<PAGE> 1
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 October 31, 1998 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)
ONE INNOVATION 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 27,127,217 shares of Common Stock, $.01 par value, outstanding
at December 14, 1998.
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SYSTEMSOFT CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1998
TABLE OF CONTENTS
PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of October 31, 1998
(Unaudited) and January 31, 1998 3
Consolidated Statements of Operations for the three and
nine months ended October 31, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the nine
months ended October 31, 1998 and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
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SYSTEMSOFT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1998 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,328,222 $ 10,763,795
Restricted cash 1,000,000 -
Accounts receivable, less allowance for doubtful
accounts of $1,802,998 as of October 31, 1998 and
$1,566,705 as of January 31, 1998, respectively 979,344 6,328,056
Prepaid royalties 51,281 2,553,704
Prepaid expenses and other current assets 857,609 2,727,184
------------ ------------
Total current assets 4,216,456 22,372,739
Property and equipment, net 1,982,694 6,807,337
Purchased software and software development costs, net 867,394 3,559,399
Prepaid royalties, long-term portion - 819,450
------------ ------------
Total assets $ 7,066,544 $ 33,558,925
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,503,509 $ 1,086,991
Accrued expenses 1,468,078 1,965,995
Income taxes payable 390,081 118,875
Accrued compensation and benefits 1,486,011 2,037,380
Accrued royalties 3,562,066 2,296,500
Deferred revenue 1,080,921 628,613
------------ ------------
Total current liabilities 9,490,666 8,134,354
Other long-term liabilities 301,310 1,480,143
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding
Common stock, $.01 par value; 90,000,000 authorized;
27,256,463 and 26,807,443 shares issued 272,576 268,074
Additional paid-in capital 83,627,587 83,328,220
Accumulated other comprehensive income (537,691) (744,100)
Less treasury stock, at cost, 159,246 shares (427,187) (427,187)
Accumulated deficit (85,660,717) (58,480,579)
------------ ------------
Total stockholders' (deficit) equity (2,725,432) 23,944,428
------------ ------------
Total liabilities and stockholders' (deficit) equity $ 7,066,544 $ 33,558,925
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
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SYSTEMSOFT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------ -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 742,988 $ 12,162,016 $ 6,345,039 $ 33,381,990
Engineering services 120,996 1,070,586 1,127,685 5,232,574
------------ ------------ ------------ ------------
Total revenues 863,984 13,232,602 7,472,724 38,614,564
------------ ------------ ------------ ------------
Cost of revenues:
Software license fees 482,258 1,678,946 3,132,445 4,009,387
Engineering services 602,867 2,083,194 1,699,010 5,015,458
------------ ------------ ------------ ------------
Total cost of revenues 1,085,125 3,762,140 4,831,455 9,024,845
------------ ------------ ------------ ------------
Gross (loss) profit (221,141) 9,470,462 2,641,269 29,589,719
Operating expenses:
Research and development 2,093,444 3,332,768 8,769,208 9,676,058
Sales and marketing 1,447,781 3,246,396 6,571,303 9,771,815
General and administrative 1,771,743 1,845,495 4,954,214 5,069,985
Loss on BIOS Licensing Agreement 2,504,100 - 2,504,100 -
Restructuring and other charges 6,679,205 - 6,679,205 -
------------ ------------ ------------ ------------
Total operating expenses 14,496,273 8,424,659 29,478,030 24,517,858
------------ ------------ ------------ ------------
(Loss) income from operations (14,717,414) 1,045,803 (26,836,761) 5,071,861
Interest income 24,741 76,895 119,491 225,055
Interest expense (23,463) (27,669) (134,424) (71,906)
Other (6,165) 85,554 (28,444) 87,575
------------ ------------ ------------ ------------
(Loss) income before provision for income taxes (14,722,301) 1,180,583 (26,880,138) 5,312,585
Provision for income taxes 300,000 236,117 300,000 1,599,743
------------ ------------ ------------ ------------
Net (loss) income ($15,022,301) $ 944,466 ($27,180,138) $ 3,712,842
============ ============ ============ ============
Per share net (loss) income
Basic ($0.56) $0.04 ($1.02) $0.14
Diluted ($0.56) $0.04 ($1.02) $0.14
Weighted average shares outstanding
Basic 26,824,386 26,384,434 26,738,596 25,862,993
Diluted 26,824,386 26,718,588 26,738,596 26,907,978
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
4
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SYSTEMSOFT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended October 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($27,180,138) $ 3,712,842
Adjustments to reconcile net (loss) income to cash used
in operating activities, net of effects from loss on BIOS
Licensing Agreement and restructuring and other charges:
Restructuring and other charges, non-cash portion 6,605,865 -
Loss on BIOS Licensing Agreement, non-cash portion 2,383,900 -
Realized foreign currency loss from sale of subsidiary 298,897 -
Depreciation and amortization 3,880,680 4,207,761
Provision for doubtful accounts 700,000 1,420,374
Tax benefit from exercise of stock options - 311,875
Stock option compensation expense 185,989 -
Other (350,956) -
Changes in operating assets and liabilities:
Accounts receivable 4,098,730 (7,738,332)
Prepaid expenses and other current assets 1,116,045 (190,735)
Prepaid royalties 425,585 (5,839,384)
Accounts payable 416,518 (554,886)
Accrued expenses (771,797) (841,416)
Other long term liabilities (1,178,833) -
Income taxes payable 257,712 (178,535)
Accrued compensation and benefits (643,391) 1,240,378
Accrued royalties 1,265,566 2,643,655
Deferred revenue 452,308 222,000
------------ ------------
Net cash used in operating activities (8,037,320) (1,584,403)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (529,279) (3,094,294)
Purchase of marketable securities, net - (2,893,227)
Proceeds from sale of property and equipment 184,910 -
Net cash received from sale of subsidiary 399,821 -
Increase in restricted cash (1,000,000) -
Purchased software and software development costs (359,098) (4,126,098)
------------ ------------
Net cash used in investing activities (1,303,646) (10,113,619)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock private placement - 7,982,500
Proceeds from exercise of stock options 67,500 1,540,881
------------ ------------
Net cash provided by financing activities 67,500 9,523,381
------------ ------------
Effects of exchange rate changes on cash and cash equivalents (162,107) (251,499)
Net decrease in cash and cash equivalents (9,435,573) (2,426,140)
Cash and cash equivalents at beginning of period 10,763,795 11,807,691
Cash and cash equivalents at end of period $ 1,328,222 $ 9,381,551
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
5
<PAGE> 6
SYSTEMSOFT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of SystemSoft Corporation and its wholly-owned subsidiaries (the
"Company"), and have been prepared by the Company in accordance with generally
accepted accounting principles. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows at the dates
and for the periods indicated. While the Company believes that the disclosures
presented are adequate to make the information not misleading, these financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1998.
Certain reclassifications have been made to the prior year's financial
statements to conform with the fiscal 1999 presentation.
The results of operations for the three and nine month periods ended October 31,
1998 are not necessarily indicative of the results that may be expected for the
full year or for any future period.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), was issued which
provides guidance on applying generally accepted accounting principles in
accounting for the costs of computer software developed or obtained for internal
use. SOP 98-1 is effective for financial statements for fiscal years beginning
after December 15, 1998, and will result in the capitalization of certain
qualifying costs incurred in the development of software for internal use. The
Company will adopt the guidelines of SOP 98-1 as of January 31, 1999 and its
adoption is not expected to have a material impact on the Company's financial
position and results of operations.
3. EARNINGS PER SHARE
The Company computes basic and diluted earnings per share in accordance with
SFAS 128, "Earnings per Share", which the Company adopted as of January 31,
1998. Accordingly, all prior period EPS data presented has been restated to
conform to the provisions of SFAS 128. Basic earnings per share is based upon
the weighted average number of common shares outstanding during the period.
Common equivalent shares result from the assumed exercise of stock options and
warrants, the proceeds of which are then assumed to have been used to repurchase
outstanding common stock using the treasury stock method.
Options to purchase 5,636,027 and 5,014,500 shares of common stock for the three
and nine month periods ended October 31, 1998, respectively, and warrants to
purchase 750,000 shares of common stock outstanding during the three and nine
month periods ended October 31, 1998 were excluded from the calculation of
diluted net loss per share as the effect of their inclusion would have been
anti-dilutive.
6
<PAGE> 7
The following is a reconciliation of the numerator and denominator of the basic
and diluted per-share computations:
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------ -----------------------------
1998 1997 1998 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BASIC EPS
Numerator:
Net (loss) income $(15,022,301) $ 944,466 $(27,180,138) $ 3,712,842
Denominator:
Common shares outstanding 26,824,386 26,384,434 26,738,596 25,862,993
Basic EPS (.56) .04 (1.02) .14
============ =========== ============ ===========
DILUTED EPS
Numerator:
Net (loss) income (15,022,301) 944,466 (27,180,138) 3,712,842
Denominator:
Common shares outstanding 26,824,386 26,384,434 26,738,596 25,862,993
Common stock equivalents - 334,154 - 1,044,985
------------ ----------- ------------ -----------
26,824,386 26,718,588 26,738,596 26,907,978
Diluted EPS $ (.56) $ .04 $ (1.02) $ .14
============ =========== ============ ===========
</TABLE>
4. COMPREHENSIVE INCOME
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income." This
statement requires that all components of comprehensive income be reported in
the financial statements in the period in which they are recognized. The
components of comprehensive income for the Company include net income and the
net change in foreign currency translation adjustments. The financial statements
of prior periods have been reclassified for comparative purposes.
Comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------ -----------------------------
1998 1997 1998 1997
------------ -------- ------------ ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net (loss) income $(15,022,301) $944,466 $(27,180,138) $3,712,842
Foreign currency translation (92,488) - (229,864) -
------------ -------- ------------ ----------
Total comprehensive (loss) income $(15,114,789) $944,466 $(27,410,002) $3,712,842
============ ======== ============ ==========
</TABLE>
7
<PAGE> 8
5. RESTRUCTURING AND OTHER CHARGES
In October 1998, the Company recorded total restructuring and other charges of
$6,679,000. The other charges were composed primarily of $3,326,000 for the
write down of prepaid royalty obligations and certain purchased software costs,
related to the Company's SystemWizard products. The charge was the result of
management's review of the realizability of these assets following the continued
weakness in sales of the Company's SystemWizard products and reduced revenue
expectations for future sales of SystemWizard products. Additionally, the
Company halted development and sales activities on some of its extended,
multi-functional SystemWizard product lines for which the Company had previously
entered into royalty obligations. Due to the cessation of these products, the
Company was required to write off the value of these prepaid obligations. Based
on its review, management concluded that these factors impaired the
realizability of certain prepaid royalties. In addition, in an effort to reduce
expenses and improve cash flow, the Company undertook certain cost reductions
and restructured its corporate office lease.
Effective November 1, 1998, the Company executed a second amendment ("the
Amendment") to its corporate office building lease. In December, 1996, the
Company entered into a 15 year lease on its new corporate headquarters being
constructed in Natick, Massachusetts. The lease obligation began in October 1997
upon acceptance of the premises; a 125,000 square foot, three story building
under which the Company was the master tenant. Under the terms of the Amendment,
the Company agreed to relinquish its master tenant status and deliver the entire
building to Metropolitan Life Insurance Company ("Met Life"). Additionally, the
Company assigned to Met Life three subleases, covering approximately 51,000
square feet, that the Company had secured on the building. As part of the
Amendment, the Company will continue to lease approximately 13,000 square feet
of office space from Met Life through October 31, 2005. Under the original lease
agreement, the Company was required to maintain a $1,000,000 letter of credit,
collateralized by $1,000,000 of cash to be maintained in a restricted cash
account. As a result of the Amendment, Met Life agreed to reduce the letter of
credit requirement to $400,000 and the Company received net cash proceeds of
approximately $470,000 from the reduction in the collateral against the letter
of credit reduction after various adjustments and fees as more fully described
in the Amendment.
As a result of the Amendment, the Company has a significantly reduced interest
in previously capitalized leasehold improvements. Accordingly, the Company
expensed $2,313,000 related to the restructuring of its corporate office lease.
The expense related to restructuring the Company's corporate office lease was
composed primarily of $1,670,00 for the write-down of unamortized leasehold
improvements, $50,000 lease renegotiation fee, and $759,000 related to the
write-down to estimated net realizable value of certain fixed assets which will
be liquidated as a result of the significant reduction in leased office space
pursuant to the Amendment. These were offset by $164,000 related principally to
the reversal of previously recorded rent accruals no longer required under the
terms of the Amendment.
The actions related to these charges were substantially completed by October 31,
1998 and resulted in a restructuring charge of approximately $3,353,000. The
charge was composed primarily of $177,000 related to closing the Company's
offices in Colorado and California, $2,313,000 for the restructuring of the
Company's corporate office lease, $566,000 related to the sale of the Company's
Japanese subsidiary, and other miscellaneous items aggregating $297,000.
Approximately $901,000 of the charge is expected to result in cash expenditures
in the twelve months subsequent to October 31, 1998 and was accrued as of
October 31, 1998. Management believes that the amounts accrued will be adequate
to cover future expenditures associated with the actions.
8
<PAGE> 9
6. LOSS ON BIOS LICENSING AGREEMENT
On October 16, 1998, the Company and its wholly-owned subsidiary, SystemSoft
Taiwan Corporation, finalized an asset purchase and license agreement (the
"License Agreement") with Insyde Software, Inc., ("Insyde") for the Company's
BIOS business. The License Agreement, which is effective as of September 1,
1998, called for the Company to transfer to Insyde, in exchange for royalty
payments of up to $2.0 million, an exclusive (even as to the Company)
irrevocable, worldwide license to the Company's BIOS business. Specific terms of
the transaction call for Insyde to pay a 10% royalty on all revenue derived from
the BIOS business up to an aggregate royalty payment of the aforementioned $2.0
million. Upon the closing of the License Agreement, Insyde prepaid $500,000 of
said royalties to the Company and will begin paying the 10% royalty when BIOS
revenue earned by Insyde exceeds $5.0 million. Guaranteed minimum royalty
payments for the remaining $1.5 million begin in the quarter ending December 31,
1999 until such time as any or all of the remaining $1.5 million in royalty
payments is paid to the Company. In addition to the $2.0 million in royalties
owed for the BIOS business, Insyde also paid $85,000 for specific tangible
personal property acquired from the Company and from a wholly-owned subsidiary
of the Company, SystemSoft Taiwan Corporation, consisting of computer, office
and engineering equipment.
As a result of the License Agreement, the Company has no on-going operations in
Taiwan and all BIOS related activities have been eliminated effective September
1, 1998. As a result of the licensing transaction and the closing of its
operations in Taiwan, the Company recorded a net loss on the BIOS Licensing
Agreement of $2,504,000. Direct expenses related to the loss on the BIOS
Licensing Agreement were $535,000 comprised primarily of facility abandonment
costs, commission accrual for assistance to be provided by Insyde for collecting
existing Taiwan accounts receivable, and fixed asset write-offs. In addition to
the direct costs resulting from the licensing transaction, the Company incurred
indirect expenses totaling $1,969,000. Whereas the Company transferred its BIOS
technology to Insyde, the Company has no on-going interest in its developed BIOS
technology. Accordingly, the Company wrote off unamortized purchased software
costs related to the BIOS technology of $1,599,000 and expensed $180,000 of
other prepaid items related to operations in Taiwan. Other miscellaneous
indirect costs charged to loss on the BIOS Licensing Agreement totaled $190,000.
7. LITIGATION
On March 3, 1998, a purported securities class action lawsuit was filed in the
United States District Court for the District of Massachusetts against the
Company and others, including certain officers and directors of the Company. The
lawsuit alleges, among other things, that the Company, during a purported class
period of January 25, 1996 through March 3, 1997, made misrepresentations and
omissions to the investing public regarding its revenue, product development and
business prospects in violation of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. Several additional complaints were filed against the
Company and others in subsequent weeks in the same federal court alleging
similar claims. Seven of the complaints alleged a longer class period ending
February 5, 1998. On May 8, 1998, the court consolidated each of these separate
actions. The plaintiffs in these consolidated actions seek unspecified damages
against the Company and other defendants.
On December 4, 1998, the Company announced that it has reached an
agreement-in-principle to settle all of the class action litigations. The terms
of the proposed settlement include the issuance of 5.2 million shares of the
Company's common stock and a contribution by the Company's directors' and
officers' liability insurance carrier of $2.9 million. The Company has
conditionally agreed to reimburse the insurance carrier $200,000, if certain
financial targets are met by the Company. All terms of the settlement are
subject to the signing of a definitive agreement and final court approval. There
can be no assurance that a definitive agreement will be signed and finally
approved by the court and that the Company will not have to continue its defense
of the lawsuits; accordingly the Company has not recorded any of the settlement
costs or other settlement transactions as of October 31, 1998. Should a
definitive agreement not be signed or finally approved for any reason, the
Company intends to defend the lawsuits vigorously.
9
<PAGE> 10
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 and nine months ended October 31, 1998
and 1997. The Company designs, develops, markets, licenses and supports
call-avoidance software to the personal computer industry and system-level
software designed to be the communication path between personal computer
hardware and its operating system software. The principal markets for the
Company's products are U.S. and Japanese based manufacturers of personal
computers and related devices.
Comparison of Three Months Ended October 31, 1998 and 1997
Revenues. Revenues were $864,000 and $13,233,000 in the three months
ended October 31, 1998 and 1997, respectively, a decrease of approximately 93%.
Software license fees decreased to $743,000 from $12,162,000 or approximately
94%. This decrease in revenues occurred throughout all product lines, with the
largest quarter to quarter decline experienced in the SystemWizard product line.
Revenues for the three month period ended October 31, 1998 were negatively
impacted by the reversal of approximately $460,000 of revenue from a Taiwanese
customer that had been recognized in the quarter ended July 31, 1998. In the
quarter ended July 31, 1998, the Company received purchase orders from a
customer for the purchase of $500,000 of various software products. In the
quarter ended October 31, 1998, the customer notified the Company of its intent
not to honor payment terms of the previously issued purchase orders. The Company
has negotiated a payment plan with the customer whereby the customer will make
payments based on actual product shipments at which time the Company will
recognize the associated revenue. Lastly, due to the August 1998 sale of the
Company's Japanese Subsidiary and the BIOS Licensing Agreement which was
effective September 1, 1998, revenues for the three month period ended October
31, 1998 excluded a significant portion of revenues which the Company had
realized in the three month period ended October 31, 1997. Revenues from the
Company's Japanese Subsidiary, Taiwanese operations and United States BIOS
business accounted for approximately a $5 million decrease in consolidated
revenues for the three months ended October 31, 1998 versus the three month
period ended October 31, 1997.
Engineering services decreased to $121,000 from $1,071,000, or
approximately 89% due to the completion, in December 1997, of the Intel
Development and License Agreement and a decrease in BIOS engineering services
revenue due to the licensing of the BIOS technology effective September 1, 1998.
Combined BIOS and Intel related engineering service revenues were $38,000 and
$572,000 in the three months ended October 31, 1998 and 1997, respectively. In
addition, many customers contract engineering services as part of their purchase
of software; due to the significant decline in software license revenues,
engineering service revenues have been adversely impacted.
Cost of Revenues. Cost of revenues was $1,085,000 and $3,762,000 in
the three months ended October 31, 1998 and 1997, respectively, a year over year
decrease of $2,677,000 or 71%. Cost of revenues consists primarily of
amortization of software development costs and purchased software costs,
royalties due third parties, and engineering costs, principally direct
engineering compensation expenses associated with engineering services revenue.
Cost of revenues as a percentage of revenues increased to 126% from 28% in the
three months ended October 31, 1998 and 1997, respectively. Cost of software
license fees as a percentage of software license fees revenues increased to 65%
from 14%, respectively primarily due to the substantial relative decrease in
software license revenue. The decrease in cost of license fees in absolute
dollars was due primarily to a decrease in the amortization of purchased
software costs and capitalized development costs. Additionally, much of the cost
of license fees, such as amortization of purchased software and capitalized
software, is relatively fixed in nature and therefore does not fluctuate as a
percentage basis consistent with changes in revenue.
Cost of engineering services increased as a percentage of engineering
service revenues to 498% from 195% in the three months ended October 31, 1998
and 1997, respectively, primarily due to the substantial relative decline in
engineering services revenue. In addition, the Company experienced a reduction
in BIOS engineering revenue in the quarter ended October 31, 1998 due to the
licensing of its BIOS technology effective
10
<PAGE> 11
September 1, 1998; however, due to the fixed nature of certain engineering
costs, primarily payroll and benefit costs, the gross margin on engineering
services was negative for the three months ended October 31, 1998. The Company
has eliminated the payroll and benefit costs related to its BIOS custom
engineering department as a result of the BIOS Licensing Agreement whereby
substantially all BIOS employees ceased working for the Company in September
1998. However, the anticipated full cost savings associated with recent cutbacks
in staff and the elimination of the BIOS custom engineering department may not
be fully realized until future quarters.
Research and Development. Research and development expenses,
consisting primarily of payroll and related expenses, were $2,093,000 and
$3,333,000, for the three months ended October 31, 1998 and 1997, respectively,
net of capitalized development costs of $171,000 in the three months ended
October 31, 1997; no development costs were capitalized in the three months
ended October 31, 1998. These results represent a year over year decrease of
$1,240,000 or 37%. The reduction in research and development expenses is due to
a reduction in headcount, including headcount reductions in the BIOS business,
Japan, and Taiwan, and cost savings associated with curtailing substantially all
discretionary spending. As a percentage of revenue, research and development
expenses increased to 242% from 25% due to the substantial relative decrease in
revenues.
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 $1,448,000 and $3,246,000
in the three months ended October 31, 1998 and 1997, respectively, a decrease of
approximately 55%. The decrease was primarily due to staff reductions, reduced
travel, reduced commissions due independent manufacturers' representatives, and
reduced marketing costs related to cost control measures. In addition, sales
expenses have decreased as a result of the sale of the Company's Japanese
subsidiary and cost savings associated with terminating operations in Taiwan as
a result of the BIOS Licensing Agreement. As a percentage of revenue, sales and
marketing expenses increased to 168% from 25% due to the substantial relative
decrease in revenues.
General and Administrative. General and administrative expenses,
consisting primarily of payroll and related expenses, provision for doubtful
accounts, depreciation, and professional fees, were $1,772,000 and $1,845,000 in
the three months ended October 31, 1998 and 1997, respectively, a decrease of
approximately 4%. The decrease was primarily due to a reduction in the provision
for bad debts and a decrease in consulting expense, offset by an increase in
depreciation expense. General and administrative expenses as a percentage of
revenues increased to 205% from 14% due to the substantial relative decrease in
revenues.
Provision for Income Taxes. Provision for income taxes was $300,000
and $236,000 in the three months ended October 31, 1998 and 1997, respectively,
an increase of 27%. The increase was due to $300,000 recorded in the quarter
ended October 31,1998 related to a foreign income tax audit, offset by the tax
savings realized due to a pre-tax loss of $14,722,000 for the quarter ended
October 31, 1998. The Company recorded a tax provision of $236,000 in the three
months ended October 31, 1997 as the Company had a pre-tax profit of $1,181,000
in the three months ended October 31, 1997. In October of 1998, the Company was
assessed approximately $300,000 by the Taiwan Tax Authority as a result of an
audit of a prior years tax return. The Company is appealing the tax assessment
but elected to accrue the full amount of the assessment in the quarter ended
October 31, 1998.
Comparison of Nine Months Ended October 31, 1998 and 1997
Revenues. Revenues were $7,473,000 and $38,615,000 in the nine months
ended October 31, 1998 and 1997, respectively, a decrease of approximately 81%.
Software license fees decreased to $6,345,000 from $33,382,000 or approximately
81%. The decrease in revenues occurred in all product lines with the most
significant declines in the PC Card (80% decrease), BIOS (84% decrease), and
SystemWizard (80% decrease) product lines. Revenues for the nine month period
ended October 31, 1998 were negatively impacted by the reversal of approximately
$460,000 of revenue from a Taiwanese customer that had been recognized in the
quarter ended July 31, 1998. In the quarter ended July 31, 1988, the Company
received purchase orders from a customer for the purchase of $500,000 of various
software products. In the quarter ended October 31, 1998, the customer notified
the Company of its intent not to honor the purchase orders issued. The Company
has
11
<PAGE> 12
negotiated a payment plan with the customer whereby the customer will make
payments based on actual product shipments. Lastly, due to the August 1998 sale
of the Company's Japanese Subsidiary and the BIOS Licensing Agreement which was
effective September 1, 1998, revenues for the nine month period ended October
31, 1998 excluded a significant portion of revenues which the Company had
realized in the nine month period ended October 31, 1997. Revenues from the
Company's Japanese Subsidiary, Taiwanese operations and United States BIOS
business were $2,045,000 and $14,043,000 in the nine months ended October 31,
1998 and 1997, respectively, a decrease of approximately 85%.
Engineering services revenue decreased to $1,128,000 from $5,233,000
or approximately 78% due to the completion, in December 1997, of the Intel
Development and License Agreement and a decrease in BIOS engineering services
revenue due to the licensing of the BIOS technology effective September 1, 1998.
Revenues generated under the Intel Agreement were $750,000 for the nine months
ended October 31, 1997; for the nine months ended October 31, 1998, no revenues
were recognized under the Intel Development Agreement. In addition, many
customers contract engineering services as part of their purchase of software;
due to the significant decline in software license revenues, engineering service
revenues have been adversely impacted.
Cost of Revenues. Cost of revenues was $4,831,000 and $9,025,000 in
the nine months ended October 31, 1998 and 1997, respectively, a year over year
decrease of $4,194,000 or 46%. Cost of revenues consists primarily of
amortization of software development costs and purchased software costs,
royalties due third parties, and engineering costs, principally direct
engineering compensation expenses associated with engineering services revenue.
Cost of revenues as a percentage of revenues increased to 65% from 23% in the
nine months ended October 31, 1998 and 1997, respectively. Cost of software
license fees as a percentage of software license fees revenues increased to 49%
from 12% primarily due to the substantial relative decrease in software license
revenue and the relative fixed nature of certain expenses, primarily
amortization of purchased license fees and capitalized software development
costs. The decrease in cost of license fees in absolute dollars was due
primarily to a decrease in the amortization of purchased software costs and
capitalized development costs.
Cost of engineering services increased as a percentage of engineering
service revenues to 151% from 96% in the nine months ended October 31, 1998 and
1997, respectively. Gross margin on engineering services was negative for the
nine months ended October 31, 1998 due the fixed cost nature, primarily payroll
and benefit costs and depreciation, of the engineering services department
combined with the substantial decline in engineering services revenues. The
Company has eliminated the payroll and benefit costs related to its BIOS custom
engineering department as a result of the BIOS Licensing Agreement whereby
substantially all BIOS employees ceased working for the Company in September
1998. However, the anticipated full cost savings associated with recent cutbacks
in staff and the elimination of the BIOS custom engineering department will not
be fully realized until future quarters.
Research and Development. Research and development expenses were
$8,769,000 and $9,676,000, net of capitalized development costs of $0 and
$511,000, in the nine months ended October 31, 1998 and 1997, respectively, a
decrease of approximately 9%. As a percentage of revenue, research and
development expenses increased to 117% from 25%. The increase in expenses
resulted primarily from increases in rent and depreciation expense, offset by a
decrease in payroll and related expenses resulting from cutbacks in staff. Rent
and depreciation expense for the nine months ended October 31, 1998 have
increased over the corresponding period ended October 31, 1997 due to
incremental rent costs of the Company's new corporate office building which was
occupied in October, 1997. Although the Company has taken steps to reduce its
research and development staff, the savings associated with this action are not
fully reflected in the results of operations for the nine months ended
October 31, 1998 due to the timing of the reductions in staff which occurred in
May and August of 1998.
12
<PAGE> 13
Sales and Marketing. Sales and marketing expenses were $6,571,000 and
$9,772,000 in the nine months ended October 31, 1998 and 1997, respectively, a
decrease of approximately 33%. The percentage decrease was primarily due to
staff reductions, decreased expenditures on marketing programs and co-op
advertising, a reduction in travel, a reduction in sales commissions due
employees, and a reduction in commissions due independent manufacturers'
representatives. In addition, sales expenses have decreased as a result of the
sale of the Company's Japanese subsidiary and cost savings associated with
terminating operations in Taiwan as a result of the BIOS Licensing Agreement.
Sales and marketing expenses as a percentage of revenues increased to 88% from
25% due to the substantial relative decline in revenues, offset by a decrease in
the level of absolute expenses.
General and Administrative. General and administrative expenses were
$4,954,000 and $5,070,000 in the nine months ended October 31, 1998 and 1997,
respectively, a decrease of approximately 2%. This decrease is due to a
reduction in bad debt expense offset by a small increase in rent expense and
depreciation expense. General and administrative expenses as a percentage of
revenues increased to 66% from 13% due to the substantial relative decrease in
revenues.
Provision for Income Taxes. Provision for income taxes was $300,000
and $1,600,000 for the nine months ended October 31, 1998 and 1997,
respectively, a decrease of 78%. The decrease was due to $300,000 recorded in
the quarter ended October 31,1998 related to a foreign income tax audit, offset
by the reduction in income tax expense related to the pre-tax loss of
$26,880,000 for the nine months ended October 31, 1998. The Company recorded a
tax provision of $1,600,000 in the nine months ended October 31, 1997 as the
Company had a pre-tax profit of $5,313,000 in the nine months ended October 31,
1997. In October of 1998, the Company was assessed approximately $300,000 by the
Taiwan Tax Authority as a result of an audit of a prior year's tax return. The
Company is appealing the tax assessment but elected to accrue the full amount of
the assessment in the quarter ended October 31, 1998.
Restructuring and Other Charges and Loss on BIOS Licensing Agreement.
In October 1998, the Company recorded total restructuring and other charges of
$6,679,000. The other charges were composed primarily of $3,326,000 for the
write down of prepaid royalty obligations and certain purchased software costs,
related to the Company's SystemWizard products. The charge was the result of
management's review of the realizability of these assets following the continued
weakness in sales of the Company's SystemWizard products and reduced revenue
expectations for future sales of SystemWizard products. Additionally, the
Company halted development and sales activities on some of its extended,
multi-functional SystemWizard product lines for which the Company had previously
entered into royalty obligations. Due to the cessation of these products, the
Company was required to write off the value of these prepaid obligations. Based
on its review, management concluded that these factors impaired the
realizability of certain prepaid royalties. In addition, in an effort to reduce
expenses and improve cash flow, the Company undertook certain cost reductions
and restructured its corporate office lease.
Effective November 1, 1998, the Company executed a second amendment
("the Amendment") to its corporate office building lease. In December, 1996, the
Company entered into a 15 year lease on its new corporate headquarters being
constructed in Natick, Massachusetts. The lease obligation began in October 1997
upon acceptance of the premises; a 125,000 square foot, three story building
under which the Company was the master tenant. Under the terms of the Amendment,
the Company agreed to relinquish its master tenant status and deliver the entire
building to Metropolitan Life Insurance Company ("Met Life"). Additionally, the
Company assigned to Met Life three subleases, covering approximately 51,000
square feet, that the Company had secured on the building. As part of the
Amendment, the Company will continue to lease approximately 13,000 square feet
of office space from Met Life through October 31, 2005. Under the original lease
agreement, the Company was required to maintain a $1,000,000 letter of credit,
collateralized by $1,000,000 of cash to be maintained in a restricted cash
account. As a result of the Amendment, Met Life agreed to reduce the letter of
credit requirement to $400,000 and the Company received net cash proceeds of
approximately $470,000 from the reduction in the collateral against the letter
of credit reduction after various adjustments and fees as more fully described
in the Amendment.
13
<PAGE> 14
As a result of the Amendment, the Company has a significantly
reduced interest in previously capitalized leasehold improvements. Accordingly,
the Company expensed $2,313,000 related to the restructuring of its corporate
office lease. The expense related to restructuring the Company's corporate
office lease was composed primarily of $1,670,00 for the write-down of
unamortized leasehold improvements, $50,000 lease renegotiation fee, and
$759,000 related to the write-down to estimated net realizable value of certain
fixed assets which will be liquidated as a result of the significant reduction
in leased office space pursuant to the Amendment. These were offset by $164,000
related principally to the reversal of previously recorded rent accruals no
longer required under the terms of the Amendment.
The actions related to these charges were substantially completed by
October 31, 1998 and resulted in a restructuring charge of approximately
$3,353,000. The charge was composed primarily of $177,000 related to closing the
Company's offices in Colorado and California, $2,313,000 for the restructuring
of the Company's corporate office lease, $566,000 related to the sale of the
Company's Japanese subsidiary, and other miscellaneous items aggregating
$297,000.
Approximately $901,000 of the charge is expected to result in cash
expenditures in the twelve months subsequent to October 31, 1998 and was accrued
as of October 31, 1998. Management believes that the amounts accrued will be
adequate to cover future expenditures associated with the actions.
On October 16, 1998, the Company and its wholly-owned subsidiary,
SystemSoft Taiwan Corporation, finalized an asset purchase and license agreement
(the "License Agreement") with Insyde Software, Inc., ("Insyde") for the
Company's BIOS business. The License Agreement, which is effective as of
September 1, 1998, called for the Company to transfer to Insyde, in exchange for
royalty payments of up to $2.0 million, an exclusive (even as to the Company)
irrevocable, worldwide license to the Company's BIOS business. Specific terms of
the transaction call for Insyde to pay a 10% royalty on all revenue derived from
the BIOS business up to an aggregate royalty payment of the aforementioned $2.0
million. Upon the closing of the License Agreement, Insyde prepaid $500,000 of
said royalties to the Company and will begin paying the 10% royalty when BIOS
revenue earned by Insyde exceeds $5.0 million. Guaranteed minimum royalty
payments for the remaining $1.5 million begin in the quarter ending December 31,
1999 until such time as any or all of the remaining $1.5 million in royalty
payments is paid to the Company. In addition to the $2.0 million in royalties
owed for the BIOS business, Insyde also paid $85,000 for specific tangible
personal property acquired from the Company and from a wholly-owned subsidiary
of the Company, SystemSoft Taiwan Corporation, consisting of computer, office
and engineering equipment.
As a result of the License Agreement, the Company has no on-going
operations in Taiwan and all BIOS related activities have been eliminated
effective September 1, 1998. As a result of the licensing transaction and the
closing of its operations in Taiwan, the Company recorded a net loss on the BIOS
Licensing Agreement of $2,504,000. Direct expenses related to the loss on the
BIOS Licensing Agreement were $535,000 comprised primarily of facility
abandonment costs, commission accrual for assistance to be provided by Insyde
for collecting existing Taiwan accounts receivable, and fixed asset write-offs.
In addition to the direct costs resulting from the licensing transaction, the
Company incurred indirect expenses totaling $1,969,000. Whereas the Company
transferred its BIOS technology to Insyde, the Company has no on-going interest
in its developed BIOS technology. Accordingly, the Company wrote off unamortized
purchased software costs related to the BIOS technology of $1,599,000 and
expensed $180,000 of other prepaid items related to operations in Taiwan. Other
miscellaneous indirect costs charged to loss on the BIOS Licensing Agreement
totaled $190,000.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended October 31, 1998, the Company funded its
operations primarily through use of existing cash and collection of accounts
receivable. As of October 31, 1998, the Company had cash and cash equivalents of
$1,328,000 and negative working capital of $(5,274,000). The Company had a net
decrease in cash and cash equivalents of $9,436,000 for the nine months ended
October 31, 1998. The principal uses of cash and cash equivalents for the nine
months ended October 31, 1998 were the funding of operations of $8,037,000,
purchases of property and equipment of $529,000, purchased software costs of
$359,000, and funding of a $1,000,000 restricted cash account related to a
letter of credit required under the Company's corporate office lease. The letter
of credit was previously unsecured under the Company's line of credit facility
with a bank and was reduced to $400,000 subsequent to October 31, 1998. The
Company is currently in violation of the tangible net worth and minimum
quarterly earnings covenants of its line of credit. As a result, the Company
does not have any borrowing ability under its line of credit.
The Company had a Development and License Agreement with Intel (the
"Intel Agreement") whereby Intel provided the Company with certain technology
funding for engineering, sales and marketing, and support services. In
consideration of Intel's technology provided and the funding received, the
Company was obligated to pay Intel royalties based on a percentage of revenues
generated on all licensed works developed under the Intel Agreement. The Intel
Agreement was amended in October 1995 to include additional engineering services
and products. In December 1997 the Company entered into an agreement (the
"December 1997 Agreement") with Intel which requires the Company to make
guaranteed payments of $4,263,000 in lieu of future royalty payments which would
have been paid over the life of certain of the Company's call-avoidance
products. The guaranteed payments are required to be made over various dates
through December 1, 1999. As of October 31, 1998, the Company owed Intel
remaining guaranteed payments of $3,263,000. The Company has not made three
guaranteed payments of $500,000 each, due June 1, 1998, September 1, 1998, and
December 1, 1998. Under the terms of the December 1997 Agreement, if the Company
is more than 60 days late on any installment payment, Intel, at its option, may
terminate the December 1997 Agreement upon written notice to the Company. Upon
any such termination, all guaranteed payments received by Intel will be credited
as royalty payments against the Company's actual royalties due Intel pursuant to
the terms of the original Intel agreements and amendments had the December 1997
Agreement never been executed and all parties will abide by the terms of the
original agreements and amendments for the remaining term thereof. As of
December 10, 1998, Intel has not notified the Company of its intent to terminate
the December 1997 Agreement.
With the sale of its Japanese Subsidiary, cutbacks in its staff, and
licensing of its BIOS technology, the Company believes it has taken significant
steps to reduce its operating expenses. Total expenses related to the Company's
Japanese Subsidiary, Taiwan operations and US based BIOS operations represented
approximately 42% of consolidated operating expenses, for the nine months ended
October 31, 1998. Although there can be no assurance as to the magnitude of
future expense reductions that the Company may realize as a result of these
actions, the Company anticipates a reduction in future cost of sales and
operating expenses. The Company believes that its current cash balances and cash
flow from operations may not be sufficient to meet its working capital
requirements through the next three months. The Company may decide that it is
necessary to further reduce operating costs in order to meet its current cash
requirements over the next three months. To address its cash shortfall, the
Company is currently reviewing various financing alternatives which, if
consummated, may provide for cash flow sufficient to meet the Company's expected
working capital needs. However, there can be no assurance that the Company would
be successful in procuring such financing, or that it could do so on terms
favorable to the Company. The sale or issuance of additional equity or
convertible debt securities could result in additional dilution to the Company's
stockholders. If the Company is unable to obtain additional financing to meet
its operating needs, the Company may be required to further significantly reduce
the scope of operations in the next three months. To date, inflation has not had
a material impact on the Company's financial results.
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<PAGE> 16
YEAR 2000
Overview. The Company is in the process of analyzing and addressing
what is known as the Year 2000 Issue. The Year 2000 Issue has arisen because
many existing computer programs use only two digits to identify a year in the
data field. These programs were designed and developed without considering the
impact of the upcoming change in the century and, accordingly, could misconstrue
dates such as "00" as the year 1900 rather than 2000. The failure of computer
programs and systems to properly recognize dates beginning in the year 2000
could adversely affect the Company's business activities.
The Company's Year 2000 Compliance Program. The Company has initiated
its Year 2000 Compliance Program, the purpose of which is: to identify important
systems that are not yet Year 2000 compliant; to initiate replacement or
remedial action to assure that key systems will continue to operate in the Year
2000 and to test the replaced or remediated systems. The Company expects to
substantially complete its Year 2000 Compliance Program activities by the end of
1999.
Information Technology Systems. The Company's critical internal
information technology ("IT") systems consist of its Electronic Mail system,
Internal financial systems, Corporate Communications system, desktop and file
management systems, Software Development tools and I/S Management tools. The
Company is contacting the vendors of these systems and obtaining assurances that
these IT systems are currently in material Year 2000 compliance. To the extent
that some employees may be using older versions of these systems that may not be
compliant, the Company intends to upgrade such systems to achieve material Year
2000 compliance. The Company is still in the process of evaluating other areas
of its existing internal IT systems at this time and will seek further
assurances from its vendors as necessary. The Company plans to test its critical
IT systems during 1999. The Company intends to evaluate the need for contingency
plans for these internal IT systems given the assurances of compliance the
Company has received for these systems. While the Company will work diligently
with all of its IT system providers, there is no guarantee that these IT systems
providers will meet Year 2000 compliance. The failure of any such IT system to
be Year 2000 compliant could have a negative effect on the business activities
of the Company.
Non-Information Technology Systems. The Company is conducting an
assessment of its non-information technology systems (such as building security,
voice mail, telephone and other systems containing embedded microprocessors) and
is in the process of determining the nature and extent of any work that may be
required to make any non-IT systems Year 2000 compliant.
Third Party Suppliers, Vendors and Customers. The Company's Year 2000
Compliance Program also includes an investigation of the Year 2000 compliance of
its major suppliers, vendors, customers and business partners. For example,
where the Company's products and services incorporate third party software the
Company will be verifying these third party suppliers Year 2000 compliance. If
there occur cases where the non-compliance of third party components does affect
features or functions used by the Company in its products, the Company intends
to install upgrades (most of which are currently available) to achieve material
compliance. In addition, the Company is in the process of
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<PAGE> 17
testing its application software. To date, the Company has found its application
software to be Year 2000 compliant. Given the number of components and the
complexity of the software incorporated in the Company's products and services,
the Company believes that in the course of conducting its Year 2000 Compliance
Program it could reasonably discover that the Year 2000 problem may affect its
software or components. However, the Company regularly develops software updates
to its product offerings as a natural course of business and the Company does
not expect that these Year 2000 updates will be excessively complex or expensive
to implement.
Year 2000 Costs and Expenses. To date, the costs associated with the
Year 2000 Issue and the Company's Year 2000 Compliance Program have not been
material. The Company will incur costs that include internal resources, software
and equipment upgrades and replacement. Based on currently available
information, the Company believes that the expense associated with its ongoing
efforts will not be material and will be funded through operations, but the
Company has not completed its evaluation of its non-IT systems and its third
party relationships.
Contingency Plans. At the present time, the Company has not yet
formulated contingency plans for addressing problems due to the Year 2000 Issue.
The Company has been assured that its critical internal IT systems are compliant
by the vendors of those systems and the Company will evaluate the need for
contingency plans for internal IT systems given those assurances. The Company is
currently in the process of evaluating the Year 2000 Issue with respect to its
non-IT systems and with respect to its major suppliers, vendors, customers and
business partners. As this evaluation process proceeds, the Company will
formulate appropriate contingency plans. The Company expects that any required
contingency planning will be completed no later than the end of 1999.
Risks Associated with Year 2000 Issue. Various statements in this
discussion of Year 2000 are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 as discussed above under
"Factors That May Affect Future Results." These statements include statements of
the Company's expectations, statements with regard to schedules and expected
completion dates and statements regarding expected Year 2000 compliance. These
forward-looking statements are subject to various risk factors which may
materially affect the Company's efforts to achieve Year 2000 compliance. These
risk factors include the inability of the Company to complete the plans and
modifications that it has identified, the failure of software vendors to deliver
the upgrades and repairs to which they have committed, the wide variety of
information technology systems and components, both hardware and software, that
must be evaluated and the large number of vendors and customers with which the
Company interacts. The Company's assessments of the effects of Year 2000 on the
Company are based, in part, upon information received from third parties and the
Company's reasonable reliance on that information. Therefore, the risk that
inaccurate information is supplied by third parties upon which the Company
reasonably relied must be considered as a risk factor that might affect the
Company's Year 2000 efforts. The Company is attempting to reduce the risks by
utilizing an organized approach, extensive testing, and allowance of ample
contingency time to address issues identified by tests.
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<PAGE> 18
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 risks 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, reduction in future
costs of sales and operating expenses, and Year 2000 issues) 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. The market for the Company's products are 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 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 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 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. As discussed in Note 7
to the accompanying Unaudited Consolidated Financial Statements, the Company has
been named as a defendant in a series of purported securities class action
lawsuits and has reached an agreement-in-principle to settle the lawsuits,
subject to the signing of a definitive agreement and final court approval of the
settlement. Should a definitive agreement not be signed or final court approval
not be obtained for any reason, the ultimate outcome of the litigations,
including the amount of possible loss, if any, cannot be determined at this
time. Additionally, Intel may terminate the December 1997 Agreement.
The Company believes that its current cash balances and cash flow
from operations may not be sufficient to meet its working capital requirements
through the next three months. If the Company is unable to obtain additional
financing sufficient to meet its operating needs, the Company may be required to
further significantly reduce the scope of its operations in the next three
months. Such reduction in scope of its operations would have a material adverse
effect on the Company's results of operations and financial condition.
The Company is currently seeking to raise additional capital and will
consider various financing alternatives, including equity or debt financings and
corporate partnering arrangements. There can be no assurance, however, that this
capital will be available on terms acceptable to the Company, if at all. If
additional financing is not available, the Company may be required to further
curtail expenses or take other steps that adversely affect the Company's future
performance.
The Company believes that future results of operations may fluctuate
significantly based upon several 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, timing and nature of new contracts
could have a significant impact on operating results for a particular quarter
and may result in unanticipated quarterly earnings,
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<PAGE> 19
shortfalls or losses. In such an event, the price of the Company's Common Stock
would likely be materially adversely affected.
The Company's Common Stock is currently listed on the NASDAQ National
Market ("NNM"). The Company has been notified by The NASDAQ Stock Market, Inc.
that unless the minimum bid price of its Common Stock is equal to or greater
than $1.00 for a minimum of ten consecutive trading days prior to January 15,
1999, the Company's Common Stock will be delisted from the NNM on January 15,
1999. Prior to such date, the Company intends to request a hearing before the
NASDAQ Listing Qualifications Panel with respect to NASDAQ's plan to delist the
Company. Under NASDAQ's rules, the hearing request will automatically stay the
delisting pending a ruling by the hearing panel. There can be no assurance that
the hearing will result in a ruling favorable to the Company and the Company's
Common Stock will continue to be listed on the NNM. If the Company's Common
Stock is delisted, trading, if any, of the Common Stock would thereafter be
conducted in a non-NASDAQ over-the-counter market, and an investor could find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, the Common Stock. In addition, if the Company's Common Stock was
delisted, the Company's securities may be subject to a rule that imposes
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors.
For transactions covered by this rule, the broker-dealer must make a special
suitability determination for the purchaser and must have received the
purchaser's written consent to the transaction prior to sale. Consequently,
delisting, if it occurred, may affect the ability of broker-dealers to sell the
Company's Common Stock and the ability of the stockholders to sell their Common
Stock.
19
<PAGE> 20
PART II. OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
(a) EXHIBITS.
2.1 Asset Purchase and License Agreement dated as of September 1,
1998 by and between SystemSoft Corporation, SystemSoft Taiwan
Corporation and Insyde Software, Inc. (filed as Exhibit to Form
8-K/A dated November 9, 1998 and incorporated by reference
herein).
27.1 Financial Data Schedule for Fiscal 1999
27.2 Financial Data Schedule for Fiscal 1998
(b) REPORTS ON FORM 8-K:
A Current Report on Form 8-K dated September 9, 1998 (which was
subsequently amended by a Current Report on Form 8-K/A dated November
9, 1998) 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
i) that the Company and its wholly-owned subsidiary, SystemSoft Taiwan
Corp., entered into a letter of understanding with Great Wide
Technologies Limited ("GWT"), later re-named Insyde Software, Inc.,
regarding the Company's agreement to enter into an exclusive,
irrevocable, worldwide License Agreement with GWT for the Company's
BIOS business, ii) the actual results for the quarter ended July 31,
1998, iii) that the Company's Board of Directors elected Frank A.
Sola, Chief Executive Officer and a Director of the Company, and iv)
that Deborah Bessemer had resigned as President, Chief Operating
Officer and a Director of the Company.
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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
December 14, 1998 By: /s/ Frank A. Sola
---------------------------
Frank A. Sola
Chief Executive Officer
December 14, 1998 By: /s/ Jeffrey R. Wakely
---------------------------
Jeffrey R. Wakely
Vice President, Finance and
Secretary
21
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