-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KP7L9j3hYdTVo3Gay5GFAeps0RkuvmKQuHSg7BCQ8g1KBLw11AIHmiRWUxhtmpIj mA6QRepX0HwJgyEToFggwQ== 0000950135-96-004848.txt : 19961210 0000950135-96-004848.hdr.sgml : 19961210 ACCESSION NUMBER: 0000950135-96-004848 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960929 FILED AS OF DATE: 19961113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VMARK SOFTWARE INC CENTRAL INDEX KEY: 0000885474 STANDARD INDUSTRIAL CLASSIFICATION: 7372 IRS NUMBER: 042818132 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20059 FILM NUMBER: 96660621 BUSINESS ADDRESS: STREET 1: 50 WASHINGTON ST CITY: WESTBOROUGH STATE: MA ZIP: 01581-1013 BUSINESS PHONE: 5083663888 MAIL ADDRESS: STREET 1: 50 WASHINGTON ST CITY: WESTBOROUGH STATE: MA ZIP: 01581-1013 10-Q 1 VMARK SOFTWARE, INC. FORM 10-Q 1 - - ------------------------------------------------------------------------------ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 1996 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-20059 ---------------------------- VMARK SOFTWARE, INC. (Exact name of registrant as specified in its charter) DELAWARE 04-2818132 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 50 WASHINGTON STREET 01581-1021 WESTBORO, MASSACHUSETTS (Zip Code) (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 366-3888 ---------------------------- 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 --- --- The number of shares outstanding of each of the registrant's classes of common stock as of: DATE CLASS OUTSTANDING SHARES September 29, 1996 Common stock, $.01 par value 8,308,424 The index to the Exhibits appears on page 14 ----------------------------------------------------------------------------- 1 2 VMARK SOFTWARE, INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 29, 1996 TABLE OF CONTENTS PAGE NUMBERING IN SEQUENTIAL NUMBERING SYSTEM --------------------------- PART I FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of September 29, 1996 and December 31, 1995 3 Condensed Consolidated Statements of Operations for the three and nine months ended September 29, 1996 and October 1, 1995 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 29, 1996 and October 1, 1995 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial 9 Condition and Results of Operations PART II OTHER INFORMATION Item 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 2 3 PART I FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS VMARK SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER 29, DECEMBER 31, 1996 1995 ------------- ------------ ASSETS CURRENT ASSETS: CASH AND EQUIVALENTS $12,994 $12,267 ACCOUNTS RECEIVABLE - NET 14,851 15,468 INCOME TAX RECEIVABLE 952 3,464 PREPAID EXPENSES AND OTHER 3,438 2,355 DEFERRED INCOME TAXES - CURRENT 1,869 1,749 ------- ------- TOTAL CURRENT ASSETS 34,104 35,303 ------- ------- PROPERTY AND EQUIPMENT - NET 14,490 15,253 ------- ------- LONG-TERM ASSETS: INTANGIBLE ASSETS - NET 7,099 8,055 DEFERRED INCOME TAXES - LONG-TERM 3,221 3,221 OTHER LONG-TERM ASSETS 1,440 1,521 ------- ------- TOTAL LONG-TERM ASSETS 11,760 12,797 ------- ------- TOTAL ASSETS $60,354 $63,353 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: LINE OF CREDIT $ 1,462 $ - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND CURRENT PORTION OF LONG-TERM DEBT 8,303 10,115 ACCRUED MERGER AND RESTRUCTURING COSTS 706 1,286 DEFERRED REVENUE 5,482 5,514 ------- ------- TOTAL CURRENT LIABILITIES 15,953 16,915 ------- ------- LONG-TERM LIABILITIES: OBLIGATIONS UNDER CAPITAL LEASES 9,074 9,271 STOCKHOLDERS' EQUITY: COMMON STOCK AND OTHER CAPITAL 38,283 37,167 COST OF TREASURY STOCK (2,956) - ------- ------- TOTAL STOCKHOLDERS' EQUITY 35,327 37,167 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $60,354 $63,353 ======= =======
3 4 VMARK SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- SEPTEMBER 29, OCTOBER 1, SEPTEMBER 29, OCTOBER 1, 1996 1995 1996 1995 --------------------------- ------------------------- REVENUE: SOFTWARE $ 8,150 $ 7,360 $26,475 $27,953 SERVICES AND OTHER 8,538 8,197 25,907 23,207 ------- ------- ------- ------- TOTAL REVENUE 16,688 15,557 52,382 51,160 ------- ------- ------- ------- COSTS AND EXPENSES: COSTS OF SOFTWARE 1,321 1,244 3,657 3,920 COSTS OF SERVICES AND OTHER 4,628 4,268 13,756 11,905 SELLING AND MARKETING 6,349 6,237 19,640 19,499 PRODUCT DEVELOPMENT 2,216 2,532 6,890 7,616 GENERAL AND ADMINISTRATIVE 1,858 2,621 5,559 6,085 MERGER INTEGRATION AND RESTRUCTURING COSTS - - 2,125 6,882 LITIGATION AND SETTLEMENT COSTS - - - 499 ------- ------- ------- ------- TOTAL COSTS AND EXPENSES 16,372 16,902 51,627 56,406 ------- ------- ------- ------- INCOME (LOSS) FROM OPERATIONS 316 (1,345) 755 (5,246) OTHER EXPENSE - NET (129) (282) (331) (258) ------- ------- ------- ------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 187 (1,627) 424 (5,504) PROVISION (CREDIT) FOR INCOME TAXES 56 (553) 459 (1,354) ------- ------- ------- ------- NET INCOME (LOSS) $ 131 $(1,074) $ (35) $(4,150) ======= ======= ======= ======= NET INCOME (LOSS) PER COMMON SHARE $ 0.02 $ (0.13) $ 0.00 $ (0.52) ======= ======= ======= ======= WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 8,363 8,067 8,099 7,984 ======= ======= ======= =======
4 5 VMARK SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED ----------------- SEPTEMBER 29, OCTOBER 1, 1996 1995 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: NET LOSS $ (35) $(4,150) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: DEPRECIATION AND AMORTIZATION 4,621 4,878 COMPENSATION EXPENSE 14 - DEFERRED INCOME TAXES (120) (1,945) INCREASE (DECREASE) IN CASH FROM: CURRENT ASSETS 1,900 1,719 CURRENT LIABILITIES (2,550) (2,286) ------- ------- CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,830 (1,784) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: EXPENDITURES FOR PROPERTY AND EQUIPMENT - NET (1,399) (2,681) EXPENDITURES FOR INTANGIBLE ASSETS AND SOFTWARE COSTS (1,525) (3,386) DECREASE (INCREASE) IN CASH SURRENDER VALUE OF OFFICERS' LIFE INSURANCE AND DEPOSITS AND OTHER 81 (269) ------- ------- CASH USED IN INVESTING ACTIVITIES (2,843) (6,336) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: BORROWINGS (REPAYMENTS) UNDER LINE-OF-CREDIT 1,462 (1,250) SALE OF COMMON STOCK 1,496 1,352 REPURCHASE OF COMMON STOCK (2,956) - ISSUANCE OF NOTE PAYABLE - 579 REPAYMENTS UNDER CAPITAL LEASE AND OTHER OBLIGATIONS (192) (149) ------- ------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (190) 532 ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (70) 1 ------- ------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS 727 (7,587) CASH AND EQUIVALENTS, BEGINNING OF PERIOD 12,267 16,017 ------- ------- CASH AND EQUIVALENTS, END OF PERIOD $12,994 $ 8,430 ======= =======
5 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited financial statements included in the Company's Annual Report to Stockholders for the year ended December 31, 1995. In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results which would be expected for the full year. 2. Income (Loss) Per Common Share Income (loss) per common share is computed using the weighted average number of common and common equivalent shares outstanding during each period presented. Common stock equivalents consist of stock options converted using the treasury stock method and are included in the calculation only if dilutive. 3. Income Taxes The Company provides for income taxes at the end of each interim period based on the estimated effective tax rate for the full fiscal year for each tax reporting corporate entity. Cumulative adjustments to the tax provision are recorded in the interim period in which a change in the estimated annual effective rate is determined. The Company has approximately $16,500,000 of available net operating loss carryforwards. The carryforwards arising from domestic losses expire through 2009, while those relating to foreign losses are available indefinitely. The loss carryforwards cannot be applied against income generated in a trade or business significantly different from that which gave rise to the carryforwards. Because of United States ("US") tax regulations, utilization of US losses in any one year will be subject to certain limitations. 6 7 4. Restructuring In the quarter ended June 30, 1996, the Company recorded restructuring costs totaling $2,125,000. This charge was associated with the downsizing of ObjectStudio-related activities and included employee severance and benefits, moving and facility consolidation costs, and the write-off of certain capitalized software costs. In connection with the merger with Easel Corporation, the Company recorded a one-time charge in the quarter ended June 30, 1995 for merger-related costs of $6,882,000. Included in these costs were legal, investment banking and accounting fees associated with the transaction, employee severance expense, and costs associated with combining the operations of the previously separate companies. 5. Preferred Share Purchase Rights On June 6, 1996, the Company's Board of Directors declared a dividend of one purchase right (a "Right") for every outstanding share of the Company's common stock. The Rights were distributed on June 12, 1996 to holders of record as of that date. Each Right entitles the holder to purchase from the Company one one-thousandth of a share of Series A Junior Preferred Stock at a price of $75 per one one-thousandth of a share, subject to adjustments in certain events. The Rights will be exercisable only if a person or group acquires 15% or more of the outstanding shares of the Company's common stock or announces a tender offer, the consummation of which would result in such person or group owning 30% or more of the Company's common stock. If a person or group (other than the Company and its affiliates) acquires 15% or more of the Company's outstanding common stock, each Right (other than Rights held by such person or group) will entitle the holder to receive shares of Common Stock, or in certain circumstances, cash, property, or other securities of the Company, having a market value of two times the exercise price of the Right. Also if the Company were acquired in a merger or other business combination, or if more than 50% of its assets or earning power were sold, each holder of a Right would be entitled to exercise such Right and thereby receive common stock of the acquiring company with a market value of two times the exercise price of the Right. Furthermore, at any time after a person or group acquires more than 15% of the outstanding stock, but prior to the acquisition of 50% of such stock, the Board of Directors may, at its option, exchange all or a part of the Rights at an exchange ratio of one share of Common Stock for each Right. The Company will be entitled to redeem the Rights at $.01 per Right, subject to adjustment in certain events, at any time on or prior to the tenth day after public announcement that a 15% or greater position has been acquired by any person or group. The Rights expire on June 12, 2006. The Company has 10,000,000 shares of $.01 par value preferred stock authorized for issuance, of which 15,000 shares have been designated by the Board of Directors as Series A Junior Preferred Stock. 7 8 6. Litigation The Company is a defendant, together with certain of its officers, in two actions filed in October 1995 in the U.S. District Court for the District of Massachusetts. Those actions have been consolidated through the filing of a Consolidated Amended Complaint (the "Complaint"). The plaintiffs allege in the Complaint that the Company and certain of its officers, during July through October 1995, made certain untrue statements and failed to disclose certain information regarding the Company's prospective financial performance in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and that such statements and omissions artificially inflated the market prices of the Company's stock. The plaintiffs purport to bring the actions on behalf of certain classes of stockholders and seek damages in unspecified amounts. The Company has denied the allegations in its answer to the Complaint and the proceeding is now in the early stages of discovery. Based upon its review to date, management of the Company believes that the actions are without merit and plans to oppose them vigorously. 8 9 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. VMARK SOFTWARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION RESULTS OF OPERATIONS The following table sets forth certain data as a percentage of total revenue for the three and nine months ended September 29, 1996 and October 1, 1995.
Three Months Ended Nine MonthsEnded ------------------ ---------------- September 29, October 1, September 29, October 1, 1996 1995 1996 1995 ---- ---- ---- ---- Revenue: Software 48.8% 47.3% 50.5% 54.6% Services and other 51.2 52.7 49.5 45.4 ----- ----- ----- ----- Total revenue 100.0 100.0 100.0 100.0 ----- ----- ----- ----- Costs and expenses: Costs of software 7.9 8.0 7.0 7.7 Costs of services and other 27.7 27.4 26.3 23.3 Selling and marketing 38.1 40.1 37.5 38.1 Product development 13.3 16.3 13.2 14.9 General and administrative 11.1 16.8 10.6 11.9 Merger integration and restructuring costs - - 4.0 13.4 Litigation and settlement costs - - - 1.0 ----- ----- ----- ----- Total costs and expenses 98.1 108.6 98.6 110.3 ----- ----- ----- ----- Income (loss) from operations 1.9% (8.6)% 1.4% (10.3)% ===== ===== ===== =====
REVENUE The Company's total revenue increased 7% to $16,688,000 in the third quarter of 1996 from $15,557,000 in the third quarter of 1995 and increased 2% to $52,382,000 in the first nine months of 1996 as compared to $51,160,000 in the first nine months of 1995. Software revenue for the third quarter of 1996 increased by 11% to $8,150,000, representing 49% of total revenue, from $7,360,000, or 47% of total revenue in the third quarter of 1995. This increase is due principally to higher revenues from UniVerse and Object Studio products, primarily in the US market. European sales of software licenses declined in the third quarter of 1996 as compared to the third quarter of 1995. Software revenue in the first nine months of 1996 decreased by 5% to $26,475,000, representing 51% of total revenue, from $27,953,000, representing 55% of total revenue, in the first nine months of 1995. The decrease in software revenue in the nine-month period is due primarily to a continued decline in sales of the ESL product line, a flattening in sales of the Company's UniVerse database products, and a progressive decline in European sales in the year-to-date figures. 9 10 Services and other revenue, consisting of consulting, training, and maintenance, continued to grow with 4% and 12% increases in the quarter and nine months ended September 29, 1996, respectively, as compared to the quarter and nine months ended October 1, 1995. Services and other revenue decreased slightly as a percentage of total revenue to 51% in the third quarter of 1996 from 53% in the third quarter of 1995. This decrease is due to modest growth quarter over quarter, offset by the increase in license revenue previously discussed. In the first nine months of 1996, services and other revenue increased to 50% of total revenue compared to 45% in the first nine months of 1995. The increase in services and other revenue in the nine- month period was a result of the Company entering into several large consulting contracts to provide on-site engagement services in the first half of the year as well as the continued expansion of the Company's customer maintenance and training base. COSTS OF SOFTWARE Costs of software, which consist of amortization of technology licenses and capitalized software, product royalties, product documentation, packaging, media and production costs, remained at approximately 16% to 17% of license revenue in the third quarter of 1996 and 1995 and remained at approximately 14% of license revenue for each of the nine-month periods presented. The increase in costs as a percentage of software revenue in the third quarter of each year when compared to year-to-date figures is due to the fact that the Company's license revenue generally declines in its third quarter periods, particularly in international markets, while the cost of license revenue is relatively fixed. COSTS OF SERVICES AND OTHER Costs of services and other, which consist of consulting, training, and other customer support service costs, increased 8% to $4,628,000 for the third quarter and increased 16% to $13,756,000 for the first nine months of 1996 as compared to the same periods of the prior year. Costs of services and other as a percentage of services and other revenue increased slightly to 54% and 53% for the quarter and nine months ended September 29, 1996, respectively, compared to 52% and 51% for the comparable periods in 1995. The profit margin associated with services and other revenue decreased slightly in 1996 due to a change in the mix of services and other revenue. A higher percentage of the increase in services and other revenue in 1996 is comprised of training and consulting revenue which typically has a lower profit margin than revenue derived from customer maintenance support. SELLING AND MARKETING Selling and marketing expenses, which consist primarily of sales organization costs and marketing programs, increased slightly in the third quarter and first nine months of 1996 by 2% and 1%, respectively. The costs as a percentage of total revenue remain at approximately 38% for all periods presented with the exception of the third quarter of 1995, when the costs were 40% of total revenue. This inconsistency in the third quarter of 1995 is a result of the drop in revenues in that period and the fixed nature of a portion of the costs. While the year to date costs have remained constant as a percentage of revenues, cost savings associated with changes in sales management in the first nine months of 1996 have been reinvested in selling and marketing efforts associated with new product offerings as well as an increase in marketing and promotional activities in international markets. 10 11 PRODUCT DEVELOPMENT Product development expenses, which consist primarily of salaries and related benefits of development personnel and facility costs, decreased 12% to $2,216,000 in the third quarter of 1996 and decreased 10% to $6,890,000 in the first nine months of 1996, as compared to the same periods of the prior year. Product development expenses as a percentage of revenue were 13% of revenue for the quarter and nine months ended September 29, 1996 compared to 16% of revenue for the third quarter of 1995 and 15% of revenue for the first nine months of 1995. This decrease in spending is due primarily to cost savings associated with the consolidation of facilities and reduction of headcount after release of Object Studio 5.0 that occurred during the second quarter of 1996 as well as economies of scale realized in connection with the merger of Easel Corporation into VMARK. GENERAL AND ADMINISTRATIVE General and administrative expenses include the costs of finance, human resources, legal, information systems, and administrative departments of the Company. General and administrative expenses decreased 29% to $1,858,000 in the third quarter of 1996 and decreased 9% to $5,559,000 in the nine months ended September 29, 1996, as compared to the same periods of 1995. The cost savings in the comparable quarterly periods reflects efficiencies gained from the restructuring which occurred in the second quarter of 1996, as well as the implementation of cost cutting procedures by management throughout 1996. This decrease is partially offset in the comparable nine month periods as a result of an increase in the bad debt provision and significant investments in internal management information systems throughout 1996. General and administrative expenses decreased to 11% of revenue for both the third quarter and first nine months of 1996, compared to 17% and 12% of revenue for the comparable periods of the previous year, respectively. NON-RECURRING ITEMS In the quarter ended June 30, 1996, the Company recorded restructuring costs totaling $2,125,000. This charge was associated with the downsizing of ObjectStudio-related activities and included employee severance and benefits, moving and facility consolidation costs, and the write-off of certain capitalized software costs. The charge was recorded pursuant to a formal plan adopted and announced in May 1996. In the second quarter of 1995, the Company recorded $6,882,000 for merger integration and acquisition costs associated with the merger with Easel Corporation. The Company also recorded $499,000 in litigation and settlement costs in the second quarter of 1995 which included the reimbursement of legal costs in excess of of the initial estimate associated with a judgement against the Company in the fourth quarter of 1994 and settlement expenses to resolve certain disagreements with two customers of the former Easel Corporation. INCOME TAXES The Company recorded provisions for income taxes of $56,000 and $459,000 for the third quarter and first nine months of 1996 respectively compared to credits of $553,000 and $1,354,000 for the same periods in 1995. The large effective tax rate in 1996 is a result of nondeductible losses generated overseas. 11 12 LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations to date primarily through sales of equity securities and positive cash flow from operations. As of September 29, 1996 the Company had $12,994,000 in cash and cash equivalents and $18,151,000 in working capital. The Company has a revolving line of credit with a bank under which the Company may borrow up to the lesser of $5,000,000 or 80% of eligible domestic accounts receivable, conditioned upon meeting certain financial covenants, including maintaining specified levels of quarterly earnings, tangible net worth, working capital and liquidity. The line of credit also limits the Company's ability to pay dividends. As of September 29, 1996 the Company's eligible accounts receivable exceeded that required to access fully the revolving line of credit. The Company also has a share repurchase line of credit with the same bank under which the Company may borrow up to $5,000,000 to be used solely to make open market repurchases of the Company's common stock. At September 29, 1996, there was $1,462,000 of borrowings outstanding under the share repurchase line of credit facility. The Company believes that its available cash, anticipated cash generated from operations based upon its operating plan, and amounts available under its credit facilities will be sufficient to finance the Company's operations and meet its foreseeable cash requirements at least for the next twelve months. During the first quarter of 1996, the Company, together with a third-party leasing company, initiated a leasing program available to current and potential customers. Under the program, customers are able to purchase VMARK products through operating and capital leases with a third party lessor. All sales under this program are subject to the Company's normal revenue recognition policies and are made without recourse to the Company. This leasing program continued in the quarter ended September 29, 1996 and sales under the program in the third quarter totaled approximately $2,600,000. During the nine months ended September 29, 1996, sales under the program totaled approximately $6,500,000. During the third quarter of 1996, the Company entered into an agreement with the same leasing company to finance the Company's purchase of $1,000,000 in external software licenses through a leasing transaction. The financed amount is payable in equal monthly installments over a one year period. FACTORS AFFECTING FUTURE RESULTS The Company operates in a rapidly changing environment that involves a number of risks, some of which are beyond the Company's control. The following discussion highlights some of these risks. The Company has experienced fluctuations in quarterly results and anticipates such fluctuations in the future. Quarterly fluctuations may be caused by numerous factors including timing of customer orders, adjustments of delivery schedules to accommodate customer or regulatory requirements, timing and level of international sales, mix of products sold, and timing of level of expenditures for sales, marketing and new product development. The Company generally ships its products upon receipt of orders and maintains no significant backlog. A substantial portion of 12 13 the Company's costs and expenses, including costs of personnel and facilities, cannot be easily reduced. If short-term demand for the Company's products declines, the Company's results of operations for that quarter would be adversely affected. Accordingly, the results of any one quarter may not be indicative of the operating results for future quarters. The Company currently derives a substantial portion of its total revenue from its core database product uniVerse. Accordingly, the Company's future results will depend, to a significant extent, on continued market acceptance of these products. Any factor adversely affecting the market for this product would have a material adverse effect of the Company's business and financial results. The market for the Company's products is characterized by ongoing technological developments and changes in customer requirements and industry standards. If the Company is unable to develop and introduce new products or enhancements in a timely manner in response to changing market conditions or customer requirements or if errors are found in products after commercial shipments, the Company's business and results of operations will be adversely affected. Approximately 40% of the Company's total revenue for the first nine months of fiscal 1996 was attributable to international sales made through international subsidiaries. Because a substantial portion of the Company's total revenue is derived from such international operations, which are conducted in foreign currencies, changes in the value of those currencies relative to the United States dollar may affect the Company's results of operations and financial position. The Company engages in certain currency-hedging transactions intended to reduce the effect of fluctuations of foreign currency exchange rates on the Company's results of operations. However, there can be no assurance that such hedging transactions will materially reduce the effect of fluctuations on such results. If, for any reason, exchange or price controls or other restrictions on the conversion of foreign currencies were imposed, the Company's business could be adversely affected. Other potential risks inherent in the Company's international business generally include longer payment cycles, greater difficulties in accounts receivable collection and the burdens of complying with a wide variety of foreign laws and regulations. The market for application development software is intensely competitive. The Company competes with many companies offering alternative solutions to the needs addressed by the Company's products. Many of these competitors may have greater financial, marketing, or technical resources than the Company and may be able to adapt more quickly to new or emerging technologies and standards or changes in customer requirements or to devote greater resources to the promotion and sale of their products than the Company. CAUTIONARY STATEMENT When used anywhere in the Form 10-Q and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer of the Company, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimated", "project", or "outlook" or similar expressions (including confirmations by an authorized executive officer of the Company of any such expressions made by a third party with respect to the Company) are intended to identify "forward-looking statements," which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those earnings presently anticipated or projected. Such risks and 13 14 uncertainties are set forth above and in Part 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. The Company specifically declines any obligation to release publicly the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements. 14 15 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a defendant, together with certain of its officers, in two actions initially filed in October 1995 in the U.S. District Court in the District of Massachusetts. Those actions have been consolidated through the filing of a Consolidated Amended Complaint (the "Complaint"). The plaintiffs allege in the Complaint that the Company and certain of its officers, during July through October 1995, made certain untrue statements and failed to disclose certain information regarding the Company's prospective financial performance in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and that such statements and omissions artificially inflated the market prices of the Company's stock. The plaintiffs purport to bring the actions on behalf of certain classes of stockholders and seek damages in unspecified amounts. The Company has denied the allegations in its answer to the Complaint and the proceeding is now in the early stages of discovery. Based upon its review to date, management of the Company believes that the actions are without merit and plans to oppose them vigorously. ITEM 2. NONE ITEM 3. NONE ITEM 4. NONE ITEM 5. NONE. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K: The Company did not file a report on Form 8-K during the quarter ended September 29, 1996. 15 16 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. VMARK Software, Inc. (Registrant) Dated: November 11, 1996 ------------------------------------- Robert M. Morrill President and Chief Executive Officer and Chairman (principal executive officer) Dated: November 11, 1996 ------------------------------------- Charles F. Kane Vice President of Finance and Chief Financial Officer, (principal finance and accounting officer) 16 EX-27 2 FINANCIAL DATA SHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APPEARING IN THE FORM 10-Q TO WHICH THIS SCHEDULE IS AN EXHIBIT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 US DOLLARS 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1 12,994,000 0 17,123,000 2,272,000 0 34,104,000 20,588,000 6,098,000 60,354,000 15,953,000 0 82,000 0 0 35,245,000 60,354,000 26,475,000 52,382,000 3,657,000 17,413,000 0 1,269,000 605,000 424,000 459,000 (35,000) 0 0 0 (35,000) 0.00 0.00
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