1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________TO _______________.
COMMISSION FILE NUMBER 0-28660
- --------------------------------------------------------------------------------
TRITEAL CORPORATION
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
DELAWARE 33-0548924
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2011 PALOMAR AIRPORT ROAD
CARLSBAD, CA 92009-1431
(Address of principal executive offices)
(760) 827-5000
(Registrant s phone 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 [ ]
As of November 12, 1997 there were 11,152,970 shares of $.001 par value
common stock outstanding.
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TRITEAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations . . . . . . . . . . 4
Consolidated Statements of Cash Flows . . . . . . . . . . 5
Notes to 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 4. Submission of Matters to a Vote of Security Holders . . . 18
Item 6. Exhibits and Reports on 8-K . . . . . . . . . . . . . . . 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRITEAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, MARCH 31,
1997 1997
------------ ------------
(Unaudited) (Note)
Current assets:
Cash and cash equivalents .......................................... $ 5,958,640 $ 11,614,707
Short-term investments ............................................. 27,751,551 31,248,987
Accounts receivable, net ........................................... 8,244,947 8,748,817
Prepaid expenses and other current assets .......................... 2,159,522 2,196,112
------------ ------------
Total current assets ............................................ 44,114,660 53,808,623
Property and equipment, net .......................................... 1,828,183 1,561,609
Other assets, net .................................................... 2,458,987 330,622
------------ ------------
Total assets ................................................... $ 48,401,830 $ 55,700,854
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 840,764 $ 1,507,250
Accrued liabilities .............................................. 5,743,323 5,064,570
Deferred revenues ................................................ 1,245,213 1,013,414
------------ ------------
Total current liabilities ...................................... 7,829,300 7,585,234
Stockholders' equity:
Preferred Stock, $.001 par value
Authorized shares -- 5,000,000
Issued and outstanding - no shares ............................... -- --
Common Stock, $.001 par value
Authorized shares -- 30,000,000
Issued and outstanding -- 11,033,058 shares and
10,768,493 shares at September 30, 1997 and
March 31, 1997, respectively ................................... 11,033 10,769
Additional paid-in capital ....................................... 55,285,441 54,861,983
Notes receivable from stockholders ............................... (77,333) (96,667)
Deferred compensation ............................................ (74,500) (100,300)
Accumulated deficit .............................................. (14,572,111) (6,560,165)
------------ ------------
Total stockholders' equity ...................................... 40,572,530 48,115,620
------------ ------------
Total liabilities and stockholders' equity ...................... $ 48,401,830 $ 55,700,854
============ ============
Note: The balance sheet at March 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
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TRITEAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenues:
License fees ...................... $ 229,680 $ 3,066,468 $ 5,047,742 $ 5,403,360
Maintenance and services .......... 514,357 539,229 1,166,183 1,002,895
------------ ------------ ------------ ------------
Total revenues ................. 744,037 3,605,697 6,213,925 6,406,255
Cost of revenues:
Cost of license fees .............. 142,881 519,825 878,132 1,040,063
Cost of maintenance and services .. 290,232 158,927 606,489 266,391
------------ ------------ ------------ ------------
Total cost of revenues ......... 433,113 678,752 1,484,621 1,306,454
------------ ------------ ------------ ------------
Gross profit ................... 310,924 2,926,945 4,729,304 5,099,801
Operating expenses:
Research and development .......... 1,367,205 552,045 2,571,385 1,035,335
Selling, general and
administrative .................. 3,806,491 2,792,826 7,327,223 5,466,532
Special charges ................... 3,865,550 -- 3,865,550 --
------------ ------------ ------------ ------------
Total operating expenses ....... 9,039,246 3,344,871 13,764,158 6,501,867
------------ ------------ ------------ ------------
Operating loss ..................... (8,728,322) (417,926) (9,034,854) (1,402,066)
Interest income, net ............... 493,247 164,567 1,035,185 154,717
------------ ------------ ------------ ------------
Loss before income taxes .......... (8,235,075) (253,359) (7,999,669) (1,247,349)
Income tax expense ................ -- -- 12,277 --
------------ ------------ ------------ ------------
Net loss ........................... $ (8,235,075) $ (253,359) $ (8,011,946) $ (1,247,349)
============ ============ ============ ============
Net loss per share ................. $ (0.75) $ (0.03) $ (0.74) $ (0.17)
============ ============ ============ ============
Shares used in computing
net loss per share .............. 10,952,012 7,987,335 10,895,782 7,354,098
============ ============ ============ ============
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TRITEAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
------------------------------
1997 1996
------------ ------------
Cash flows from operating activities:
Net loss ........................................................ $ (8,011,946) $ (1,247,349)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................... 506,151 234,952
Provision for doubtful accounts ............................. 2,800,000 --
Amortization of deferred compensation ....................... 25,800 25,800
Changes in operating assets and liabilities:
Accounts recereceivable ................................... (2,296,130) 2,606,879
Prepaid expenses and other current assets ................. 36,590 (482,578)
Accounts payable .......................................... (666,486) (474,472)
Accrued liabilities ....................................... 678,753 761,370
Deferred revenues ......................................... 231,799 (34,122)
------------ ------------
Net cash provided by (used in) operating activities ............ (6,695,469) 1,390,480
Cash flows from investing activities:
Short-term investments ...................................... 3,497,436 (9,531,226)
Purchase of property and equipment .......................... (772,725) (333,012)
Other assets ................................................ (2,128,365) (73,922)
------------ ------------
Net cash provided by (used in) investing activities ............. 596,346 (9,938,160)
Cash flows from financing activities:
Repayments on line of credit ................................ -- (113,542)
Repayments of long-term debt ................................ -- (334,373)
Proceeds from repayments on shareholder notes ............... 19,334 --
Proceeds from issuance of common stock ...................... 423,722 20,400,931
Proceeds from issuance of preferred stock, net .................. -- 3,566,164
------------ ------------
Net cash provided by financing activities ....................... 443,056 23,519,180
------------ ------------
Increase (decrease) in cash and cash equivalents ................ (5,656,067) 14,971,500
Cash and cash equivalents at beginning of period ................ 11,614,707 301,251
------------ ------------
Cash and cash equivalents at end of period ...................... $ 5,958,640 $ 15,272,751
============ ============
See accompanying notes.
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TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
TriTeal Corporation (the "Company") develops, markets and supports open
systems-based, mission-critical desktop system software and integrated
applications that enable multi-platform deployment of client/server
applications throughout an enterprise.
The Consolidated Financial Statements of the Company included in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended March 31, 1997 (the "Form 10-K") contain
additional information about the Company, its operations and its financial
statements and accounting practices, and should be read in conjunction with
this Quarterly Report on Form 10-Q. These unaudited consolidated financial
statements have been prepared in accordance with the instructions on Form 10-Q
and, therefore, certain information and footnote disclosures normally contained
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted.
The accompanying unaudited consolidated financial statements of the Company
reflect all adjustments of a normal recurring nature which are, in the opinion
of management, necessary for a fair presentation of the financial position,
results of operations and cash flows for all periods presented. The interim
financial information herein are not necessarily indicative of results for any
future interim periods or for the full fiscal year ending March 31, 1998.
NOTE 2 - COMPUTATION OF NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
common shares and common stock equivalents outstanding. Common equivalent
shares from stock options and warrants are excluded from the computation when
their effect is antidilutive except that, pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common shares and common
equivalent shares issued during the twelve months prior to the initial filing
of the Registration Statement with the Securities and Exchange Commission have
been included in the calculation as outstanding for all periods prior to the
Company's initial public offering (using the treasury stock method). The
calculation also gives effect to the conversion of all convertible preferred
shares (using the if-converted method), which automatically converted into
common shares upon completion of the Company's initial public offering.
NOTE 3 - USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
disclosures made in the accompanying notes to the consolidated financial
statements. Actual results could differ from those estimates.
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NOTE 4 - INTANGIBLES AND OTHER ASSETS
During the first quarter of fiscal 1998, the Company acquired certain
third-party technologies associated with the development of its SoftNC
technology and related products for $2.25 million. These costs were
capitalized and are being amortized to research and development expense over a
three-year useful life.
In accordance with Statement of Financial Accounting Standards No. 121
("SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of," the Company records impairment losses on
long-lived assets used in operations when events and circumstances indicate
that assets might be impaired and the estimated future undiscounted cash flows
to be generated by those assets are less than the assets' carrying amounts. To
date, the Company has incurred no such losses.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
the Company will adopt for all periods ending after December 15, 1997.
Pursuant to SFAS No. 128, the Company will replace the reporting of primary
earnings per share ("EPS") with basic EPS, which excludes the dilutive effect
of stock options and warrants. Fully diluted EPS will be replaced by diluted
EPS, which includes the dilutive effect of stock options, similar to the
calculation of fully diluted EPS under Accounting Principles Board Opinion No.
15. The Company will be required to change the method currently used and to
restate all prior periods. The effect of the adoption of SFAS No. 128 was not
material for the three months ended September 30, 1997 and 1996.
NOTE 6 - SPECIAL CHARGES
During the quarter ended September 30, 1997, the Company recorded special
charges of $3.9 million associated primarily with a charge related to
potentially uncollectible receivables from a U.S. government reseller and
employee termination expenses related to the Company's sales and marketing
functions.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties including, among other things, the effect of the Company's plans
to reduce operating expenses. Words such as "believes," "expects," "intends" and
similar expressions are intended to identify forward- looking statements, but
are not the exclusive means of identifying such statements. The Company's actual
results may differ materially from the results discussed in or implied by the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those risks and uncertainties discussed below, as well
as other risks set forth under the caption "Business-Risk Factors" in the Form
10-K. The following discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto included in Item 1 of
this Quarterly Report on Form 10-Q and in the Form 10-K.
OVERVIEW
TriTeal develops, markets and supports open systems-based, mission-critical
desktop system software and integrated applications that enable multi-platform
deployment of client/server applications throughout an enterprise. The Company
was founded in January 1993, commenced operations in April 1993 and released
its first product in May 1993. In August 1995, the Company introduced its
current flagship product, TED. The Company's current products are based, in
part, on certain technologies licensed from Hewlett-Packard, The Open Group
(formerly the Open Software Foundation), SPYRUS and other technology vendors.
The Company's revenues historically have been derived from two principal
sources: (i) license fees for the use of the Company's software products, and
(ii) maintenance agreements and software development contract revenues. To
date, substantially all of the Company's revenues have been attributable to
sales of licenses of the TED family of products and related services. The
Company does not anticipate receiving a significant amount of revenues from
software development contracts in the future. The Company has not introduced
for commercial sale any products based on its Java-based SoftNC technology,
introduced during fiscal 1997, and the Company currently expects that the TED
family of products and related services will account for substantially all of
its revenues for the foreseeable future. Revenues from software licenses are
generally recognized upon shipment. Revenues from maintenance agreements are
recognized over the contract terms, which generally is one year. Software
development contract revenues are recognized using the percentage-of-
completion method.
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues
The Company's total revenues decreased to $744,000 for the three months
ended September 30, 1997 from $3.6 million for the three months ended September
30, 1996. License fees decreased to $230,000 for the three months ended
September 30, 1997 from $3.1 million for the three months ended September 30,
1996. During the three months ended September 30, 1997 and 1996, license fees
aggregated 31% and 85% of total revenues, respectively. The Company's sales
generally comprise a small number of orders with a large dollar amount per
order. The decrease in
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license fees was due primarily to the Company's failure to close any of the
large transactions it was pursuing at the end of the second quarter of fiscal
1998. The Company believes that there is significant customer uncertainty and
confusion in the enterprise computing market concerning selection of systems and
applicable standards, particularly with respect to the migration from UNIX
client workstations to Windows NT platforms and the early-stage development of
Java and Java-based computing environments. This uncertainty has contributed,
and may continue to contribute, to some customer hesitation or reluctance to
purchase the Company's products, as well as to an extension of the Company's
product sales cycle. Maintenance and services revenues, which also include
revenues derived from software development contracts, decreased to $514,000 for
the three months ended September 30, 1997 from $539,000 for the three months
ended September 30, 1996. The decrease in maintenance and services revenues was
due primarily to a decrease in revenues from software development contracts,
offset in part by an increase in maintenance revenues associated with a larger
installed base of customers. The Company does not anticipate receiving a
significant amount of revenues from software development contracts in the
future; however, it may enter into such contracts in special situations where
such software development may be necessary or where the technology may allow the
Company to introduce new products, penetrate new markets or establish strategic
relationships.
Cost of Revenues
The Company's total cost of revenues decreased to $433,000 for the three
months ended September 30, 1997 from $679,000 for the three months ended
September 30, 1996. As a percentage of total revenues, gross margin decreased
to 42% for the three months ended September 30, 1997 from 81% for the three
months ended September 30, 1996. The decrease in gross margin was a result of
the decrease in the volume of sales of licenses, which typically have higher
gross margins. Furthermore, the Company's gross margin for the three months
ended September 30, 1997 was substantially lower than historical levels due
primarily to the fixed component of third-party royalty costs and related
maintenance. The cost of license fees, which consists primarily of third-party
royalties for licensed technology, related maintenance charges, and media and
documentation, decreased to $143,000 for the three months ended September 30,
1997 from $520,000 for the three months ended September 30, 1996. The decrease
in the cost of license fees was due principally to a lower volume of sales of
licenses. The cost of maintenance and services, which consists primarily of
labor and related overhead, increased to $290,000 for the three months ended
September 30, 1997 from $159,000 for the three months ended September 30, 1996.
The increase in the cost of maintenance and services was due primarily to an
increase in the number of professional services and technical support personnel
and related overhead costs necessary to support a larger installed customer
base, product upgrades and development activities.
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Research and Development
Research and development expenses include costs associated with the
development of new products, enhancements of existing products and quality
assurance activities. These expenses consist primarily of personnel costs,
overhead costs relating to occupancy, equipment depreciation and supplies. In
accordance with Statement of Financial Accounting Standards No. 86, internal
development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as
incurred until technological feasibility has been established. To date, the
Company's internal software development has been completed concurrent with the
establishment of technological feasibility and, accordingly, no such costs have
been capitalized. During the first quarter of fiscal 1998, the Company
acquired certain third-party technologies associated with the development of
its SoftNC technology and related products for $2.25 million. These costs were
capitalized and are being amortized to research and development expense over a
three-year useful life. Total amortization expense associated with these
technologies for the three months ended September 30, 1997 was approximately
$188,000.
Research and development expenses increased to $1.4 million for the three
months ended September 30, 1997 from $552,000 for the three months ended
September 30, 1996. The increase in research and development expenses was
attributable primarily to the development of the Company's research and
development organization and reflects the increased costs associated with both
additional headcount and expanded research and development efforts, as well as
amortization of acquired third-party technologies. Research and development
expenses represented 184% and 15% of total revenues for the three months ended
September 30, 1997 and 1996, respectively, reflecting both increased
expenditures and decreased revenues in the second quarter of fiscal 1998. The
Company believes that a significant level of investment for product development
is required and, accordingly, the Company anticipates that, for the foreseeable
future, these expenses will continue to represent a significant percentage of
total revenues.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of salaries,
commissions and bonuses, promotional expenses and occupancy costs. Selling,
general and administrative expenses increased to $3.8 million for the three
months ended September 30, 1997 from $2.8 million for the three months ended
September 30, 1996. The increase in selling, general and administrative
expenses was due primarily to increased administrative personnel and occupancy
costs, the hiring of additional sales and marketing personnel, increased travel
associated with additional headcount and additional promotional activities.
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Special Charges
The Company recorded special charges of $3.9 million, associated primarily
with a charge related to potentially uncollectible receivables from a U.S.
government reseller and employee termination expenses related to the Company's
sales and marketing functions.
Operating Losses
The Company reported a net loss of $8.2 million, or $.75 per share, for the
quarter ended September 30, 1997 as a result of a significant shortfall in
anticipated revenue due to the Company's inability to close any of the large
transactions it was pursuing at the end of the second quarter of fiscal 1998.
Included in the net loss for the quarter were special charges of $3.9 million
associated primarily with a charge related to potentially uncollectible
receivables from a U.S. government reseller and employee termination expenses
related to the Company's sales and marketing functions. The Company expects to
incur a loss in the third quarter of fiscal 1998, and there can be no assurance
that the Company will be able to achieve or sustain profitability in future
quarters. The Company believes that there is significant customer uncertainty
and confusion in the enterprise computing market concerning selection of
systems and applicable standards, particularly with respect to the migration
from UNIX client workstations to Windows NT platforms and the early-stage
development of Java and Java-based computing environments. This uncertainty has
contributed, and may continue to contribute, to some customer hesitation or
reluctance to purchase the Company's products, as well as to an extension of
the Company's product sales cycle. The Company is currently developing plans
intended to reduce operating costs in an effort to bring expenses in line with
revenue expectations; however, if revenues cannot be increased and operating
expense reduced in the third quarter of fiscal 1998 and subsequent quarters,
the Company may be required to further reorganize and realign its operations,
including additional reductions in personnel and other measures designed to
reduce ongoing operating expenses. Any such reorganization or realignment may
cause the Company to incur additional charges, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Interest Income, Net
Interest income (expense), net, represents interest earned on the Company's
cash, cash equivalents and short-term investments, offset in part during the
three months ended September 30, 1996 by interest expense on the Company's
borrowings. Net interest income was $493,000 for the three months ended
September 30, 1997 compared to net interest income of $165,000 for the three
months ended September 30, 1996. This increase was attributable to earnings on
the proceeds from the Company's initial and follow-on public offerings during
fiscal 1997, which together generated approximately $44.7 million in net cash
proceeds.
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SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues
The Company's total revenues decreased to $6.2 million for the six months
ended September 30, 1997 from $6.4 million for the six months ended September
30, 1996. License fees decreased to $5.0 million for the six months ended
September 30, 1997 from $5.4 million for the six months ended September 30,
1996. During the six months ended September 30, 1997 and 1996, license fees
aggregated 81% and 84% of total revenues, respectively. The Company's sales
generally comprise a small number of orders with a large dollar amount per
order. The decrease in license fees was due primarily to the Company's failure
to close any of the large transactions it was pursuing at the end of the second
quarter of fiscal 1998. The Company believes that there is significant customer
uncertainty and confusion in the enterprise computing market concerning
selection of systems and applicable standards, particularly with respect to the
migration from UNIX client workstations to Windows NT platforms and the
early-stage development of Java and Java-based computing environments. This
uncertainty has contributed, and may continue to contribute, to some customer
hesitation or reluctance to purchase the Company's products, as well as to an
extension of the Company's product sales cycle. Maintenance and services
revenues, which also include revenues derived from software development
contracts, increased to $1.2 million for the six months ended September 30, 1997
from $1.0 million for the six months ended September 30, 1996. The increase in
maintenance and services revenues was due primarily to additional maintenance
agreements associated with a larger installed base of customers, offset in part
by a decrease in revenue from software development contracts. The Company does
not anticipate receiving a significant amount of revenues from software
development contracts in the future; however, it may enter into such contracts
in special situations where such software development may be necessary or where
the technology may allow the Company to introduce new products, penetrate new
markets or establish strategic relationships.
Cost of Revenues
The Company's total cost of revenues increased to $1.5 million for the six
months ended September 30, 1997 from $1.3 million for the six months ended
September 30, 1996 associated primarily with an increase in the number of
professional services and technical support personnel and related overhead costs
necessary to support a larger installed customer base, product upgrades and
development activities. As a percentage of total revenues, gross margin
decreased to 76% for the six months ended September 30, 1997 from 80% for the
six months ended September 30, 1996. The decrease in gross margin was a result
of the decrease in the volume of sales of licenses, which typically have higher
gross margins. The cost of license fees decreased to $878,000 for the six months
ended September 30, 1997 from $1.0 million for the six months ended September
30, 1996. The decrease in the cost of license fees was due principally to a
lower volume of sales of licenses in the second quarter of fiscal 1998. The cost
of maintenance and services, which consists primarily of labor and related
overhead, increased to $606,000 for the six months ended September 30, 1997 from
$266,000 for the six months ended September 30, 1996. The increase in the cost
of maintenance and services was due primarily to an increase in the number of
professional services and technical support personnel and related overhead costs
necessary to support a larger installed customer base, product upgrades and
development activities.
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Research and Development
Research and development expenses increased to $2.6 million for the six
months ended September 30, 1997 from $1.0 for the six months ended September
30, 1996. The increase in research and development expenses was attributable
primarily to the development of the Company's research and development
organization and reflects the increased costs associated with both additional
headcount and expanded research and development efforts, as well as
amortization on acquired third-party technologies totaling $250,000. Research
and development expenses represented 41% and 16% of total revenues for the six
months ended September 30, 1997 and 1996, respectively. The Company believes
that a significant level of investment for product development is required and,
accordingly, the Company anticipates that, for the foreseeable future, these
expenses will continue to represent a significant percentage of total revenues.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of salaries,
commissions and bonuses, promotional expenses and occupancy costs. Selling,
general and administrative expenses increased to $7.3 million for the six
months ended September 30, 1997 from $5.5 million for the six months ended
September 30, 1996. The increase in selling, general and administrative
expenses was due primarily to increased administrative personnel and occupancy
costs, the hiring of additional sales and marketing personnel, increased travel
associated with additional headcount and additional promotional activities.
Operating Losses
The Company reported a net loss of $8.0 million, or $.75 per share, for the
six months ended September 30, 1997 as a result of a significant shortfall in
anticipated revenue due to the Company's inability to close any of the large
transactions it was pursuing at the end of the second quarter of fiscal 1998.
Included in the net loss for the quarter were special charges of $3.9 million
associated primarily with a charge related to potentially uncollectible
receivables from a U.S. government reseller and employee termination expenses
related to the sales and marketing functions. The Company expects to incur a
loss in the third quarter of fiscal 1998, and there can be no assurance that the
Company will be able to achieve or sustain profitability in future quarters. The
Company believes that there is significant customer uncertainty and confusion in
the enterprise computing market concerning selection of systems and applicable
standards, particularly with respect to the migration from UNIX client
workstations to Windows NT platforms, and the early-stage development of Java
and Java-based computing environments. This uncertainty has contributed, and may
continue to contribute, to some customer hesitation or reluctance to purchase
the Company's products, as well as to an extension of the Company's product
sales cycle. The Company is currently developing plans intended to reduce
operating costs in an effort to bring expenses in line with revenue
expectations; however, if revenues cannot be increased and operating expenses
reduced in the third quarter of fiscal 1998 and subsequent quarters, the Company
may be required to further reorganize and realign its operations, including
additional reductions in personnel and other measures designed to reduce ongoing
operating expenses. Any such reorganization or realignment may
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cause the Company to incur additional charges, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Interest Income, Net
Net interest income increased to $1.0 million for the six months ended
September 30, 1997 from $155,000 for the six months ended September 30, 1996.
This increase was attributable to earnings on the proceeds from the Company's
initial and follow-on public offerings during fiscal 1997, which together
generated approximately $44.7 million in net cash proceeds.
FACTORS AFFECTING OPERATING RESULTS
The Company has experienced significant fluctuations in its revenues
and operating results from quarter to quarter and anticipates that it will
continue to experience such quarterly fluctuations. In addition, the Company's
sales are made predominantly in the third month of each fiscal quarter and tend
to be concentrated in the latter half of that third month.
Accordingly, the Company's quarterly results of operations are difficult to
predict, and delays in product delivery or in closings of sales near the end of
a quarter could cause quarterly revenues to fall substantially short of
anticipated levels and, to a greater degree, adversely affect profitability.
Factors that may contribute to such quarterly fluctuations include rapid and
continued changes in the enterprise computing market, such as the migration
from UNIX client workstations to Windows NT platforms; uncertainty over
evolving standards within the enterprise computing market; reduction in demand
for existing products and shortening of product life cycles as a result of new
product introductions by the Company; the Company's competitors or other
providers of hardware, software and components for the Company's market; the
timing of introduction of products or product enhancements by the Company;
competition and pricing in the software industry; market acceptance of new
products; customer order deferrals in anticipation of new products; seasonal
factors, such as the fiscal year ends of the government and other customers;
the number of new orders and product shipments; the size and timing of
individual orders; product quality problems; changes in customer budgets or
procurement procedures; changes in operating expenses; changes in Company or
customer strategy; personnel changes; changes in foreign currency exchange
rates; changes in mix of products sold; and changes in general economic
conditions.
The Company's sales generally comprise a small number of orders with a large
dollar amount per order. The loss or delay in receipt of individual orders,
therefore, could have a more significant impact on the revenues and quarterly
results of the Company than on those of companies with higher sales volumes or
lower revenues per order. The Company's software products generally are shipped
as orders are received, and revenues are recognized upon shipment of the
products and related software licenses to commercial customers, agencies of
the U.S. government and U.S. government resellers, provided no significant
vendor obligations exist and collection of the related receivable is deemed
probable. As a result, software license revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter. The
timing of license fee revenue is difficult to predict because of the length of
the Company's sales cycle, which is typically three to nine months from the
initial contact. Because the Company's operating expenses are based on
anticipated revenue trends and because a high
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percentage of the Company's expenses are relatively fixed, a delay in the
recognition of revenue from a limited number of license transactions could
cause significant variations in operating results from quarter to quarter and
could result in losses substantially in excess of anticipated amounts. To the
extent such expenses precede, or are not subsequently followed by, increased
revenues, the Company's operating results would be materially and adversely
affected.
For example, during the second quarter of fiscal 1998, the Company
experienced a substantial revenue shortfall due primarily to the Company's
failure to close any of the large transactions it was pursuing at the end of
the second quarter of fiscal 1998. This significant revenue shortfall, along
with certain charges, caused the Company to incur a substantial loss for the
quarter and there can be no assurance that additional revenue shortfalls due to
delays, cancellations or failures to close orders will not occur in the future.
As a result of the foregoing factors, among others, revenues for any quarter
are subject to significant variation, and the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
In addition, the achievement of anticipated revenues is substantially dependent
on the ability of the Company to attract, on a timely basis, and retain skilled
personnel, especially sales and support personnel. Fluctuations in operating
results may also result in volatility in the price of the Company's common
stock in the public market. Due to all of the foregoing factors, among others,
it is likely that, from time to time in the future, the Company's results of
operations would be below the expectations of public market analysts and
investors.
Because the Company derives a substantial portion of its revenues from
government resellers and agencies of the U.S. government, the Company's largest
receivables tend to have lengthy collection cycles. To date, the impact of such
lengthy collection cycles has not been material to the Company's working
capital requirements; however, during the second quarter of fiscal 1998, the
Company recorded a $2.8 million charge related to potentially uncollectible
receivables from a U.S. government reseller. There can be no assurance that
future delays in payment from government or commercial customers will not
adversely affect the Company's results of operations or ability to meet its
anticipated liquidity needs.
The Company's business is subject to a number of other significant risks
including, but not limited to, its limited operating history and history of
operating losses (including an accumulated deficit of $14.6 million at
September 30, 1997); the relatively small number of customers that have
historically accounted for a significant percentage of the Company's revenues,
particularly departments and agencies of the U.S. government; the
concentration of the Company's customers among enterprises supporting UNIX
operating systems; confusion in the enterprise computing market concerning
selection of systems and applicable standards, particularly with respect to the
migration from UNIX client workstations to Windows NT platforms and the
early-stage development of Java and Java-based computing environments; the
Company's dependence on the growth of the desktop and client/server market and
continuation of heterogeneous operating environments; intense competition in
the Company's markets (including competitors and potential competitors with
significantly greater resources than the Company); the Company's dependence on
certain strategic relationships, third-party technology licenses and indirect
channel partners; the risks associated with rapidly changing technology and
evolving standards;
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the concentration of the Company's product line on the TED family of products
and services; successful retention and management of the Company's employee
base; the Company's dependence on proprietary technology and other risks common
to emerging growth, high technology software companies as well as other factors
discussed herein.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and met its capital
expenditure requirements primarily from proceeds of the Company's initial and
follow-on public offerings of Common Stock and private sales of Preferred
Stock, sales of its software products and services, as well as borrowings under
its bank credit facility.
At September 30, 1997, the Company had $33.7 million in cash, cash
equivalents and short-term investments, representing 70% of total assets.
Net cash used in operating activities for the six months ended September 30,
1997 reflects primarily the net loss for the period and an increase in accounts
receivable, which was offset by an increase in the provision for doubtful
accounts. The Company generally does not offer payment terms beyond 60 days;
however, the Company's sales to government resellers and agencies of the U.S.
government typically have longer payment cycles. Because the Company derives a
substantial portion of its revenues from government resellers and agencies of
the U.S. government, the Company's largest receivables tend to have lengthy
collection cycles. To date, the impact of such lengthy collection cycles has
not been material to the Company's working capital requirements; however,
during the second quarter of fiscal 1998, the Company recorded a $2.8 million
charge related to potentially uncollectible receivables from a U.S. government
reseller. There can be no assurance that future delays in payment from
government or commercial customers will not adversely affect the Company's
results of operations or ability to meet its anticipated liquidity needs.
Investing activities provided net cash of $596,000 for the six months ended
September 30, 1997, and consisted primarily of maturities on short-term
investments, offset in part by the purchase of property and equipment. Capital
expenditures have generally consisted of computer workstations, networking
equipment, office furniture and equipment and leasehold improvements. The
Company had no material firm commitments for capital expenditures at September
30, 1997, but expects to purchase additional computer equipment, furniture and
fixtures and to enhance its management information systems throughout fiscal
1998 and 1999.
In April 1997, the Company signed a 10-year lease agreement, scheduled to
commence in July 1998, for approximately 51,000 square feet of office space
intended for use as the new corporate headquarters in Carlsbad, California. As
of September 30, 1997, the Company's principal commitments, including the
10-year lease signed in April 1997, consisted of obligations under operating
leases aggregating approximately $12.5 million through 2008.
The Company's operations to date have required substantial amounts of
capital. The Company expects to spend substantial funds to support the growth
of its products, to add enhancements and additional applications to its
products and to expand internationally. The Company's capital requirements will
depend on numerous factors, including the progress of the
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Company's research and development programs, the commercial acceptance of its
products, the resources the Company devotes to advanced technologies and the
demand for its products. The Company believes that its current cash, cash
equivalents and short-term investments, along with its available credit
facility, will be sufficient to meet its anticipated cash needs for working
capital, capital expenditures and business expansion for at least the next 12
months. The estimate of the period for which the Company expects its available
cash balances and credit facilities to be sufficient to meet its capital
requirements is a forward-looking statement that involves risks and
uncertainties set forth herein and under the caption "Business - Risk Factors"
in the Form 10-K.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 7, 1997, a complaint was filed with the United States District
Court for the Southern District of California against the Company and certain
of its officers. The complaint was brought on behalf of a purported class of
investors in the Company's Common Stock. The complaint alleges, among other
things, that the defendants misrepresented or failed to disclose to investors
material facts concerning the Company and its business, operations, revenues
and prospects and that certain of the defendants improperly sold shares of
Common Stock of the Company at prices that were artificially inflated as a
result of these alleged non-disclosures or misrepresentations. The complaint
alleges violations of the federal securities laws. No specific amount of
damages is alleged. The Company believes that the allegations of the complaint
are without merit and intends to defend against these allegations vigorously.
No assurance as to the outcome of this matter can be given; however, an
unfavorable resolution of this matter could have a material adverse effect on
the Company's business, results of operations and financial condition.
ITEM 2. CHANGES IN SECURITIES
A) REPORT OF SALES OF SECURITIES AND USE OF PROCEEDS THEREFROM
On August 6, 1996, the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form SB-2 (File No.
333-5052-LA) covering an aggregate of 2,875,000 shares of Common Stock at a
price to the public of $8.00 per share, or an aggregate price of $23,000,000.
The managing underwriters of the offering were PaineWebber Incorporated and
Piper Jaffray Inc. All of the shares registered were sold prior to termination
of the offering. Net proceeds, after deducting underwriting commissions and
discounts of $1,610,000 and other offering costs of $1,008,006, were
$20,381,994, including net proceeds from shares sold on the exercise of the
underwriters' over-allotment option. Use of net proceeds from August 6, 1996
through September 30, 1997, was as follows:
Purchase and installation of machinery and equipment $ 1,603,167
Repayment of indebtedness $ 334,373
Working capital $12,316,531
The use of proceeds described above does not represent a material
change in the use of proceeds described in the prospectus. None of the
proceeds used were paid to persons or entities
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that were, at the time, affiliates, directors, or officers of the Company,
associates of officers or directors, or persons owning 10% or more of any class
of equity security of the Company
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on August 27, 1997
(the "Annual Meeting"). At the Annual Meeting, the Company's stockholders
elected one director to the Company's Board of Directors and approved the
proposals as more fully described below.
At the Annual Meeting, 9,095,605 shares out of a total of 10,890,710
shares of Common Stock outstanding at the record date were represented in person
or by proxy.
The proposals considered at the Annual Meeting were voted on as follows:
1. Election of Director
Proposal to elect one director to hold office until the 2000 Annual
Meeting of Stockholders or his earlier resignation or removal.
Nominee Votes For Votes Withheld
------- --------- --------------
Arthur S. Budman 9,085,845 9,760
2. Approval of 1995 Stock Option Plan, as amended
Proposal to approve the Company's 1995 Stock Option Plan, as amended,
to, among other things, (a) increase the aggregate number of shares
of Common Stock authorized for issuance under such plan by 1 million
shares, (b) extend eligibility under the plan to non- employee
directors of the Company and provide for automatic grant of options to
non-employee directors, and (c) extend the term of such plan to July
2007. Proposal was approved by a vote of 5,661,523 shares in favor;
1,038,429 shares against; 15,407 shares abstaining; and 2,380,246
shares unvoted.
3. Approval of 1996 Employee Stock Purchase Plan, as amended
Proposal to approve the Company's 1996 Employee Stock Purchase Plan,
as amended, to increase the aggregate number of shares of Common Stock
authorized for issuance under such plan by 50,000 shares. Proposal was
approved by a vote of 6,984,011 shares in favor; 550,426 shares
against; 15,347 shares abstaining; and 1,545,821 shares unvoted.
4. Appointment of Independent Auditors
Proposal to ratify the selection of Ernst & Young LLP as independent
auditors of the Company for its fiscal year ending March 31, 1998.
Proposal was approved by a vote of 9,076,908 shares in favor, 14,400
shares against, and 4,297 shares abstaining.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS:
*10.32 1995 Stock Option Plan, as amended
*10.33 Form of Incentive Stock Option Agreement Under the
1995 Stock Option Plan, as amended
*10.34 Form of Nonstatutory Stock Option Agreement Under the
1995 Stock Option Plan, as amended
*10.35 Form of Non-insider Director Nonstatutory Stock Option
Agreement Under the 1995 Stock Option Plan, as amended
*10.36 1996 Employee Stock Purchase Plan, as amended
*10.37 Incentive Stock Option Agreement for David Chen,
granted pursuant to 1995 Stock Option Plan, as amended
*10.38 Nonstatutory Stock Option Agreement for David Chen,
granted pursuant to the 1995 Stock Option Plan, as
amended
*10.39 Non-Plan Nonstatutory Stock Option Agreement for David
Chen
*10.40 Agreement Between TriTeal Corporation and Armando
Viteri Regarding Continued Employment, dated March 31,
1997
*10.41 Agreement Between TriTeal Corporation and Rand
Schulman Regarding Continued Employment, dated
August 7, 1997
*10.42 Severance Agreement and General Release of Claims
Between TriTeal Corporation and Robert D. Ruhe, dated
September 7, 1997
11.1 Statement Regarding Calculation of Net Income (Loss)
Per Share
27.1 Financial Data Schedule
*Indicates management compensatory plan, contract or arrangement
B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by the Company during the three
months ended September 30, 1997.
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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.
TRITEAL CORPORATION
Date: November 12, 1997 /s/ Jeffrey D. Witous
------------------------ --------------------------------------------
Jeffrey D. Witous
Chief Executive Officer and
Chairman of the Board
Date: November 12, 1997 /s/ Arthur S. Budman
------------------------ --------------------------------------------
Arthur S. Budman
Chief Financial Officer and Director
(Principal financial and accounting officer)
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