<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Commission File Number 0-26212
______________________________
PURE ATRIA CORPORATION
(Exact name of registrant specified in its charter)
DELAWARE 94-3141575
_______________________________ ______________________________________
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
18880 HOMESTEAD ROAD
CUPERTINO, CALIFORNIA 95014
(Address of principal executive offices)
TELEPHONE: (408) 863-9900
(Registrant's telephone number, including area code)
---------------------
1309 SOUTH MARY AVENUE
SUNNYVALE, CALIFORNIA 94087
(Former name or former address, if changed since last report)
---------------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
43,183,741 shares of Common Stock, $.0001 par value, as of May 1, 1997
================================================================================
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PURE ATRIA CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1997 and December 31, 1996.......................... 2
Condensed Consolidated Statements of Operations
For the three months ended March 31, 1997 and 1996............ 3
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 1997 and 1996............ 4
Notes to Condensed Consolidated Financial Statements.......... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 13
SIGNATURES............................................................. 14
INDEX TO EXHIBITS...................................................... 15
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PURE ATRIA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------- -----------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 16,900 $ 17,363
Short-term investments................. 63,621 80,014
Accounts receivable, net............... 25,510 29,478
Prepaid expenses and other current 3,330 3,526
assets................................
Deferred tax assets.................... 9,054 9,054
-------- --------
Total current assets.................. 118,415 139,435
Property and equipment, net............. 17,022 12,974
Other assets, net....................... 1,495 1,541
-------- --------
Total assets.......................... $136,932 $153,950
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C>
Accounts payable....................... 3,861 3,802
Accrued payroll and related expenses... 8,581 8,987
Accrued merger and integration expenses 11,361 15,371
Other accrued expenses................. 8,074 10,003
Deferred revenue....................... 25,292 24,281
Income taxes........................... 2,244 1,308
-------- --------
Total current liabilities........... 59,413 63,752
-------- --------
Stockholders' equity:
Common stock........................ 4 4
Additional paid-in capital.......... 130,785 99,847
Cumulative translation adjustment... (1,287) (831)
Accumulated deficit................. (51,983) (8,822)
-------- --------
Total stockholders' equity.......... 77,519 90,198
-------- --------
Total liabilities and stockholders'
equity................................. $136,932 $153,950
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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PURE ATRIA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------
MARCH 31,
-------------------
1997 1996
--------- -------
<S> <C> <C>
Revenues:
Product................................ $ 18,273 $20,164
Maintenance and other.................. 11,762 8,466
-------- -------
Total revenues...................... 30,035 28,630
-------- -------
Cost of revenues:
Product................................ 839 561
Maintenance and other.................. 3,974 2,253
-------- -------
Total cost of revenues.............. 4,813 2,814
-------- -------
Gross margin........................ 25,222 25,816
-------- -------
Operating expenses:
Sales and marketing.................... 13,741 13,227
Research and development............... 6,448 5,185
General and administrative............. 2,772 2,335
In-process research and development
and merger related costs............. 45,187 ---
-------- -------
Total operating expenses............ 68,148 20,747
-------- -------
Income (loss) from operations........... (42,926) 5,069
Other income............................ 907 761
-------- -------
Income (loss) before income taxes... (42,019) 5,830
Income taxes............................ 1,142 1,979
-------- -------
Net income (loss)................... $(43,161) $ 3,851
======== =======
Net income (loss) per share............. $(1.02) $0.09
======== =======
Shares used in per share computation.... 42,326 43,399
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, MARCH 31,
-------- ---------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss).................................. $(43,161) $ 3,851
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization.............. 1,307 1,549
Tax benefit of stock option exercises --- 300
In-process research and development....... 44,117
Changes in operating assets and
liabilities:
Accounts receivable....................... 3,534 (3,189)
Prepaid expenses and other current 196 (330)
assets...................................
Accounts payable.......................... 104 1,539
Accrued merger and integration............ (4,436) (1,461)
Accrued payroll and related expenses. (273) (965)
Other accrued expenses.................... (1,781) 1,010
Deferred revenue.......................... 1,343 4,047
Income taxes.............................. 936 1,488
------- -------
Net cash provided by operating
activities.............................. 1,886 7,839
------- -------
Cash flows from investing activities:
Purchases of property and equipment,
net........................................ (5,593) (2,959)
Other assets................................ 46 (130)
Acquisition of Integrity QA Software,
net of cash acquired....................... (16,101) ---
Proceeds from the sale of short-term
investments................................ 97,196 16,865
Purchases of short-term investments,
net........................................ (80,803) (17,600)
------- -------
Net cash used for investing
activities.............................. (5,255) (3,824)
------- -------
Cash flows from financing activities:
Repayment of bank borrowings, net........... --- (64)
Proceeds from issuance of common
stock, net................................. 3,348 1,654
------- -------
Net cash provided by financing
activities.............................. 3,348 1,590
------- -------
Effect of foreign currency exchange
rate changes on cash........................ (442) (32)
------- -------
Change in cash and cash equivalents.......... (463) 5,573
Cash and cash equivalents, beginning of
period...................................... 17,363 24,294
------- -------
Cash and cash equivalents, end of period $ 16,900 $ 29,867
======== ========
Non cash investing and financing activities:
Common stock issued in
connection with acquisition of
Integrity QA Software................... $ 27,590 ---
======== ========
Cash paid during the period for:
taxes..................................... $ 7 $ 208
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments, which
in the opinion of management are necessary to fairly state Pure Atria
Corporation's (the "Company" or "Pure Atria") and its subsidiaries' condensed
consolidated financial position, the results of its operations, and its cash
flows for the periods presented. A merger between Atria Software Inc. ("Atria")
and CST Acquisition Corporation, a wholly owned subsidiary of Pure Software,
Inc., resulted in Atria becoming a wholly owned subsidiary of the Company (the
"Merger") and was accounted for as a pooling of interests for reporting
purposes. In connection with the Merger, the Company changed its name from Pure
Software Inc. to Pure Atria Corporation.
These financial statements should be read in conjunction with the audited
consolidated financial statements included in the Pure Atria's Annual Report on
Form 10-K for the year ended December 31, 1996. The consolidated results of
operations for the period ended March 31, 1997 are not necessarily indicative of
the results to be expected for any subsequent quarter or for the entire fiscal
year ending December 31, 1997.
(2) NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using net income (loss) and is
based on the weighted average number of shares outstanding of common stock and
dilutive common equivalent shares from stock options using the treasury stock
method. The difference between primary and fully diluted net income (loss) per
share is either not material or anti-dilutive in all periods presented.
(3) ACQUISITIONS
Atria Software, Inc.
- --------------------
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 to 1 exchange ratio. The transaction
was accounted for as a pooling of interests, and accordingly, the Company's
Unaudited Condensed Consolidated Financial Statements have been restated to
include the financial position and results of Atria as of and for the three
months ended March 31, 1996. For income tax purposes, Atria was acquired in a
tax free reorganization.
Integrity QA Software, Inc.
- ---------------------------
On January 31, 1997, the Company completed the acquisition of Integrity QA
Software, Inc. ("Integrity"), a provider of quality assurance software tools. An
aggregate of 1,237,228 shares of Pure Atria Common Stock were issued (including
Pure Atria Common Stock to be reserved for issuance upon exercise of Integrity
options to be assumed by Pure Atria) in exchange for (i) all of the issued and
outstanding capital stock of Integrity and (ii) all unexpired and unexercised
stock options to acquire capital stock of Integrity. 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
5
<PAGE>
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 recorded a one-
time pre-tax charge to operations of $44.7 million associated with this
acquisition which is included in-process research and development and merger
related costs.
(4) RECENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128").
------------------
SFAS No. 128 requires the presentation of both basic earnings per share and
diluted earnings per share for companies with potentially dilutive securities
such as outstanding options and convertible debt. SFAS No. 128 is effective for
annual and interim periods ending after December 15, 1997 and will require
restatement of all comparative per share amounts. The basic loss per share will
be no different from the primary loss per share as presented in the accompanying
consolidated statements of operations as neither consider outstanding options
nor convertible debt. Basic earnings per share, which does not consider
potentially dilutive securities, will be greater than primary earnings per
share. In addition, diluted earnings per share will not differ materially from
fully diluted earnings per share.
(5) SUBSEQUENT EVENT
On April 7, 1997, the Company announced that it had entered into a
definitive agreement ("the Merger Agreement") to be acquired by Rational
Software Corporation ("Rational"). Under the terms of the Merger Agreement all
of the outstanding shares of Pure Atria common stock will be exchanged for
shares of Rational on the basis of 0.90 shares of Rational stock for each share
of Pure Atria stock. Outstanding stock options to purchase Pure Atria stock
will be converted at the exchange ratio into Rational stock options. The
transaction is expected to be accounted for as a pooling of interests and to
qualify as a tax-free reorganization. It is anticipated that Rational will
recognize a one-time charge related to certain merger costs and related expenses
in the quarter ended September 30, 1997.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
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. Pure Atria distributes its products primarily through its direct
sales force and continues to expand its international operations, particularly
in Europe and Asia Pacific.
Total revenues were $30.0 million and $28.6 million for the three months
ended March 31, 1997 and March 31, 1996, respectively, representing an increase
of 5% over the prior year's comparable period. Total revenues increased
primarily due to increased maintenance, training and consulting fees resulting
from a larger installed base offset by lower than expected product revenues.
The rate of growth in the Company's revenues slowed in the first quarter,
principally as a result of a longer than expected sales cycle for the
ClearCase(R) product line encountered by former Pure Software and newly-hired
field sales representatives. The Company believes that this, and other factors,
could continue to impact the rate of growth in revenue for future quarters,
resulting in lower rates of growth than the Company has experienced
historically. The Company has been experiencing an increasing number of orders
occurring later in the quarter, making fluctuations in revenues more difficult
to predict.
Product Revenues. Revenues from product licenses were $18.3 million and
----------------
$20.2 million for the three months ended March 31, 1997 and March 31, 1996,
respectively, representing a decrease of 9% over the prior year's comparable
period. For the three months ended March 31, 1997 and March 31, 1996, product
revenues as a percentage of total revenues were 61% and 70%, respectively. The
principal reason for the decrease in product revenues was a longer than
anticipated sales cycle for the Company's ClearCase(R) product line encountered
by former Pure Software and newly hired field sales representatives, which
affected all of the Company's major territories in North America, Europe and
Asia Pacific.
Maintenance and Other Revenues. Maintenance and other revenues were $11.8
------------------------------
million and $8.5 million for the three months ended March 31, 1997 and March 31,
1996, respectively, representing an increase of 39% over the prior year's
comparable period. For the three months ended March 31, 1997 and March 31,
1996, maintenance and other revenues as a percentage of total revenues were 39%
and 30%, 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 31% and 28% of total revenues for the three months ended March 31,
1997 and March 31, 1996, respectively. The increases in international revenues
as a percentage of total revenues were primarily due to the increase in the
number of
7
<PAGE>
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.
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 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 $0.8 million and $0.6 million for the three months ended March 31, 1997 and
March 31, 1996, respectively, representing 5% and 3% of the related product
revenues for each respective three month period. Cost of product revenues in
absolute dollars increased 50% from the three months ended March 31, 1996 to the
three months ended March 31, 1997. The increase in dollar amount and percentage
of related product revenues was primarily due to the increased cost of
production of more complex software products.
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 $4.0 million and
$2.3 million for the three months ended March 31, 1997 and March 31, 1996,
respectively, representing 34% and 27% of the related maintenance and other
revenues for each respective three month period. Cost of maintenance and other
revenues increased 76% from the three months ended March 31, 1996 to the three
months ended March 31, 1997. 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. Cost of maintenance and other revenues
increased as a percentage of the related maintenance and other revenues
primarily as a result of and a slower rate of growth in maintenance and other
revenues combined with the relatively fixed nature of the costs included in cost
of maintenance and other revenues.
Operating Expenses
------------------
Sales and Marketing. Sales and marketing expenses, consisting primarily
-------------------
of salaries, commissions, bonuses for sales and marketing personnel and
promotional expenses were $13.7 million and $13.2 million, or 46% as a
percentage of total revenues for both the three months ended March 31, 1997 and
March 31, 1996. The dollar increase in sales and marketing expenses is primarily
attributable to increased marketing activities, including trade shows, seminars
and promotional expenses as well as an increase in Pure Atria's sales force and
related travel expenses
Research and Development. Research and development expenses, consisting
------------------------
primarily of salaries, benefits and related costs, were $6.4 million and $5.2
million, or 21% and 18% as a percentage of total revenues, for the three months
ended March 31, 1997 and March 31, 1996, respectively. This represents an
increase of 24% from the three months ended March 31, 1996 to the three months
ended March 31, 1997. 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. Research and development expenses increased
as a percentage of total revenues primarily as a result of a slower rate of
growth in revenues combined with the relatively fixed nature of the costs
included in research and development expenses.
8
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General and Administrative. General and administrative expenses,
--------------------------
consisting primarily of the corporate, finance, legal and administrative
expenses of the Company, were $2.8 million and $2.3 million, or 9% and 8% as a
percentage of total revenues, for the three months ended March 31, 1997 and
March 31, 1996, respectively. The dollar increase in general and administrative
expenses was primarily due to increased staffing and associated expenses
necessary to build an infrastructure to support the Company's growth. General
and administrative expenses increased as a percentage of total revenues
primarily as a result of a slower rate of growth in revenues combined with the
relatively fixed nature of the costs included in general and administrative
expenses.
In-Process Research and Development and Merger Related Costs. On January
------------------------------------------------------------
31, 1997, the Company completed the acquisition of Integrity QA Software, Inc.
("Integrity"), a provider of quality assurance software tools in a transaction
valued at approximately $44.7 million. The consideration was made up of
approximately $40.9 million in cash and stock and $2.8 million of transaction
costs. In addition, the Company incurred certain nonrecurring transition costs
of $1.0 million. During the quarter ended March 31, 1997, the Company recorded a
one-time pre-tax charge of $45.2 million to reflect the amount allocated to in-
process research and development and transition costs related to the Integrity
acquisition and $0.5 million related to the separate acquisition of certain
technology.
Other Income
------------
Other income consists of the net effect of interest income, interest expense
and miscellaneous income and expense items. Other income was $0.9 million and
$0.8 million for the three months ended March 31, 1997 and March 31, 1996,
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 cash generated from
operations.
Income Taxes
------------
Pure Atria incurred income tax expense of $1.1 million and $2.0 million for
the three months ended March 31, 1997 and March 31, 1996, respectively. The
actual tax rates differ from the statutory rate primarily due to state income
taxes, tax exempt interest, research credits, and certain nonrecurring charges
incurred in connection with the Integrity acquisition in 1997 that was not fully
deductible for tax purposes.
9
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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 $16.9 million at March 31, 1997 compared
to $17.4 million at December 31, 1996. 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, capital additions related to the
expansion of operations, cash payment of merger and integration costs and cash
distributed pursuant to the acquisition of Integrity, partially offset by cash
proceeds from the issuance of common stock. As of March 31, 1997 and December
31,1996, Pure Atria had short-term investments of $63.6 million, and $80.0
million, respectively, with a maturity date of greater than three months from
the date of purchase. The decrease in short-term investments is primarily due to
the funding of capital additions related to the expansion of operations and new
corporate headquarters in Cupertino, California, cash payment of merger and
integration costs and cash distributed pursuant to the acquisition of Integrity.
Net cash provided by operations for the three months ended March 31, 1997
of $1.9 million consisted principally of a net loss, adjusted for depreciation
and amortization, non-recurring charges and a decrease in accounts receivable,
offset by payment of merger and integration costs and other accrued expenses.
The increase in accounts receivable compared to March 31, 1996 reflects an
increase in Days Sales Outstanding ("DSO"), as well as increased revenue levels
compared to the three months ended March 31, 1996. Pure Atria expects that DSO
will increase as international revenues increase as Pure Atria expands into new
markets, a greater percentage of orders are received later in the quarter and
the Company's customer base expands. Net cash provided by operations for the
three months ended March 31, 1996 of $7.8 million consisted principally of net
income, adjusted for depreciation and amortization and deferred revenue,
partially offset by growth in accounts receivable and the payment of merger and
integration expenses.
In the three months ended March 31, 1997, Pure Atria used cash of $5.6
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 and improvements related to the Company's new
corporate headquarters. In the three months ended March 31, 1996, Pure Atria
used cash of $3.0 million for the purchase of property and equipment. 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 three months ended March 31, 1997, net cash of $3.3 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 three months ended March 31,
1996 was $1.6 million and consisted primarily of the sale of common stock from
stock option exercises and employee stock purchase plans.
As of March 31, 1997, Pure Atria had working capital of $59.0 million,
compared to $75.7 million at December 31, 1996. 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.
On April 7, 1997, Pure Atria announced that it had entered into a
definitive agreement (the "Merger Agreement") to be acquired by Rational
Software Corporation ("Rational"). Under the terms of the Merger
10
<PAGE>
Agreement all of the outstanding shares of Pure Atria common stock will be
exchanged for shares of Rational on the basis of 0.90 shares of Rational stock
for each share of Pure Atria stock. Outstanding stock options to purchase Pure
Atria stock will be converted at the exchange ratio into Rational stock options.
The transaction is expected to be accounted for as a pooling of interests and to
qualify as a tax-free reorganization. It is anticipated that Rational will
recognize a one-time charge related to certain merger costs and related expenses
in the quarter ended September 30, 1997.
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 Form 10-Q contain forward-
looking statements that are based on management's current beliefs, assumptions,
expectations, estimates and projections. 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 ("Windows 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. 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 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(R) 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
11
<PAGE>
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 a quarter (if any) 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 and among the various
products that make up the Company's product line. 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 reductions or losses in
quarterly earnings. In such an event the price of Pure Atria Common Stock would
likely be materially adversely affected.
Under the terms of the Merger Agreement, a number of conditions and
requirements must be satisfied before the acquisition of Pure Atria by Rational
may be consummated. There can be no assurance that the proposed merger and
related transactions announced by Rational and Pure Atria (the "Merger") will be
successfully consummated, or that the benefits of the merger anticipated by the
two companies will be realized. Furthermore, there can be no assurance that the
present and potential customers of Pure Atria will continue their current buying
patterns without regard to the proposed Merger. Any significant delay or
reduction in orders could have an adverse effect on the near-term business and
results of operations of the combined companies.
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.
12
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits.
10.24 Agreement and Plan of Reorganization dated as of April 7, 1997
by and among Pure Atria Corporation, Rational Software
Corporation and Wings Merger Corporation (which is
incorporated by reference to Registrant's Current Report on
Form 8-K filed April 7, 1997).
11.1 Statement Regarding Computation of Net Income (Loss) Per
Share.
27.1 Financial Statement Data Schedule
b) Reports on Form 8-K.
April 7, 1997 - Item 5 - Other events - Reporting that Pure
Atria Corporation had entered into an Agreement and Plan of
Reorganization with Rational Software Corporation, and Wings
Merger Corporation (a wholly owned subsidiary of Rational
Software Corporation).
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 12, 1997 PURE ATRIA CORPORATION
By: /s/ Chuck Bay
-------------
Chuck Bay
Vice President, Finance, Chief Financial
Officer, General Counsel and Secretary
(Duly Authorized Officer and Principal
Financial Officer)
14
<PAGE>
INDEX TO EXHIBITS
Exhibit
No.
- -------
10.24 Agreement and Plan of Reorganization dated as of April 7, 1997 by and
among Pure Atria Corporation, Rational Software Corporation and Wings
Merger Corporation (which is incorporated by reference to Registrant's
Current Report on Form 8-K filed April 7, 1997).
11.1 Statement Regarding Computation of Net Income (Loss) Per Share.
27.1 Financial Statement Data Schedule
15
<PAGE>
EXHIBIT 11.1
PURE ATRIA CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
MARCH 31,
--------------------
1997 1996
-------- -------
<S> <C> <C>
Net income (loss)......................... $(43,161) $ 3,851
======== =======
Weighted average number of common
shares outstanding....................... 42,326 39,433
Number of common stock equivalents as a
result of stock options outstanding
using the treasury stock method.......... -- 3,966
Shares used in per share computation...... 42,326 43,399
-------- -------
Net income (loss) per share............... $ (1.02) $ 0.09
======== =======
</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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 16,900,000
<SECURITIES> 63,621,000
<RECEIVABLES> 25,510,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 118,415,000
<PP&E> 17,022,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 136,932,000
<CURRENT-LIABILITIES> 59,413,000
<BONDS> 0
0
0
<COMMON> 4,000
<OTHER-SE> 130,785,000
<TOTAL-LIABILITY-AND-EQUITY> 136,932,000
<SALES> 18,273,000
<TOTAL-REVENUES> 30,035,000
<CGS> 839,000
<TOTAL-COSTS> 4,813,000
<OTHER-EXPENSES> 68,148,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (42,019,000)
<INCOME-TAX> 1,142,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,161,000)
<EPS-PRIMARY> (1.02)
<EPS-DILUTED> 0
</TABLE>
