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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
___________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 00-26810
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LOGIC WORKS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2663477
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
UNIVERSITY SQUARE AT PRINCETON
111 CAMPUS DRIVE
PRINCETON, NJ 08540
(Address and zip code of principal executive offices)
(609) 514-1177
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 11,465,000 COMMON STOCK SHARES
OUTSTANDING AT AUGUST 5, 1996.
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LOGIC WORKS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30,1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income for the Three
and Six Months Ended June 30, 1996 and 1995 . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1996 and 1995 . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . 17
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 17
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 17
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LOGIC WORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1996 1995
--------------------------
(unaudited) (audited)
ASSETS
Current Assets
Cash and cash equivalents $21,302,000 $29,846,000
Marketable securities 6,212,000 -
Accounts receivable 10,136,000 8,882,000
Other current assets 2,861,000 2,309,000
--------------------------
Total current assets 40,511,000 41,037,000
Property and equipment, net 4,863,000 2,289,000
Other assets 561,000 565,000
--------------------------
$45,935,000 $43,891,000
--------------------------
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,608,000 $ 2,583,000
Accrued compensation 1,531,000 1,207,000
Deferred revenue 3,648,000 3,081,000
Income taxes payable - 925,000
Other current liabilities 1,721,000 2,346,000
--------------------------
Total current liabilities 8,508,000 10,142,000
Long-term liabilities 232,000 232,000
Total stockholders' equity 37,195,000 33,517,000
--------------------------
$45,935,000 $43,891,000
--------------------------
--------------------------
See notes to condensed consolidated financial statements.
3
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LOGIC WORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
1996 1995 1996 1995
----------- ---------- ----------- ------------
(unaudited) (unaudited) (unaudited) (audited)
<S> <C> <C> <C> <C>
Revenues
License fees $ 9,211,000 $ 6,474,000 $16,642,000 $10,964,000
Service fees 2,291,000 1,183,000 4,300,000 2,121,000
----------- ----------- ----------- -----------
Total revenues 11,502,000 7,657,000 20,942,000 13,085,000
Cost of revenues
Cost of license fees 541,000 642,000 987,000 963,000
Cost of service fees 938,000 726,000 1,992,000 1,293,000
----------- ----------- ----------- -----------
Total cost of revenues 1,479,000 1,368,000 2,979,000 2,256,000
Gross margin 10,023,000 6,289,000 17,963,000 10,829,000
Operating expenses
Sales and marketing 6,146,000 4,297,000 11,192,000 7,244,000
Research and development 1,340,000 868,000 2,602,000 1,748,000
General and administrative 1,373,000 642,000 2,720,000 1,281,000
----------- ----------- ----------- -----------
Total operating expenses 8,859,000 5,807,000 16,514,000 10,273,000
Operating income 1,164,000 482,000 1,449,000 556,000
Other income and (expense), net 236,000 (28,000) 494,000 (43,000)
----------- ----------- ----------- -----------
Income before income taxes 1,400,000 454,000 1,943,000 513,000
Income taxes 532,000 173,000 759,000 195,000
Net income $ 868,000 $ 281,000 $ 1,184,000 $ 318,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Primary earnings per share $ 0.07 $ 0.03 $ 0.09 $ 0.03
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Fully diluted earnings per share $ 0.07 $ 0.03 $ 0.09 $ 0.03
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares outstanding:
Primary 12,911,000 7,666,000 12,933,000 7,630,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Fully diluted 12,911,000 10,129,000 12,934,000 10,102,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See notes to the condensed consolidated financial statements.
4
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LOGIC WORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1996 1995
---------------------------
(unaudited) (audited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,184,000 $ 318,000
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization 434,000 253,000
Compensation element of common stock, warrants and stock option grants 332,000 190,000
Changes in operating assets and liabilities:
Increase in current assets and other noncurrent assets (1,756,000) (1,896,000)
(Decrease) increase in accounts payable and accrued liabilities (2,201,000) 1,748,000
Increase in deferred revenue 567,000 301,000
--------------------------
Net cash (used in) provided by operating activities (1,440,000) 914,000
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,925,000) (1,032,000)
Purchase of marketable securities (6,212,000) -
Purchase of other assets (129,000) -
--------------------------
Net cash used in investing activities (9,266,000) (1,032,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of stock 2,263,000 7,000
Dividends paid - (100,000)
Borrowings on term loan - 700,000
Repayments on term loan - (39,000)
--------------------------
Net cash provided by financing activities 2,263,000 568,000
Effect of foreign exchange rate on cash (101,000) 6,000
Net decrease in cash and cash equivalents (8,544,000) 456,000
Cash and cash equivalents at beginning of period 29,846,000 936,000
--------------------------
Cash and cash equivalents at end of period $21,302,000 $ 1,392,000
--------------------------
--------------------------
</TABLE>
See notes to the condensed consolidated financial statements.
5
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LOGIC WORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Logic Works, Inc. (the "Company") is a provider of database design and business
process modeling tools and services. The Company was incorporated in Delaware
in 1985 and operates in one industry segment. The Company has subsidiaries in
Australia, Canada, England, Germany and Switzerland. The accompanying
condensed consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries.
The accompanying condensed consolidated financial statements have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission and, accordingly, do not include all financial information and
footnotes required under generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying condensed
consolidated financial statements contain all adjustments consisting of normal
recurring adjustments that the Company considers necessary for a fair
presentation of the financial position of the Company as of June 30, 1996 and
the results of the Company's operations for the three and six months ended June
30, 1996 and 1995, respectively, and its cash flows for the six months ended
June 30, 1996 and 1995, respectively. This report on Form 10-Q should be read
in conjunction with the Company's audited financial statements for the year
ended December 31, 1995 and the notes therein, included in the Company's annual
report on Form 10K. The results of operations for interim periods are not
necessarily indicative of the results of operations to be expected for the
entire year.
2. PER SHARE AMOUNTS
Primary net income per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding and gives effect to
certain adjustments. Shares used in computing primary net income per share
include common shares and common equivalent shares consisting of outstanding
stock options and warrants. For periods prior to August 23, 1995 such
computations have been adjusted to reflect as outstanding, using the treasury
stock method, all common and common equivalent shares issued during the twelve
month period preceding August 24, 1995, the date of the Company's initial filing
of its Registration Statement on Form S-1 with the Securities and Exchange
Commission, as if they were outstanding for all periods presented.
Fully diluted net income per share is computed in the same manner as primary net
income per share adjusted for the end of period estimated fair value and the
assumed conversion for the period prior to August 24, 1995 (using the if
converted method) of the 2,400,000 shares of Series A Redeemable Preferred Stock
outstanding, which converted to common shares on a one-for-one basis upon the
consummation of the Company's initial public offering.
6
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3. MARKETABLE SECURITIES
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt and equity securities and are classified as available-for-sale when the
Company does not have the positive intent and ability to hold to maturity.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported in a separate component of shareholders'
equity. The amortized cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in investment income. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in investment income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in investment income.
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
Available-for-Sale Securities
------------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Gains/(Losses) Value
------------------------------------------------------------------
<S> <C> <C> <C> <C>
JUNE 30, 1996
U.S. Treasury securities
and obligations of U.S. government agencies $4,530,000 $2,000 $32,000 $4,564,000
U.S. corporate securities 1,661,000 - (13,000) 1,648,000
-----------------------------------------------------------------
Total marketable securities $6,191,000 $2,000 $19,000 $6,212,000
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-
LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-
LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE THOSE DISCUSSED IN "BUSINESS CONSIDERATIONS" IN THIS REPORT AND IN OTHER
FILINGS MADE BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Logic Works, Inc. ("Logic Works" or the "Company") is a leading provider of
client/server database design and business process modeling software. The
Company's Windows-based products allow customers to realize the benefits of
client/server systems by enabling easy, rapid and high-quality design,
deployment and management of relational databases and related applications.
The Company has focused on increasing revenues, marketing its products to gain
market share, and developing a broad customer base. Since the initial release of
its products, the Company has developed and expanded its distribution channels,
including a direct sales force (principally telesales) and indirect channels
(primarily VARs, dealers and distributors).
In July 1996, the Company established a new alliance with Progress Software.
Through this cooperative development agreement, Progress Software will offer
ERWIN/ERX to its existing customers and to other organizations that will use
PROGRESS development tools and database products to develop mission-critical
business applications.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of total
revenues for the periods indicated (subtotals not adjusted for rounding):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------
1996 1995 1996 1995
-----------------------------------
<S> <C> <C> <C> <C>
PERCENTAGES OF REVENUES:
Revenues:
License fees . . . . . . . . . . 80.1% 84.6% 79.5% 83.8%
Services . . . . . . . . . . . . 19.9 15.4 20.5 16.2
-----------------------------------
Total revenues . . . . . . . . . 100.0 100.0 100.0 100.0
-----------------------------------
Cost of revenues:
License fees . . . . . . . . . . 4.7 8.4 4.7 7.4
Services . . . . . . . . . . . . 8.2 9.5 9.5 9.9
-----------------------------------
Total cost of revenues . . . . . 12.9 17.9 14.2 17.3
-----------------------------------
Gross margin . . . . . . . . . . . 87.1 82.1 85.8 82.7
-----------------------------------
Operating expenses:
Sales and marketing. . . . . . . 53.4 56.1 53.4 55.4
Research and development . . . . 11.7 11.3 12.4 13.4
General and administrative . . . 11.9 8.4 13.0 9.8
-----------------------------------
Total operating expenses . . . . 77.0 75.8 78.8 78.6
-----------------------------------
Operating income . . . . . . . . . 10.1 6.3 7.0 4.1
Other income (expense) . . . . . . 2.1 (0.4) 2.4 (0.3)
-----------------------------------
Income before income taxes . . . . 12.2 5.9 9.4 3.8
Income taxes . . . . . . . . . . . 4.6 2.3 3.6 1.5
-----------------------------------
Net income . . . . . . . . . . . . 7.6% 3.6% 5.8% 2.3%
-----------------------------------
-----------------------------------
</TABLE>
8
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TOTAL REVENUES. Total revenues increased 49.4% to $11.5 million in the three
months ended June 30, 1996 from $7.7 million in the three months ended June
30, 1995. Total revenues increased 59.5% to $20.9 million in the six months
ended June 30, 1996 from $13.1 million in the six months ended June 30, 1995.
The Company's revenues are derived from two sources: license fees and
services. The Company derived approximately $2.5 million and $1.3 million, or
21.7% and 16.9% of its total revenues, from international customers in the
three months ended June 30, 1996 and 1995, and $4.8 million and $2.9 million,
or 23.0% and 22.1% of its total revenues, from international customers in the
six months ended June 30, 1996 and 1995, respectively. The Company expects
that international revenues will continue to represent a significant
percentage of total revenues. To date, most of the Company's international
license fees and services revenue have been denominated in United States
dollars and, accordingly, the Company has not experienced significant foreign
currency exposure. The Company anticipates that, in the future, an increasing
proportion of the Company's sales will be denominated in foreign currencies.
In such event, foreign currency translations may contribute to significant
fluctuations in the Company's results of operations and the Company may enter
into hedging transactions to mitigate the effects of exchange rate variations.
LICENSE FEES. License fees increased 43.8% to $9.2 million in the three
months ended June 30, 1996 from $6.4 million in the three months ended June
30, 1995. License fees increased 52.3% to $16.6 million in the six months
ended June 30, 1996 from $10.9 million in the six months ended June 30, 1995.
License fees include revenues from software licensed either directly by the
Company or through VARs, dealers or distributors, and resales of third party
software. The increases during these periods resulted from the introduction
of Logic Works ModelMart product, the Company's workgroup management system,
continued increased market acceptance of the Company's products, including
ERWIN and BPWIN, which were stimulated by the Company's sales and marketing
activities, and the expansion of the Company's direct and indirect channels.
Revenue from the Logic Works ModelMart server accounted for 8.3% and 6.4%
of total license fees in the three and six months ended June 30, 1996. The
ERWIN product line accounted for 78.5% and 85.7% of its license fees in the
three months ended June 30, 1996 and 1995, and 80.0% and 87.9% for the six
months ended June 30, 1996 and 1995. The remainder of the license fees were
received from licenses of BPWIN, and to a significantly lesser extent, RPTWIN
and OOWIN.
COST OF LICENSE FEES. Cost of license fees consists primarily of the costs of
product media, duplication, manuals and shipping for software licensed to the
Company's customers. The dollar increase in the cost of license fees reflects
the growth in license fees during the periods presented. However, the decrease
in the cost of license fees as a percentage of license fees resulted primarily
from the termination of an agreement with Sybase Inc.'s Powersoft unit in the
third quarter of 1995. The agreement permitted the Company to purchase and
resell Powersoft's Powerbuilder product as part of a bundled product with ERWIN.
The Company may enter into, from time to time, other arrangements under which
the Company will resell third party products, resulting in additional costs of
license fees.
SERVICES FEE REVENUE. Services revenue increased by 91.7% to $2.3 million in
the three months ended June 30, 1996 from $1.2 million in the three months ended
June 30, 1995. Services revenue increased 104.8% to $4.3 million in the six
months ended June 30, 1996 from $2.1 million in the six months ended June 30,
1995. Services revenue includes fees from software maintenance agreements, and
training and consulting services. The growth in services revenues during the
periods presented was primarily the result of increased maintenance fees
associated with the increased number of licenses during such periods, and to a
lesser extent increased consulting and training services provided by the
Company's Professional Services Group.
COST OF SERVICES. Cost of services consists primarily of personnel and related
costs for training, consulting provided by the Professional Services Group,
customer technical support and payments to third party service providers. Cost
of services also reflects the costs associated with product media, duplication,
manuals, and shipping product upgrades to customers who have subscribed to the
Company's maintenance
9
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plans. The increase in cost of services is the result of the expansion and
increasing amount of training and consulting services provided by the
Professional Services Group.
SALES AND MARKETING. Sales and marketing expenses increased to $6.1 million
in the three months ended June 30, 1996 from $4.3 million in the three months
ended June 30, 1995 and represented 53.4% and 56.1%, respectively, of total
revenues in each period. Sales and marketing expenses increased to $11.2
million in the six months ended June 30, 1996 from $7.2 million in the six
months ended June 30, 1995 and represented 53.4% and 55.4% respectively, of
total revenues in each period. Sales and marketing expenses consist
primarily of salaries, commissions and bonuses paid to sales and marketing
personnel, as well as travel and promotional expenses.
Sales and marketing expenses increased markedly during each of the periods
presented, due primarily to substantial increases in personnel expenses from
increased hiring, increased advertising and promotional costs, and increased
sales commissions. During each of the periods presented, the Company has
increased the number of employees in its sales and marketing organization. The
significant growth in the Company's sales and marketing expenses during the
three and six months ended June 30, 1996 reflects the expansion of its direct
field sales force and its European sales and marketing staff. The increases in
sales and marketing expenses during the three and six months ended June 30, 1996
also reflects increased advertising and promotional programs related to releases
of extended versions of ERWIN and new products such as Logic Works' ModelMart,
ERWIN/Open and ErWIN/Navigator. During the three and six months ended June 30,
1996, the Company also increased its seminar activity and expanded its targeted
direct mail efforts.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to $1.3
million in the three months ended June 30, 1996 from $0.9 million in the three
months ended June 30, 1995 and represented 11.7% and 11.3% of total revenues,
respectively. Research and development expenses increased to $2.6 million in
the six months ended June 30, 1996 from $1.7 million in the six months ended
June 30, 1995 and represented 12.4% and 13.4% of total revenues, respectively.
Research and development expenses consist primarily of software engineering
personnel costs, costs of third party equipment and software for development
purposes and costs of outside consultants hired by the Company to assist in its
product development efforts. Research and development expenses are generally
charged to operations as they are incurred and have not been capitalized since
capitalizable costs have not been material. The increase in research and
development expenses during the periods presented was the result of the
Company's ongoing development of extended versions of ERWIN and BPWIN, and Logic
Works ModelMart, as well as ongoing development of new products for future
release and the continuation of its quality control and quality assurance
programs. During the second quarter, the Company launched a data warehousing
cornerstone initiative. A consortium of customers was established to assist in
the development of a data warehouse product line. This collaboration between the
Company and a select group of customers was established to guide the development
of a planned metadata management tool for supporting a data warehousing
solution. It is anticipated to include a combination of products, education,
consulting, services and partnerships with several leading data warehousing
vendors.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to
$1.4 million for the three months ended June 30, 1996 from $0.6 million for the
three months ended June 30, 1995 and represented 11.9% and 8.4% of total
revenues, respectively. General and administrative expenses increased to $2.7
million for the six months ended June 30, 1996 from $1.3 million for the six
months ended June 30, 1995 and represented 13.0% and 9.8% of total revenues,
respectively. General and administrative expenses consist primarily of salaries
of administrative, executive and financial personnel, provision for doubtful
accounts, and professional fees. The increase in general and administrative
expenses related primarily to the overall expansion of the Company's operations
and facilities and to its becoming a public company which is subject to
reporting and other requirements since October 1995.
10
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PROVISION FOR INCOME TAXES. The Company's effective tax rate was 38% and 40%
for the three and six months ended June 30, 1996 and 1995, respectively. These
effective tax rates were based on estimated annual federal and state statutory
rates.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had cash and cash equivalents of $21,302,000 and
marketable securities of $6,212,000.
Net cash (used in) provided by operating activities was ($1,440,000) and
$914,000 for the six months ended June 30, 1996 and 1995, respectively. The
increase in cash used in operating activities is primarily related to an
increase in accounts receivable as a result of increased revenues and a decrease
in accounts payable and income taxes payable.
Net cash and cash equivalents used in investing activities increased $8,234,000
in the first six months of 1996 as compared to the same period in 1995. This
increase in investing activities is the result of purchases of marketable
securities, and increased purchases of property, plant and equipment resulting
from the growing headcount and the move of the Company's corporate headquarters
from a 27,000 square foot facility to a 70,000 square foot facility.
Net cash provided by financing activities increased by $1,695,000 in the first
six months of 1996 compared to the same period in 1995 as a result of the
exercise of outstanding options to purchase shares of the Company's Common
Stock.
The Company believes that its existing cash balances together with cash flow
from operations will be sufficient to meet its cash requirements for at least
the next twelve months.
BUSINESS CONSIDERATIONS
The Company's future business, financial condition and results of
operations are dependent on the Company's ability to successfully manage the
following business risks. No assurance can be given that the Company will be
able to manage such risks successfully. The failure to manage such risks
successfully could have a material adverse effect on the Company's business,
financial conditions and results of operations, and on the market price of its
securities.
POTENTIAL FOR SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS;
SEASONALITY. The Company has experienced, and may in the future experience,
significant quarter to quarter fluctuations in its results of operations. Such
fluctuations may result in volatility in the price of the Company's Common
Stock. Quarterly results of operations may fluctuate as a result of a variety of
factors, including demand for the Company's products, the timing of introduction
of new products and product enhancements by the Company or its competitors,
market acceptance of new products, the mix of direct and indirect sales, the mix
of license fee and services revenue, the mix of products within license fee
revenue, the mix of maintenance, training and consulting services within
services revenue, the geographic mix of revenue, the nature and timing of
significant marketing and joint marketing programs, the number and timing of new
hires, foreign currency exchange rate fluctuations, competitive conditions in
the industry and general economic conditions. The Company has historically
recognized a substantial portion of its revenues in the last month of a quarter,
with these revenues frequently concentrated in the last week of the quarter. As
a result, license fees in any quarter are substantially dependent on orders
booked and shipped in the last month and last week of that quarter. The
Company's revenues have historically been difficult to forecast because of the
Company's relatively short sales cycle, the reliance on customer-initiated
inquiries for a substantial portion of the Company's telesales, variations in
the size, type and purchasing procedures of the Company's customers, the use of
indirect distribution channels that place orders on an as-needed basis and the
Company's limited backlog. A high percentage of the Company's operating expenses
is based
11
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primarily on planned product introductions and sales forecasts and the Company
may be unable to adjust spending in a timely manner to compensate for any
unexpected shortfalls in revenues. Accordingly, the Company believes that period
to period comparisons of results of operations are not necessarily meaningful
and should not be relied upon as an indication of future results of operations.
There can be no assurance that the Company will be profitable in any future
quarter. The Company has historically experienced increased demand for its
products during the third quarter, due primarily to the purchasing patterns of
United States Federal governmental agencies, decreased demand in the first
quarter and increased demand in the fourth quarter, due to other customers'
buying patterns and the effects of quarterly and annual sales performance
quotas. Due to the Company's limited operating history and as a result of its
rapid revenue growth, seasonal trends in the Company's results of operations
have not clearly emerged. However, the Company believes that its future
operating results may follow a similar pattern of seasonal fluctuation. Due to
the foregoing factors, in future quarters the Company's operating results could
be below the expectations of public market analysts and investors. Such an event
would have a material adverse effect on the price of the Company's Common Stock.
DEPENDENCE ON ERWIN PRODUCT LINE. The ERWIN line of products and related
services accounted for approximately 78.5% and 85.7% of the Company's revenues
in the three months ended June 30, 1996 and 1995 and 80.0% and 87.9% in the six
months ended June 30, 1996 and 1995. These products and services are expected to
continue to account for the majority the Company's revenues for the foreseeable
future. Accordingly, the Company's future results of operations will depend, in
part, on achieving broader market acceptance of ERWIN and related services.
Customer acceptance of ERWIN will also depend on the Company's ability to
preserve its open architecture by continuing to support leading relational
database management systems, client-side application development tools, other
modeling tools and the Internet and Intranet operating environments. This
multi-vendor support may place a significant strain on the development resources
of the Company. Failure to provide support for databases, tools and new
operating environments of the Internet/Intranet that achieve broad market
acceptance may materially and adversely affect sales of ERWIN. A reduction in
demand or increase in competition in the market for its ERWIN line of products
and related services, or decline in sales of such products and services, would
have a material adverse effect on the Company's business, results of operations
and financial condition, and the market price of its securities.
RISKS ASSOCIATED WITH THE MARKET ACCEPTANCE OF LOGIC WORKS MODELMART AND
ERWIN/OPEN FOR MODELMART. In the first quarter of 1996, the Company introduced
Logic Works ModelMart, which serves as a repository of ERWIN data models. While
this new product has accounted for 8.3% and 6.4% of total license revenues for
the three and six months ended June 30, 1996, respectively, there can be no
assurance that the Company will be successful in achieving market acceptance for
Logic Works ModelMart. This product is anticipated to result in significantly
higher average order sizes than the Company's existing products and represents
for its users a commitment to a model-driven development approach at the
workgroup level rather than the individual developer level. The Company believes
that, due to the anticipated higher average order sizes and increased
sophistication, this product will require a longer and more involved sales
process, purchase decisions to be made at a higher management level and greater
technical field support than its existing products. There can be no assurance
that the Company's direct sales force will be successful in marketing this
product at a level that offsets the costs of a direct field sales force. The
Company's business, results of operations and financial condition, and the
market price of its securities would be materially and adversely affected if
Logic Works ModelMart fails to achieve market acceptance or if the direct field
sales force is unable to generate significant sales of this product.
EMERGING MARKET FOR MODEL-DRIVEN DEVELOPMENT TOOLS. The market for
client/server database design tools is relatively new and emerging and will be
subject to frequent and continuing changes in customer preferences and
technology. The adoption of the Company's products requires acceptance and a
commitment to a model-driven development approach and the use of the IDEF1X
notation for data modeling. Although the IDEF1X notation is part of the Federal
Information Processing Standard, other competing modeling notations exist that
have been widely accepted, including Information Engineering (IE), MERISE and
object-oriented notations. The use of the IDEF1X notation may require end-users
who
12
<PAGE>
have adopted other notations to invest in training to make effective use of the
Company's products. There can be no assurance as to the rate of adoption of
client/server technology and model-driven development tools or that the
Company's products will achieve market acceptance among organizations that adopt
client/server systems.
MANAGEMENT OF GROWTH. The Company has recently experienced a period of
significant growth that has placed a significant strain upon its management
systems and resources. The Company has established financial budgeting and
forecasting procedures and is implementing new financial and management controls
and reporting systems. The Company is also in the process of implementing a new
management information system to automate the Company's financial reporting
procedures and to provide capacity for additional growth. There can be no
assurance that the Company will be able to implement these reporting and
information systems and controls on a timely basis. The Company's ability to
compete effectively and to manage future growth, if any, will require the
Company to continue to improve its financial and management controls, reporting
systems and procedures and budgeting and forecasting capabilities on a timely
basis and expand, train and manage its employee work force. There can be no
assurance that the Company will be able to do so successfully. The Company's
failure to do so could have a material adverse effect upon the Company's
business, results of operations and financial condition.
EXPANSION OF INDIRECT CHANNELS; POTENTIAL FOR CHANNEL CONFLICT. An integral
part of the Company's strategy is to expand indirect marketing channels using
VARs, dealers and distributors. The Company announced a distribution agreement
for its ERWIN and BPWIN product lines with Lifeboat Distribution and
DistribuPro. The Company dedicates specific resources to develop indirect
marketing channels. There can be no assurance that the Company will be able to
attract and retain VARs, dealers and distributors that will be able to market
the Company's products effectively and will be qualified to provide timely and
cost-effective customer support and service. The Company's agreements with such
third parties do not restrict such third parties from marketing competitive
products. In many cases, these agreements may be terminated by either party at
any time without cause. Therefore, there can be no assurance that any VAR,
dealer or distributor will continue to represent the Company's products, and the
inability to attract and retain important VARs, dealers or distributors could
have a material adverse effect on the Company's business, results of operations
and financial condition. In addition, if the Company is successful in selling
products through these channels, the Company expects that any material increase
in the Company's indirect sales as a percentage of total revenues will
materially and adversely affect the Company's average selling prices and gross
margins due to the lower unit prices that the Company receives when selling
through indirect channels. Selling through indirect channels limits the
Company's direct contacts with its customers which can hinder the Company's
ability to accurately forecast sales, evaluate customer satisfaction and
recognize emerging customer requirements. The Company's strategy of marketing
its products directly to end-users and indirectly through VARs, dealers and
distributors may result in distribution channel conflicts. The Company's direct
sales efforts may compete with those of its indirect channels and to the extent
different resellers target the same customers, resellers may also come into
conflict with each other. Although the Company has attempted to allocate the
markets for its products among its distribution channels in a manner to avoid
potential conflicts, there can be no assurance that channel conflict will not
materially and adversely affect its relationships with existing VARs, dealers or
distributors or adversely affect its ability to attract new VARs, dealers and
distributors.
RISKS ASSOCIATED WITH INTERNATIONAL CUSTOMERS AND OPERATIONS. The Company
derived approximately $2.5 million, and $1.3 million, or 21.7% and 16.9% of its
total revenues, from international customers in the three months ended June 30,
1996 and 1995 and $4.8 million and $2.9 million, or 23.0% and 22.1% of its total
revenues, from international customers in the six months ended June 30, 1996 and
1995. The Company expects that such revenues will continue to represent a
significant percentage of its total revenues. The Company believes that its
continued growth and profitability will require expansion of its sales in
foreign markets. The Company intends to continue to expand its operations
outside of the United States and enter additional international markets, which
will require significant management attention and financial resources. The
Company opened an office in France in July 1996 to expand its European market.
Since certain international markets have adopted MERISE or other modeling
notations which are
13
<PAGE>
different from the IDEF1X standard used by the Company's products, acceptance of
the Company's products in certain international markets may require the customer
to adopt a new modeling standard. In addition, acceptance of the Company's
products in certain international markets has required, and may in the future
require, extensive, time-consuming and costly modifications to the Company's
products to localize the products for use in particular markets. There can be no
assurance that the Company will be able to achieve market acceptance of its
products in international markets or maintain or increase international market
demand for its products and services. To date, substantially all of the
Company's international license fees and services revenue have been denominated
in United States dollars. An increase in the value of the United States dollar
relative to foreign currencies could make the Company's products more expensive
and, therefore, potentially less competitive in foreign markets. The Company
does not currently hedge its exposure to foreign currency fluctuations. The
Company anticipates that, in the future, an increasing proportion of the
Company's sales will be denominated in foreign currencies. In such event,
foreign currency translations may contribute to significant fluctuations in the
Company's results of operations and the Company may enter into hedging
transactions to mitigate the effects of future exchange rate variations.
Additional risks inherent in the Company's international business activities
generally include unexpected changes in regulatory requirements, tariffs and
other trade barriers, longer accounts receivable payment cycles, difficulties in
managing international operations, potentially adverse tax consequences,
restrictions on repatriation of earnings, and the burdens of complying with a
wide variety of foreign laws. There can be no assurance that such factors will
not have a material adverse effect on the Company's future international
revenues and, consequently, on the Company's business, results of operations and
financial condition.
RELIANCE ON CERTAIN RELATIONSHIPS. The Company has established strategic
relationships with a number of organizations that it believes are important to
its worldwide sales, marketing and support activities, as well as to its product
development efforts. The Company's relationships with RDBMS vendors, application
development tool vendors, and other software vendors, hardware vendors and
consultants provide marketing and sales opportunities for the Company's direct
sales force, expand the distribution of its products, and broaden its product
offerings through product bundling. These relationships also assist the Company
in keeping pace with the technological and marketing developments of major
software vendors, and in certain instances, provide the Company with technical
assistance for the Company's product development efforts. There can be no
assurance that these companies, most of which have significantly greater
financial and marketing resources than the Company, will not develop or market
software products which compete with the Company's products in the future or
will not otherwise discontinue their relationships with or support of the
Company. The failure by the Company to maintain its existing relationships, or
to establish new relationships in the future, because of a divergence of
interests, acquisition of one or more of these third parties or other reason,
could have a material adverse effect on the Company's business, results of
operations and financial condition.
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE. The client/server software market
is characterized by rapid technological change, changes in customer
requirements, frequent new product introductions and enhancements, and emerging
industry standards. The introduction of products embodying new technologies and
the emergence of new industry standards can render existing products obsolete
and unmarketable. Accordingly, the life cycles of the Company's products are
difficult to estimate. The Company's future success will depend in part upon its
ability to enhance current products and to develop and introduce new products
that respond to evolving customer requirements and keep pace with technological
developments and opportunities, such as the Internet and datawarehousing, and
emerging industry standards, such as new operating systems, including Windows NT
and Windows 95, the Internet and Intranet, hardware platforms, user interfaces,
RDBMS software and third-party application development tools. There can be no
assurance that the Company will be successful in developing and marketing
product enhancements or new products that respond to technological change,
changes in customer requirements, or emerging industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of new products and
enhancements, or that any new products or enhancements that it may introduce
will achieve market acceptance. The inability of the Company for technological
or other reasons, to develop and introduce new
14
<PAGE>
products or enhancements in a timely manner in response to changing customer
requirements, technological change or emerging industry standards, would have a
material adverse effect on the Company's business, results of operations and
financial condition.
RISK OF PRODUCT DEFECTS OR DEVELOPMENT DELAYS. Software products such as those
offered by the Company often encounter development delays and may contain
undetected errors or failures when introduced or when new versions are released.
The Company has in the past experienced delays in the development of software of
up to one year in certain circumstances. Although the Company has not
experienced any material adverse effects resulting from any such errors or
delays to date, there can be no assurance that, despite testing by the Company
and by current and potential customers, errors will not be found in new products
or releases after commencement of commercial shipments, or that the Company will
not experience development delays, resulting in delays in the shipment of
products and a loss of or delay in market acceptance, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
DEPENDENCE ON PROPRIETARY RIGHTS; RISKS OF INFRINGEMENT. The Company's success
is heavily dependent upon its proprietary technology. The Company regards its
software as proprietary, and relies primarily on a combination of contract,
copyright and trademark law, trade secrets, confidentiality agreements and
contractual provisions to protect its proprietary rights. The Company has no
patents or patent applications pending, and existing trade secrets and copyright
laws afford only limited protection. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem, particularly in international markets and as a result of the growing
use of the Internet. The Company may in the future make source code for one or
more of its products available to certain of its customers and strategic
partners which may increase the likelihood of misappropriation or other misuse
of the Company's software. In selling its products, the Company relies primarily
on "shrink wrap" licenses that are not signed by licensees and, therefore, it is
possible that such licenses may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that the steps taken by the Company to protect
its proprietary rights will be adequate or that the Company's competitors will
not independently develop technologies that are substantially equivalent or
superior to the Company's technologies. Third-party software underlying the
Company's RPTWIN product is licensed on a non-exclusive, fully paid-up basis and
such license is subject to termination by such third-party only in the event of
the Company's breach or bankruptcy. However, there can be no assurance that such
license will not be revoked or terminated in the future, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company is not aware that any of its products, trademarks or other
proprietary rights infringe the proprietary rights of third parties. However,
there can be no assurance that third parties will not assert infringement claims
against the Company in the future with respect to current or future products. As
the number of software products in the industry increases and the functionality
of these products further overlaps, the Company believes that software
developers may become increasingly subject to infringement claims. Any such
claims, with or without merit, can be time consuming and expensive to defend,
cause product shipment delays or require the Company to enter into royalty or
licensing agreements. Such royalty agreements, if required, may not be available
on terms acceptable to the Company, or at all, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
PRODUCT LIABILITY. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. In selling its products, the Company relies
primarily on "shrink wrap" licenses that are not signed by licensees and,
therefore, it is possible that such licenses may be unenforceable under the laws
of certain jurisdictions. As a result, it is
15
<PAGE>
possible that the limitation of liability provisions contained in the Company's
license agreements may not be effective. Although the Company has not
experienced any product liability claims to date, the sale and support of
products by the Company may entail the risk of such claims. A successful product
liability claim brought against the Company could have a material adverse effect
upon the Company's business, results of operations and financial condition.
DEPENDENCE ON KEY PERSONNEL. The Company's future performance depends in
significant part upon the continued service of its key technical, sales and
senior management personnel, none of whom is bound by an employment agreement.
The loss of the services of one or more of the Company's executive officers or
other key employees could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company is a party
to employment agreements with certain executive officers and key employees. The
Company's future success also depends on 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 the Company
can retain its key technical, sales and managerial employees or that it can
attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future.
CONTROL BY EXISTING STOCKHOLDERS. The Company's officers, directors and
affiliated entities together beneficially own approximately 46% of the
outstanding shares of Common Stock. As a result, these stockholders are able to
exercise control over matters requiring stockholder approval, including the
election of directors, and mergers, acquisitions, consolidations and sales of
all or substantially all of the assets of the Company. This may prevent or
discourage tender offers for the Company's Common Stock unless the terms are
approved by such stockholders. See "Security Ownership of Certain Beneficial
Owners and Management" in the Company's Proxy Statement dated April 10, 1996.
"LOGIC WORKS" "ERWIN" and "BPWIN" are registered trademarks of the Company.
"OOWIN," "RPTWIN," "Logic Works ModelMart," "ERWIN/OPEN for ModelMart," and
"ERWIN Navigator" are trademarks of the Company.
16
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not subject to any lawsuits or other claims which, in
the opinion of management, based upon consultation with legal counsel,
will have a material adverse effect on the Company's business,
financial condition, and/or results of operations.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on
May 7, 1996.
(b) The motions before stockholders were:
(1) To elect two Class I Directors:
Votes Votes Votes Broker
Name of Director For Against Withheld Abstentions Nonvotes
- ---------------- --- ------- -------- ----------- --------
Benjamin C. Cohen 8,559,576 - 120,000 - -
Robert E. Davoli 8,559,576 - 120,000 - -
(2) To ratify the selection of Ernst & Young LLP,
independent public accountants, as auditors of the
Company for the fiscal year ending December 31, 1996.
Votes For 8,679,576
Votes Against -
Votes Withheld -
Abstentions -
Broker Nonvotes -
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
11. Statement regarding computation of per share earnings.
27. Statement regarding financial data schedule.
17
<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.
LOGIC WORKS, INC.
Dated: August 14 , 1996 By: /s/ BENJAMIN C. COHEN
-------------------------
Benjamin C. Cohen
Chief Executive Officer, President and
Director
(Principal Executive Officer)
Dated: August 14, 1996 By: /s/KENNETH W. ZENG
-------------------------
Kenneth W. Zeng
Controller and Assistant Secretary
(Principal Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
NUMBER DESCRIPTION
- ------ -----------
11 Statement re: Computation of Per Share Earnings
27 Statement re: Financial Data Schedule
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
LOGIC WORKS, INC.
COMPUTATION OF EARNINGS PER SHARE
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------
1996 1995 1996 1995
--------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY
Net income $868,000 $251,000 $1,184,000 $258,000
--------------------------------------------------------
--------------------------------------------------------
Weighted average number of common shares outstanding 11,246,000 5,392,000 11,171,000 5,334,000
Stock options granted one year prior to initial filing - 859,000 - 887,000
Stock warrants granted one year prior to initial filing - 199,000 - 199,000
Weighted average stock options outstanding 1,665,000 1,216,000 1,762,000 1,210,000
--------------------------------------------------------
Weighted average number of common shares outstanding as adjusted 12,911,000 7,666,000 12,933,000 7,630,000
Net income per share $0.07 $0.03 $0.09 $0.03
--------------------------------------------------------
--------------------------------------------------------
FULLY DILUTED
Net income $868,000 $281,000 $1,184,000 $318,000
--------------------------------------------------------
--------------------------------------------------------
Weighted average number of common shares outstanding 11,246,000 5,392,000 11,171,000 5,334,000
Automatic conversion feature of Series A redeemable convertible
preferred stock - 2,400,000 - 2,400,000
Stock options granted one year prior to initial filing - 859,000 - 887,000
Stock warrants granted one year prior to initial filing - 199,000 - 199,000
Weighted average stock options outstanding 1,665,000 1,279,000 1,763,000 1,282,000
--------------------------------------------------------
Weighted average number of common shares outstanding as adjusted 12,911,000 10,129,000 12,934,000 10,102,000
--------------------------------------------------------
--------------------------------------------------------
Net income per share $0.07 $0.03 $0.09 $0.03
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000949871
<NAME> LOGIC WORKS, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 21,302,000
<SECURITIES> 6,212,000
<RECEIVABLES> 10,626,000
<ALLOWANCES> 490,000
<INVENTORY> 0
<CURRENT-ASSETS> 40,511,000
<PP&E> 5,946,000
<DEPRECIATION> 1,083,000
<TOTAL-ASSETS> 45,935,000
<CURRENT-LIABILITIES> 8,508,000
<BONDS> 0
0
0
<COMMON> 114,000
<OTHER-SE> 37,081,000
<TOTAL-LIABILITY-AND-EQUITY> 45,935,000
<SALES> 16,642,000
<TOTAL-REVENUES> 20,942,000
<CGS> 987,000
<TOTAL-COSTS> 2,979,000
<OTHER-EXPENSES> 16,514,000
<LOSS-PROVISION> 172,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,943,000
<INCOME-TAX> 759,000
<INCOME-CONTINUING> 1,184,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,184,000
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
