<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the three months ended April 30, 1996 Commission File Number 0-24418
SYSTEMSOFT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3121799
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2 VISION DRIVE
NATICK, MASSACHUSETTS 01760
(Address of principal executive offices) (Zip Code)
508-651-0088
(registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Registrant had 10,784,761 shares of Common Stock, $.01 par value, outstanding at
June 7, 1996.
Total number of pages with exhibits is 12.
The Exhibit Index appears on page 11.
<PAGE>
SYSTEMSOFT CORPORATION
FORM 10-Q
For the Three Months Ended April 30, 1996
TABLE OF CONTENTS
Page Number
-----------
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
a) Consolidated Balance Sheets as of April 30, 1996
(Unaudited) and January 31, 1996 3
b) Consolidated Statements of Operations for the three
months ended April 30, 1996 and 1995 (Unaudited) 4
c) Consolidated Statements of Cash Flows for the three
months ended April 30, 1996 and 1995 (Unaudited) 5
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
2
<PAGE>
SYSTEMSOFT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, January 31,
1996 1996
---- ----
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $10,106,827 $7,406,039
Marketable securities 1,895,791 3,960,490
Accounts receivable, less allowance
for doubtful accounts of $551,038 and
and $491,037 as of April 30, 1996
and January 31, 1996, respectively 7,581,835 7,561,096
Receivable from related party 816,124 692,722
Prepaid and other current assets 1,039,106 868,929
Deferred income taxes 1,512,756 1,512,756
----------- -----------
Total current assets 22,952,439 22,002,032
Property and equipment, net 3,274,497 2,830,529
Purchased software, net 1,667,385 556,058
Software development costs, net 1,954,214 1,563,303
----------- -----------
Total assets $29,848,535 $26,951,922
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,370,640 $680,493
Accrued expenses 329,382 402,066
Income taxes payable 79,901 524,258
Accrued commissions 538,074 497,354
Accrued compensation and benefits 294,167 582,845
----------- -----------
Total current liabilities 2,612,164 2,687,016
Deferred income taxes 674,390 674,390
Commitments
Minority interest in subsidiary 50,000 50,000
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000
shares authorized; none issued and
outstanding - -
Common stock, $.01 par value; 30,000,000
shares authorized; 10,784,848 and
10,553,019 shares issued 107,848 105,530
Additional paid-in capital 26,664,299 24,973,086
Less treasury stock, at cost, 79,623 shares (427,187) (427,187)
Accumulated earnings (deficit) 167,021 (1,110,913)
----------- -----------
Total stockholders' equity 26,511,981 23,540,516
----------- -----------
Total liabilities and
stockholders' equity $29,848,535 $26,951,922
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE>
SYSTEMSOFT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended April 30,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Software license fees $5,355,156 $3,878,692
Engineering services 2,235,040 880,002
Related party 458,333 405,000
Other 1,500 16,915
----------- -----------
Total revenues 8,050,029 5,180,609
----------- -----------
Cost of revenues:
Software license fees 403,273 198,283
Engineering services 752,256 398,785
Related party 214,931 309,449
Other - 24,080
----------- -----------
Total cost of revenues 1,370,460 930,597
----------- -----------
Gross profit 6,679,569 4,250,012
Operating expenses:
Research and development 1,686,116 1,093,469
Sales and marketing 2,414,818 1,737,786
General and administrative 689,074 536,318
----------- -----------
Total operating expenses 4,790,008 3,367,573
----------- -----------
Income from operations 1,889,561 882,439
Interest income 98,257 149,160
Interest expense (156) (175)
Foreign exchange gain (loss) (21,611) 3,888
----------- -----------
Income before provision for income taxes 1,966,051 1,035,312
Provision for income taxes 688,118 389,801
----------- -----------
Net income 1,277,933 645,511
=========== ===========
Net income per common share $0.11 $0.06
=========== ===========
Weighted average number of common and
common equivalent shares outstanding 11,580,240 11,124,974
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
4
<PAGE>
SYSTEMSOFT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended April 30
---------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $1,277,933 $645,511
Adjustments to reconcile net income
to cash provided by operating
activities:
Depreciation and amortization 578,813 329,800
Provision for doubtful accounts 63,000 88,172
Tax benefit of disqualifying dispositions
of stock options 998,611 543,230
Changes in operating assets and liabilities:
Accounts receivable (927,808) (801,923)
Receivable from related party (338,333) 25,000
Prepaid and other current assets (170,177) (271,409)
Accounts payable 690,147 (11,610)
Accrued expenses (72,685) 59,090
Income taxes payable (444,357) (157,090)
Accrued commissions 197,290 (67,563)
Accrued compensation and benefits (288,675) (215,197)
Accrued royalties and distributions 214,931 (70,286)
Deferred revenue from related party - 95,000
------------ -----------
Net cash provided by operating
activities 1,778,690 190,725
------------ -----------
Cash flows from investing activities:
Sale of marketable securities 2,064,699 17,975
Purchases of property and equipment (667,775) (280,177)
Purchased software costs (618,716) -
Software development costs (551,028) (165,295)
----------- -----------
Net cash provided by (used in)
investing activities 227,180 (427,497)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 694,918 514,763
Purchase of treasury stock - (81,909)
----------- -----------
Net cash provided by financing
activities 694,918 432,854
----------- -----------
Net increase in cash and cash equivalents 2,700,788 196,082
Cash and cash equivalents at beginning
of period 7,406,039 7,806,387
----------- -----------
Cash and cash equivalents at end of period $10,106,827 $8,002,469
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE>
SYSTEMSOFT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries and its majority-owned subsidiary. All
intercompany transactions and accounts have been eliminated.
Unaudited Consolidated Financial Statements
The accompanying consolidated financial statements of the Company as
of April 30, 1996 and for the three months ended April 30, 1996 and 1995 are
unaudited. All adjustments (consisting only of normal recurring adjustments)
have been made which, in the opinion of management, are necessary for a fair
presentation thereof. These financial statements should be read in conjunction
with the Company's financial statements and notes thereto contained in the
Company's Form 10-K, SEC File No. 0-24418, filed on April 30, 1996. The results
of operations for the three month periods ended April 30, 1996 and 1995 are not
necessarily indicative of the results that may be expected for the full year or
for any future period. In June 1995, the Company completed a merger with
Ventura Micro, Inc. ("VMI") which was accounted for as a pooling of interests.
The consolidated statements of operations for the three months ended April 30,
1995, the consolidated statements of cash flows for the three months ended April
30, 1995 and all related footnotes presented herein include the accounts of the
Company and VMI restated for the earliest period presented.
Net Income Per Common Share
Net income per common share is computed based upon the weighted
average number of common and common equivalent shares outstanding during each
period using the treasury stock method. Common equivalent shares are included in
the calculations where the effect on their inclusion would be dilutive.
Previously reported per share amounts have been restated for the effect of the
VMI merger, which was accounted for as a pooling of interests.
2. Income Taxes
The components of the provision for income taxes include federal and
state income taxes currently payable and those deferred because of temporary
differences between the financial statement and tax basis of assets and
liabilities. The major difference between the actual provision for income taxes
and the statutory federal income tax rates for the three months ended April 30,
1996 and 1995 are the utilization of certain tax credits.
6
<PAGE>
3. Acquisitions
In June 1995, the Company completed its merger with VMI, a system
software and consulting company specializing in PC Card technology. This
transaction, which is being accounted for as a pooling of interests, was
effected through the exchange of approximately 94,000 shares of the Company's
common stock for all of the issued and outstanding shares of VMI stock. The
Company's consolidated financial statements for the period ended April 30, 1995
have been restated to include the accounts and operations of VMI. Separate
revenues, net income and related per share amounts of the merged entities are
not presented because the impact of VMI is not material.
4. Commitments
Pursuant to a seven-year lease executed in July, 1995, the Company
pays annual base rent for its headquarters beginning at approximately $606,000
and increasing to $670,000 during the term of the lease. The Company and the
lessor have the option to terminate the lease after 54 months on six months
written notice. The lease also contains a renewal option to extend the term for
up to three additional one-year periods.
5. Nonmonetary Transactions
Included in software license fee revenues for the quarter ended April
30, 1996 are revenues of $600,000 from software licenses exchanged for purchased
software. Included in engineering services revenues for the quarter ended April
30, 1996 are revenues of $87,500 from engineering services exchanged for
computer equipment. There were no nonmonetary transactions for the quarter ended
April 30, 1995. No gain or loss was recognized as a result of these
transactions.
7
<PAGE>
SYSTEMSOFT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the three months ended April 30, 1996 and 1995.
The Company designs, develops, markets, licenses and supports to the personal
computer industry connectivity and other system-level software designed to be
the communication path between the personal computer hardware and its operating
system software. The principal markets for the Company's products are U.S. and
Asia Pacific based manufacturers of personal computers and related devices. In
June 1995, the Company completed a merger with VMI which was accounted for as a
pooling of interests. The management's discussion and analysis of financial
condition and results of operations presented herein includes the accounts of
the Company and VMI restated for the earlier period presented.
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of total revenues (except cost of revenues items,
which are set forth as a percentage of the corresponding revenue items):
<TABLE>
<CAPTION>
Three Months Ended April 30,
----------------------------
1996 1995
---- ----
(unaudited)
Revenues:
<S> <C> <C>
Software license fees 66.5% 74.9%
Engineering services 27.8 17.0
Related party 5.7 7.8
Other 0.0 0.3
---------- ----------
Total revenues 100.0 100.0
---------- ----------
Cost of revenues:
Software license fees 7.5 5.1
Engineering services 33.7 45.3
Related party 46.9 76.4
Other 0.0 142.4
---------- ----------
Total cost of revenues 17.0 18.0
---------- ----------
Gross profit 83.0 82.0
Operating expenses:
Research and development 20.9 21.1
Sales and marketing 30.0 33.5
General and administrative 8.6 10.4
---------- ----------
Total operating expenses 59.5 65.0
---------- ----------
Income from operations 23.5 17.0
Interest income 1.2 2.9
Interest expense 0.0 0.0
Foreign exchange gain (loss) (0.3) 0.1
---------- ----------
Income before provision for income 24.4 20.0
taxes
Provision for income taxes 8.5 7.5
---------- ----------
Net income 15.9% 12.5%
========== ==========
</TABLE>
8
<PAGE>
Comparison of Three Months Ended April 30, 1996 and 1995
Revenues. Revenues were $8,050,000 and $5,181,000 in the three months
ended April 30, 1996 and 1995, respectively, an increase of approximately 55%.
Software license fees increased to $5,355,000 from $3,879,000 or approximately
38%. This increase was primarily due to the growth in PC Card software license
fees as well as revenue attributable to a transaction in which the Company
granted software licenses in exchange for software licenses to be used in the
Company's products. Certain contracts include fixed royalty fees for various
time periods in lieu of royalties on a per unit basis. Although such contracts
provide for fixed payments to be made at specified time periods, the timing or
amount of such payments may be renegotiated as a matter of business practice.
Revenues attributable to such fees, which are included in software license fees,
were $800,000 and $1,468,000 in the three months ended April 30, 1996 and 1995,
respectively. The $800,000 in fixed royalties recognized in the three months
ended April 30, 1996 resulted from renegotiated contract terms. Such revenue
would have otherwise been recorded in the subsequent four quarters. Engineering
services increased to $2,235,000 from $880,000 or approximately 154% due to
engineering services related to a significant contract with Digital Equipment
Corporation to develop call-avoidance software products, as well as growth in
the mobile computing market and PC Card engineering services. Related party
revenues increased to $458,000 from $405,000 or approximately 13%. Revenues
generated under the Development and License Agreement, as amended, with Intel
Corporation (The "Intel Agreement") were $375,000 and $405,000 in the three
months ended April 30, 1996 and 1995, respectively.
Cost of Revenues. Cost of revenues was $1,370,000 and $931,000 in the
three months ended April 30, 1996 and 1995, respectively. Cost of revenues
consists primarily of amortization of software development costs and purchased
software, royalties and other engineering and sales and marketing costs under
the Intel Agreement, in addition to engineering costs associated with
engineering services revenues. Cost of revenues as a percentage of revenues
decreased slightly to 17% from 18% in the three months ended April 30, 1996 and
1995, respectively. Cost of software license fees as a percentage of software
license fees revenues increased to 8% from 5% primarily due to increases in
amortization of purchased software and software development costs. The increase
in amortization expense in both absolute dollars and percentage of revenues was
due to increases in purchased software and software development costs and the
commencement of amortization with new product releases. Cost of engineering
services decreased as a percentage of engineering service revenues to 34% from
46%, primarily due to increased efficiency in providing engineering services
and substantial relative growth of revenues. Cost of related party revenues as a
percentage of related party revenues decreased to 47% from 76%, due to a
decrease in the lower margin services provided under the original Intel
Agreement as well as certain personnel costs being included in Research and
Development under the amended Intel Agreement. Gross profit increased slightly
to 83% from 82%.
Research and Development. Research and development expenses,
consisting primarily of payroll and related expenses, were $1,686,000 and
$1,093,000, net of capitalized development costs of $551,000 and $165,000, in
the three months ended April 30, 1996 and 1995, respectively, an increase of
9
<PAGE>
approximately 54%. The increase in expenses resulted primarily from staff
additions to support the product development effort. Research and development
expenses as a percentage of revenues remained unchanged. Included in Research
and Development are costs associated with certain work done under the Intel
Agreement, as amended.
Sales and Marketing. Sales and marketing expenses, consisting
primarily of payroll and related expenses, costs of marketing programs and
events, sales commissions to independent manufacturers' representatives and
travel costs, were $2,415,000 and $1,738,000 in the three months ended April 30,
1996 and 1995, respectively, an increase of approximately 39%. The percentage
increase was primarily due to staff additions, increased costs of marketing
programs, additional travel costs and sales commissions resulting from the
increased level of revenue. Sales and marketing expenses as a percentage of
revenues decreased to 30% from 34%, due primarily to the substantial relative
growth in revenues.
General and Administrative. General and administrative expenses,
consisting primarily of payroll and related expenses, provision for doubtful
accounts and professional fees, were $689,000 and $536,000 in the three months
ended April 30, 1996 and 1995, respectively, an increase of approximately 28%.
The percentage increase was primarily due to staff additions, increased
professional fees and travel expenses. General and administrative expenses as a
percentage of revenues decreased slightly to 9% from 10% due to the substantial
relative growth in revenues.
Provision for Income Taxes. Provision for income taxes was $688,000
and $390,000 in the three months ended April 30, 1996 and 1995, respectively.
In the three months ended April 30, 1996 and 1995, the Company was able to
reduce its federal tax liability through the utilization of certain tax credits.
Liquidity and Capital Resources
During the three months ended April 30, 1996, the Company funded its
operations through its operating profits. As of April 30, 1996, the Company had
cash and cash equivalents and marketable securities of $12,003,000 and working
capital of $20,340,000. The Company's operating activities provided cash of
$1,779,000 for the three months ended April 30, 1996. The Company's investing
activities provided cash of $227,000 in the three months ended April 30, 1996.
The principal uses of cash have been the purchase of property and equipment of
$668,000 and purchased software of $619,000. During the three months ended
April 30, 1996, the Company's financing activities have provided cash of
$695,000, due to the exercise of stock options. The Company believes that its
current cash balances and cash flow from operations will be sufficient to meet
its working capital and capital expenditure requirements through the next twelve
months. To date, inflation has not had a material impact on the Company's
financial results.
10
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three month
period for which this report is filed.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SYSTEMSOFT CORPORATION
June 14, 1996 By: /s/ Robert F. Angelo
----------------------
Robert F. Angelo
President, Chief Executive Officer and Chairman of
the Board
June 14, 1996 By: /s/ David P. Sommers
-----------------------------
David P, Sommers
Vice President, Finance and
Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from first
quarter 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JAN-31-1997 JAN-31-1996
<PERIOD-START> FEB-01-1996 FEB-01-1995
<PERIOD-END> APR-30-1996 APR-30-1995
<CASH> 10,106,827 7,406,039
<SECURITIES> 1,895,791 3,960,490
<RECEIVABLES> 8,132,873 8,052,133
<ALLOWANCES> 551,038 491,037
<INVENTORY> 0 0
<CURRENT-ASSETS> 22,952,439 22,002,032
<PP&E> 5,046,307 4,291,032
<DEPRECIATION> 1,771,810 1,460,503
<TOTAL-ASSETS> 29,848,535 26,951,922
<CURRENT-LIABILITIES> 2,612,164 2,687,016
<BONDS> 0 0
0 0
0 0
<COMMON> 107,848 105,530
<OTHER-SE> 26,404,133 23,434,986
<TOTAL-LIABILITY-AND-EQUITY> 29,848,535 26,951,922
<SALES> 5,355,156 3,878,692
<TOTAL-REVENUES> 8,050,029 5,180,609
<CGS> 403,273 198,283
<TOTAL-COSTS> 1,370,460 930,597
<OTHER-EXPENSES> 4,790,008 3,367,573
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 156 175
<INCOME-PRETAX> 1,966,051 1,035,312
<INCOME-TAX> 688,118 389,801
<INCOME-CONTINUING> 1,277,933 645,511
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,277,933 645,511
<EPS-PRIMARY> .11 .06
<EPS-DILUTED> .11 .06
</TABLE>
