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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ________
Commission file number 00-26810
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:
11,257,000 common stock shares outstanding at May 3, 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 March 31, 1996 and
December 31, 1995........................................... 3
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 1996 and 1995........................ 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 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
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LOGIC WORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
ASSETS 1996 1995
------------ -----------
(unaudited) (audited)
Current Assets
Cash and cash equivalents............... $ 20,243,000 $29,846,000
Marketable securities................... 6,149,000 --
Accounts receivable..................... 9,807,000 8,882,000
Deposit receivable...................... 1,400,000 --
Other current assets.................... 2,869,000 2,309,000
------------ -----------
Total current assets.................. 40,468,000 41,037,000
Property and equipment, net............... 3,759,000 2,289,000
Other assets.............................. 1,084,000 565,000
------------ -----------
$ 45,311,000 $43,891,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable........................ $ 1,872,000 $ 2,583,000
Accrued compensation.................... 1,433,000 1,207,000
Deferred revenue........................ 3,382,000 3,081,000
Income taxes payable.................... 1,227,000 925,000
Other current liabilities............... 2,068,000 2,346,000
------------ ------------
Total current liabilities............. 9,982,000 10,142,000
Long-term liabilities................... 232,000 232,000
Total stockholders' equity............ 35,097,000 33,517,000
------------ ------------
$ 45,311,000 $ 43,891,000
============ ============
See notes to condensed consolidated financial statements.
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LOGIC WORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
THREE MONTHS ENDED
MARCH 31,
------------ -----------
1996 1995
------------ -----------
Revenues
License fees............................ $ 7,431,000 $ 4,490,000
Service fees............................ 2,009,000 938,000
------------ -----------
Total revenues........................ 9,440,000 5,428,000
Cost of revenues
Cost of license fees .................. 446,000 321,000
Cost of service fees................... 1,054,000 567,000
------------ -----------
Total cost of revenues............... 1,500,000 888,000
Gross margin............................. 7,940,000 4,540,000
Operating expenses
Sales and marketing.................... 5,046,000 2,947,000
Research and development............... 1,262,000 880,000
General and administrative............. 1,348,000 639,000
------------ -----------
Total operating expenses............. 7,656,000 4,466,000
Operating income......................... 284,000 74,000
Other income and (expenses), net......... 258,000 (15,000)
------------ -----------
Income before income taxes............... 542,000 59,000
Income taxes............................. 226,000 22,000
------------ -----------
Net income............................... 316,000 $ 37,000
============ ===========
Primary earnings per share............... $ 0.02 $ 0.00
============ ===========
Fully diluted earnings per share......... $ 0.02 $ 0.00
============ ===========
Weighted average shares outstanding:
Primary.................................. 12,956,000 7,563,000
============ ===========
Fully diluted............................ 12,981,000 9,975,000
============ ===========
See notes to the condensed consolidated financial statements.
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LOGIC WORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS CASH FLOWS
(unaudited)
THREE MONTHS ENDED
MARCH 31,
------------ -----------
1996 1995
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ............................... $ 316,000 $ 37,000
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Depreciation and amortization............ 167,000 105,000
Compensation element of common
stock, warrants and stock option grants.. 170,000 51,000
Changes in operating assets and liabilities:
Increase in current assets and
other noncurrent assets.............. (2,819,000) (563,000)
(Decrease) Increase in accounts
payable and accrued liabilities..... (867,000) 425,000
Increase in deferred revenue........... 301,000 5,000
============ ===========
Net cash (used in) provided by
operating activities.................... (2,732,000) 60,000
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment......... (1,598,000) (406,000)
Purchase of marketable securities.......... (6,149,000) --
Purchase of trademarks and copyrights...... (60,000) --
------------ -----------
Net cash used in investing activities...... (7,807,000) (406,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the exercise of
stock options........................... 936,000 47,000
----------- -----------
Net cash provided by financing activities.. 936,000 47,000
Net decrease in cash and cash equivalents.. (9,603,000) (299,000)
Cash and cash equivalents at
beginning of period..................... 29,846,000 936,000
----------- -----------
Cash and cash equivalents at end
of period............................. $ 20,243,000 $ 637,000
============ ============
See notes to the condensed consolidated financial statements.
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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 unaudited condensed consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries.
The accompanying unaudited 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 unaudited 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 March 31, 1996 and the results of the Company's
operations and its cash flows for the three months ended March 31, 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 (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.
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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 securities are classified as available-for-sale when the
Company does not have the positive intent and ability to hold to maturity, and
all equity securities, except for those purchased for the trading portfolio.
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:
Available-for-Sale Securities
---------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------
MARCH 31, 1996
U.S. Treasury securities
and obligations of
U.S. government agencies.... $5,081,000 $400 $(2,000) $5,079,000
U.S. corporate securities....... 1,069,000 92 -- 1,070,000
---------- ---------- --------- -----------
Total marketable securities..... $6,150,000 $500 $(2,000) $6,149,000
========== ========== ========= ===========
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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 THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q 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).
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):
THREE MONTHS ENDED
MARCH 31,
------------ -----------
1996 1995
------------ -----------
PERCENTAGES OF REVENUES:
Revenues:
License fees............................ 78.8% 82.7%
Services................................ 21.2 17.3
------------ -----------
Total revenues........................ 100.0 100.0
------------ -----------
Cost of revenues:
License fees............................ 4.7 5.9
Services................................ 11.1 10.5
------------ -----------
Total cost of revenues................ 15.8 16.4
------------ -----------
Gross margin.............................. 84.2 83.6
------------ -----------
Operating expenses:
Sales and marketing..................... 53.5 54.3
Research and development................ 13.4 16.2
General and administrative.............. 14.3 11.8
------------ -----------
Total operating expenses.............. 81.2 82.3
------------ -----------
Operating income.......................... 3.0 1.3
Other income (expense).................... (2.7) (0.2)
------------ -----------
Income before income taxes................ 5.7 1.1
Income taxes.............................. 2.3 0.4
------------ -----------
Net income................................ 3.4% 0.7%
============ ===========
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TOTAL REVENUES. Total revenues increased 73.9% to $9.4 million in the three
months ended March 31, 1996 from $5.4 million in the three months ended March
31, 1995. The Company's revenues are derived from two sources: license fees
and services. The Company derived approximately $2.3 million and $1.5
million, or 24.3% and 27.6% of its total revenues, from international
customers in three months ended March 31, 1996 and 1995, respectively. The
Company expects that international revenues will continue to represent a
significant percentage of total revenues. To date, most all of the Company's
international license fees and services revenue have been denominated in
United States dollars and, accordingly, the Company has not hedged 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 exchange rate variations.
LICENSE FEES. License fees increased 65.5% to $7.4 million in the three
months ended March 31, 1996 from $4.5 million in the three months ended March
31, 1995. License fees include revenues from software licensed either
directly from the Company or through VARs, dealers or distributors, and
resales of third party software. The increases during these periods resulted
from increased market acceptance of the Company's products, primarily ERwin
and BPwin, which were stimulated by the Company's sales and marketing
activities, the introduction of ModelMart, Logic Works' workgroup management
system, and the expansion of the Company's direct and indirect channels. The
ERwin product line accounted for 79.8% and 90.7% of its license fees in the
three months ended March 31, 1996 and 1995, respectively. The remainder of
the license fees were received from licenses of BPwin, ModelMart 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 rapid growth in license fees during the periods presented.
However, the decrease in the cost of license fees as a percentage of license
fees resulted 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 anticipates entering into, from time
to time, other arrangements under which the Company will resell third
party products, resulting in future costs of license fees.
SERVICES FEE REVENUE. Services revenue increased by 114.2% to $2.0 million
in the three months ended March 31, 1996 from $0.9 million in the three
months ended March 31, 1995. Services revenue includes fees from software
maintenance agreements, and training and consulting services. The growth in
services revenues during the periods presented was the result of increased
maintenance fees associated with the increased number of licenses during such
periods, and increased training services generated from the continued growth
of the Company's Professional Services Group. The Company plans to expand
the group and is focused on increasing the growth of its training and
consulting services revenue.
COST OF SERVICES. Cost of services consists primarily of personnel and
related costs for training, consulting, customer 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 plans.
The increase in cost of services is the result of the expansion and
increasing amount of training and consulting services by the Professional
Services Group.
SALES AND MARKETING. Sales and marketing expenses increased to $5.0 million
in the three months ended March 31, 1996 from $2.9 million in the three
months ended March 31, 1995 and represented 53.5% and 54.3%, respectively, of
total revenues in each period. Sales and marketing expenses consist primarily
of
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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 months ended March 31, 1996 reflected 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 months ended
March 31, 1996 also reflected increased advertising and promotional programs
related to releases of extended versions of ERwin and new products such as
ERwin/ERX for ModelMart and Logic Works ModelMart. During the three months
ended March 31, 1996, the Company also increased its trade show 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 March 31, 1996 from $0.9 million in the
three months ended March 31, 1995 and represented 13.4% and 16.2% 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 growth 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 developing
new products for future release and the continuation of its quality control
and quality assurance programs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to
$1.3 million for the three months ended March 31, 1996 from $0.6 million for
the three months ended March 31, 1995 and represented 14.3% and 11.8% 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.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 38% and 40%
for the three months ended March 31, 1996 and 1995, respectively. These
effective tax rates were based on the federal and state statutory rates.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had cash and cash equivalents of
$20,243,000 and marketable securities of $6,149,000.
Net cash (used) provided by operating activities was ($2,732,000) and
$60,000 for the three months ended March 31, 1996 and 1995. The increase in
cash used in operating activities is primarily related to the deposit
receivable from the Company's new landlord and an increase in accounts
receivable.
Net cash and cash equivalents used in investing activities increased
$7,401,000 in the first three months of 1996 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 $889,000 in the
first three months of 1996 compared to the same period in 1995. This increase
is the result of additional options to purchase shares of the Company's stock
being exercised.
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As part of its growth strategy, the Company pursues the acquisition of
other companies that sell products and services that either complement or
expand its existing business. As a result, the Company continually evaluates
potential acquisition opportunities, which may be material in size and scope.
The Company does not currently have any commitments or agreements with
respect to any acquisitions. The Company anticipates, however, that one or
more potential acquisition opportunities, including those that could be
material may become available in the future. If and when appropriate
acquisition opportunities become available, the Company intends to pursue
them actively. The Company may utilize equity securities, to consummate
acquisitions, which may cause dilution to investors in the Company's Common
Stock. In addition, the Company may be required to utilize cash to consummate
acquisitions. No assurances can be given that the Company will have adequate
resources to consummate any acquisition, that any acquisition will or will not
occur, that if any acquisition does occur it will not materially and adversely
affect the Company or not be dilutive to stockholders or that any such
acquisition will be successful in enhancing the Company's business.
The Company believes that its existing cash balances together with cash
flow from operations will be sufficient to meet its cash requirements
for 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 considerations. No assurance can be given that the Company will be
able to manage such considerations successfully. The failure to manage such
considerations 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 are
difficult to forecast because of the Company's relatively short historic
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 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, it is
likely that in future quarters the Company's operating results will be below
the
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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 79.8% and 90.7% of the Company's
revenues in the three months ended March 31, 1996 and 1995, respectively.
These products and services are expected to continue to account for
substantially all of 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 and
other modeling tools. This multi-vendor support may place a significant
strain on the development resources of the Company. Failure to provide
support for databases and tools 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 DEVELOPMENT AND MARKETING OF LOGIC WORKS MODELMART
AND ERWIN/OPEN FOR MODELMART. The Company recently introduced Logic Works
ModelMart, which serves as a repository of ERwin data models. 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. To prepare for the introduction of this product, the Company
commenced the development and expansion of a direct field sales force in
1995, which represents a new and untested method of distribution for the
Company. 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. Since the Company's future growth is based, in
large part, on the success of this product, 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 have adopted other notations to invest in training to
make effective use of the Company's products. To date, many customers have
only ordered limited numbers of copies of the Company's software and have not
yet fully deployed the software in their application development efforts.
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 recently introduced financial
budgeting and forecasting procedures and plans to add new financial and
management controls and reporting systems. The Company is also in the process
of evaluating and selecting 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
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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 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 $2.3 million, and $1.5 million, or 24.3% and 27.6% of
its total revenues, from international customers in the three months ended
March 31, 1996 and 1995 respectively. 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. Since certain international markets have adopted
MERISE or other modeling notations which are 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
13
<PAGE>
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, 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 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
14
<PAGE>
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 has licensed certain technology from Manager Software Products,
Inc. (MSP), which it resells as its MSP Migrator for ERwin. The agreement
expires on December 31, 1997 unless renewed by the parties. There can be no
assurance that "MSP" will continue to support this product in a manner
acceptable to the Company or that this agreement will be renewed by MSP on
terms acceptable to the Company.
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 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.
15
<PAGE>
CONTROL BY EXISTING STOCKHOLDERS. The Company's officers, directors and
affilated entities together beneficially own approximately 64% 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.
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
Not applicable.
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: May 14 , 1996 By: /s/ BENJAMIN C. COHEN
------------------------
Benjamin C. Cohen
Chief Executive Officer,
President and Director
(Principal Executive Officer)
Dated: May 14, 1996 By: /s/ MARK S. FINKEL
-------------------------
Mark S. Finkel
Executive Vice President
and Chief Financial
Officer
(Principal Financial Officer)
18
<PAGE>
EXHIBIT INDEX
NUMBER DESCRIPTION PAGE NO.
- ------ ----------- --------
11 Statement re: Computation of Per Share Earnings 20
27 Statement re: Financial Data Schedule 21
19
<PAGE>
LOGIC WORKS, INC.
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED
MARCH 31,
------------ -----------
1996 1995
------------ -----------
PRIMARY
Net income per share..................... $ 316,000 $ 7,000
============ ===========
Weighted average number of
common shares outstanding.............. 11,095,000 5,247,000
Stock options granted one year prior
to initial filing ..................... -- 923,000
Stock warrants granted one year prior
to initial filing...................... -- 199,000
Weighted average stock options
outstanding ........................... 1,861,000 1,194,000
------------ -----------
Weighted average number of common shares
outstanding as adjusted................ 12,956,000 7,563,000
Net income per share..................... $0.02 $0.00
============ ===========
FULLY DILUTED
Net income per share ................... $ 316,000 $ 37,000
============ ===========
Weighted average number of common shares
outstanding............................ 11,095,000 5,247,000
Automatic conversion feature of
Series A redeemable convertible
preferred stock....................... -- 2,400,000
Stock options granted one year
prior to initial filing................ -- 923,000
Stock warrants granted one year
prior to initial filing................ -- 199,000
Weighted average stock options
outstanding............................ 1,886,000 1,206,000
------------ -----------
Weighted average number of common shares
outstanding as adjusted................ 12,981,000 9,975,000
============ ===========
Net income per share..................... $0.02 $0.00
============ ===========
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 20,243,000
<SECURITIES> 6,149,000
<RECEIVABLES> 10,274,000
<ALLOWANCES> 467,000
<INVENTORY> 0
<CURRENT-ASSETS> 40,468,000
<PP&E> 4,619,000
<DEPRECIATION> 860,000
<TOTAL-ASSETS> 45,311,000
<CURRENT-LIABILITIES> 9,982,000
<BONDS> 0
0
0
<COMMON> 111,000
<OTHER-SE> 34,986,000
<TOTAL-LIABILITY-AND-EQUITY> 45,311,000
<SALES> 7,431,000
<TOTAL-REVENUES> 9,440,000
<CGS> 446,000
<TOTAL-COSTS> 1,500,000
<OTHER-EXPENSES> 7,656,000
<LOSS-PROVISION> 91,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 542,000
<INCOME-TAX> 226,000
<INCOME-CONTINUING> 316,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 316,000
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
