY-AND-EQUITY> 153,950,000
<SALES> 93,437,000
<TOTAL-REVENUES> 132,495,000
<CGS> 2,643,000
<TOTAL-COSTS> 14,382,000
<OTHER-EXPENSES> 126,078,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,296,000)
<INCOME-TAX> 2,361,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,657,000)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> 0
</TABLE>
