<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: SEPTEMBER 30, 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 November 7, 1996 there were 16,604,614 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: 15
NO EXHIBITS ARE FILED WITH THIS REPORT
<PAGE> 2
SYNCRONYS SOFTCORP
FORM 10-QSB
Table of Contents
PART I
FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations
Three months ended September 30, 1995 and 1996 . . . . . . . . . . . . . 4
Statements of Cash Flows
Three months ended September 30, 1996 and 1995 . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . 7
PART II
OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNCRONYS SOFTCORP
Balance Sheet (unaudited)
September 30, 1996
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 6,574,405
Trade accounts receivable, net 147,235
Other receivables 2,000,000
Income tax refund receivable 566,739
Inventories 57,441
Prepaid expenses and other current assets 561,737
------------
Total current assets 9,907,557
Property and equipment, at cost, net 123,361
Note receivable, excluding current portion 146,670
Unamortized debt issuance costs, excluding current portion 794,689
Amounts due from related parties, principally shareholders 148,500
------------
$ 11,120,777
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 963,116
Accrued expenses 4,616,622
Product recall liability 1,123,000
------------
Total current liabilities 6,702,738
------------
Convertible debentures 11,275,180
Stockholders' deficiency:
Common stock, $.0001 par value. Authorized 75,000,000
shares; issued and outstanding 15,019,293 shares 1,502
Additional paid in capital 5,076,181
Accumulated deficit (11,934,824)
------------
Total stockholders' deficiency (6,857,141)
------------
$ 11,120,777
============
</TABLE>
See accompanying notes to financial statements
<PAGE> 4
SYNCRONYS SOFTCORP
Statements of Operations (unaudited)
Three Months Ended September 30, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Net revenues $10,543,174 127,192
Cost of revenues 1,304,175 11,960
----------- -----------
Gross profit 9,238,999 115,232
----------- -----------
Operating expenses:
Research and development 224,403 467,565
Marketing and selling 1,796,366 449,901
General and administrative 359,392 482,140
----------- -----------
Total operating expenses 2,380,161 1,399,606
----------- -----------
Operating profit (loss) 6,858,838 (1,284,374)
Other income (expense) 12,757 (303,986)
----------- -----------
Income (loss) before income taxes 6,871,595 (1,588,360)
Income taxes 2,748,638 -
----------- -----------
Net income (loss) $ 4,122,957 (1,588,360)
=========== ===========
Net earnings (loss) per share $ .29 (.11)
=========== ===========
Weighted average number of common shares and common share
equivalents used in computation of net earnings
(loss) per share. 14,411,159 15,019,293
=========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE> 5
SYNCRONYS SOFTCORP
Statements of Cash Flows (unaudited)
Three Months Ended September 30, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,122,957 $(1,588,360)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation 15,379 11,215
Amortization of debt issuance costs - 51,736
Accrued interest on debentures - 331,862
Non-cash expense related to the issuance of stock options - 74,133
Changes in operating assets and liabilities:
Trade accounts receivable (4,750,228) (18,808)
Other receivables - 242,236
Income tax refund receivable - 336,373
Inventories (17,267) (57,441)
Prepaid expenses and other current assets (632,471) (82,410)
Trade accounts payable 597,365 (77,355)
Accrued expenses 464,927 (425,576)
Product recall liability - (2,238,757)
Taxes payable 2,071,906 -
----------- -----------
Net cash provided (used) in operating activities 1,872,568 (3,441,152)
----------- -----------
Net cash used in investing activities - capital expenditures (27,985) (11,829)
----------- -----------
Net cash used in financing activities:
Principal payments on long-term debt (5,063) -
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,839,520 (3,452,981)
Cash and cash equivalents at beginning of period 705,966 10,027,386
----------- -----------
Cash and cash equivalents at end of period $ 2,545,486 $ 6,574,405
=========== ===========
Supplementary disclosures of cash flow information:
Cash paid during the period for income taxes $ 715,647 -
Cash paid during the period for interest - -
Supplemental disclosure of non-cash activities:
Convertible debentures including accrued interest and
unamortized debt issuance costs converted to
equity during period - $ 1,940,752
</TABLE>
See accompanying notes to financial statements
<PAGE> 6
SYNCRONYS SOFTCORP
Notes to Financial Statements (unaudited)
September 30, 1995 and 1996
(1) BASIS OF PRESENTATION
The condensed financial statements of Syncronys Softcorp (the
"Company") for the three months ended September 30, 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, 1996. The results of
operations for the three months ended September 30, 1996 are not
necessarily indicative of the results for the entire year ending June
30, 1997.
(2) NET EARNINGS (LOSS) PER SHARE
Net earnings per share is based on the weighted average number of
common and commmon equivalent shares outstanding during each period.
Common stock equivalents and convertible debentures have been excluded
from the computation for the quarter ended September 30, 1996, a loss
period, as their inclusion would be anti-dilutive.
<PAGE> 7
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, 1996. 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, 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 develops and markets software products. Products
currently in retail distribution are: RAM Charger 3.0 which provides a
performance boost for the Mac operating system through intelligent and more
efficient memory utilization and dynamic memory allocation; MacAccess 2.0 which
enables PCs to read write and format Mac floppy discs and most common removable
media in Windows 3.1x and 95; and WinKrypt, an advanced Windows 95 security
suite allowing the user to lock data, secure e-mail and search for intruders.
RAM Charger 3.0 and MacAccess 2.0 began shipping late in the first quarter of
FY 1997 and WinKrypt began shipping in early November 1996. The following
products are scheduled for introduction and shipping before Christmas 1996:
Burn It!, an enhanced file deletion utility for Windows 95 and MacIntosh System
7x that overwrites the sector multiple times effectively barring its retrieval;
EyeCatcher, a Windows 95 program that turns a video or PC camera into a
motion-detection security system providing instant, real-time fax and e-mail
"alert" delivery and/ or replay of recorded images triggered by custom
pre-programmed cues or timing; CD-Speedster (PC) and CD-Speedster (Mac) which
increase speed and performance on CD-ROMs under Windows 95 and 3.1x, and under
MacIntosh System 7x by incorporating proprietary caching technology; and
SoftRAM3.0 a system performance utility designed to boost, compress RAM and
monitor system performance for Windows 95 and 3.1x. However, there can be
no assurance that these new products will be released by the Company or if
released, that such release will be on a timely basis.
BACKGROUND
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.
<PAGE> 8
The Company released SoftRAM for Windows 3.1x in late May of 1995,
and SoftRAM95 for Windows 95 and 3.1x in August of 1995. This program was
designed to increase the Random Access Memory ("RAM") that a personal computer
("PC") can make available to Windows applications through proprietary memory
compression technology which allocates a PC's physical RAM in a manner that
optimizes space and speed. A significant portion of the Company's net revenues
were derived from SoftRAM during FY 1996 (approximately 96%). However, the
Company announced on October 20, 1995 that it had identified a problem with
SoftRAM95, the net result of which is that RAM compression was not being
delivered to the Windows 95 operating system. The Company also announced a
comprehensive consumer program which included refunds, extended toll-free
customer assistance and a program to re-sticker all product in the retail
channel informing consumers that SoftRAM95 was suitable for Windows 3.1x 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 and initiated the recall of SoftRAM95 from
the retail channel.
The Company's development team is working on a new version of SoftRAM,
to be known as SoftRAM3.0, a system performance utility which is designed to
boost, compress RAM and monitor system performance for Windows 95 and Windows
3.1x (see "Product Development", below). However, there can be no assurance
that SoftRAM3.0 or other new products will be released by the Company on a
timely basis or that, if released, these products will achieve any significant
degree of market acceptance, or that such acceptance, if attained, will be
sustained for any significant period. Failure to complete or lack of demand
for SoftRAM3.0 or other new products would have a material adverse effect upon
the Company and such adverse effect would be severe (see "Liquidity and Capital
Resources", below).
FLUCTUATIONS IN OPERATING RESULTS
The Company generated a significant operating loss in the first
quarter of FY 1997 and expects to generate ongoing losses, until such time, if
any, new products are released and accepted in the marketplace. There can be
no assurance that new products will be released by the Company, or if released
that such release will be on a timely basis; or that such new products will
achieve any degree of market acceptance or that such acceptance will be
sustained for any significant period; or that they will be profitable or
profitability, if any, can be sustained. Although the Company's expenses 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 until
such time, if any, as new products are released and accepted by the
marketplace. As well, 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 and there can be no assurance that the Company will be
successful in so responding. Failure to complete new products on a timely
basis or if new products do not achieve a significant degree of market
acceptance, could have adverse consequences upon the Company which could be
severe.
The Company has in the past experienced fluctuations in its quarterly
operating results and expects such fluctuations to continue, to varying and
unpredictable degrees, in the future. Factors that contribute to fluctuations
in the Company's quarterly operating results include the timing of new product
introductions, competitive offerings, product shipments, product returns,
promotional programs, seasonality and general economic conditions. In
addition, quarterly operating results are affected by changes in market
acceptance and sales of existing products. Historically, seasonality has not
been a significant factor for the Company and the Company generally believes
that its operating results for any quarter are not necessarily indicative of
results for any future period.
<PAGE> 9
Moreover, because the Company generally ships its software products
within a short period after receipt of an order, it typically does not maintain
a material backlog of unfilled orders. As a result, revenues in any quarter or
other period are substantially dependent upon orders booked in that period.
Orders booked during any particular period are substantially dependent upon
numerous factors, including the scheduled release of new products and product
enhancements and updates by the Company and its competitors; the release or
anticipated release of complementary products by other software suppliers;
market acceptance of such products, enhancements and updates; delays in
customer orders in anticipation of industry developments and numerous other
factors, many of which are beyond the Company's control.
Accordingly, the Company's revenues are difficult to forecast and may
vary significantly from quarter to quarter. In addition, the Company's expense
levels for each quarter are, to a significant extent, fixed in advance based
upon the Company's expectation as to the net revenues to be generated during
that quarter. The Company therefore is generally unable to adjust spending in
a timely manner to compensate for any unexpected shortfall in net revenues.
Further as a result of these factors any delay in product introductions,
whether due to internal delays or delays caused by third party difficulties, or
any significant shortfall in demand in relation to the Company's expectations
would have an almost immediate adverse impact on the Company's operating
results and on its ability to maintain profitability in a quarter.
CONSOLIDATED RESULTS OF OPERATIONS
Net Revenues
<TABLE>
<CAPTION>
FY 1996 Decrease FY 1997
<S> <C> <C> <C> <C>
Net Revenues First Quarter $10,543,174 >100 % $127,192
</TABLE>
During FY 1996, the Company derived substantially all of its software
revenues from sales of SoftRAM and SoftRAM95 to software distributors, computer
superstores and mass merchandisers in North America. Revenues during the first
quarter of FY 1996 were primarily attributable to the introduction of SoftRAM
which began shipping in May of 1995 and SoftRAM95 which began shipping in
August 1995. Sales for the first quarter of FY 1997 were negligible as the
Company released two products late in the quarter - RAM Charger 3.0 and
MacAccess 2.0 - the first products released since the Company's recall of
SoftRAM95 (see "Overview", above). The Company anticipates recognizing
relatively little revenues as compared to the prior year until such time, if
any, new products are released and gain market acceptance.
Cost of Revenues
<TABLE>
<CAPTION>
FY 1996 Decrease FY 1997
<S> <C> <C> <C> <C>
Cost of Revenues First Quarter $1,304,175 >100% $11,960
Percentage of Net Revenues 12% 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
decreased to 8% during FY 1997, from 12% in FY 1996, due in part to a change in
third party manufacturers for the Company's software products. The overall
decrease in the cost of revenues during the first quarter of FY 1997 is
directly attributable to the decrease in net revenues.
<PAGE> 10
Research and Development Expenses
<TABLE>
<CAPTION>
FY 1996 Increase FY 1997
<S> <C> <C> <C> <C>
Research and Development
Expenses First Quarter $224,403 >100% $467,565
Percentage of Net Revenues 2% >100%
</TABLE>
Research and development expenses increased from $224,403 during the
first quarter of FY 1996 to $467,565 during the first quarter of FY 1997. This
increase is primarily attributable to expenses associated with the development
of several new products and to the increase in the number of research and
development projects. Research and development expenses increased as a
percentage of net revenues during the first quarter, as compared to the prior
year, due to the decrease in revenues for the period. The Company expects
research and development expenses to increase during the second quarter of FY
1997 due to 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 first
quarter of FY 1997, 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 FY 1996 or
1997 have been borne directly by the Company's customers.
Marketing and Selling Expenses
<TABLE>
<CAPTION>
FY 1996 Decrease FY 1997
<S> <C> <C> <C> <C>
Marketing and Selling
Expenses First Quarter $1,796,366 >100% $449,901
Percentage of Net Revenues 17% >100%
</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 were significantly
higher during the first quarter of FY 1996 as compared to the first quarter of
FY 1997 due primarily to expenses associated with the introduction of SoftRAM95
in August of 1995, and due to other expenses required to support net revenues
during the period. Marketing and selling expenses increased as a percentage of
net revenues during the first quarter, as compared to the prior year, due to
the decrease in revenues for the period. The Company anticipates that
additional marketing and selling expenses will be required to support the
launch of new products during FY 1997, particularly through the end of the
second quarter.
General and Administrative Expenses
<TABLE>
<CAPTION>
FY 1996 Increase FY 1997
<S> <C> <C> <C> <C>
General and Administrative
Expenses First Quarter $359,392 >100% $482,140
Percentage of Net Revenues 3% >100%
</TABLE>
General and administrative expenses increased in FY 1997 due primarily
to increases in direct and indirect expenses required to support the increase
in research and development projects, via facilities expansion and the
increased number of support and management staff. General and administrative
expenses increased as a percentage of net revenues during the first quarter, as
compared to the prior year, due to the decrease in revenues for the period.
Although the Company's general and administrative expenses 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 until new products are
released.
<PAGE> 11
Other Income (Expense), Net
<TABLE>
<CAPTION>
FY 1996 Increase FY 1997
<S> <C> <C> <C> <C>
Other Income (Expense), Net First Quarter $12,757 >100% ($303,986)
</TABLE>
Other income and expense for the first quarter of FY 1997 consists
primarily of accrued interest on convertible debentures and the amortization of
the related debt issuance costs, which was partially offset by interest income.
Other income and expense for the first quarter of FY 1996 consists largely of
interest income and expense.
Net Income (Loss)
For the reasons outlined above the Company realized a $1,588,360 net loss
during the first quarter of FY 1997 as compared to net income of $4,122,957
during the first quarter of FY 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $3,452,981 from June 30, 1996 to
September 30, 1996 due primarily to the cash used in operating activities for
the quarter of $3,441,152. Over the same period, the Company's working capital
decreased by only $1,358,523 (from $4,563,342 at June 30, 1996 to $3,204,819 at
September 30, 1996) due primarily to the offsetting effects of the decrease in
current liabilities. 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 the acquisition of Veritas Technology Solutions Ltd.
discussed below (see "Part II - Other Information - Item 5." below for further
information).
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 relatively little revenue and related cash
flows and anticipates this trend will continue until such time, if any, new
products are released and accepted in the marketplace. Management believes
that its existing cash and working capital balances will be sufficient to
meet its working capital needs for the balance of FY 1997. The Company
generally receives cash from sales 60 to 90 days after shipping its product.
Should the receipt of cash from the release of new products exceed this nine
month period the adverse consequences would be severe. The Company evaluates
its liquidity and capital needs on a continuous basis and based on the
Company's requirements and capital market conditions may, from time to time,
raise working capital through additional debt or equity financing. There is no
assurance that such financing will be available in the future to meet
additional 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 new products, or lack of acceptance in the marketplace for
such products if released, or the Company's working capital needs otherwise
exceed its resources, the adverse consequences would be severe. Both the
management of the Company's current growth and the expansion of the Company's
current business involve significant financial risk and require significant
capital investment.
<PAGE> 12
PRODUCT DEVELOPMENT
In addition to RAM Charger 3.0, MacAccess 2.0 and WinKrypt already in
retail distribution, the Company has also licensed and developed several other
new products including Burn It!; EyeCatcher; CD-Speedster (PC);
CD-Speedster(Mac) and SoftRAM3.0 (see "Overview" above, for descriptions of
these products).
Burn It!; EyeCatcher; CD-Speedster (PC) and CD-Speedster(Mac) are
scheduled for release before Christmas 1996. However no assurance can be made
as to when, or if at all, these products will be released into distribution
channels. The Company has not met a series of announced release dates and
targets for SoftRAM3.0 but currently anticipates shipping by Christmas 1996.
The Company has released a beta version of one of the components of SoftRAM3.0
and anticipates releasing a final, internally tested, version at Fall Comdex
1996. However, as the product has not yet been fully tested and verified by
external sources, there can be no assurance as to when, or if at all,
SoftRAM3.0 will be released into distribution channels. Certain of the
Company's distributors and several software retailers have already indicated a
willingness to stock Burn It!; EyeCatcher; CD-Speedster (PC); CD-Speedster(Mac)
and SoftRAM3.0 when and if available.
There can be no assurance that new products will be released by the
Company or if released, that such release will be on a timely basis; or that
any products will achieve any significant degree of market acceptance or that
such acceptance, if attained, will be sustained for any significant period; or
that such products will be profitable or that profitability, if any, will be
sustained. As well, 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 and there can be no assurance that the Company will be
successful in so responding. Failure to complete on a timely basis, or lack of
demand for new products upon completion and distribution, would have a material
adverse effect upon the Company and such adverse effect would be severe.
The Company believes continued investment in research and development
to develop state-of-the-art technology for incorporation into its products is
required if it is to remain competitive in the marketplace. As well, the
Company must also maintain good relations with PC platform, operating system
and peripheral equipment vendors to enable it to develop and market competitive
software products.
The Company depends on the successful development of new products,
including both new titles and the adaptation of existing titles to new
platforms and technologies, to expand its product offerings and to augment
revenues from products introduced in prior years that have declined in revenue
prospects. The Company also depends on upgrades of existing products to
lengthen the life cycle of such products. Finally, the Company must continually
anticipate and adapt its products to emerging personal computer platforms and
environments. If the Company's products become outdated and lose market share,
or if new products or existing product upgrades are not introduced when planned
or do not achieve the revenues anticipated by the Company, the Company's
operating results could be materially adversely affected.
Exclusive of licensing agreements and acquisitions, the length of time
required to develop the Company's products and product upgrades typically
ranges from nine to 24 months, as is common in the software industry. In the
past, the Company has experienced delays in the planned release of new products
or product upgrades from one to 12 months as a result of completing
development, product testing and quality assurance. There can be no assurance
that such delays from the planned product release dates will not occur in the
future. Additionally, there can be no assurance that the Company will be able
to release new products on schedule or that such new products, if released,
will achieve market acceptance. If a product's release is delayed, it may miss
an important selling season and the Company's expected return on its investment
in the product could be materially delayed or diminished.
<PAGE> 13
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
SETTLED ACTIONS
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 THE COMPANY AND
CERTAIN OF ITS OFFICERS (RAINER POERTNER, DANIEL G. TAYLOR AND WENDELL BROWN)
ENTERED INTO A CONSENT DECREE WITH THE FTC PURSUANT TO WHICH THEY AGREED TO
COMPLY WITH FTC REGULATIONS IN RESPECT TO ALL FUTURE PRODUCTS. THE CONSENT
DECREE BECOME FINAL ON OCTOBER 7, 1996.
PRELIMINARILY SETTLED ACTIONS
The Company and certain current or former directors and officers of
the Company (Daniel G. Taylor, Rainer Poertner, Wendell Brown and Kevin P.
O'Neill) were 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 was
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 were 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 contended 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 sought damages of an unspecified amount,
injunctive relief and the costs and expenses of litigation including attorney's
fees. THE COMPANY HAS ENTERED INTO A SETTLEMENT IN THIS CASE, WHICH THE COURT
PRELIMINARILY APPROVED NOVEMBER 4, 1996. HEARING ON THE FINAL APPROVAL OF THIS
SETTLEMENT IS SET FOR JANUARY 27, 1997. ONCE FINALLY APPROVED, PURSUANT TO THE
TERMS OF THE SETTLEMENT WITHOUT ANY ADMISSION OF LIABILITY WHATSOEVER, THE
DEFENDANTS WOULD PAY $3.25 MILLION IN FULL SATISFACTION OF THE ACTION,
INCLUSIVE OF ATTORNEYS FEES AND ALL COSTS ASSOCIATED WITH THE ADMINISTRATION OF
THE SETTLEMENT. THE COMPANY'S PRIMARY DIRECTOR'S AND OFFICER'S INSURANCE
CARRIER HAS AGREED TO CONTRIBUTE UP TO $2 MILLION TO THE SETTLEMENT. THE
COMPANY'S EXCESS DIRECTOR'S AND OFFICER'S INSURANCE CARRIER HAS AGREED TO
CONTRIBUTE UP TO $1.25 MILLION TO THE SETTLEMENT, BUT HAS PRESERVED ITS
COVERAGE DEFENSES AND BROUGHT A DECLARATORY ACTION AGAINST THE COMPANY ON
OCTOBER 1, 1996 TO RECOVER ITS CONTRIBUTIONS (SEE "PENDING LITIGATION" BELOW).
PURSUANT TO THE COURT'S PRELIMINARY APPROVAL OF THE SETTLEMENT, THE INSURERS
ARE TO FUND THE SETTLEMENT ACCOUNT BY NOVEMBER 14, 1996.
The Florida Attorney General's Office 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. THE FLORIDA
ATTORNEY GENERAL'S OFFICE AND THE COMPANY HAVE BEEN ENGAGED IN SETTLEMENT
DISCUSSIONS. THE PARTIES ARE CONTINUING WORK ON THE SETTLEMENT.
<PAGE> 14
PENDING ACTIONS
The Company and certain current or former directors and officers of
the Company (Daniel G. Taylor, Rainer Poertner, Wendell Brown and Kevin
O'Neill) have been named as defendants in a complaint for declaratory relief
filed on October 1, 1996 in United States District Court for the Central
District of California by Agricultural Excess & Surplus Insurance Company
("AESIC"). The complaint seeks a declaration that AESIC is not obligated under
its directors and officers' insurance policy to indemnify any of the defendants
for any amounts incurred with the Marshall, Martin, Carnal, Levy, O'Seep,
Seigel and Marotto matters. AESIC also seeks a declaration that it is entitled
to recoup all amounts expended to fund the settlement of the Marshall
litigation.
The Company intends to defend the above action vigorously, and to file
a counterclaim for bad faith against AESIC. The Company cannot predict the
financial impact of the costs of this litigation with any certainty, but
believes that such costs could be substantial.
ITEM 5. OTHER INFORMATION.
ACQUISITION OF SOFTWARE DEVELOPMENT COMPANY
The Company recently entered into an agreement to acquire an Israeli
software developer, Veritas Technology Solutions Ltd., whose development
expertise and product roster is complimentary to the Company's development and
marketing strengths. This transaction would provide for a share swap whereby
the developer would become a wholly owned subsidiary of the Company. This
transaction is subject to due diligence, various governmental approvals and
other conditions, and accordingly, there can be no assurance that this
transaction will be consummated.
RESTRUCTURING TERMS OF CONVERTIBLE DEBENTURES
The Company amended $7.81 million of the $10 million in convertible
debentures outstanding as of October 14, 1996. Under the terms of that
amendment, $7.81 million of the debentures are prohibited from being converted
into Syncronys common stock for 150 days. Thereafter, fifteen percent of such
$7.81 million of debentures may convert into Syncronys common stock in each
month following the expiration of the 150 day period, with the last such
debentures convertible only in the month beginning 331 days after the amendment
became effective. Additionally, the fixed-price element of the conversion
formula has been changed to $3.50, and the corresponding warrant strike price
has been changed to $5.22. All other terms remain unchanged.
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> 15
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: November 14, 1996 /s/ Barbara Velline
_______________________________
Barbara Velline
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<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>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 6,574,405
<SECURITIES> 0
<RECEIVABLES> 2,713,974
<ALLOWANCES> 0
<INVENTORY> 57,441
<CURRENT-ASSETS> 9,907,557
<PP&E> 123,361
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,120,777
<CURRENT-LIABILITIES> 6,702,738
<BONDS> 11,275,180
0
0
<COMMON> 1,502
<OTHER-SE> (6,858,743)
<TOTAL-LIABILITY-AND-EQUITY> 11,120,777
<SALES> 127,192
<TOTAL-REVENUES> 127,192
<CGS> 11,960
<TOTAL-COSTS> 1,399,606
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 303,986
<INCOME-PRETAX> (1,588,360)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,588,360)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,588,360)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> 0
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