<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
---------------
Amendment No. 1
---------------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: DECEMBER 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 February 7, 1997 there were 19,260,401 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: 32
EXHIBITS ARE INDEXED AT PAGE 16
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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 December 31, 1995 and 1996 . . . . 4
Six months ended December 31, 1995 and 1996 . . . . . 5
Statement of Cash Flows
Six months ended December 31, 1995 and 1996 . . . . . 6
Notes to Financial Statements . . . . . . . . . . . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . 8
PART II
OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . 17
EXPLANATORY NOTE
This 10-QSB/A is being filed to amend the report on Form 10-QSB for the
period ended December 31, 1996 in response to comments received from the SEC
with regards to a confidential treatment request for portions of Exhibit 10.1.
The amended report reflects amended disclosure items only, see "Part II" below.
There are no changes to the financial statements.
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<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNCRONYS SOFTCORP
Balance Sheet (unaudited)
December 31, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,525,682
Trade accounts receivable, net 176,765
Income tax refund receivable 566,739
Inventories 153,093
Prepaid expenses and other current assets 900,565
------------
Total current assets 6,322,844
Property and equipment, at cost, net 122,115
Note receivable, excluding current portion 97,780
Unamortized debt issuance costs, excluding
current portion 451,499
Goodwill 400,000
Amounts due from related parties,
principally shareholders 148,500
------------
$ 7,542,738
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Trade accounts payable $ 1,166,952
Accrued expenses 2,111,220
Product recall liability 845,156
------------
Total current liabilities 4,123,328
------------
Convertible debentures 9,395,865
Stockholders' deficiency:
Common stock, $.0001 par value. Authorized 75,000,000
shares; issued and outstanding 17,233,344 shares 1,723
Additional paid in capital 7,548,988
Accumulated deficit (13,527,166)
------------
Total stockholders' deficiency (5,976,455)
------------
$ 7,542,738
============
</TABLE>
See accompanying notes to financial statements
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<PAGE> 4
SYNCRONYS SOFTCORP
Statements of Operations (unaudited)
Three Months Ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Net revenues $ 2,776,814 606,020
Cost of revenues 384,783 133,618
----------- ----------
Gross profit 2,392,031 472,402
----------- ----------
Operating expenses:
Research and development 353,940 741,820
Marketing and selling 3,725,745 1,082,731
General and administrative 766,200 719,066
Nonrecurring Charge - Recall 2,500,000 -
----------- ----------
Total operating expenses 7,345,885 2,543,617
----------- ----------
Operating loss (4,953,854) (2,071,215)
Other income and expenses:
Interest income 41,660 74,803
Interest expense (840) (261,822)
Income from insurance settlement - 750,000
Other, net - (84,108)
----------- ----------
Total other income and expenses 40,820 478,873
----------- ----------
Loss before income taxes (4,913,034) (1,592,342)
Income tax (benefit) expense (1,971,023) -
----------- ----------
Net loss $(2,942,011) (1,592,342)
=========== ==========
Net loss per share $ (.21) (.09)
=========== ==========
Weighted average number of common shares and
common share equivalents used in computation
of net loss per share. 14,411,159 17,233,344
=========== ==========
</TABLE>
See accompanying notes to financial statements
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<PAGE> 5
SYNCRONYS SOFTCORP
Statements of Operations (unaudited)
Six Months Ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Net revenues $13,319,988 733,212
Cost of revenues 1,688,958 145,578
----------- ----------
Gross profit 11,631,030 587,634
----------- ----------
Operating expenses:
Research and development 578,343 1,209,385
Marketing and selling 5,522,111 1,532,632
General and administrative 1,125,592 1,201,206
Nonrecurring Charge - Recall 2,500,000 -
----------- ----------
Total operating expenses 9,726,046 3,943,223
----------- ----------
Operating income (loss) 1,904,984 (3,355,589)
Other income and expenses:
Interest income 48,058 154,415
Interest expense (1,525) (593,684)
Income from insurance settlement - 750,000
Other, net 7,044 (135,844)
----------- ----------
Total other income and expenses 53,577 174,887
----------- ----------
Income (loss) before income taxes 1,958,561 (3,180,702)
Income tax expense 777,615 -
----------- ----------
Net income (loss) $ 1,180,946 (3,180,702)
=========== ==========
Net earnings (loss) per share $ .08 (.19)
=========== ==========
Weighted average number of common shares and
common share equivalents used in computation
of net earnings(loss) per share. 14,411,159 17,233,344
=========== ==========
</TABLE>
See accompanying notes to financial statements
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<PAGE> 6
SYNCRONYS SOFTCORP
Statements of Cash Flows (unaudited)
Six Months Ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,180,946 $(3,180,702)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 51,647 158,783
Accrued interest on debentures - 593,684
Non-cash expense related to the issuance
of stock options - 195,518
Other - (157,962)
Changes in operating assets and liabilities:
Trade accounts receivable 1,146,782 (48,338)
Other receivables - 2,242,236
Income tax refund receivable - 336,373
Inventories (299,767) (153,093)
Prepaid expenses and other current assets (278,698) (193,958)
Note receivable - 48,890
Trade accounts payable 909,365 126,481
Accrued expenses (1,407,596) (2,930,978)
Product recall liability 2,500,000 (2,516,601)
Taxes payable (416,994) -
----------- ----------
Net cash provided (used) in operating
activities 3,385,685 (5,479,667)
----------- ----------
Net cash (used) provided by investing activities:
Capital expenditures (195,480) (22,037)
----------- ----------
Net cash used in financing activities:
Principal payments on long-term debt (10,156) -
----------- ----------
Net increase (decrease) in cash and
cash equivalents 3,180,049 (5,501,704)
Cash and cash equivalents at beginning of period 705,966 10,027,386
----------- ----------
Cash and cash equivalents at end of period $ 3,886,015 $4,525,682
=========== ==========
Supplementary disclosures of cash flow information:
Cash paid during the period for income taxes $ 1,015,647 -
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 - $3,892,395
Acquisition of Veritas Technology Solutions Ltd.
- a stock for stock purchase recorded at the
fair market value of shares issued on the
date of issuance - 400,000
</TABLE>
See accompanying notes to financial statements
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<PAGE> 7
SYNCRONYS SOFTCORP
Notes to Financial Statements (unaudited)
December 31, 1995 and 1996
(1) BASIS OF PRESENTATION
The condensed financial statements of Syncronys Softcorp (the "Company")
for the six months ended December 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, 1996. The results of operations for the three months and six months
ended December 31, 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 three and six months ended December 31, 1996, loss
periods, as their inclusion would be anti-dilutive.
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<PAGE> 8
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: (1) 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; (2) 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; (3) WinKrypt, an advanced Windows 95 security suite
allowing the user to lock data, secure e-mail and search for intruders; (4) Burn
It!, an enhanced file deletion utility for Windows 95 and MacIntosh System 7x
that overwrites the sector multiple times effectively barring its retrieval; and
(5) & (6) CD-Speedster (PC) and CD-Speedster (Mac) which increase speed and
performance of CD-ROMs under Windows 95 and 3.1x, and under MacIntosh System 7x
by incorporating proprietary caching technology. RAM Charger 3.0 and MacAccess
2.0 began shipping late in the first quarter of FY 1997. WinKrypt, and Burn It!
began shipping in November 1996. CD-Speedster (PC) and CD-Speedster (Mac) began
shipping in January 1997.
The following products are scheduled for introduction and shipping
before the end of the third fiscal quarter: Windrenalin HD, a patented software
product that adds instant hard drive acceleration to PCs operating under Windows
95; and SoftRAM3.0, a system performance utility designed to accelerate CD-ROM
data access, compress data in RAM and monitor system performance for Windows 95
and 3.1x. In order to focus its resources on the release and development of the
products discussed above, the Company has postponed until the spring the release
date of 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. 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.
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<PAGE> 9
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.
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
accelerate CD-ROM data access, compress data in 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 and
second quarters 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 in relation to net revenues until such time, if any, that new
products are released and gain market acceptance. 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, would 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.
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<PAGE> 10
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.
RESULTS OF OPERATIONS
Net Revenues
<TABLE>
<CAPTION>
FY 1996 (Decrease) FY 1997
------- ---------- --------
<S> <C> <C> <C> <C>
Net Revenues First Six Months $ 13,319,988 (94)% $ 733,212
Second Quarter 2,776,814 (78)% 606,020
</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
six months 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. Revenues for the first six months of FY 1997 were negligible as the
Company released two products late in first quarter (RAM Charger 3.0 and
MacAccess 2.0) and two products in November 1996 (WinKrypt and Burn It!) - 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 Six Months $ 1,688,958 (91)% $145,578
Percent of Net Revenues 13% 20%
Second Quarter $ 384,783 (65)% $133,618
14% 22%
</TABLE>
Cost of revenues consists of direct manufacturing costs and royalty
expenses for the Company's software products. Cost of revenues as a percentage
of net revenues increased to 20% during FY 1997, from 13% in FY 1996, due
primarily to royalty expenses associated with certain of the Company's software
products. No royalty expenses were incurred during FY 1996 The overall
decrease in the cost of revenues during the first six months of FY 1997 is
directly attributable to the decrease in net revenues.
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<PAGE> 11
Research and Development Expenses
<TABLE>
<CAPTION>
FY 1996 Increase FY 1997
------- -------- -------
<S> <C> <C> <C> <C>
R & D Expenses First Six Months $ 578,343 >100% $1,209,385
Percent of Net Revenues 4% >100%
Second Quarter $ 353,940 >100% $ 741,820
13% >100%
</TABLE>
Research and development expenses increased from $578,343 during the
first six months of FY 1996 to $1,209,385 during the first six months 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 six months, as compared to the
prior year, due to the decrease in revenues for the period. The Company expects
research and development expenses will be maintained near the current level for
the balance of FY 1997 due to the number of research and development staff and
projects and the acquisition of Veritas Technology Solutions Ltd. (see "Part II
- - Other Information - Item 5." below for further information).
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 second
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>
M & S Expenses First Six Months $ 5,522,111 (72)% $ 1,532,632
Percent of Net Revenues 41% >100%
Second Quarter $ 3,725,745 (71)% $ 1,082,731
134% >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 six months of FY 1996 as compared to the first six
months of FY 1997 due primarily to expenses associated with the introduction of
SoftRAM95 in August of 1995 and related marketing expenses throughout the
period. Marketing and selling expenses increased as a percentage of net
revenues during the first six months of FY 1997, as compared to the prior year,
due to the decrease in revenues for the period. The Company anticipates that
significant marketing and selling expenses will be required to support the
launch of new products during the balance of FY 1997.
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<PAGE> 12
General and Administrative Expenses
<TABLE>
<CAPTION>
Increase
FY 1996 (Decrease) FY 1997
------- ---------- -------
<S> <C> <C> <C> <C>
G & A Expenses First Six Months $1,125,592 7% $1,201,206
Percent of Net Revenues 8% >100%
Second Quarter $ 766,200 (6)% $ 719,066
28% >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 six months
of FY 1997, 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 in relation to net revenues until such time, if any, that new products
are released and gain market acceptance.
Other Income (Expense), net
<TABLE>
<CAPTION>
FY 1996 Increase FY 1997
------- --------- --------
<S> <C> <C> <C> <C>
Other Income (Expense), First Six Months $53,577 >100% $174,887
net
Second Quarter 40,820 >100% 478,873
</TABLE>
Other income and expense for the first six months of FY 1997 consists
primarily of interest income and an insurance settlement, which were partially
offset by accrued interest on convertible debentures and the amortization of
the related debt issuance costs. Other income and expense for the first six
months of FY 1996 consists largely of interest income and expense.
Net Income (Loss)
For the reasons outlined above the Company realized a $3,180,702 net loss
during the first six months of FY 1997 as compared to net income of $1,180,946
during the first six months of FY 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $5,501,704 from June 30, 1996 to
December 31, 1996 due primarily to the cash used in operating activities for
the six month period of $5,479,667. Over the same period, the Company's
working capital decreased by only $2,363,826 (from $4,563,342 at June 30, 1996
to $2,199,516 at December 31, 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 those discussed below (see "Part II - Other
Information - Item 5." for further information).
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<PAGE> 13
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 six 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. The generation of the
Company's current growth and the expansion of the Company's current business
involve significant financial risk and require significant capital investment.
PRODUCT DEVELOPMENT
In addition to RAM Charger 3.0, MacAccess 2.0, WinKrypt, Burn It! and
CD-Speedster (PC) & CD-Speedster(Mac) already in retail distribution, the
Company has also developed and licensed several other new products including
Windrenalin HD, SoftRAM3.0 and EyeCatcher (see "Overview" above, for
descriptions of these products).
Windrenalin HD and SoftRAM3.0 are scheduled for release before the end
of the third fiscal quarter. The Company has targeted a spring release date
for EyeCatcher. 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
previously announced release dates and targets for SoftRAM3.0. The Company has
completed the Windows 3.1 component of SoftRAM3.0 and posted it as a patch file
on its website for previous SoftRAM and SoftRAM95 (W3.1) users only. However,
the Windows 95 component of the product has not yet been fully tested and
verified by external sources. Accordingly, 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 Windrenalin HD, SoftRAM3.0 and
EyeCatcher 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 competitive software
products.
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The Company depends on the successful development of new products,
including 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 15 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 lose
market position and the Company's expected return on its investment in the
product could be materially delayed or diminished.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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
APPROVED JANUARY 27, 1997. PURSUANT TO THE TERMS OF THE SETTLEMENT WITHOUT ANY
ADMISSION OF LIABILITY WHATSOEVER, THE DEFENDANTS PAID $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 CONTRIBUTED $2 MILLION TO THE
SETTLEMENT. THE COMPANY'S EXCESS DIRECTOR'S AND OFFICER'S INSURANCE CARRIER
CONTRIBUTED $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).
PRELIMINARILY SETTLED ACTIONS
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.
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 (see the Company's Annual Report on 10-KSB for its
fiscal year end June 30, 1996 "Item 3 - Legal Proceedings" for a detailed
discussion of each of these matters). AESIC also seeks a declaration that it
is entitled to recoup all amounts expended to fund the settlement of the
Marshall litigation (see "Settled Actions" above).
The Company intends to defend the above action vigorously and has
filed a counterclaim for bad faith against AESIC and a third party complaint
against the brokers. The Company cannot predict the financial impact of the
costs of this litigation with any certainty, but believes that such costs could
be substantial.
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ITEM 2. CHANGES IN SECURITIES
During the quarter ended December 31, 1996 under the Company's 1995
Stock Option Plan (the "Plan") the Company granted incentive stock options to
purchase an aggregate number of 190,000 shares of Common Stock to several
employees and an officer and non-qualified stock options to purchase an
aggregate number of 140,000 shares of Common Stock to consultants to the Company
and an officer. All options granted under the Plan during the quarter ended
December 31, 1996 have been granted at exercise prices equal to the fair market
value at the date of grant with vesting provisions at varying intervals through
December 31, 1998.
Additionally, during the quarter ended December 31, 1996 the Company
granted 205,000 options to non-employees in exchange for certain product
licensing agreements and services. All options granted have been granted at
exercise prices equal to the fair market value at the date of grant with
vesting provisions varying through December 2001 based primarily on the
attainment of various contractual performance factors.
ITEM 5. OTHER INFORMATION.
ACQUISITION OF SOFTWARE DEVELOPMENT COMPANY
On December 5, 1996, the Company issued 400,000 shares of its Common
stock, $.0001 par value, pursuant to Regulation S to the shareholders of
Veritas Technology Solutions Ltd. ("Veritas"), an Israeli software developer
whose development expertise and product roster is complimentary to the
Company's development and marketing strengths. The shares were issued as
consideration for the acquisition of 100% of the shares outstanding of Veritas
pursuant to a Share Exchange Agreement among the Company, Veritas and the
shareholders of Veritas. Pursuant to the terms of the agreement, half of the
shares issued in conjunction with the acquisition may not be sold prior to
January 27, 1998.
The Company accounted for this transaction as a purchase. The fair
value of the shares on the date of issuance were recorded as goodwill subject
to the Company's full evaluation of the assets acquired, and will be amortized
over no more than a five year period. Final closing of this transaction took
place on January 27, 1997. There can be no assurance that the Company will
generate revenues or profits as a result of this acquisition.
LICENSING AGREEMENT WITH ACCELERATION SOFTWARE
The Company has recently entered into a licensing agreement with
Acceleration Software International Corporation ("Acceleration Software") to
publish and market Windrenalin HD (formerly known as SuperFassst!), a patented
software product that adds instant hard drive acceleration to PCs operating
under Windows 95. Under the terms of the agreement the Company has guaranteed
cumulative minimum royalty payments to Acceleration Software of $850,000 by May
of 1998, of which the Company has advanced $250,000. There can be no assurance
that the Company will generate revenues or profits as a result of this licensing
agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Index to Exhibits: 10.1 - Agreement dated December 8, 1996 among
Syncronys Softcorp and Acceleration Software International Corporation
- page 18. (Portions of Exhibit 10.1 have been omitted pursuant to a
request for confidential treatment.)
(b) Reports filed on Form 8-K: During the second quarter of FY1997 the Company
filed one report on Form 8-K dated December 19, 1996, to report under
Item 9 the sales of equity securities pursuant to Regulation S in
conjunction with the acquisition of Veritas Technology Solutions Ltd., an
Israeli corporation.
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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 5, 1997 /s/ Barbara Velline
--------------------------
Barbara Velline
Chief Financial Officer
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<PAGE> 1
SOFTWARE LICENSE & DISTRIBUTION AGREEMENT
This Agreement is made as of the 8th day of December, 1996
BETWEEN: SYNCRONYS SOFTCORP, a Nevada corporation with its principal
place of business at 3958 Ince Boulevard, Culver City, CA,
90232
("Distributor")
AND: ACCELERATION SOFTWARE INTERNATIONAL CORPORATION, a Washington
corporation with its principal place of business at 1223 NW
Finn Hill Road Poulsbo, WA 98370
("Developer")
WITNESS THAT WHEREAS Developer has developed a Windows 95 software program
entitled "SuperFassst!" which Distributor wishes to distribute pursuant to the
terms of this Agreement;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the premises
and the mutual agreements and covenants herein contained (the receipt and
adequacy of such consideration is hereby mutually acknowledged by each party),
the parties hereby covenant and agree as follows:
SECTION 1. DEFINITIONS
1.01 "SOFTWARE" shall mean an object copy of the hard drive accelerator
called SuperFassst! for Windows '95 on a CD-ROM (or other media if available)
packaged for retail sale to end users, in retail packaging to be approved by
Developer in accordance with Section 2.06, together with modifications,
revisions and error corrections which Developer shall make available to
Distributor from time to time.
1.02 "END USER" shall mean any third party which obtains a copy of the
Software to fulfill its own computer aided instruction or tool needs.
1.03 "SALE" OR "SELLING" OR "PURCHASE" OR "PURCHASING" of Software or a copy
of the Software shall mean, with respect to the intellectual property rights
related to such Software, the grant or acquisition, respectively, of a license
to use the Software. With respect to tangible property, such terms shall be
accorded their common meanings. In either case, such terms shall (i) include
all sales, licenses, transfers or other dispositions for value, (ii) include use
by Distributor, and (iii) be deemed a sale not later than when recorded as such
on the books or records of Distributor which are maintained for financial
statement purposes.
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<PAGE> 2
1.04 "SITE LICENSES" shall mean licensing software for multiple computers or
multiple users. It is intended that the industry standard usage of selling
software to corporations using site, enterprise, server, seat or processor-based
licenses and similar transactions be incorporated into the definition of Site
Licenses.
1.05 "OEM BUNDLING" shall mean licensing software for resale only in
combination with one or more other items, typically hardware. It is intended
that the industry standard usage of selling software via OEM licensing, bundling
and similar transactions be incorporated into the definition of OEM Bundling.
1.06 "DIRECT MARKETING" shall mean the promotion and selling of software
directly to End Users without using a reseller, specifically using the Internet,
online sales, and direct mail. It is intended that the industry standard usage
of direct marketing be incorporated into the definition of Direct Marketing.
1.07 "RETAIL CHANNEL" shall mean all resellers who purchase the Software for
ultimate sale to an individual and specifically excludes Site Licenses, OEM
Bundling and Direct Marketing.
SECTION 2. APPOINTMENT AND AUTHORITY OF DISTRIBUTOR
2.01 GRANT OF LICENSE. Developer hereby grants to Distributor a license to
distribute and market (a) the English language version of the Software into the
Retail Channel on an exclusive basis and Direct Marketing on a non-exclusive
basis for the United States and Canada, (b) if Distributor achieves the "Launch
Plan" described in Section 2.02, the English and German language version of the
Software into the Retail Channel on an exclusive basis and Direct Marketing on a
nonexclusive basis in Germany, and (c) the English language version of the
Software into the Retail Channel and Direct Marketing on a non-exclusive basis
for the rest of the world except for France, Poland and Japan (the "License").
Distributor may in its discretion from time to time sub-license, transfer or
assign in whole or part an interest in the license in sub-sections (b) and (c)
above, to any other person for the purposes of increasing distribution and sales
of the Software outside of United States and Canada; provided however, that any
such sub-license, transfer or assignment shall be subject to Developer's rights
contained in this Agreement and shall not in any way relieve Distributor of its
obligations to Developer hereunder.
2.02 LAUNCH PLAN. Distributor will use its best efforts to market and sell
the Software in a manner to maximize the sales potential of the Software. If
Distributor has at least [CONFIDENTIAL PORTION HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION] copies of the Software placed in the Retail
Channel in the United States and Canada with retailers which represent not less
than 70% of computer software retail sales as determined by PC Data within three
months following the Commencement Date (as defined in Section 10.01), the
"Launch Plan" will be
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<PAGE> 3
deemed to have been met, and Distributor will have the rights in Germany
described in Section 2.01(b). Distributor acknowledges that EU trade rules
prohibit absolute exclusivity, but if the Launch Plan is met, Developer will not
appoint any other distributor of the Software in the Retail Channel for Germany.
2.03 RESERVATIONS FROM GRANT.
(a) Developer reserves all rights not specifically granted in Section 2.01,
including, without limitation, all rights to OEM Bundling and Site Licenses and
non-exclusive rights to Direct Marketing, as well as any and all rights to
Developer products other than the Software. All OEM Bundling, Site Licenses and
Direct Marketing undertaken by the Developer shall use the name SuperFassst! (or
others names that are different from the name selected by Distributor). The
version of the Software available on a large scale via OEM Bundling will not be
at a higher revision level than the version available in retail updated by free
Internet upgrades. Developer shall release major new revisions not less than
six (6) months apart.
(b) In the event that Distributor cannot resolve the pre-existing liabilities of
Ballard Synergy Corporation to Computer City and Micro Central (in an
arrangement approved by Developer) for amounts not more than $ [CONFIDENTIAL
PORTION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION] in cash
payments plus not more than $ [CONFIDENTIAL PORTION HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION] in Developer's foregone revenues (e.g., product
credit) before February 15, 1997, Developer retains the right to distribute to
Computer City and Micro Central not more than 8,000 units of a premium priced
retail version of the Software combined with other software, whose distribution
price shall not be less than $ [CONFIDENTIAL PORTION HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION]. Such distribution by the Developer shall be
done in a way to minimize any negative impact on the sales and marketing of the
Software.
2.04 MARKET DATA. Distributor shall, where available, provide Developer
with (a) quarterly Software sales numbers through distributors, resellers, sales
representatives and End Users (b) marketing and merchandising programs completed
and planned, (c) any other information of benefit to Developer in cooperating
with Distributor and developing modifications to the Software or new products.
2.05 MINIMUM PERFORMANCE REQUIREMENTS. Distributor shall purchase a minimum
of [CONFIDENTIAL PORTION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
COMMISSION] copies of the Software from Developer during the six (6) month
period following the Commencement Date, defined in Section 10.01, and
[CONFIDENTIAL PORTION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION]
copies for each subsequent six (6) month period, during the term of this
Agreement.
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2.06 DISTRIBUTOR RESPONSIBILITIES. Distributor shall, at its cost, produce
retail packaging, media label artwork, user's manuals, localization of non-code
resources to German if German language rights are granted as per 2.01(b), and
sales and marketing materials for the Software and shall use its best efforts to
pursue aggressive sales and marketing to realize the maximum sales potential for
the Software. All such packaging and materials shall be provided to Developer
for its review and approval, such approval not to be unreasonably withheld or
delayed. Failure by Developer to approve or disapprove a component within seven
(7) business days shall be deemed to be approval for that component. For
SuperFassst! the parties have agreed at minimum that (a) Distributor shall not
use "SuperFassst!" as the product name, but rather will use a different name of
its choice, (b) reference to the "SuperFassst! Technology" will appear in
reasonable prominence on the front of the box, (c) Developer's corporate logo
and "created by" attribution will appear in reasonable prominence on the back of
the box and (d) the appropriate legal trademark and copyright notices will
appear in fine print on the box.
2.07 DISTRIBUTOR REPRESENTATIONS. Distributor represents to Developer that
it has full right and authority to enter into this Agreement and to perform its
obligations under this Agreement. This Agreement and Distributor's performance
hereunder, do not conflict with or cause a breach under any agreement, license
or other instrument, or law, rule, order or regulation to which the Distributor
is bound or subject.
SECTION 3. PRODUCTION OF SOFTWARE
3.01 PRODUCTION. Developer shall, at its cost and at a facility of its
selection, reproduce the executable code of Software on a electronic media (with
media label artwork provided per Section 2.06) in a form suitable for use in
retail packaging and shall deliver same to location(s) specified by Distributor.
Developer shall use its best efforts to make available a reasonably secure
floppy based version of the Software. The parties agree to fully cooperate to
minimize delivery costs and production costs, such production costs shall not
exceed $ [CONFIDENTIAL PORTION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
COMMISSION] per media. Under no circumstances shall Distributor replicate or
otherwise duplicate Software, on CD-ROM discs or otherwise, or obtain such
replicated or duplicated Software from any source other than Developer.
Possession by Distributor of a "Gold Disc" or other medium commonly used to
replicate or duplicate software shall not be construed as evidence that
Distributor has any right to replicate or duplicate Software.
3.02 ORDERS. Distributor will place written purchase orders with the
Developer for the Software with at least five (5) days production lead time and
shipping instructions and shall pay for such orders, including shipping and any
other associated charges in accordance with Section 6.03.
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3.03 SOFTWARE RETURNS. Distributor shall have the right not more than once
per month to return Software media to the Developer for credit (up to a monthly
maximum of half of the average monthly volume of Software media delivered
to Distributor for the previous three months) who shall issue to Distributor an
RMA for such returns. This Section 3.03 together with Section 7.01 are
Distributor's sole and exclusive return rights.
SECTION 4. END USER RESTRICTIONS
Distributor shall distribute the Software only in its original, unopened
packages and subject to a "shrink-wrap" or other appropriate license agreement,
which shall be subject to approval by Developer, such approval not to be
unreasonably withheld or delayed.
SECTION 5. RESTRICTIONS ON DISTRIBUTOR
Distributor agrees not to reverse assemble, decompile, or otherwise attempt to
derive source code from the Software, modify the Software or translate the
software. Distributor further agrees to comply with all laws, foreign and
domestic in connection with the marketing and selling of the Software.
SECTION 6. PAYMENT
6.01 PAYMENT AMOUNT. Distributor shall pay Developer an amount equal to
[CONFIDENTIAL PORTION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION]
% of the Gross Revenues realized by Distributor for the sale of the Software
("Payment Amount"). Gross Revenues shall mean the amount booked less returns as
per Section 3.03 and 7.01, less return reserve in accordance with GAAP (the
current amount is approximately 10% to 15% of units) and such return reserve
will be utilized before the returns allowed in Section 3.03 and 7.01, less
freight out and less industry standard cash discounts not to exceed 3%. Both
parties agree on an initial Payment Amount of at least [CONFIDENTIAL PORTION HAS
BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION] dollars per unit of
Software delivered to Distributor, less the returns specified in 3.03 and 7.01.
Distributor will notify Developer of any price changes, however any pricing
reduction shall be agreed to in writing by both parties, acting reasonably to
maximize long term revenues. The Payment Amount is in addition to reimbursement
to Developer of the cost of the Software media and shipping charges.
6.02 ADVANCE PAYMENT. Distributor shall, no later than December 20, 1996,
pay Developer a non-refundable two hundred and fifty thousand dollars ($250,000)
as an advance against the Payment Amount and reimbursement for the cost of the
Software media.
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6.03 ON-GOING PAYMENTS. Upon depletion of the Advance Payment, the
Distributor shall pay the Developer in respect of the Payment Amount and the
cost of the Software media $ [CONFIDENTIAL PORTION HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION] per CD-ROM disc (or other media) delivered to
the Distributor net 15 days with the balance due net 75 days. In the event that
the Distributor fails to pay net 15 more than three times in any given year or
is ever more than 30 days late, then Developer shall have the option to change
terms to COD rather than net 15 days.
6.04 RECONCILIATIONS AND AUDIT. Distributor shall maintain accurate books
and records pertaining to the production and distribution of Software.
Distributor shall provide an account reconciliation within thirty (30) days
after the end of each calendar quarter, for the sales made during such quarter.
Each reconciliation shall be accompanied by a detailed statement showing the
basis on which such payment was calculated. Upon fifteen days notice by
Developer, Distributor shall provide access to its books and records during
ordinary business hours to an independent certified public accounting firm,
retained by Developer on a non-contingency basis to review Distributor's books
to verify such calculations. Such verification shall occur no more than twice
annually. Such verification shall be at Developer's expense, unless the
verification reflects an underpayment of seven and a half percent (7.5%) or more
of the amount that should have been paid for the period audited, in which case
Distributor shall bear the expense of such audit. Interest of one and one-half
percent (1.5%) per month shall be paid on payments not timely made.
6.05 TRANSACTIONS WITH AFFILIATES. All transactions by Distributor with
Affiliates shall be at fair market prices for comparable transactions between
unrelated parties, including a reasonable profit on such transactions.
6.06 LETTER OF CREDIT. Distributor shall, not later than December 20, 1996,
provide Developer with a formal letter of credit (in a form acceptable to
Developer, such acceptance not to be unreasonably withheld or delayed) drawn on
a major US Bank in the amount of six hundred thousand dollars ($600,000). The
Developer may, ninety (90) days after the first anniversary of the Commencement
Date, draw down an amount equal to the difference between eight-hundred fifty
thousand dollars ($850,000) and the actual Payment Amounts paid to Developer,
provided that the principal amount of the Letter of Credit may be reduced in
accordance with Section 9.05.
6.07 DISTRIBUTOR OPTIONS. Prior to December 20, 1996, Distributor shall
grant Developer or its designees 200,000 options on terms not less favorable
than provided in Distributor's stock option plan, to purchase Distributor's
common stock at the closing bid price as of the date hereof which shall vest and
be exercisable as follows:
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(a) 25,000 options upon achieving aggregate unit sales of the
Software equal to or in excess of 62,500 units;
(b) an additional 25,000 options upon achieving aggregate unit
sales of the Software equal to or in excess of 125,000 units;
(c) an additional 25,000 options upon achieving aggregate unit
sales of the Software equal to or in excess of 187,500 units;
(d) an additional 25,000 options upon achieving aggregate unit
sales of the Software equal to or in excess of 250,000 units;
(e) an additional 50,000 options upon achieving aggregate unit
sales of the Software equal to or in excess of 350,000 units;
and
(f) an additional 50,000 options upon achieving aggregate unit
sales of the Software equal to or in excess of 450,000 units;
and
6.08 BUNDLED TRANSACTIONS. Where Software is bundled with another software
product, the portion of the gross revenues attributed to the Software shall be
based upon and apportioned in accordance with the retail prices of the
constituent parts of the bundle. In no event will Distributor or any of its
resellers bundle the Software with other products (whether "hard" bundled or
"soft" bundled and whether with software or hardware) without Developer's prior
written consent.
SECTION 7. DEVELOPER'S WARRANTY
7.01 WARRANTY. Developer warrants that the media on which the Software is
delivered will be free of defects in material and workmanship for a period of
ninety (90) days from delivery to Distributor. Software that an end user returns
(accompanied by a Distributor certification for each shipment) will be treated
as defective media. As the sole remedy for this warranty, Developer shall either
replace the defective media or repay the full amount it received for the
Software plus shipping charges to the Distributor at Distributor's option. This
Section 7.01 together with Section 3.03 are Distributor's sole and exclusive
return rights.
7.02 LIMITATION OF LIABILITY AND REMEDIES. EXCEPT AS SET FORTH IN THIS
AGREEMENT, DEVELOPER MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED,
AND SPECIFICALLY EXCLUDES ANY WARRANTY THAT THE SOFTWARE IS FIT FOR ANY
PARTICULAR PURPOSE AND FURTHER SPECIFICALLY EXCLUDES ANY IMPLIED WARRANTIES OF
MERCHANTABILITY. THE STATED WARRANTIES, COVENANTS AND REMEDIES SET FORTH IN
THIS AGREEMENT ARE IN LIEU OF ALL OTHER OBLIGATIONS OR LIABILITIES ON THE PART
OF DEVELOPER FOR DAMAGES
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OR OTHER RELIEF, INCLUDING, BUT NOT LIMITED TO, SPECIAL, INDIRECT OR
CONSEQUENTIAL DAMAGES THAT IN ANY WAY ARISE OUT OF OR IN CONNECTION WITH THE USE
AND/OR THE PERFORMANCE OF THE SOFTWARE. IN NO EVENT EXCEPT FOR (A) FRAUD BY THE
DEVELOPER, (B) FAILURE, REFUSAL OR INABILITY OF THE DEVELOPER TO PROVIDE THE
SOFTWARE MEDIA AND (C) THE INDEMNIFICATION OBLIGATIONS OF SECTION 13, SHALL THE
LIABILITY OF DEVELOPER TO DISTRIBUTOR PURSUANT TO THIS AGREEMENT EXCEED THE
AMOUNT RECEIVED BY DEVELOPER FROM DISTRIBUTOR WITH RESPECT TO THE SOFTWARE.
SECTION 8. ADDITIONAL OBLIGATIONS OF DISTRIBUTOR
8.01 PROMOTION OF SOFTWARE OR TECHNOLOGY. Distributor shall, at its own
expense, vigorously promote the distribution of the Software. Such promotion
shall include, but shall not be limited to, advertising the Software in
publications, participating in trade shows, establishing appropriate
distribution channels and merchandising programs, and directly soliciting orders
from customers for Software. Developer shall provide Distributor with 500 copies
of the Software per year free of charge for NFR and promotional purposes.
8.02 COMPETITIVE SALES. During the term of this Agreement and for three
months after termination, Distributor shall not market or sell any product
directly competitive with the current version of the Software or a significant
subset thereof. In addition, during the term of this Agreement and for twelve
months after termination, Distributor shall not use the tradename of the
Software or artwork uniquely associated with the Software to market or sell any
software product directly competitive with the current version of the Software
or a significant subset thereof.
SECTION 9. ADDITIONAL OBLIGATIONS OF DEVELOPER
9.01 NEW DEVELOPMENTS. Developer shall provide Distributor reasonable
notice of new developments in connection with the Software.
9.02 MARKETING ASSISTANCE. Developer shall provide Distributor with market
data which is obtained by Developer and relates to the Software and which may
benefit Distributor in distributing the Software.
9.03 TECHNICAL ACCEPTANCE. Developer shall at its sole expense be
responsible for running industry standard quality assurance tests on
SuperFassst! prior to providing it to Distributor for release. Developer shall
fully cooperate with Distributor in its due diligence approval of SuperFassst!
and the behavior of the underlying technology, ("Technical Acceptance"). For the
initial release, Technical Acceptance shall be deemed to have been satisfied
upon Developer's receipt of the Advance Payment described in 6.02 and the
Software shall also be deemed to be Technically Superior. For future formal
releases, Technical Acceptance shall be deemed to have been satisfied upon
reasonable agreement between the parties.
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9.04 USERS MANUAL. Distributor shall at its sole expense, but with the
reasonable cooperation and input of Developer, be responsible for preparing the
users manual for the Software. Developer shall provide Distributor with the
electronic form of the current SuperFassst! user manual.
9.05 TECHNICAL SUPERIORITY. Developer shall maintain the Technical
Superiority of SuperFassst! Software and its underlying technology. Technical
Superiority shall mean not less than 25% performance improvement over Windows 95
and its subsequent releases ("OS Competitor") and/or competitive software
products ("Product Competitor") on tests proposed by Developer and accepted by
an independent testing laboratory (to be mutually agreed by the parties, acting
reasonably). As soon as practicable after release of a new OS Competitor or
Product Competitor, the then current version of the Software and such product
shall be provided to an independent testing laboratory. In the event that the
Software is determined by that testing laboratory not to be Technically
Superior, then Developer shall have forty-five (45) days to deliver to
Distributor a version of the Software which is Technically Superior or otherwise
delivers mutually agreed to added functionality to restore the leadership
positioning of the Software in the Retail Channel, failing which the sole
recourse is to reduce the principal amount of the Letter of Credit referred to
in Section 6.06 by either (a) equal to the Payment Amount referred to in Section
6.01 multiplied by the unit sell through of the Product Competitor as reported
in PC Data or (b) $500 per day from the release date of the OS Competitor as
reported in PC Data, such reductions shall stop after the first anniversary of
the Commencement Date.
9.06 SUPPORT. Developer shall at its sole expense be responsible for
providing reasonable professional end-user technical support for the Software
with access by way of toll-free phone, fax, mail and e-mail. Developer shall at
its sole expense be responsible for correcting bugs or providing reasonable
workarounds for the Software as and when the need arises. Distributor shall give
Developer notice of all Software "bugs" promptly upon discovery and, in the case
of Fatal or Severe bugs, within forty-eight (48) hours after discovery.
9.07 PERFORMANCE VALIDATION. Developer shall provide Distributor detailed
benchmark procedures and results to characterize the performance of the Software
across a wide spectrum of computers. Technical descriptions of the black box
behavior of the Software will be provided in a white paper sanitized of
proprietary information to convey the expected performance behavior of the
Software.
9.08 DEVELOPER REPRESENTATIONS. Developer represents to Distributor that
it has full right and authority to enter into this Agreement. This Agreement
and Developer's performance hereunder, do not conflict with or cause a breach
under
PAGE 9
<PAGE> 10
any agreement, license or other instrument, or law, rule, order or regulation to
which the Developer is bound or subject. Developer further represents to
Distributor that it has good and valid title to the Software code and to grant
the License, free and clear of any claims, encumbrance, rights and obligations.
9.09 GOLD MASTER ESCROW. Developer shall from time to time place a true,
correct and complete gold master copy of the executable code of the Software and
all major revisions thereto with Data Base, Inc. as escrow agent, in accordance
with an industry standard escrow agreement approved by Distributor, such
approval not be unreasonably withheld or delayed. In the event that the
Developer goes into bankruptcy or insolvency and as a result thereafter fails,
refuses or is unable to provide the Software media to the Distributor in
accordance with orders placed by Distributor under Section 3 and does not cure
such failure within 20 days after notice by Distributor specifying the failure
and specifically stating that Distributor intends to obtain the Software from
the escrow agent, Developer hereby irrevocably directs such escrow agent to
deliver such gold master copy of the Software to the Distributor who shall use
such copy exclusively for use in accordance with the Agreement.
9.10 PRODUCT LIABILITY INSURANCE. Developer shall obtain (and during the
term of this Agreement shall maintain) product liability insurance with respect
to Software limited by $1,000,000 per occurrence and a maximum of $3,000,000
liability. Developer will name Distributor as an Additional Insured on such
policy and will utilize such insurance against any product liability claim with
respect to the Software. Distributor agrees to provide Developer with notice of
any such claim as promptly as possible and in any event within the time periods
required of an Additional Insured in accordance with the policy.
SECTION 10. TERM, RENEWAL AND TERMINATION
10.01 TERM. The License shall be for a term of three (3) years from the
earlier of (a) the date of first availability of the Software at any reseller or
(b) February 15, 1997 (the "Commencement Date") unless terminated earlier under
the provisions of this Agreement. This term shall automatically renew for two
(2) additional one (1) year periods provided Distributor has met the Minimum
Performance Requirements set forth in Section 2.05. Failure by Distributor to
meet the Minimum Performance Requirements shall not constitute a breach of this
Agreement. Failure of Distributor to obtain written approval of the Letter of
Credit described in 6.06 prior to December 20, 1996 shall give Developer the
option to terminate this Agreement.
10.02 CONVERSION TO NON-EXCLUSIVE DISTRIBUTORSHIP. In the event Distributor
fails to meet Minimum Performance Requirements of Section 2.05, Developer shall
have the option to make the License completely non-exclusive; provided
Distributor is notified at least three months before the Software will be
available in the Retail Channel via another party, such notice can be given
during the Distributor's
PAGE 10
<PAGE> 11
exclusive period if reasonable projections indicate likely failure to meet the
Minimum Performance Requirements. In the event an alternate source of the
Software is in the Retail Channel before the first anniversary of the
Commencement Date, the principal amount of the Letter of Credit (under Section
6.06) shall be reduced by an amount equal to the Payment Amount referred to in
Section 6.01 multiplied by the unit sell through of such Software as reported in
PC Data.
10.03 BREACH AND TERMINATION. Prior to terminating this Agreement,
requesting arbitration, filing suit or taking similar action upon a breach of
this Agreement by either party, the non-breaching party shall give the breaching
party notice of the basis for asserting such breach. If the breaching party
fails to cure such breach within thirty (30) days, and the breach is a material
breach, the non-breaching party may terminate this Agreement. If the breach is
the non-payment of any amounts due under this Agreement, the breach shall be
deemed to be a material breach, and the breaching party shall have fifteen (15)
days to cure such breach. Sections 8.02, 11, 12, 13 and 14 shall survive
termination or expiration of this Agreement for any reason.
10.04 WAIVER OF LIABILITY ON TERMINATION. Should this Agreement or any portion
thereof lawfully expire, terminate or not be renewed, neither party will be
liable to the other because of such event for reimbursement of costs or expenses
or for damages on account of the loss of prospective profits, anticipated sales,
goodwill or on account of expenditures, inventory, investments, leases or
commitment in connection with the business of Developer or Distributor, or for
any other reason whatsoever flowing from such event. Such event shall not,
however, relieve either party of any obligation incurred before termination or
of liability for breach of any of the provisions of this Agreement. The parties
hereby specifically waive, to the maximum extent permitted by law, any claims
for compensation damages arising out of the lawful termination or expiration of
this Agreement in accordance with its terms.
SECTION 11. PROPERTY RIGHTS
Distributor agrees that Developer owns all right, title and interest in the
Software now or hereafter subject to this Agreement, and in all patents,
trademarks, trade names, inventions, copyrights, know-how, trade secrets, and
any other proprietary information relating to the design, operation or
maintenance of the Software, all technology contained therein and the
SuperFassst! trademarks, and advertising, sales, marketing materials and artwork
that Developer creates in connection with the Software. The use by Distributor
of any of these property rights is authorized only for the purposes set forth in
this Agreement, and upon termination of this Agreement for any reason such
authorization shall cease except to the extent necessary for Distributor to
provide maintenance to its existing customers for the Software. Software source
code shall be disclosed by Developer to Distributor only in Developer's sole
discretion. Distributor shall own and at all times continue to own
PAGE 11
<PAGE> 12
copyright, trademarks and other intellectual property rights to such names
as Distributor shall market SuperFassst! under and to all other advertising,
sales and marketing materials and artwork that Distributor creates in connection
with the Software.
SECTION 12. INDEMNIFICATION OF DEVELOPER
Distributor warrants that it will not make any false or misleading statements to
any End User or potential End User and also that it will not make any
representation or warranty to any customer outside the End User license
agreement. Distributor agrees, at its own expense, to defend and indemnify
Developer, if necessary, against any actions, liabilities, costs, damages,
claims, losses and expenses (including but not limited to attorney's fees)
arising out of Distributor's breach of this warranty. Distributor agrees to
provide Developer with notice of any such claim as promptly as possible.
SECTION 13. INDEMNIFICATION OF DISTRIBUTOR
Developer agrees to defend, indemnify and hold Distributor harmless from and
against any and all claims, demands, liabilities, actions, judgments, and
expenses, including attorney's fees and expenses reasonably incurred by, against
or of Distributor, arising out of any breach of Section 9.08 or any product
liability claim with respect to the Software. Distributor agrees to provide
Developer with notice of any such claim as promptly as possible.
SECTION 14. CONFIDENTIALITY
14.01 DEFINITION. "Confidential Information" shall mean any information, idea,
technology, know-how, invention, algorithm, data, process, technique, program,
computer software, computer code and related documentation, work-in-process,
future development, engineering, manufacturing, marketing, business, technical,
financial or personal matter relating to the parties, their research,
development, present or future products, sales, customers, employees,
opportunities, market, or business, whether in oral, written, graphic or
electronic form, that is treated as confidential by the respective parties and
identified as such at the time of disclosure to the other party. In addition,
the material terms and conditions of this Agreement shall be treated as
Confidential Information.
14.02 MAINTAINING CONFIDENCE. Developer and Distributor, their respective
officers, employees, agents, representatives, and permitted assigns shall hold
in confidence Confidential Information belonging to the other; and shall use
such Confidential Information only during the term of this Agreement and only as
expressly permitted herein. The material terms and conditions of this Agreement
shall be considered Confidential Information. Each party may disclose such
Confidential Information belonging to the other to its employees with a need to
PAGE 12
<PAGE> 13
know, provided that such employees are bound to maintain the confidentiality of
such Confidential Information. Non-disclosure obligation shall not apply to such
information if the party can document (a) has entered the public domain and is
generally available to the public as a result of no act or omission of the party
or its employees or agents, (b) is lawfully received by the party from third
parties without restriction and without breach of any duty of non disclosure by
any such third party, or (c) is developed independently by the party without
reference to the Confidential Information. The parties shall use reasonable
efforts to identify and prevent any unauthorized use or disclosure of
Confidential Information, and shall advise each other in the event one party
learns or has reason to believe that any person has violated or intends to
violate the terms of this Agreement, and will cooperate in seeking injunctive
relief against such person.
SECTION 15. GENERAL
15.01 NO ASSIGNMENT. Subject to the provisions of Section 2.01 herein,
neither party may assign all or any part of its interest in or to this Agreement
without the written consent of the other party and any purported assignment
without such consent shall be void.
15.02 EXPENSES. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expenses.
15.03 NOTICES. All notices, requests, demands or directions relating to this
Agreement shall be in writing and delivered via courier addressed to the
appropriate party at the address of such party as set out below, or to such
other addresses as may be specified by one party to the other parties by notice
in writing. Any notice, request, demand, direction authorization or other
communication given shall be deemed to have been received by the party to whom
it was given on the third business day following the sending thereof by courier.
If to Developer: Acceleration Software International Corporation
1223 NW Finn Hill Road
Poulsbo, WA 98370, United States
If to Distributor: Syncronys Softcorp
3958 Ince Blvd.
Culver City, CA 90232, United States
15.04 ARBITRATION, JURISDICTION AND VENUE. Any controversy or claim between the
parties arising out of or relating to this Agreement or any alleged breach
thereof shall be resolved by arbitration conducted in greater Seattle,
Washington in accordance with the Commercial Arbitration Rules of the American
Arbitration Association then in effect by a single arbitrator knowledgeable
about the
PAGE 13
<PAGE> 14
development, distribution and licensing of computer software. Either party may
submit such controversy or claim for arbitration by giving written notice. The
arbitrator shall apply the law of the State of California as more fully set
forth in Section 15.05. The decision of the arbitrator, including, without
limitation, with respect to specific performance of this Agreement shall be
final and binding upon the parties. The parties may seek from the court a
provisional remedy in connection with an arbitrable controversy or claim and
such application to the court shall not waive any right of arbitration. The
prevailing party in any such arbitration shall be entitled to recover from the
non prevailing party in addition to all other relief, all reasonable costs and
expenses, including, without limitation, attorneys fees and expert witness fees,
actually incurred by such party in connection with such arbitration. Each of the
parties, by executing this Agreement, unconditionally submits to the
jurisdiction of the courts of the State of Washington and of the United States
with respect to the enforcement of this provision or any arbitration award
hereunder and agrees to accept service of process in California.
15.05 CHOICE OF LAW. This Agreement shall be governed by and construed under
the laws of the State of California without regard to conflict of laws
principles or the U.N. Convention on Contracts for the International Sale of
Goods.
15.06 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto and supersedes all prior agreements, whether written
or oral, made between the parties hereto, and there do not exist any
representations, warranties, terms or conditions, expressed or implied,
statutory or otherwise, and no agreements collateral hereto, other than as
expressly set forth or referred to in this Agreement.
15.07 INUREMENT. This Agreement and each of the terms and provisions hereof
shall inure to the benefit of and be binding upon the parties hereto and their
respective heirs, executors, administrators, personal representatives,
successors and permitted assigns.
15.08 SEVERABILITY. If any one or more of the provisions contained in this
Agreement should be invalid, illegal or unenforceable in any respect in any
jurisdiction, the validity, legality and enforceability of such provision or
provisions shall not in any way be affected or impaired thereby in any other
jurisdiction and the validity, legality and enforceability of the remaining
provisions contained herein shall not in anyway be affected or impaired thereby.
15.09 FURTHER ASSURANCES. The parties hereto shall with reasonable diligence
do all such things and provide all such reasonable assurances as may be required
to consummate the transactions contemplated hereby, and each party hereto shall
provide such further documents or instruments required by the other party as may
be reasonably necessary or desirable to effect the purpose of this Agreement and
carry out its provisions.
PAGE 14
<PAGE> 15
15.10 NO JOINT VENTURE. Neither party hereto shall use the name, trademark or
other identification of the other party in any manner except as authorized by
the other party. Nothing contained herein shall be construed to (a) give either
party the power to direct or control the day-to-day activities of the other or
(b) constitute the parties as partners, joint ventures, co-owners or otherwise
as participants in a joint or common undertaking. All financial obligations
associated with each party's business is the sole and exclusive responsibility
of that party. Distributor shall not constitute, and shall take no action which
would cause it to be treated as, a "permanent establishment" of Developer within
the meaning of the tax laws of any country.
IN WITNESS WHEREOF, the parties have entered into this Agreement effective as of
the date provided above.
SYNCRONYS SOFTCORP
___________________________________________________
Per: Daniel G. Taylor, EVP - Marketing
ACCELERATION SOFTWARE INTERNATIONAL CORPORATION
___________________________________________________
Per: Clint L. Ballard, C.E.O.
PAGE 15
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<PERIOD-START> JUL-1-1996
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<INVENTORY> 153,093
<CURRENT-ASSETS> 6,322,844
<PP&E> 122,115
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<TOTAL-LIABILITY-AND-EQUITY> (5,976,455)
<SALES> 733,212
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<CGS> 145,578
<TOTAL-COSTS> 3,943,223
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<INTEREST-EXPENSE> 593,684
<INCOME-PRETAX> (3,180,702)
<INCOME-TAX> 0
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