FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 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 No. 0-12192
BGS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2559993
(State of Incorporation) (I.R.S. Employer
Identification No.)
128 Technology Center, Waltham, Massachusetts 02254
(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 891-0000
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
Number of shares outstanding of each of the issuer's classes of common stock.
Common stock, $.10 par value
Shares outstanding @ October 31, 1996...............................3,214,849
BGS Systems, Inc.
Table of Contents
Part I Financial Information: Page No.
Item 1 - Financial Statements:
Balance Sheets
Statements of Income
Statements of Cash Flows
Notes to Financial Statements
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations
Part II Other Information:
Item 6 - Exhibits and Reports on Form 8-K
Signatures
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Part I Financial Information
Item 1. Financial Statements
BGS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 31, January 31,
1996 1996
-----------------------------
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ASSETS
Current Assets:
Cash and cash equivalents $10,489,465 $11,228,411
Marketable securities 2,220,000 1,040,000
Accounts receivable, less allowances of
$365,000 at October 31, 1996 and January
31, 1996 for doubtful accounts 10,421,253 14,162,823
Prepaid expenses and other assets 1,517,718 951,033
Deferred income taxes 257,398 257,398
Total current assets 24,905,834 27,639,665
Capitalized software 915,625 775,000
Equipment:
Land 2,258,360 2,258,360
Building 3,607,792 3,037,777
Furniture and fixtures 1,660,573 1,607,098
Computer equipment 7,379,517 6,488,993
14,906,242 13,392,228
Less accumulated depreciation 7,225,217 6,426,094
7,681,025 6,966,134
Total Assets $33,502,484 $35,380,799
============ ============
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 894,993 $ 1,343,665
Accrued expenses 690,499 1,162,102
Accrued compensation and employee benefits 1,537,457 2,197,567
Deferred revenue 13,028,425 15,082,034
Federal and state income taxes payable (548,963) 421,159
Billings in excess of costs and earnings on
uncompleted contracts - 213,110
Dividends payable - -
Total current liabilities 15,602,411 20,419,637
Stockholders' equity:
Common stock, $.10 par value-authorized
10,000,000 shares; issued and outstanding
3,214,849 shares 321,486 321,486
Capital in excess of par value 14,424,076 14,387,404
Retained earnings 5,665,882 3,082,920
Equity adjustment from foreign currency
translation (516,002) (700,680)
19,895,442 17,091,130
Less cost of 85,363 shares (112,885 shares
in 1995) of common stock in treasury 1,995,369 2,129,968
Total stockholders' equity 17,900,073 14,961,162
Total liabilities and stockholders' equity $33,502,484 $35,380,799
============ ============
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FORM 10-Q
BGS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
October 31, October 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUES:
License fee $ 6,813,400 $ 5,262,032 $18,366,699 $14,458,851
Maintenance fees 4,484,157 4,176,412 13,366,570 12,597,705
Other 742,066 555,077 2,113,288 1,565,332
------------ ------------ ------------ -----------
12,039,623 9,993,521 33,846,557 28,621,888
------------ ------------ ------------ -----------
COSTS AND EXPENSES:
Costs of software 723,461 280,841 2,848,501 1,456,806
Costs of maintenance & support 2,801,587 2,592,477 6,884,540 5,970,017
Costs of consulting, develop-
ment contracts and other 272,487 160,634 831,508 541,380
Sales and marketing 3,444,488 3,143,656 9,986,230 8,951,379
General and administrative 918,277 857,672 2,692,976 2,583,622
Research and development 746,358 114,005 1,531,010 1,120,408
------------ ----------- ------------ ----------
8,906,658 7,149,285 24,774,765 20,623,612
------------ ----------- ------------ ----------
OPERATING INCOME 3,132,965 2,844,236 9,071,792 7,998,276
Investment income:
Interest income, net 127,117 199,623 411,119 614,400
Other income 181,268 (16,493) 418,520 157,561
------------ ----------- ------------ ----------
308,385 183,130 829,639 771,961
------------ ----------- ------------ ----------
INCOME BEFORE TAXES 3,441,350 3,027,366 9,901,431 8,770,237
Income taxes 1,226,596 1,077,819 3,410,928 3,051,385
NET INCOME $ 2,214,754 $ 1,949,547 $ 6,490,503 $ 5,718,852
============ =========== ============ ===========
Net income per share $ .70 $ .62 $ 2.05 $ 1.83
============ =========== ============ ==========
Weighted average number of
shares outstanding 3,180,721 3,138,938 3,162,966 3,126,190
============ ============ ============ ==========
Net income per share: The computations of income per share are based on the
weighted average number of shares of Common Stock outstanding during the
periods, including the dilutive effect of stock options.
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FORM 10-Q
BGS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
October 31,
1996 1995
-----------------------------
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OPERATING ACTIVITIES:
Net income $ 6,490,503 $ 5,718,852
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,119,552 696,590
Changes in operating assets and
liabilities:
Accounts receivable 4,112,721 3,457,926
Billings in excess of costs & estimated
earnings on uncompleted contracts (213,111) -
Other current assets (565,425) (912,918)
Accounts payable and accrued expenses (1,856,836) (941,674)
Deferred revenue (2,235,976) (2,831,165)
Federal and state income taxes (979,965) (96,851)
Foreign currency transaction 122,868 (91,848)
------------ ------------
Net cash provided by operating activities 5,994,331 4,998,912
------------ ------------
FINANCING ACTIVITIES:
Purchases of common stock for treasury 36,672 390,162
Proceeds from issuance of common stock 134,599 (149,366)
Dividends paid (3,907,540) (2,330,647)
------------ ------------
Net cash used in financing activities (3,736,269) (2,089,851)
------------ ------------
INVESTING ACTIVITIES:
Purchases of available-for-sale securities (1,180,000) (2,260,000)
Proceeds from maturity of available-for-sale
securities - 2,405,000
Additions to capitalized software costs (482,813) (375,000)
Additions to equipment (1,480,476) (829,338)
Net cash provided by (used in) investing ------------ ------------
activities (3,143,289) (1,059,338)
------------ ------------
Effect of exchange rate changes on cash and
cash equivalents 146,281 78,849
Net increase (decrease) in cash and cash
equivalents (738,946) 1,928,572
Cash and cash equivalents at beginning of
fiscal year 11,228,411 9,084,622
------------ ------------
Cash and cash equivalents at end of period $10,489,465 $11,013,194
============ ============
See Accompanying Notes to Financial Statements
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FORM 10-Q
BGS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
I. Accounting Comments
With respect to the unaudited statements for the interim periods included
in this report, management of the Company believes that all adjustments
necessary for fair presentation of the results for such interim periods have
been included, and are of a normal recurring nature.
Reference is made to the registrant's Annual Report on Form 10-K, filed
with the Securities and Exchange Commission on April 26, 1996, which
incorporates the financial statements and notes thereto, including a summary of
significant accounting policies, for the fiscal years ended January 31, 1996 and
January 31, 1995.
The results for the interim periods are not necessarily indicative of the
results for the entire year.
FORM 10-Q
Part 1-Item 2
BGS SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Material Changes in Results of Operations
Operating revenues for the first nine months and the third quarter of fiscal
year 1997 were 18% and 20% above the levels of the comparable periods of the
prior fiscal year. The Company s newer UNIX and Visualizer products continued
their growth trend and pushed license fee growth to 27% for the nine-month
period. Sales of the Company s Datacenter products posted modest declines in
the nine-month period. While still showing growth in license fee revenue for
the nine-month period, the Company's international operations posted weak
results in the third quarter. The Company's United Kingdom and Australian
operations posted gains in third quarter license fee revenue that was more
than offset by the shortfalls experienced at the balance of the Company's
international operations. Both the domestic and international operations of
the Company continue to experience the impact of the timing of large software
purchases by its customers. The receipt of several large orders by the
Company's domestic operations was somewhat offset by the delay of several
orders expected by the Company's international operations. While these
anomalies did somewhat offset each other in the current quarter, they continue
to be of concern because of the increased potential for unevenness in the
total revenue of the Company for the foreseeable future. In the third quarter
the Company released for production, products for local area networks and
Windows NT. While both of these markets are quite large, neither can be
characterized as traditional markets of the Company and we expect increased
competition. Additionally, the Company has an agreement(which expires in the
first quarter of the next fiscal year) with another software company to
distribute the product which provides data used in our LAN product. While
discussions are continuing, it appears that we may not come to an agreement
on the terms of a new agreement and this will be disruptive to our planned
entry to that market.
Maintenance fee revenue grew approximately 6% in the nine month period and 7%
in the third quarter over the comparable periods of the prior year. The
Company's overall maintenance renewal rate is improving over the prior fiscal
year's rate. In particular, the maintenance renewal rate for our domestic
operations is 6% above the levels of the prior year. The Company continues to
experience a high degree of nonrenewal for its more mature products and
expects that this will continue as its customers transition to newer
technology.
Other revenue for both the nine-month period and the third quarter was over
30% above last year's levels. An increase in the number of customers
requiring on site installation and other consulting services was the primary
reason for the improved revenue for both periods. This increased level of
consulting services has placed a strain on the Company's available consulting
resources and unless the Company can engage more of these scarce resources
this growth will not continue. The level of third party development contract
revenue continues at a minimum maintenance level and is not expected to vary
significantly over the next few quarters.
FORM 10-Q
Aggregate costs and expenses for the third quarter and the nine-month period
increased 20% and 25% over the comparable periods of the prior year. Sales
and marketing expenses were higher for both periods primarily as a result of
the increased levels of software sales. In the prior fiscal year the Company
incurred a higher level of expenditures for marketing activity relating to the
Company's new products, especially introductory marketing expenses for the
UNIX products. General and administrative expenses increased nominally and
were primarily the result of normal salary and overhead increases.
The cost of software increased substantially in both periods. Development
work on an increased number of product features and product iterations as well
as a shortage of qualified software engineers has driven up the cost of
developing and maintaining software. A continuation of this shortage of
qualified software engineers will continue to increase the Company's product
development cost and may result in delays in the release of new products.
The cost of maintenance and support increased in both periods and will
continue to increase as the Company introduces both additional new products
and new iterations of the current product line. The cost of the consulting
portion of other revenue is labor intensive and any increase in consulting
revenue produces a somewhat disproportionate increase in the associated costs.
The increase in the costs of other revenue is directly related to the increase
in the costs of earning the consulting revenue.
Gross margins for the nine-month period were 4 to 5 percent lower on all
categories of revenue. The costs of developing and supporting the increased
breadth of products as well as the required growth in the infrastructure
necessary to support our continued growth combined to cause this reduction in
margins. A continuation of the elevated costs to employ qualified software
engineers and the growth in the Company's infrastructure will put pressure on
the Company's margin throughout the next fiscal year. Research and
development costs on new products will continue to increase as the Company
continues its expansion into the distributed systems market and use of outside
consultants to assist in development projects when qualified software
engineers cannot be hired.
Investment income declined from both periods last year as the level of
marketable securities was lower due to the purchase and renovation of the
Company's new headquarters. The Company does not enter into any forward
exchange contracts.
Net income grew approximately 13% for both periods and earnings per share grew
13% for the nine-month period and 11% for the third quarter. The effective
tax rate was approximately 34% for both years.
Material Changes in Financial Condition/Liquidity
Cash and marketable securities increased $441,000 as current year earnings
were offset by an increase in the payment and rate of the quarterly dividends,
the costs related to the renovation of the Company's new headquarters and the
purchase of new computer equipment. The decrease in accounts receivable from
January 31 is primarily due to the collection of outstanding accounts and the
lower sales levels in the third quarter of the current fiscal year versus the
normal increased sales activity during the fourth quarter. Deferred revenue
declined as a result of the normal reduced level of prebilled maintenance
contracts in the third quarter versus the end of the fourth quarter.
FORM 10-Q
The Company expects to move to its new headquarters in the latter part of the
fourth quarter. While the Company does not expect an adverse impact on
operations related to the move, it does recognize that any change is
disruptive to an organization and that there is always the remote possibility
that a new system may not work exactly as planned and may result in lost or
delayed revenue.
The Company's cash resources are considered sufficient to finance the
Company's growth in the foreseeable future.
FORM 10-Q
BGS SYSTEMS, INC.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The exhibits filed as part of this Form 10-Q are
listed on the Exhibit Index immediately preceding such
exhibits and are incorporated herein by reference.
(b) Form 8-K. The Registrant did not file any reports on
Form 8-K during the quarter for which this report is filed.
FORM 10-Q
INDEX TO EXHIBITS
Exhibits Page Number
11 Statement regarding Computation
of per share earnings
27 Financial Data Schedule
FORM 10-Q
BGS SYSTEMS, INC.
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.
BGS Systems, Inc.
128 Technology Center
Waltham, Massachusetts 02254
Date: December 13, 1996 By: /S/ HAROLD S. SCHWENK, JR.
Harold S. Schwenk, Jr.
President and Chief Executive Officer
Date: December 13, 1996 By: /S/ NORMAND BILODEAU
Normand Bilodeau
Chief Financial Officer
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FORM 10-Q
STATEMENT REGARDING COMPUTATIONS OF PER SHARE EARNINGS
BGS SYSTEMS, INC.
For the quarter ended
October 31,
1996 1995
---------------------------
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PRIMARY
Average shares outstanding 3,129,486 3,116,159
Net effect of stock options, if dilutive,
based on the treasury stock method using
the average market price 51,235 22,779
----------- -----------
Total 3,180,721 3,138,938
----------- -----------
Net income $ 2,214,754 $ 1,949,547
=========== ===========
Net income per share $ .70 $ .62
=========== ===========
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For the nine months ended
October 31,
1996 1995
---------------------------
<S> <C> <C>
PRIMARY
Average shares outstanding 3,126,869 3,108,478
Net effect of stock options, if dilutive,
based on the treasury stock method using
the average market price 36,09 17,712
----------- -----------
Total 3,162,966 3,126,190
----------- -----------
Net income $ 6,490,503 $ 5,718,852
=========== ===========
Net income per share $ 2.05 $ 1.83
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000718976
<NAME> BGS SYSTEMS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> OCT-31-1996
<EXCHANGE-RATE> 1
<CASH> 10,489,465
<SECURITIES> 2,220,000
<RECEIVABLES> 10,421,253
<ALLOWANCES> 365,000
<INVENTORY> 0
<CURRENT-ASSETS> 24,905,834
<PP&E> 14,906,242
<DEPRECIATION> 7,225,217
<TOTAL-ASSETS> 33,502,484
<CURRENT-LIABILITIES> 15,602,411
<BONDS> 0
0
0
<COMMON> 321,486
<OTHER-SE> 17,578,587
<TOTAL-LIABILITY-AND-EQUITY> 33,502,484
<SALES> 18,366,699
<TOTAL-REVENUES> 33,846,557
<CGS> 21,750,998
<TOTAL-COSTS> 24,774,765
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,901,431
<INCOME-TAX> 3,410,928
<INCOME-CONTINUING> 6,490,503
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,490,503
<EPS-PRIMARY> 2.05
<EPS-DILUTED> 2.05
</TABLE>
