<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 quarterly period ended April 30, 1997 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 26,176,042 shares of Common Stock, $.01 par value, outstanding at
June 9, 1997.
<PAGE>
SYSTEMSOFT CORPORATION
FORM 10-Q
For the Quarterly Period Ended April 30, 1997
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page Number
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
a) Consolidated Balance Sheets as of April 30, 1997
(Unaudited) and January 31, 1997 3
b) Consolidated Statements of Operations for the three
months ended April 30, 1997 and 1996 (Unaudited) 4
c) Consolidated Statements of Cash Flows for the
three months ended April 30, 1997 and 1996
(Unaudited) 5
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 2. Changes in Securities 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
2
<PAGE>
SYSTEMSOFT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, January 31,
1997 1997
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,930,605 $ 10,807,691
Restricted cash 1,000,000 1,000,000
Marketable securities 101,507 101,507
Accounts receivable, less allowance for doubtful
accounts of $987,445 and $917,915 as of April 30,
1997 and January 31, 1997, respectively 14,261,207 12,352,489
Receivable from related party 1,666,702 1,466,015
Prepaid royalties 6,697,560 --
Prepaid and other current assets 2,852,919 2,443,941
Deferred income taxes 2,528,079 2,528,079
------------ ------------
Total current assets 36,038,579 30,699,722
Property and equipment, net 4,880,896 4,935,625
Purchased software, net 4,486,838 3,747,032
Software development costs, net 1,358,668 1,368,359
------------ ------------
Total assets $ 46,764,981 $ 40,750,738
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,817,018 $ 2,148,092
Accrued expenses 1,447,601 2,503,207
Accrued royalties 3,735,850 96,250
Income taxes payable 1,043,590 348,500
Accrued commissions 242,630 48,238
Accrued compensation and benefits 901,973 450,218
------------ ------------
Total current liabilities 9,188,662 5,594,505
Deferred income taxes 1,642,141 1,642,141
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $.01 par value; 90,000,000 shares authorized;
25,246,100 and 25,146,061 shares issued 252,461 251,460
Additional paid-in capital 69,070,385 68,670,675
Less treasury stock, at cost, 79,623 shares (427,187) (427,187)
Warrants 3,770,939 3,770,939
Accumulated earnings (deficit) (36,732,420) (38,751,795)
------------ ------------
Total stockholders' equity 35,934,178 33,514,092
------------ ------------
Total liabilities and stockholders' equity $ 46,764,981 $ 40,750,738
============ ============
</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,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Revenues:
Software license fees $ 10,659,241 $ 5,355,156
Engineering services 1,246,331 2,235,040
Related party 440,000 458,333
Other 131,402 1,500
------------ ------------
Total revenues 12,476,974 8,050,029
------------ ------------
Cost of revenues:
Software license fees 970,858 403,273
Engineering services 1,146,131 752,256
Related party 314,313 214,931
Other 638 --
------------ ------------
Total cost of revenues 2,431,940 1,370,460
------------ ------------
Gross profit 10,045,034 6,679,569
Operating expenses:
Research and development 3,134,740 1,686,116
Sales and marketing 2,906,497 2,414,818
General and administrative 986,370 689,074
------------ ------------
Total operating expenses 7,027,607 4,790,008
------------ ------------
Income from operations 3,017,427 1,889,561
Interest income 52,583 98,257
Interest expense (23,924) (156)
Foreign exchange loss (31,994) (21,611)
------------ ------------
Income before provision for income taxes 3,014,092 1,966,051
Provision for income taxes 994,717 688,118
------------ ------------
Net income 2,019,375 1,277,933
============ ============
Net income per common share $0.08 $0.06
============ ============
Weighted average number of common and
common equivalent shares outstanding 26,856,019 23,160,480
============ ============
</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,
---------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,019,375 $ 1,277,933
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 1,120,845 578,813
Provision for doubtful accounts 75,000 63,000
Tax benefit of disqualifying dispositions of stock options -- 998,611
Changes in operating assets and liabilities:
Accounts receivable (3,624,681) (927,808)
Receivable from related party (440,000) (338,333)
Prepaid royalties (5,447,560) --
Prepaid and other current assets (221,885) (170,177)
Accounts payable (331,074) 690,147
Accrued expenses (1,055,606) (72,685)
Income taxes payable 695,090 (444,357)
Accrued commissions 267,012 197,290
Accrued compensation and benefits 451,755 (288,675)
Accrued royalties 3,878,913 214,931
Deferred revenue from related party -- --
------------ ------------
Net cash provided by operating activities (2,612,816) 1,778,690
------------ ------------
Cash flows from investing activities:
Sale of marketable securities -- 2,064,699
Purchases of property and equipment (517,743) (667,775)
Purchased software costs (967,130) (618,716)
Software development costs (180,108) (551,028)
------------ ------------
Net cash provided by (used in) investing activities (1,664,981) 227,180
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 400,711 694,918
Purchase of treasury stock -- --
------------ ------------
Net cash provided by financing activities 400,711 694,918
------------ ------------
Net increase in cash and cash equivalents (3,877,086) 2,700,788
Cash and cash equivalents at beginning of period 11,807,691 7,406,039
------------ ------------
Cash and cash equivalents at end of period $ 7,930,605 $ 10,106,827
============ ============
</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
Unaudited Consolidated Financial Statements
The accompanying consolidated financial statements of SystemSoft
Corporation ("the Company") as of April 30, 1997 and for the three months ended
April 30, 1997 and 1996 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 May 1, 1997. The results of operations for the three month period
ended April 30, 1997 are not necessarily indicative of the results that may be
expected for the full year or for any future period. Certain prior year amounts
in the financial statements have been reclassified to conform to the 1998
presentation.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS Number 128, "Earnings per Share" ("FAS128"). This standard is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. FAS128 simplifies the standards for computing earnings
per share and makes them comparable to international EPS standards. The Company
will adopt FAS128 for fiscal 1998 and, upon adoption, will restate all prior EPS
presented.
2. Stock dividend
The Company issued a 2:1 stock split in the form of a stock dividend
on July 17, 1996. All amounts and per share data has been retroactively
adjusted for the earliest period presented.
3. Subsequent event
In May 1997, the Company completed a private placement of its common
stock whereby in exchange for 1,066,666 shares of stock the Company received
gross proceeds of $8,000,000.
6
<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, 1997 and 1996.
The Company designs, develops, markets, licenses and supports to the personal
computer industry call-avoidance software and 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.
On December 19, 1996 the Company acquired Radish Communications Systems, Inc.
("Radish"), a developer of advanced telecommunications software by means of a
merger of a wholly owned subsidiary of the Company with and into Radish with
Radish as the surviving corporation (the "Radish Merger"). The acquisition
was accounted for as a purchase and accordingly the results of Radish are
included in the consolidated financial statements since the date of acquisition.
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,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Revenues:
Software license fees 85.4% 66.5 %
Engineering services 10.0 27.8
Related party 3.5 5.7
Other 1.1 0.0
----------------------------
Total revenues 100.0 100.0
----------------------------
Cost of revenues:
Software license fees 9.1 7.5
Engineering services 92.0 33.7
Related party 71.4 46.9
Other 0.5 0.0
----------------------------
Total cost of revenues 19.5 17.0
----------------------------
Gross margin 80.5 83.0
Operating expenses:
Research and development 25.1 20.9
Sales and marketing 23.3 30.0
General and administrative 7.9 8.6
----------------------------
Total operating expenses 56.3 59.5
----------------------------
Income from operations 24.2 23.5
Other income 0.0 0.9
----------------------------
Income before provision for income taxes 24.2 24.4
Provision for income taxes 8.0 8.5
----------------------------
Net income 16.2% 15.9%
============================
</TABLE>
7
<PAGE>
Comparison of Three Months Ended April 30, 1997 and 1996
Revenues. Revenues were $12,477,000 and $8,050,000 in the three months
ended April 30, 1997 and 1996, respectively, an increase of approximately 55%.
Software license fees increased to $10,659,000 from $5,355,000, or approximately
99%. This increase was primarily due to growth in software license fees for the
Company's new call avoidance product "System Wizard", the addition of revenue
from products acquired in the Radish Merger, and growth in the Company's PC
Card product revenue due to increased revenue primarily from the Company's
Japanese and Taiwanese subsidiaries. Certain contracts include fixed royalty
fees for various time periods in lieu of royalties on a per unit basis. Revenues
attributable to such fees, which are included in software license fees, were
$215,000 and $800,000 in the three months ended April 30, 1997 and 1996,
respectively. 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. There were no revenues from
renegotiated contract terms included in the revenues recognized in the three
months ended April 30, 1997. The $800,000 in fixed royalties recognized in the
three months ended April 30, 1996 were a result of renegotiated contract terms.
This $800,000 would have otherwise been recorded in the subsequent four fiscal
quarters.
Engineering services revenue decreased to $1,246,000 from $2,235,000, or
approximately 44%. This decrease was due to a drop in the engineering services
revenue for all products, most notably the System Wizard and BIOS products. This
decrease is primarily attributable to the completion of the System Wizard
development agreement with Digital Equipment Corporation and a decrease in BIOS
engineering due to a large contract for a single manufacturer being completed
during fiscal 1997. Related party revenues decreased 4% from $458,000 in fiscal
1997 to $440,000 in fiscal 1998. 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, 1997 and 1996,
respectively.
Cost of Revenues. Cost of revenues was $2,432,000 and $1,370,000 in the
three months ended April 30, 1997 and 1996, respectively. These numbers
represent a year over year increase of $1,062,000 or 78%. Cost of revenues
consists primarily of amortization of software development costs and purchased
software, royalties due third parties and engineering costs associated with
engineering services revenues. Cost of revenues as a percentage of revenues
increased by 3% to 20% from 17% in the three months ended April 30, 1997 and
1996, respectively. Cost of software license fees as a percentage of software
license fees revenues increased to 9% from 8% in the three months ended April
30, 1997 and 1996, respectively. This increase is primarily due to the increased
amortization costs associated with the larger asset balance of purchased
software and the recognition of royalty expense associated with System Wizard
revenue. System Wizard revenue is subject to varying royalty rates to certain
vendors for licensed technology in different product offerings in the System
Wizard product family. These royalties may effect the total gross margin
realized by the Company in any particular quarter depending upon the mix of
System Wizard revenue components as well as the percentage of System Wizard
revenue recognized as compared to the Company's total revenue. Cost of
engineering services increased as a percentage of engineering service revenues
to 92% from 34% in the three months ended April 30, 1997 and 1996, respectively.
This increase is due to staff additions as well as the increased engineering
effort required to deliver System Wizard
8
<PAGE>
technology. Cost of related party revenues as a percentage of related party
revenues increased to 71% in three months ended April 30, 1997 from 47% for the
three months ended April 30, 1996. This increase is a result of royalties due
the related party on sales of System Wizard.
Research and Development. Research and development expenses, consisting
primarily of payroll and related expenses, were $3,135,000 and $1,686,000, net
of capitalized development costs of $180,000 and $551,000, in the three months
ended April 30, 1997 and 1996, respectively. These results represent a year over
year increase of $1,449,000 or 86%. As a percentage of revenue, research and
development expenses increased to 25% from 21% for the same three month period
last year. The increase in expenses resulted primarily from staff additions, the
increased development effort expended to integrate the technology acquired from
Radish with the Company's existing technology and a reduction in the amount of
research and development costs capitalized during the three months ended April
30, 1997 when compared to the same period of a year ago.
Sales and Marketing. Sales and marketing expenses, consisting primarily of
payroll and related expenses, costs of marketing programs and events, sales
commissions to internal sales personnel and independent manufacturers'
representatives and travel costs, were $2,906,000 and $2,415,000 in the three
months ended April 30, 1997 and 1996, respectively, an increase of approximately
20%. The increase was primarily due to staff additions, first quarter marketing
programs and conferences and additional travel costs. Sales and marketing
expenses as a percentage of revenues decreased to 23% from 30% due to the
relative growth in revenues.
General and Administrative. General and administrative expenses, consisting
primarily of payroll and related expenses, provision for doubtful accounts,
facility costs and professional fees, were $986,000 and $689,000 in the three
months ended April 30, 1997 and 1996, respectively. These figures represent an
increase of approximately 43% and is due mainly to increases in personnel costs,
professional fees and facility costs. General and administrative expenses as a
percentage of revenues decreased to 8% from 9% due to the relative growth in
revenues.
Provision for Income Taxes. Provision for income taxes was $995,000 and
$688,000 in the three months ended April 30, 1997 and 1996, respectively. The
provision recorded in the three months ended April 30, 1997 represents 33% of
pre-tax income as compared to 35% of pre-tax income for the three months ended
April 30, 1996. This effective tax rate decrease is the result of the
utilization of certain tax credits including the credit for research and
development costs.
Liquidity and Capital Resources
During the three months ended April 30, 1997, the Company funded its
operations primarily through its operating cash flows. As of April 30, 1997 the
Company had cash and cash equivalents and marketable securities of $8,032,000
and working capital of $26,850,000. The Company had a net decrease in cash and
cash equivalents of $3,877,000 for the three months ended April 30, 1997. The
principal uses of cash for the three months ended April 30, 1997 were
9
<PAGE>
a $2,000,000 cash payment for a royalty agreement termination (see below),
purchases of property and equipment of $518,000 and purchases of software of
$967,000.
In February 1997, the Company terminated its Software Development and
License Agreement (the "Original Agreement") with Digital Equipment Corporation
("DEC") whereby the Company will provide DEC certain license privileges and
guarantee payments of $6,750,000 in lieu of future royalties which would have
been paid over the life of the call avoidance software products. The guaranteed
payments include cash payments of $2,000,000 each in the first and second
quarters of fiscal 1998 and $1,500,000 in the third fiscal quarter of 1998 for a
total payment of $5,500,000. In addition a $1,250,000 receivable due the Company
from DEC was offset in the first quarter. The Company has begun expensing these
amounts based upon the royalty rates negotiated in the Original Agreement and
expects the amounts to be completely expensed by the end of fiscal 1999.
During the three months ended April 30, 1997, the Company's financing
activities have provided cash of $401,000, due to the exercise of stock options.
In May 1997, the Company completed a private placement of its common stock
whereby in exchange for 1,066,666 shares of stock the Company received gross
proceeds of $8,000,000. 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.
Certain Factors That May Affect Future Results
Information provided by the Company or statements made by its employees may
contain "forward-looking" information which involves risk and uncertainties. In
particular, statements contained in the Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical facts
(including, but not limited to, statements concerning sufficiency of funds for
the Company's working capital) are "forward-looking statements." The Company's
actual future results may differ significantly from those stated in any forward-
looking statements. Factors that may cause such differences include, but are not
limited to, the factors discussed below as well as the accuracy of the Company's
internal estimates of revenue and operating expense levels. Each of these
factors, and others, are discussed from time to time in the Company's Securities
and Exchange Commission filings.
The Company's future results are subject to substantial risks and
uncertainties. Revenue growth rates experienced by the Company to date may not
be indicative of future growth rates and there can be no assurance that the
Company will remain profitable in the future. The market for the Company's
system-level and call-avoidance software is characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
The Company's future success will depend upon its ability to enhance its current
software and to develop and introduce new software, on a timely basis, which
keeps pace with technological developments and evolving industry standards as
well as to respond to changes in customer requirements. The Company may confront
new competitors as it introduces new products and expands into new markets.
Certain current and potential competitors of the Company are more established,
benefit from greater
10
<PAGE>
market recognition and have substantially greater financial, development and
marketing resources than the Company. Competitive pressures or other factors,
including entry into new markets, may result in unit royalty erosion that could
have a material adverse effect on the Company's results of operations. The
Company believes that its success to date has been largely dependent on the
adoption of its software by key participants in the PC industry the loss of
which could adversely affect the Company's product development efforts. In
addition, the inability of the Company to replace revenues provided by a key
customer could have a material adverse effect on the Company's business and
financial condition. The Company's success to date has depended to a significant
extent upon a number of key management and technical employees. The loss of
services of one or more of these key employees could have a material adverse
effect on the Company's business and financial condition.
The Company believes that future results of operations may fluctuate
significantly based upon numerous factors including the timing of new product
introductions, product mix, activities of competitors and the ability of the
Company to penetrate new markets. The volume and timing of new contracts could
have a significant impact on operating results for a particular quarter and may
result in unanticipated quarterly earnings, shortfalls or losses. In such an
event, the price of the Company's Common Stock would likely be materially
adversely affected.
Part II. OTHER INFORMATION
Item 2. - Changes in Securities
On May 7, 1997, the Company completed a private placement (the
"Placement") of 1,066,666 shares (the "Shares") of its Common Stock,
$.01 par value per share, to Sykes Enterprises, Incorporated
("Sykes"), for gross proceeds to the Company of approximately
$8,000,000. The offer and sale of the shares were exempt from
registration under the Securities Act of 1933, as amended (the
"Securities Act") pursuant to Section 4(2) and Rule 506 of Regulation
D under the Securities Act in reliance upon information available to
the Company as of May 7, 1997, including certain representations and
warranties of the purchases of the Shares. The Shares were offered
only to Sykes, and "accredited investor" as such term is defined in
Rule 501 (a)(3) of Regulation D.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits.
--------
4.1 The Common Stock Purchase Agreement ("Purchase Agreement") by and
between the Company and Sykes Enterprises, Incorporated made and
entered as of May 6, 1997 (filed as Exhibit to Form 8-K dated May
7, 1997 and incorporated by reference herein).
(b) Reports on Form 8-K:
-------------------
A current report on Form 8-K dated May 7, 1997 was filed during
the Company's current quarter. The Current Report on Form 8-K was
filed pursuant to Item 5 of Form 8-K announcing the completion of
the Placement pursuant to the terms of the Purchase Agreement.
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 11, 1997 By:
-------------------------
Robert F. Angelo
President, Chief Executive Officer
and Chairman of the Board
June 11, 1997 By:
-------------------------
David P. Sommers
Senior Vice President, Finance, Treasurer
and Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<CASH> 7,930,605
<SECURITIES> 101,507
<RECEIVABLES> 16,195,354
<ALLOWANCES> 987,445
<INVENTORY> 0
<CURRENT-ASSETS> 36,038,579
<PP&E> 9,197,439
<DEPRECIATION> 4,316,743
<TOTAL-ASSETS> 46,764,981
<CURRENT-LIABILITIES> 9,188,662
<BONDS> 0
0
0
<COMMON> 252,461
<OTHER-SE> 35,681,717
<TOTAL-LIABILITY-AND-EQUITY> 46,764,981
<SALES> 11,905,572
<TOTAL-REVENUES> 12,476,974
<CGS> 2,431,940
<TOTAL-COSTS> 9,459,547
<OTHER-EXPENSES> 31,994
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,924
<INCOME-PRETAX> 3,014,092
<INCOME-TAX> 999,717
<INCOME-CONTINUING> 2,019,375
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,019,375
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
