<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: MARCH 31, 1996
Commission file number 0-25736
SYNCRONYS SOFTCORP
(Name of Small Business Issuer as specified in Its Charter)
NEVADA 33-0653223
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3958 INCE BOULEVARD
CULVER CITY, CA 90232
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (310) 842-9203
Indicate by check mark whether the Issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the Issuer 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 May 7, 1996 there were 13,821,011 shares of the Issuer's Common Stock,
$.0001 Par Value, outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
TOTAL PAGES IN THIS REPORT: 20
NO EXHIBITS ARE FILED WITH THIS REPORT
<PAGE> 2
SYNCRONYS SOFTCORP
FORM 10-QSB
Table of Contents
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS........................................3
Balance Sheet..........................................3
Statement of Operations
Three months ended March 31, 1995 and 1996..........4
Nine months ended March 31, 1995 and 1996...........5
Statement of Cash Flows
Nine months ended March 31, 1996....................6
Nine months ended March 31, 1995....................7
Notes to Financial Statements..........................8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................9
PART II
OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS...........................................16
ITEM 5. OTHER INFORMATION...........................................19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................19
SIGNATURES..................................................20
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNCRONYS SOFTCORP
Balance Sheet (unaudited)
March 31, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,932,363
Trade accounts receivable, less allowance for doubtful
receivables and returns of $1,585,185 61,669
Other receivables 469,565
Inventories 327,500
Deferred tax assets 39,605
Prepaid expenses and other current assets 306,420
-----------
Total current assets 3,137,122
Property and equipment, at cost, net 161,670
Note receivable 220,000
-----------
$ 3,518,792
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,474,529
Accrued expenses 1,477,290
-----------
Total current liabilities 2,951,819
-----------
Stockholders' equity:
Common stock, $.0001 par value. Authorized 75,000,000
shares; issued and outstanding 13,821,011 shares 1,382
Additional paid in capital 1,987,533
Accumulated deficit (1,421,942)
-----------
Total stockholders' equity 566,973
-----------
$ 3,518,792
===========
</TABLE>
See accompanying notes to financial statements
<PAGE> 4
SYNCRONYS SOFTCORP
Statements of Operations (unaudited)
Three Months Ended March 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
------------ -----------
<S> <C> <C>
Net revenues $ 149,185 388,191
Cost of revenues 12,300 24,205
------------ -----------
Gross profit 136,885 363,986
------------ -----------
Operating expenses:
Research and development 125,171 354,817
Marketing and selling 51,089 741,418
General and administrative 119,014 1,535,075
Nonrecurring Charge - Recall -- 1,700,000
------------ -----------
Total operating expenses 295,274 4,331,310
------------ -----------
Operating loss (158,389) (3,967,324)
Other income (expense) (22,773) 219,424
------------ -----------
Loss before income taxes (181,162) (3,747,900)
Income taxes -- (777,615)
------------ -----------
Net loss $ (181,162) (2,970,285)
============ ===========
Net loss per share $ (.01) (.21)
============ ===========
Weighted average number of common shares and common
share equivalents used in computation of net
loss per share 12,957,000 13,825,773
============ ===========
</TABLE>
See accompanying notes to financial statements
<PAGE> 5
SYNCRONYS SOFTCORP
Statements of Operations (unaudited)
Nine Months Ended March 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
------------ -----------
<S> <C> <C>
Net revenues $ 639,629 13,708,179
Cost of revenues 32,063 1,713,163
------------ -----------
Gross profit 607,566 11,995,016
------------ -----------
Operating expenses:
Research and development 389,575 933,160
Marketing and selling 204,422 6,263,529
General and administrative 206,055 2,660,667
Nonrecurring Charge - Recall -- 4,200,000
------------ -----------
Total operating expenses 800,052 14,057,356
------------ -----------
Operating loss (192,486) (2,062,340)
Other income (expense) (22,736) 273,001
------------ -----------
Loss before income taxes (215,222) (1,789,339)
Income taxes -- --
------------ -----------
Net loss $ (215,222) (1,789,339)
============ ===========
Net loss per share $ (.02) (.13)
============ ===========
Weighted average number of common shares and common
share equivalents used in computation of net loss per
share 12,957,000 13,825,773
============ ===========
</TABLE>
See accompanying notes to financial statements
<PAGE> 6
SYNCRONYS SOFTCORP
Statement of Cash Flows (unaudited)
Nine Months Ended March 31, 1996
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $(1,789,339)
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 53,400
Gain on sale of subsidiary (202,616)
Decrease in deferred tax assets 190,395
Increase in allowance for doubtful accounts and returns 1,210,185
Changes in operating assets and liabilities:
Accounts receivable 851,283
Inventories (299,767)
Prepaid expenses and other current assets (204,879)
Accounts payable 1,172,836
Accrued expenses 1,188,763
Taxes payable (724,994)
-----------
Net cash provided in operating activities 1,445,267
-----------
Net cash used in investing activities - capital expenditures (125,189)
-----------
Net cash used in financing activities:
Principal payments on long-term debt (93,681)
-----------
Net increase in cash and cash equivalents 1,226,397
Cash and cash equivalents at beginning of period 705,966
-----------
Cash and cash equivalents at end of period $ 1,932,363
===========
Supplementary disclosures of cash flow information:
Cash paid during the period for income taxes was $1,015,647
No cash was paid during the period for interest
</TABLE>
See accompanying notes to financial statements
<PAGE> 7
SYNCRONYS SOFTCORP
Statement of Cash Flows (unaudited)
Nine Months Ended March 31, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $(215,222)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 68,653
Net changes in operating assets and liabilities 214,682
---------
Net cash provided by operating activities 68,113
---------
Net cash used in investing activities - capital expenditures (28,202)
---------
Net cash used in financing activities:
Principal payments on long-term debt (43,200)
---------
Net decrease in cash and cash equivalents (3,289)
Cash and cash equivalents at beginning of period 11,011
---------
Cash and cash equivalents at end of period $ 7,722
=========
Supplementary disclosures of cash flow information:
No cash was paid during the period for income taxes or
interest
</TABLE>
See accompanying notes to financial statements.
<PAGE> 8
SYNCRONYS SOFTCORP
Notes to Financial Statements (unaudited)
March 31, 1995 and 1996
(1) BASIS OF PRESENTATION
The condensed financial statements of Syncronys Softcorp (the "Company")
for the nine months ended March 31, 1995 and 1996 are unaudited and
reflect all adjustments, consisting of normal recurring adjustments as
well as additional adjustments, which are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods
presented. These condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-KSB for its fiscal year ended
June 30, 1995. The results of operations for the three months and nine
months ended March 31, 1996 are not necessarily indicative of the
results for the entire year ending June 30, 1996.
(2) NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common
and commmon equivalent shares outstanding during each period, after
retroactive adjustment for stock splits, plus the shares that would be
outstanding assuming exercise of dilutive stock options, which are
considered common stock equivalents. Additionally, common shares issued
in the merger of Seamless Software Corporation ("Seamless") into the
Company have been assumed to be outstanding for all periods presented.
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following information should be read in conjunction with the
financial statements and the notes thereto, as well as the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", from the Company's Annual Report on 10-KSB for its fiscal year
ended June 30, 1995. The analysis set forth below is provided pursuant to
applicable Securities and Exchange Commission regulations and is not intended to
serve as a basis for projections of future events.
FORWARD-LOOKING STATEMENTS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS FORM 10-QSB ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE SET FORTH IN SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS
AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, THE COMPANY'S DEPENDENCE ON THE
TIMELY DEVELOPMENT, INTRODUCTION AND CUSTOMER ACCEPTANCE OF PRODUCTS (INCLUDING
SOFTRAM), THE IMPACT OF COMPETITION AND DOWNWARD PRICING PRESSURES, THE ABILITY
OF THE COMPANY TO REDUCE ITS OPERATING EXPENSES AND RAISE ANY NEEDED CAPITAL,
THE EFFECT OF CHANGING ECONOMIC CONDITIONS, RISKS IN TECHNOLOGY DEVELOPMENT AND
THE EFFECTS OF OUTSTANDING LITIGATION. OTHER FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN SUCH FORWARD-LOOKING
STATEMENTS INCLUDE THE RISKS AND UNCERTAINTIES DETAILED IN THE COMPANY'S MOST
RECENT FORM 10-KSB AND ITS OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION FROM TIME TO TIME.
OVERVIEW
The Company is a leading pioneer in the development of RAM compression
software technology -- a technology that did not exist two to three years ago.
Much like disk compression products, the early progress in RAM compression
software has proven extremely challenging. Nonetheless, the Company believes
that the market for RAM compression software technology, and its many potential
applications, is considerable. Although the Company has been in existence since
1986, its current operations have been in place only since its merger with
Seamless in May 1995. Accordingly, the Company is still in many respects subject
to many of the risks and uncertainties inherent to a new enterprise. Among these
is the risk that the Company's initial performance may not necessarily be
indicative of its performance in the future.
The Company's principal product, SoftRAM, began shipping in May of
1995. A substantial majority of the Company's net revenues were derived from
SoftRAM during the first nine month period of FY 1996 (approximately 97%) and
the Company depends on SoftRAM and related products to provide a substantial
portion of the Company's future revenues. However, on October 20, 1995 the
Company announced that it had identified a problem with the SoftRAM95 version
for Windows 95, the net result of which is that Random Access Memory ("RAM")
compression was not being delivered to the Windows 95 operating system. The
Company initially addressed the problem by undertaking a program to re-sticker
all product in the retail channel informing consumers that SoftRAM95 was
suitable for Windows 3.1 only. As this stickering program did not result in
complete coverage of all inventory, on December 18, 1995, the Company decided to
avoid any potential consumer confusion and/or liability by undertaking the
recall of SoftRAM95 from the retail channel. Along with the recall, the Company
has put in place a comprehensive program for SoftRAM consumers (see "SoftRAM
Product Recall", below). The Company is now not distributing any SoftRAM or
other products, has experienced a significant reduction in revenues as a result
and expects to generate no revenues until the new version of SoftRAM or other
new products are put into distribution.
<PAGE> 10
The Company's development team is working on a new version of SoftRAM
designed to deliver full RAM compression functionality for Windows 95 and an
improved version of SoftRAM for Windows 3.1 and management anticipates
concluding development during July 1996 (see "Product Development", below).
However, there can be no assurance that the new version of SoftRAM or other new
products will be introduced by the Company on a timely basis or that these
products will achieve any significant degree of market acceptance, or that such
acceptance will be sustained for any significant period. Failure to complete or
lack of demand for the new version of SoftRAM would have a material adverse
effect upon the Company and such adverse effect would be severe (see "Liquidity
and Capital Resources", below). In addition, if any new version of SoftRAM or
other new products do not achieve a significant degree of market acceptance, the
adverse consequences upon the Company would be severe.
FLUCTUATIONS IN OPERATING RESULTS
Although the Company's revenues in the first nine month period of FY
1996 increased dramatically as compared to the same period in the prior year,
there can be no assurance that, even if the Company succeeds in getting new
products into distribution, such revenues will continue in the future, or that
the Company's revenues and profitability will not vary significantly by quarter.
The Company has in the second and third quarters of FY 1996 experienced
a substantial decline in its operating revenues and operating results as
compared to the first quarter of FY 1996 due primarily to the Company's recall
of SoftRAM95 and the related expenses, and to the significantly high volume of
SoftRAM95 sold into distribution channels in August and September in conjunction
with the release of Windows 95. The Company expects to generate no future
revenue until the new version of SoftRAM or other new products are released.
There can be no assurance that SoftRAM or such other new products will be
introduced on a timely basis, that they will achieve any degree of market
acceptance or that they will be profitable or profitability, if any, can be
sustained. Although the Company's expense levels for each quarter are, to a
significant extent, fixed in advance, the Company is making efforts to adjust
spending to compensate for the expected shortfall in net revenues. However, the
Company expects to generate a significant operating loss in the fourth quarter
of fiscal 1996 and until such time, if any, the new version of SoftRAM or other
new products are released. There can be no assurance that the adverse
consequences resulting from such losses will not be severe.
Generally, the Company believes that its operating results for any
quarter are not necessarily indicative of results for any future period.
RESULTS OF OPERATIONS
Net Revenues
<TABLE>
<CAPTION>
FY 1996 Increase FY 1995
<S> <C> <C> <C> <C>
Net Revenues First Nine Months $ 13,708,179 greater than 100% $ 639,629
Third Quarter 388,191 greater than 100% 149,185
</TABLE>
The Company has derived a significant majority of its utilities
software revenues from sales of SoftRAM to software distributors, computer
superstores and mass merchandisers in North America. The growth in revenues
during the first nine month period of FY 1996 was primarily attributable to the
introduction of SoftRAM which began shipping in May of 1995 and of the Windows
95 version of SoftRAM which began shipping in August 1995. SoftRAM sales
constituted roughly 97% of the Company's revenues during the first nine month
period of FY 1996 and made no contribution during the first nine month period of
FY 1995. Sales in the third quarter of FY 1996 declined substantially from sales
in the first and second quarters due to the significant volume of SoftRAM95 sold
into distribution channels in August and September in conjunction with the
release of Windows 95, and to the Company's announcement that it had identified
a problem with the SoftRAM95 version for Windows 95 on October 20, 1995, and its
subsequent recall of SoftRAM95 towards the end of the second quarter (see
"SoftRAM Product Recall", below).
<PAGE> 11
Cost of Revenues
<TABLE>
<CAPTION>
FY 1996 Increase FY 1995
<S> <C> <C> <C> <C>
Cost of Revenues First Nine Months $ 1,713,163 greater than 100% $ 32,063
Percent of Net Revenues 13% 5%
Third Quarter $ 24,205 97% $ 12,300
6% 8%
</TABLE>
Cost of revenues consists of direct manufacturing costs for the
Company's software products. Cost of revenues as a percentage of net revenues
increased to 13% in the first nine month period of FY 1996, from 5% in the first
nine month period of FY 1995, primarily due to the fact that the majority of the
Company's net revenues in the first nine month period of FY 1996 were derived
from sales of SoftRAM. SoftRAM carries a lower gross margin than the Company's
other products, which comprised the Company's revenues in the first nine month
period of FY 1995. Additionally, the Company recognized an additional $500,000
in cost of revenues during the first quarter of FY 1996 to reflect the
anticipated costs of providing an upgrade to its Windows 95 version of SoftRAM
to existing customers and for customer returns and refunds, as well as an
approximately $150,000 charge to cost of revenues during the second quarter of
FY 1996 to reflect the write-off of existing inventories of SoftRAM (see
"SoftRAM Product Recall", below). The overall increase in the cost of revenues
in the first nine month period of FY 1996 is directly attributable to the
increase in net revenues.
Research and Development Expenses
<TABLE>
<CAPTION>
FY 1996 Increase FY 1995
<S> <C> <C> <C> <C>
R & D Expenses First Nine Months $ 933,160 greater than 100% $ 389,575
Percent of Net Revenues 7% 61%
Third Quarter $ 354,817 greater than 100% $ 125,171
91% 84%
</TABLE>
Research and development expenses increased from $389,575 in the first
nine month period of FY 1995 to $933,160 for the first nine month period of FY
1996. This increase is primarily attributable to expenses associated with the
development of the Windows 95 version of SoftRAM and to the increase in the
number of research and development projects. Although the Company's research and
development expenses increased in the first nine month period of FY 1996 as
compared to the same period in the prior year, as a percentage of net revenues,
research and development expenses decreased to 7% from 61% due to the even
greater growth in the Company's net revenues. Research and development expenses
increased in the third quarter of FY 1996 as a percentage of net revenues
primarily due to the decrease in net revenues for the quarter as compared to the
first and second quarters. Although the Company is making efforts to adjust its
spending to compensate for the expected shortfall in net revenues until the new
version of SoftRAM or other new products are released, the Company expects
research and development expenses to continue to increase during FY 1996
primarily due to the anticipated increase in the number of research and
development staff and projects.
In accordance with Statement of Financial Accounting Standards No. 86
(FASB 86), the Company examines the software development costs after
technological feasibility has been established to determine if the amounts are
significant enough to require capitalization. Through the end of the third
quarter of FY 1996, these amounts have not been deemed significant, and
substantially all software development costs have been expensed in the period
incurred. None of the Company's research and development costs for the first
nine month periods of FY 1996 or 1995 were borne directly by the Company's
customers.
<PAGE> 12
Marketing and Selling Expenses
<TABLE>
<CAPTION>
FY 1996 Increase FY 1995
<S> <C> <C> <C> <C>
M & S Expenses First Nine Months $ 6,263,529 greater than 100% $ 204,422
Percent of Net Revenues 46% 32%
Third Quarter $ 741,418 greater than 100% $ 51,089
191% 34%
</TABLE>
Marketing and selling expenses are comprised mainly of salaries and
commissions, advertising and promotions, trade shows, and customer service and
technical support expenses. Marketing and selling expenses increased in the
first nine month period of FY 1996 primarily due to expenses associated with the
introduction of the Windows 95 version of SoftRAM in August of 1995, and due to
other expenses required to support the increase in net revenues. While sales and
marketing expenses increased as a percentage of net revenues in the third
quarter of FY 1996 due to the decrease in net revenues in the quarter, sales and
marketing expenses decreased nearly $3 million from the second quarter as a
result of the Company's efforts to adjust its spending to compensate for the
shortfall in net revenues until the new version of SoftRAM or other new products
are released. While the Company expects marketing and selling expenses to
continue at reduced levels until the release of SoftRAM or other new products,
the Company expects that additional marketing and selling expenses will be
required to support the relaunch of SoftRAM and the release of other new
products.
General and Administrative Expenses
<TABLE>
<CAPTION>
FY 1996 Increase FY 1995
<S> <C> <C> <C> <C>
G & A Expenses First Nine Months $ 2,660,667 greater than 100% $ 206,055
Percent of Net Revenues 19% 32%
Third Quarter $ 1,535,075 greater than 100% $ 119,014
395% 80%
</TABLE>
General and administrative expenses increased in the first nine month
period of FY 1996 due primarily to legal expenses along with increases in
direct and indirect expenses required to support the increase in net revenues
and the new corporate structure. As a percentage of net revenue these expenses
fell from 32% to 19% during the first nine month period of FY 1996 as compared
to the same nine month period of FY 1995, due primarily to economies of scale -
the allocation of fixed costs over a larger revenue base. From the second
quarter to the third quarter of FY 1996, general and administrative expenses
increased $768,875, or 100%, due primarily to increased expenses due to the
facilities expansion and legal fees (see "Part II. Other Information -- Item 1.
Legal Proceedings", below). General and Administrative expenses increased in the
third quarter of FY 1996 as a percentage of net revenues due to the increase in
expense and the decrease in net revenues for the quarter as compared to the
first and second quarters. While the Company is making efforts to adjust its
spending to compensate for the expected shortfall in net revenues until the new
version of SoftRAM or other new products are released, the Company's general and
administrative expenses are to a certain extent fixed and may be significantly
affected by the fees and costs of litigation, legal and professional services
and any settlements in litigation.
Nonrecurring Charge - SoftRAM Product Recall
Although the final cost of the SoftRAM product recall cannot be
estimated with any certainty, the Company has taken a one time charge of $4.2
million in FY 1996 to provide for the expected costs of this recall. See
"SoftRAM Product Recall", below, for a detailed discussion of this issue.
<PAGE> 13
Other Income (Expense)
<TABLE>
<CAPTION>
FY 1996 Increase FY 1995
<S> <C> <C> <C> <C>
Other Income (Expense) First Nine Months $ 273,001 greater than 100% $ (22,736)
2% 4%
Third Quarter 219,424 greater than 100% (22,773)
57% 15%
</TABLE>
Other income and expense consists largely of interest income and
expense. Interest income increased during FY 1996 as compared to FY 1995 as a
result of the increase in overall cash balances. Additionally, other income and
expense for the third quarter of FY 1996 includes the approximately $200,000
gain on the sale of the Company's Autoship subsidiary (see "Part II. Item 5.
Other Information - Sale of Autoship Subsidiary", below).
LIQUIDITY AND CAPITAL RESOURCES
The working capital at March 31, 1996 was $185,303 as compared to
$2,294,166 at June 30, 1995. Cash and cash equivalents increased $1,226,397 from
June 30, 1995 to March 31, 1996 due to the $1,445,267 in cash provided by
operating activities during the first nine month period of FY 1996. Over the
same period, the Company's working capital decreased by $2.1 million due
primarily to the effects of the Company's recall of its SoftRAM product (see
"SoftRAM Product Recall", below, for a detailed discussion of this issue). The
Company uses its working capital to finance ongoing operations and the
development and marketing of its software products. Additionally, the Company
evaluates from time to time acquisitions of products or companies that could
complement the Company's business, expand its product line, or augment its
revenues and cash flows. The Company has no plans, commitments or agreements
with respect to any such transactions as of the date of this report other than
those discussed below (see "Strategic Alliances").
The Company's success and ongoing financial viability is contingent
upon its selling of its products and the related generation of cash flows. The
Company is currently generating little or no revenue and related cash flows and
anticipates generating little or no revenue or cash flows until the new version
of SoftRAM or other new products are released. Management believes that its
existing cash and working capital balances will be sufficient to meet its
working capital needs for two to three months. The Company generally receives
cash from sales 60 to 90 days after shipping its product. Should the receipt of
cash from the release of the new version of SoftRAM or other new products exceed
this two to three month period the adverse consequences could well be severe.
The Company is attempting to raise additional capital through debt or equity
financing, and has already made preliminary inquiries to put such financing in
place. However, there can be no assurance that such financing will be available
in the future to meet the working capital needs of the Company, or as to the
terms or conditions of any such financing that is available. Should there be any
significant delays in the release of the new version of SoftRAM or other new
products or the Company's working capital needs otherwise exceed its resources,
the adverse consequences would be severe.
<PAGE> 14
SOFTRAM PRODUCT RECALL
The Company announced on October 20, 1995 that it had identified a
problem with the SoftRAM95 version for Windows 95, the net result of which is
that Random Access Memory ("RAM") compression was not being delivered to the
Windows 95 operating system. The Company initially addressed the problem by
undertaking a program to re-sticker all product in the retail channel informing
consumers that SoftRAM95 was suitable for Windows 3.1 only. As this stickering
program did not result in complete coverage of all inventory, on December 18,
1995, the Company decided to avoid any potential consumer confusion and/or
liability by undertaking the recall of SoftRAM95 from the retail channel. The
Company expects that the recall will apply to approximately 150,000 to 200,000
units of SoftRAM in distribution channels on the recall date. Although the final
cost of the recall cannot be estimated with any certainty, the Company has taken
a one time charge to provide for the expected costs of this recall of $4.2
million. Although the Company believes that it has resources sufficient to pay
these costs, the ultimate impact of recall on the Company's finances and results
of operations cannot be predicted with any certainty. Further, there can be no
assurances that the adverse consequences will not be severe.
On October 20, 1995, the Company also announced a comprehensive program
for SoftRAM consumers which the Company expected to mitigate the potential
adverse effects to the Company arising from this problem. However, the problem
resulted in several private lawsuits as well as inquiries by the New York
Regional Office of the Federal Trade Commission and the Florida Attorney
General's Office (see "Part II. Other Information -- Item 1. Legal
Proceedings"). This problem could have a negative impact on the reputation of
the Company and its products and could have an adverse effect on the Company's
ability to profitably market SoftRAM96 and/or the Company's results of
operations. Additionally, the problem could give rise to additional private
lawsuits and inquiries and investigations by consumer and trade groups,
governmental authorities, financial organizations and other investors,
securities dealers and other organizations. There can be no assurance that the
expense, or the other potential consequences of such private lawsuits, inquiries
and investigations would not have a material adverse effect upon the Company.
Additionally, there can be no assurance that the Company's efforts will mitigate
potential adverse effects, or that the adverse consequences will not be severe.
<PAGE> 15
PRODUCT DEVELOPMENT
The Company's development team is working on a new version of SoftRAM
designed to deliver full RAM compression functionality for Windows 95 and an
improved version of SoftRAM for Windows 3.1 as well as several other new
products. Management previously announced that it expected to release the new
version of SoftRAM as early as December 22, 1995. However, the Company's
development team has experienced unanticipated delays in developing the
SoftRAM96 (which comprises both a Windows 95 and Windows 3.1 version). While
developing the SoftRAM95 upgrade the Company encountered a complex series of
technological challenges and identified and pursued several independent areas
for substantial improvement to create a next generation of both product
versions. These independent components are by nature technologically novel and
more extensive than originally expected. SoftRAM96 and the SoftRAM95 upgrade are
now entering the early-stage component integration and testing phases. While
management is not able to predict a precise release date for the new version of
SoftRAM with any certainty, it anticipates concluding development in July 1996.
Certain of the Company's distributors and several software retailers have
indicated a willingness to restock SoftRAM when the new version is available and
is shown to deliver its full RAM compression functionality for Windows 95.
However, there can be no assurance that the new version of SoftRAM or other new
products will be introduced by the Company on a timely basis or that these
products will achieve any significant degree of market acceptance, or that such
acceptance will be sustained for any significant period. In addition, the
Company's success will depend in part on its ability to respond promptly to
market feedback and provide adequate technical support and service to customers.
There can be no assurance that a market will develop for the Company's products,
or that, if a market does develop, that such products will be profitable or that
profitability, if attained, can be sustained. Failure to complete on a timely
basis, or lack of demand for the new version of SoftRAM or other new products
upon completion and distribution, would have a material adverse effect upon
the Company and such adverse effect would be severe. In addition, if any new
version of SoftRAM or other new products do not achieve a significant degree
of market acceptance, the adverse consequences upon the Company would be severe.
STRATEGIC ALLIANCES
The Company has recently formed its first two strategic alliances with
software development companies, both of which have extensive expertise in
performance and productivity enhancement technologies. Jump Development Group
("Jump") has licensed its award-winning RAM Charger Macintosh (Mac) memory
management software to the Company for North American and European distribution.
Approximately 80,000 copies of RAM Charger have been sold since its introduction
and RAM Charger is currently a best selling Macintosh title in Japan.
Additionally, Jump will be leading a dedicated team in the development of new
Mac products for the Company. PowerPro Software, Inc. ("PowerPro") has entered
into a development relationship with the Company to develop system and
productivity software for the Windows utility market. PowerPro's flagship
product, Quick Restart, has sold in excess of 120,000 copies since its
introduction. PowerPro will be leading a dedicated team in the development of
new software products for the Windows platform for the Company. There can be no
assurance that the Company will generate revenue or profits as a result of the
licensing agreements or development relationships with Jump and PowerPro.
<PAGE> 16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
SETTLED ACTIONS
Mobius Capital Corp. ("Mobius") (a significant shareholder of the
Company), Daniel G. Taylor (an officer of the Company) and certain others
commenced an action in July 1995 in the British Columbia Supreme Court against
Rob Keenan, Dev Randhawa and MacKenzie Ward & Company Inc. ("MacKenzie") in
which the defendants are alleged, among other things, to have engaged in an
unlawful and fraudulent conspiracy to attempt to take control of Mobius.
MacKenzie commenced a counterclaim on September 25, 1995 against Mobius, the
Company and certain current or former officers of the Company (Mr. Taylor
and Kevin P. O'Neill) and alleged that it is entitled, among other things, to
a payment of shares of the Company's Common Stock, $.0001 Par Value, arising
from the merger of the Company and Seamless. In the counterclaim, MacKenzie
sought specific performance, unspecified damages, costs, interest and
unspecified other relief. ON MAY 3, 1996 THE CLAIM AND COUNTERCLAIM WERE
DISMISSED, WITHOUT COSTS TO ANY PARTY AND WITH THE CONSENT OF ALL PARTIES, BY
THE SUPREME COURT OF BRITISH COLUMBIA.
The Company, a software retailer and "Doe" defendants were named as
defendants in an action commenced on November 1, 1995 by Carol Levy in the
Superior Court of the State of California for Alameda County. Ms. Levy contended
that advertising by the defendants of SoftRAM95 was false, deceptive and
misleading. Ms. Levy sought injunctive relief, restitution, costs and attorney's
fees.
The Company and certain other parties, including several software
retailers and distributors, certain officers of the Company (Rainer Poertner and
Wendell Brown) and "Doe" defendants, were named as defendants in a putative
class action lawsuit commenced by Douglas K. Martin and various other
individuals on January 2, 1996 in the Superior Court of the State of California
for Alameda County. In Mr. Martin's complaint, the putative plaintiff class was
described as including all persons in the world who had purchased Syncronys and
was estimated in the complaint to include more than 100,000 members. Mr. Martin
contended that the defendants breached the warranty of merchantability and that
the collective defendants were engaged in a conspiracy to defraud the class
members through false representations related to SoftRAM. The complaint also
included a claim of unfair competition. Additionally, Mr. Martin contended that
some putative class members suffered damage to their computer systems as a
result of their use of SoftRAM. For himself and the putative plaintiff class,
Mr. Martin sought damages of an unspecified amount, punitive damages, injunctive
relief, restitution, costs and attorney's fees.
THE LEVY AND MARTIN ACTIONS WERE SETTLED TOGETHER AND WERE DISMISSED
WITH PREJUDICE BY THE SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR ALAMEDA
COUNTY ON MARCH 14, 1996. UNDER THE TERMS OF THE SETTLEMENT, THE PLAINTIFFS
RECEIVED $250 EACH FOR A TOTAL OF $8,750 AND THE COMPANY AGREED TO PAY
ATTORNEY'S FEES.
The Company was named as defendant in a putative class action lawsuit
commenced by James Marotto on December 7, 1995 in the Court of Common Pleas of
Lackawanna County, Pennsylvania. In Mr. Marotto's complaint, the putative
plaintiff class on whose behalf the action was brought was described as
including all persons in the United States who purchased SoftRAM, SoftRAM95 or
any updates thereof between March 1, 1995 and November 13, 1995, for use on any
personal computer utilizing any generation of Windows software, and was
estimated in the complaint to include more than 600,000 members. Mr. Marotto
contended that the Company breached certain warranties relating to SoftRAM, made
fraudulent misrepresentations concerning SoftRAM and SoftRAM95, and that the
Company's marketing and sale of SoftRAM and SoftRAM95 comprised unlawful conduct
of trade or commerce. For himself and the putative
<PAGE> 17
plaintiff class, Mr. Marotto sought damages of an unspecified amount (but at
least $100 per class member) including punitive damages, costs and attorney's
fees. THE PARTIES REACHED A SETTLEMENT AND THE PLAINTIFF'S REQUEST FOR DISMISSAL
WITH PREJUDICE WAS GRANTED ON APRIL 12, 1996. PURSUANT TO THE PARTIES'
SETTLEMENT, THE COMPANY HAS PAID THE REPRESENTATIVE NAMED PLAINTIFF $2,000 AND
WILL PAY ATTORNEY'S FEES.
PRELIMINARILY SETTLED ACTIONS
The Company and a software retailer were named as defendants in a
putative class action lawsuit commenced by Michael R. Seigel on December 21,
1995 in the Circuit Court of Cook County, Illinois. In Mr. Seigel's complaint,
the putative plaintiff class on whose behalf the action was brought was
described as including all purchasers, owners, lessees, lessors or users of
SoftRAM95 in the United States and the world from its date of introduction. The
complaint estimated that 700,000 copies of SoftRAM95 had been sold. Mr. Seigel
contended that the Company breached certain warranties relating to SoftRAM,
breached its contract with purchasers and that the Company's and the software
retailer's advertising and promotion of SoftRAM was an unfair method of
competition, and that they made misrepresentations. Additionally, Mr. Seigel
contended that the use of the Company's product caused the loss of data on his
personal computer and the system to crash. For himself and the putative
plaintiff class, Mr. Seigel sought damages of an unspecified amount, injunctive
relief, costs and attorney's fees. THE COMPANY HAS ENTERED INTO A SETTLEMENT IN
THIS CASE, WHICH THE COURT PRELIMINARILY APPROVED FEBRUARY 13, 1996. HEARING ON
THE FINAL APPROVAL OF THIS SETTLEMENT IS SET FOR JUNE 24, 1996. ONCE FINALLY
APPROVED THE NAMED PLAINTIFF AND CLASS MEMBERS MAY BE ENTITLED TO UP TO $400,000
IN ATTORNEY'S FEES AND THE BENEFITS UNDER THE SETTLEMENT AGREEMENT, WHICH ARE
PRIMARILY AN UPGRADE OR REFUND ON SOFTRAM PRODUCTS AND COUPONS FOR SYNCRONYS
PRODUCTS.
The Company has been in contact with the New York Regional Office of
the Federal Trade Commission which made an inquiry into the SoftRAM product
line. THE COMPANY COOPERATED WITH THE FTC'S INQUIRIES AND RECENTLY ENTERED INTO
A CONSENT DECREE WITH THE FTC. THE CONSENT DECREE WILL BECOME FINAL ONLY UPON
COMMISSION APPROVAL, WHICH BY LAW MAY ONLY OCCUR AFTER PUBLICATION IN THE
FEDERAL REGISTER AND AN OPPORTUNITY FOR PUBLIC COMMENT.
PENDING ACTIONS
The Company, a retailer and a software company have been named as
defendants in a putative class action commenced on February 8, 1996 by Nathaniel
O'Seep in the Fifth Judicial Circuit in Marion County, Florida. In Mr. O'Seep's
complaint, the putative plaintiff class on whose behalf the action is brought is
described as including all persons and entities in the United States that
presently own SoftRAM, which is estimated in the complaint to include
approximately 700,000 members. The complaint excludes certain persons from the
putative class, including the defendants, persons who have retained counsel
prior to the date of filing this complaint, persons who timely opt out and
persons who have given valid reasons to all of the defendants. Mr. O'Seep
contends that the defendants breached certain warranties relating to SoftRAM,
that the Company and the software company made misrepresentations and failed to
disclose material facts in marketing and selling SoftRAM and that the Company
breached its contract with purchasers. The complaint also alleges that the
Company's activities constitute a violation of civil RICO under a Florida
statute. Additionally, Mr. O'Seep contends that the use of the Company's product
caused damage to the user's computer system. For himself and the putative
plaintiff class, Mr. O'Seep is seeking damages of an unspecified amount, costs
and attorney's fees.
The Company and several software retailers have been named as
defendants in an action commenced on April 1, 1996 by Henri Carnal in the
Superior Court of the State of California for San Francisco County. Mr. Carnal
contends that the defendants engaged in deceptive, unfair and unlawful business
practices in connection with marketing SoftRAM95. Mr. Carnal is seeking
injunctive relief, restitution, costs and attorney's fees.
<PAGE> 18
The Company and certain current or former officers of the Company
(Daniel G. Taylor, Rainer Poertner, Wendell Brown and Kevin P. O'Neill) have
been named as defendants in a putative class action lawsuit commenced by Julie
Marshall on December 14, 1995 in the United States District Court, Central
District of California, Western Division. In Ms. Marshall's complaint, the
putative plaintiff class on whose behalf the action is brought is described as
all persons who purchased Syncronys common stock between June 1, 1995 and
December 7, 1995, inclusive, and suffered damages as a result thereof which is
estimated in the complaint to be hundreds of persons. Excluded from the putative
class are the named defendants, members of the immediate families of each
defendant, any entity in which any defendant has a controlling interest, and the
legal representatives, heirs, successors, predecessors in interest, or assigns
of any of the defendants. Ms. Marshall contends that the individual defendants
engaged in various forms of misconduct in violation of the Securities Exchange
Act of 1934 and a Rule of the Securities Exchange Commission promulgated
thereunder, including misrepresenting the readiness and abilities of Syncronys'
products, in order to inflate the market price of Syncronys common stock, which
resulted in the putative class members purchase of Syncronys common stock at
artificially inflated prices. For herself and the putative plaintiff class, Ms.
Marshall is seeking damages of an unspecified amount, injunctive relief and the
costs and expenses of litigation including attorney's fees.
The Florida Attorney General's Office has initiated a civil
investigation relating to the SoftRAM products and served a subpoena requesting
documents and information from the Company. The Company has been in contact and
working with that office in an effort to resolve any concerns about SoftRAM.
Although the Company intends to defend the above actions vigorously,
the Company may decide to settle one or more actions in order to limit the
expense and inconvenience associated with the defense. The Company has discussed
settlement in theory in the above actions. The Company cannot predict the
financial impact of the costs of defending these actions, or their settlement,
with any certainty, but believes that these costs to the Company could be
substantial and that the adverse consequences could be severe.
<PAGE> 19
ITEM 5. OTHER INFORMATION.
Sale of Autoship Subsidiary
On January 15, 1996 the Company entered into an agreement with a
British Columbia company (the "Purchaser") to sell the shares in its wholly
owned subsidiary, Autoship Systems Corporation ("Autoship"). This agreement, as
amended February 26, 1996, provides for a purchase price of approximately
$440,000 which is comprised of the forgiveness of an approximately $220,000 note
payable due the purchaser and cash payments over time of approximately $220,000.
The transaction closed on February 29, 1996 and was approved by a committee of
the Company's Board of Directors upon their evaluation of a fairness opinion
issued by an independent investment firm which reviewed and evaluated the
agreement and amendment.
The Purchaser is wholly owned by Dr. Lloyd Baron, an outside member of
the Company's Board of Directors who is not part of the committee of the
Company's Board of Directors which approved this transaction. In March 1995, the
Purchaser sold the Company an 80% interest in Autoship for consideration of
approximately $245,000, comprised mainly of an approximately $220,000 note
payable. Also in March 1995, the remaining 20% interest in Autoship was
purchased from an unaffiliated third party for approximately $120,000 in a
convertible debenture which was subsequently converted to common stock. In March
1995, Daniel G. Taylor, currently an officer and director of the Company, and
Kevin O'Neill, a former officer of the Company , had an interest in the
Purchaser. These interests were subsequently acquired by Dr. Baron.
The Company believes that this transaction is in the best interests of
the Company and its shareholders. Autoship is not a strategic part of the
Company's business nor has it been a significant source of revenues, profits or
cash for the Company. During the first eight month period of FY 1996 Autoship
contributed approximately 3.8% of the Company's revenues and 1.3% of the
Company's losses, and generated a net use of cash of approximately $14,000.
Moreover, the Company believes that this transaction will improve its financial
condition via the forgiveness of debt and the cash receipts over time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: None filed with this report
(b) Reports filed on Form 8-K: None filed by the Company during the quarter for
which this report is filed.
<PAGE> 20
SIGNATURES
In accordance with the requirements of the Exchange Act, the Issuer has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SYNCRONYS SOFTCORP
(REGISTRANT)
Date: May 14, 1996 /S/ Barbara Velline
---------------------------
Barbara Velline
Vice President - Finance & Controller
(Chief Financial Officer)
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S STATEMENTS OF OPERATIONS AND BALANCE SHEET AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<CURRENCY> U.S. DOLLARS
<S> <C>
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<PERIOD-START> JUL-01-1995
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<EXCHANGE-RATE> 1
<CASH> 1,932,363
<SECURITIES> 0
<RECEIVABLES> 61,669
<ALLOWANCES> 0
<INVENTORY> 327,500
<CURRENT-ASSETS> 3,137,122
<PP&E> 161,670
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<COMMON> 1,382
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<SALES> 13,708,179
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<CGS> 1,713,163
<TOTAL-COSTS> 14,057,356
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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