<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 July 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 26,721,624 shares of Common Stock, $.01 par value, outstanding at
September 11, 1998.
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SYSTEMSOFT CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
TABLE OF CONTENTS
PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
a) Consolidated Balance Sheets as of July 31, 1998
(Unaudited) and January 31, 1998
3
b) Consolidated Statements of Operations for the
three and six months ended July 31, 1998
and 1997 (Unaudited) 4
c) Consolidated Statements of Cash Flows for the
six months ended July 31, 1998 and 1997
(Unaudited) 5
d) Notes to Consolidated Financial Statements
(Unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
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SYSTEMSOFT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1998 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,240,110 $ 10,763,795
Restricted cash 1,000,000 --
Accounts receivable, less allowance for doubtful
accounts of $1,992,000 as of July 31, 1998 and
$1,566,705 as of January 31, 1998, respectively 3,082,612 6,328,056
Prepaid royalties 2,632,105 2,553,704
Related party note receivable 185,997 --
Prepaid expenses and other current assets 1,693,374 2,727,184
------------ ------------
Total current assets 10,834,198 22,372,739
Property and equipment, net 6,207,944 6,807,337
Purchased software and software development costs, net 2,597,526 3,559,399
Prepaid royalties, long-term portion 315,464 819,450
------------ ------------
Total assets $ 19,955,132 $ 33,558,925
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,179,592 $ 1,086,991
Accrued expenses 904,841 1,965,995
Income taxes payable 90,081 118,875
Accrued compensation and benefits 1,368,980 2,037,380
Accrued royalties 3,242,750 2,296,500
Deferred revenue 815,041 628,613
------------ ------------
Total current liabilities 7,601,285 8,134,354
Other long-term liabilities 579,567 1,480,143
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding
Common stock, $.01 par value; 90,000,000 authorized;
26,882,661 and 26,807,443 shares issued 268,838 268,074
Additional paid-in capital 83,452,521 83,328,220
Accumulated other comprehensive income (881,476) (744,100)
Less treasury stock, at cost, 159,246 shares (427,187) (427,187)
Accumulated deficit (70,638,416) (58,480,579)
------------ ------------
Total stockholders' equity 11,774,280 23,944,428
------------ ------------
Total liabilities and stockholders' equity $ 19,955,132 $ 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 July 31, Six Months Ended July 31,
----------------------------- ------------------------------
1998 1997 1998 1997
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 2,197,165 $10,429,331 $ 5,602,051 $21,284,974
Engineering services 399,121 2,475,657 1,006,689 4,096,988
----------- ----------- ------------ -----------
Total revenues 2,596,286 12,904,988 6,608,740 25,381,962
----------- ----------- ------------ -----------
Cost of revenues:
Software license fees 1,284,979 1,358,945 2,650,187 2,330,441
Engineering services 515,450 1,471,820 1,096,143 2,932,264
----------- ----------- ------------ -----------
Total cost of revenues 1,800,429 2,830,765 3,746,330 5,262,705
----------- ----------- ------------ -----------
Gross profit 795,857 10,074,223 2,862,410 20,119,257
Operating expenses:
Research and development 3,145,482 3,208,550 6,675,764 6,343,290
Sales and marketing 2,173,405 3,618,922 5,123,522 6,525,419
General and administrative 1,736,357 2,238,120 3,182,471 3,224,490
----------- ----------- ------------ -----------
Total operating expenses 7,055,244 9,065,592 14,981,757 16,093,199
----------- ----------- ------------ -----------
(Loss) income from operations (6,259,387) 1,008,631 (12,119,347) 4,026,058
Interest income 44,637 95,577 94,750 148,160
Interest expense (27,973) (20,313) (110,961) (44,237)
Foreign exchange (loss) gain (15,292) 34,015 (22,279) 2,021
----------- ----------- ------------ -----------
(Loss) income before provision for income taxes (6,258,015) 1,117,910 (12,157,837) 4,132,002
Provision for income taxes -- 368,909 -- 1,363,626
----------- ----------- ------------ -----------
Net (loss) income $(6,258,015) $ 749,001 $(12,157,837) $ 2,768,376
=========== =========== ============ ===========
Per share net (loss) income
Basic $ (0.23) $ 0.03 $ (0.46) $ 0.11
Diluted $ (0.23) $ 0.03 $ (0.46) $ 0.10
Weighted average shares outstanding
Basic 26,712,494 26,180,936 26,695,701 25,602,274
Diluted 26,712,494 27,149,326 26,695,701 27,002,673
</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>
Six Months Ended July 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(12,157,837) $ 2,768,376
Adjustments to reconcile net (loss) income to cash used in
operating activities:
Depreciation and amortization 2,591,392 2,574,208
Provision for doubtful accounts 700,000 900,375
Tax benefit from exercise of stock options -- 270,403
Other (324,407) --
Changes in operating assets and liabilities:
Accounts receivable 2,545,444 (6,001,835)
Prepaid expenses and other current assets 1,010,116 (781,319)
Prepaid royalties 425,584 (6,023,480)
Accounts payable 92,601 (511,883)
Accrued expenses (942,875) (297,959)
Other long term liabilities (900,574) --
Income taxes payable (42,288) 72,958
Accrued compensation and benefits (714,000) 810,271
Accrued royalties 946,250 2,369,941
Deferred revenue 186,428 --
------------ ------------
Net cash used in operating activities (6,584,166) (3,849,944)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash (1,000,000) --
Purchases of property and equipment (572,003) (2,225,692)
Purchase of marketable securities, net -- (2,951,250)
Proceeds from sale of property and equipment 60,192 --
Purchased software and software development costs (268,465) (2,689,612)
------------ ------------
Net cash used in investing activities (1,780,276) (7,866,554)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock private placement -- 7,982,500
Increase in related party note receivable (185,997) --
Proceeds from exercise of stock options 74,685 1,379,062
------------ ------------
Net cash provided by financing activities (111,312) 9,361,562
------------ ------------
Effects of exchange rate changes on cash and cash equivalents (47,931) (57,237)
Net decrease in cash and cash equivalents (8,523,685) (2,412,173)
Cash and cash equivalents at beginning of period 10,763,795 11,807,691
Cash and cash equivalents at end of period $ 2,240,110 $ 9,395,518
============ ============
</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 six month period ended July 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 5,389,218 and 5,636,027 shares of common stock for the
quarters ended July 31, 1998 and April 30, 1998, respectively, and warrants to
purchase 750,000 shares of common stock outstanding during the quarters ended
July 31, 1998 and April 30, 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 July 31, Six Months Ended July 31,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
BASIC EPS
Numerator:
Net (loss) income $(6,258,015) $ 749,001 $(12,157,837) $ 2,768,376
Denominator:
Common shares outstanding 26,712,494 26,180,936 26,695,701 25,602,274
Basic EPS (.23) .03 (.46) .11
=========== =========== ============ ===========
DILUTED EPS
Numerator:
Net (loss) income (6,258,014) 749,001 (12,157,837) 2,768,376
Denominator:
Common shares outstanding 26,712,494 26,180,936 26,695,701 25,602,274
Common stock equivalents -- 968,390 -- 1,400,399
----------- ------------ ------------ -----------
26,712,494 27,149,326 26,695,701 27,002,673
Diluted EPS $ (.23) $ .03 $ (.46) $ .10
=========== =========== ============ ===========
</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 July 31, Six Months Ended July 31,
-------------------------- -------------------------
1998 1997 1998 1997
----------- -------- ------------ ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net (loss) income $(6,258,015) $749,001 $(12,157,837) $2,768,376
Foreign currency translation (209,958) -- (137,376) --
----------- -------- ------------ ----------
Total comprehensive (loss) income $(6,467,973) $749,001 $(12,295,213) $2,678,376
=========== ======== ============ ==========
</TABLE>
7
<PAGE> 8
5. 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 allege 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. The Company believes that the
allegations of the several complaints are without merit and it intends to defend
these consolidated actions vigorously.
6. DUE FROM RELATED PARTY
In June 1998, the Chairman of the Company's Board of Directors, formerly the CEO
and Chairman of the Board of Directors, borrowed approximately $186,000 from the
Company. The note receivable bears interest at an annual rate of 5% and is
payable on or before June 3, 1999. The note receivable is collateralized by a
security interest in the net proceeds from the sale of all Incentive and
Non-Qualified Stock Options granted to the Chairman under the 1994 Omnibus Stock
Option Plan. On September 14, 1998, the principal and all accrued interest due
under the note was paid in full.
7. SUBSEQUENT EVENTS
In August 1998, the Company sold its Japanese Subsidiary, Pacific SystemSoft KK
("PSKK"). Under the terms of a Stock Purchase Agreement, Toyo MicroSystems
Corporation ("Toyo"), a majority owned subsidiary of Standard Microsystems
Corporation, acquired all issued and outstanding stock of PSKK from SystemSoft.
The Company and Toyo have entered into a Distribution Agreement, under which
PSKK will remain the Company's exclusive representative and distributor in
Japan. Revenues and total expenses of the Company's Japanese Subsidiary
represented approximately 7% and 4% of consolidated revenues and expenses,
respectively, for the six months ended July 31, 1998.
On August 25, 1998, the Company and its wholly-owned subsidiary, SystemSoft
Taiwan Corporation, entered into a letter of understanding with Great Wide
Technologies Limited ("GWT"), a Taiwan-based corporation, regarding the
Company's agreement to enter into an exclusive (even as to the Company),
irrevocable, worldwide License Agreement, which will be effective as of
September 1, 1998. Pursuant to said License Agreement, GWT will be obligated to
pay the Company a 10% royalty on revenue from the BIOS business up to an
aggregate amount of $2.0 million. GWT has agreed to prepay $674,000 of said
royalties upon execution of the License Agreement. Once GWT has paid the Company
$2.0 million in royalties, GWT will have a fully paid-up license and the Company
has agreed to assign all of its right, title and interest in and to the BIOS
products (as described in the License Agreement) and all related documentation,
including copyrights, patents and trade secrets relating thereto. The Company
has also agreed not to compete with GWT in the worldwide BIOS-related business
(as defined in said License Agreement) for a period of ten years.
8
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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 six months ended July 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 Asia Pacific based manufacturers of personal
computers and related devices.
Comparison of Three Months Ended July 31, 1998 and 1997
Revenues. Revenues were $2,596,000 and $12,905,000 in the three months
ended July 31, 1998 and 1997, respectively, a decrease of approximately 80%.
Software license fees decreased to $2,197,000 from $10,429,000 or approximately
79%. This decrease in revenues occurred throughout all product lines, with the
largest quarter to quarter decline in the SystemWizard product line. Revenues in
the Asia Pacific region were $1,055,000 and $4,302,000 in the three months ended
July 31, 1998 and 1997, respectively, a decrease of approximately 75%. For the
three months ended July 31, 1998, revenues for the Company's Japanese
Subsidiary, Taiwanese operations and United States BIOS business accounted for
$1,198,000 or 46% of consolidated revenues.
Engineering services decreased to $399,000 from $2,476,000, or
approximately 84% due to the completion, in December 1997, of the Intel
Development and License Agreement and a general decrease in the demand for
contract engineering services. 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 $1,800,000 and $2,831,000 in the
three months ended July 31, 1998 and 1997, respectively. These numbers represent
a year over year decrease of $1,031,000 or 36%. Cost of revenues consists
primarily of amortization of software development costs and purchased software,
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 69% from 22% in the
three months ended July 31, 1998 and 1997, respectively. Cost of software
license fees as a percentage of software license fees revenues increased to 58%
from 13%, respectively primarily due to the substantial relative decrease in
software license revenue. The decrease in cost of license fees in absolute
dollars was due 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 129% from 59% in the three months ended July 31, 1998 and
1997, respectively primarily due to the substantial relative decline in
engineering services revenue. Gross margin for engineering services was negative
for the three months ended July 31, 1998 due to the fixed cost nature, primarily
payroll and benefit costs, of the engineering services department combined with
the substantial decline in engineering services revenues.
9
<PAGE> 10
Research and Development. Research and development expenses, consisting
primarily of payroll and related expenses, were $3,145,000 and $3,209,000, for
the three months ended July 31, 1998 and 1997, respectively, net of capitalized
development costs of $160,000 in the three months ended July 31, 1997; no
development costs were capitalized in the three months ended July 31, 1998.
These results represent a year over year marginal decrease of $64,000 or 2%. As
a percent of revenue, research and development expenses increased to 121% from
25% due to the substantial relative decrease in revenues. The increase in
expenses resulted primarily from increases in rent and depreciation expense,
offset by a decrease in consulting and compensation expense. Although the
Company has taken steps to reduce its research and development staff, the
anticipated savings associated with this action will not be fully realized until
future quarters due to severance costs incurred along with the timing of the
reduction in staff. The staff reductions occurred in May and August of 1998.
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 $2,173,000 and $3,619,000 in the three
months ended July 31, 1998 and 1997, respectively, a decrease of approximately
40%. The decrease was primarily due to staff reductions, reduced commissions due
independent manufacturers' representatives, and reduced marketing costs related
to both cost control measures and a reduction in the level of co-op advertising.
As a percentage of revenue, sales and marketing expenses increased to 84% from
28% 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 and professional fees, were $1,736,000 and $2,238,000 in the three
months ended July 31, 1998 and 1997, respectively, a decrease of approximately
22%. The decrease was primarily due to reductions in headcount and a decrease in
the provision for bad debts in the three months ended July 31, 1998 versus the
three months ended July 31, 1997. General and administrative expenses as a
percentage of revenues increased to 67% from 17% due to the substantial relative
decrease in revenues.
Provision for Income Taxes. Provision for income taxes was $0 and
$369,000 in the three months ended July 31, 1998 and 1997, respectively. The
decrease in the provision for income taxes is due to the pre-tax loss of
$6,258,000 in the three months ended July 31, 1998 versus pre-tax profit of
$1,118,000 in the three months ended July 31, 1997. The Company did not record a
benefit for income taxes in the three months ended July 31, 1998 due to certain
foreign tax liabilities that may be owed related to the termination of its
operations in Taiwan and Japan.
Comparison of Six Months Ended July 31, 1998 and 1997
Revenues. Revenues were $6,609,000 and $25,382,000 in the six months
ended July 31, 1998 and 1997, respectively, a decrease of approximately 74%.
Software license fees decreased to $5,602,000 from $21,285,000 or approximately
74%. The decrease in revenues occurred in all product lines with the most
significant declines in the PC Card, BIOS, and SystemWizard product lines.
Revenues in the Asia Pacific region were $2,233,000 and $8,323,000 in the six
months ended July 31, 1998 and 1997, respectively, a decrease of approximately
73%. For the six months ended July 31, 1998 revenues for the Company's Japanese
Subsidiary, Taiwanese operations and United States BIOS business accounted for
$2,398,000 or 36% of consolidated revenues.
Engineering services revenue decreased to $1,007,000 from $4,097,000 or
approximately 75%. This decrease was due to a drop in engineering services
revenue for all products due to reduced demand for contract engineering
services; however the largest decrease was in SystemWizard due to the completion
in fiscal 1998 of the development agreement with Intel Corporation. Revenues
generated under the Intel Agreement were $750,000 for the six months ended July
31, 1997; for the six months ended July 31, 1998, no revenues were recognized
under the Intel development agreement.
10
<PAGE> 11
Cost of Revenues. Cost of revenues was $3,746,000 and $5,263,000 in the
six months ended July 31, 1998 and 1997, respectively. These numbers represent a
year over year decrease of $1,517,000 or 29%. Cost of revenues as a percentage
of revenues increased to 57% from 21% in the six months ended July 31, 1998 and
1997, respectively. Cost of software license fees as a percentage of software
license fees revenues increased to 47% from 11% primarily due to an increase in
USB royalties and an increase in product costs for VoiceView modems directly
related to an increase in VoiceView sales. In January 1998, the Company
completed the USB Licensing Agreement under which the Company licensed its USB
technology but retained the rights to service certain USB customers subject to
paying a royalty on USB revenue recognized.
Cost of engineering services increased as a percentage of engineering
service revenues to 109% from 72% in the six months ended July 31, 1998 and
1997, respectively. Gross margin on engineering services was negative for the
six months ended July 31, 1998 due the fixed cost nature, primarily payroll and
benefit costs, of the engineering services department combined with the
substantial decline in engineering services revenues.
Research and Development. Research and development expenses were
$6,676,000 and $6,343,000, net of capitalized development costs of $0 and
$340,000, in the six months ended July 31, 1998 and 1997, respectively, an
increase of approximately 5%. As a percentage of revenue, research and
development expenses increased to 101% from 25%. The increase in expenses
resulted primarily from increases in rent and depreciation expense, offset by a
decrease in consulting expense. Rent and depreciation expense for the six months
ended July 31, 1998 have increased over the corresponding period ended July 31,
1997 due to incremental rent costs of the Company's new corporate office
building occupied in the third quarter of fiscal 1998. Although the Company has
taken steps to reduce its research and development staff, the savings associated
with this action will not be fully realized until future quarters due to
severance costs incurred along with the timing of the reduction in staff. The
staff reductions occurred in May and August of 1998.
Sales and Marketing. Sales and marketing expenses were $5,124,000 and
$6,525,000 in the six months ended July 31, 1998 and 1997, respectively, a
decrease of approximately 21%. The percentage decrease was primarily due to
staff reductions, decreased expenditures on marketing programs and co-op
advertising, a reduction in travel, and a reduction in commissions due
independent manufacturers' representatives. Sales and marketing expenses as a
percentage of revenues increased to 78% from 26% due to the substantial relative
decline in revenues.
General and Administrative. General and administrative expenses were
$3,182,000 and $3,224,000 in the six months ended July 31, 1998 and 1997,
respectively, a decrease of approximately 1%. This decrease is due to a
reduction in bad debt expense offset by a small increase in rent expense and
depreciation expense.
Provision for Income Taxes. Provision for income taxes was $1,364,000
for the six months ended July 31, 1997. There was no provision for income taxes
for the six months ended July 31, 1998. The Company did not record a benefit for
income taxes in the six months ended July 31, 1998 due to certain foreign tax
liabilities that may be owed related to the termination of its operations in
Taiwan and Japan.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended July 31, 1998, the Company funded its
operations primarily through use of existing cash and collection of accounts
receivable. As of July 31, 1998, the Company had cash and cash equivalents of
$2,240,000 and working capital of $3,233,000. The Company had a net decrease of
cash and cash equivalents of $8,524,000 for the six months ended July 31, 1998.
The principal uses of cash and cash equivalents for the six months ended July
31, 1998 were the funding of operations of $6,770,000, purchases of property and
equipment of $572,000, 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. 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 July 31, 1998, the Company owed Intel remaining
guaranteed payments of $3,263,000. The Company has not made two guaranteed
payments of $500,000 each, due June 1, 1998 and September 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 September 11, 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
potential licensing of its BIOS technology, the Company believes it has taken
significant steps to reduce its operating expenses as of August, 1998. Total
expenses related to the Company's Japanese Subsidiary, Taiwan operations and US
based BIOS operations represented approximately 18% of consolidated expenses for
the six months ended July 31, 1998. Although there can be no assurances 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, cash flow from operations and proceeds from the sale of its Japanese
Subsidiary and the potential licensing of its BIOS technology will be sufficient
to meet its working capital and capital expenditure requirements through the
next six months. This operating cash flow expectation assumes that the Company
meets its revenue forecast during the second half of fiscal 1999, something the
Company has been unable to do for the first six months of fiscal 1999, and that
the potential BIOS licensing agreement is consummated. The Company may decide
that it is necessary to seek additional financing or reduce operating costs in
order to meet its current cash requirements over the next six months.
12
<PAGE> 13
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. 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 and the potential licensing of its BIOS
technology) 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 5
to the accompanying Unaudited Consolidated Financial Statements, the Company has
been named as a defendant in a series of purported securities class action
lawsuits. Although the Company believes that the allegations in these complaints
are without merit and intends to vigorously defend against them, the ultimate
outcome, including the amount of possible loss, if any, of litigation cannot be
determined at this time. There is no assurance that the Company will carry out
the licensing of its BIOS technology. Additionally, Intel may terminate the
December 1997 Agreement.
13
<PAGE> 14
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, 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"). In order to continue to be listed on the NNM, however, the
Company must maintain (i) $2,000,000 in net tangible assets (total assets less
total liabilities and goodwill), a market capitalization of $35,000,000, or
$500,000 in net income for two of the last three years, (ii) a $1,000,000 market
value for the public float, (iii) two market-makers, and (iv) a minimum bid
price of $1.00 per share. As of August 27, 1998, the Company was not in
compliance with item (iv) above. If the Company continues to fail to meet this
or any other of these maintenance criteria it may result in the delisting of the
Company's securities from the NNM, and trading, if any, and the Company's
securities would thereafter be conducted in the non-NNM over-the-counter market.
If the Company's securities are delisted, an investor could find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of, the Company's securities. In addition, if the Common Stock were to become
delisted from trading on the NNM and the trading price of the Common Stock were
to remain below $5.00 per share, trading in the Common Stock would also be
subject to the requirements of certain rules promulgated under the Securities
Exchange Act of 1934, as amended, which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-NNM equity security that has a market price of
less than $5.00 per share, subject to certain exceptions). Such rules require
the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and must receive the
purchaser's written consent to the transaction prior to the sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in the Common Stock, which could
severely limit the market liquidity of the Common Stock and the ability of
purchasers in this offering to sell the Common Stock in the secondary market.
14
<PAGE> 15
PART II. OTHER INFORMATION
Item 4. - Submission of Matters to a Vote of Security Holders
At the Company's 1998 annual meeting of stockholders held July 1,
1998, the Company's stockholders took the following actions:
(1) The Company's stockholders reelected Robert F. Angelo, Deborah M.
Besemer, Robert N. Goldman, W. Frank King, Ph.D. and David J. McNeff
as directors of the Company to serve until the next annual meeting of
stockholders and until their successors shall have been duly elected
and qualified or until their earlier resignation or removal. Election
of the directors was determined by a plurality of the votes cast at
the 1998 annual meeting. No other persons were nominated, or received
votes, for election as directors of the Company at the 1998 annual
meeting of stockholders. The following table sets forth each director
elected at the annual meeting (with vote results):
<TABLE>
<CAPTION>
Broker
Name For Withheld Abstentions Non-Votes
---- --- -------- ----------- ---------
<S> <C> <C> <C> <C>
Robert F. Angelo 22,786,102 1,108,977 0 0
Deborah M. Besemer 22,798,990 1,096,089 0 0
Robert N. Goldman 22,799,600 1,095,479 0 0
W. Frank King 21,937,343 1,957,736 0 0
David J. McNeff 22,821,108 1,073,971 0 0
</TABLE>
(2) The Company's stockholders approved and adopted an amendment to the
SystemSoft Corporation Amended and Restated 1994 Employee Stock
Purchase Plan increasing the number of shares available for issuance
from 700,000 to 1,100,000, by a vote of 22,486,944 in favor, 1,126,251
shares opposed and 281,884 shares abstaining.
Item 5. - Other Information
The deadline for submission of proposals by shareholders pursuant to
Rule 14a-8 issued under the Securities Exchange Act of 1934 (the
"Act"), which are intended for inclusion in the proxy statement to be
furnished to all stockholders entitled to vote at the next annual
meeting of shareholders of the Company, is January 28, 1999. Pursuant
to recent amendments to the rules relating to proxy statements under
the Act, the shareholders of the Company are hereby notified that the
deadline for providing timely notice to the Company of matters that
shareholders desire to introduce at the next annual meeting of
stockholders of the Company (which are not otherwise submitted for
inclusion in the proxy statement in accordance with the preceding
sentence) is April 13, 1999. Management proxies will be authorized to
exercise discretionary authority with respect to any such shareholder
proposal not included in the Company's proxy materials for the next
annual meeting unless the Company receives notice of such proposal
prior to April 13, 1999 and the conditions set forth in Rule
14a-4(c)(2)(i)-(iii) under the Act are met. In order to curtail any
controversy as to the date on which a proposal was received by the
Company, it is suggested that proponents submit their proposals by
Certified Mail, Return Receipt Requested.
Item 6. - Exhibits and Reports on Form 8-K
(a) EXHIBITS.
10.1 Note and Security Agreement between the Company and Robert F.
Angelo
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 May 7, 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 preliminary results for the
quarter ended April 31, 1998. In addition, a Current Report on Form
8-K dated May 28, 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 actual results for the quarter ended April 30, 1998.
15
<PAGE> 16
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
September 11, 1998 By: /s/ Frank A. Sola
------------------------------
Frank A. Sola
Chief Executive Officer
September 11, 1998 By: /s/ Jeffrey R. Wakely
------------------------------
Jeffrey R. Wakely
Vice President, Finance and
Secretary
16
<PAGE> 1
Exhibit 10.1
PROMISSORY NOTE
$185,997.19 Natick, Massachusetts
June 3, 1998
FOR VALUE RECEIVED, Robert F. Angelo, whose address is 2 Southwest Circle,
Sudbury, MA 01776 ("Maker") promises to pay to the order of SystemSoft
Corporation, whose address is One Innovation Drive Natick, MA 01760 ("Payee"),
the sum of One Hundred Eighty Five Thousand Nine Hundred Ninety Seven Dollars
and Nineteen Cents ($185,997.19) together with interest on the unpaid principal
balance at the rate of five percent (5%) simple interest per annum. The
principal and interest amount of $195,297.04 shall be due and payable on or
before June 3, 1999.
1. Security Interest and Prepayment
Maker grants Payee a security interest in the net proceeds from the sale of all
Incentive Stock Options and Non-Qualified Stock Options granted to Maker by
Payee under Payee's 1994 Omnibus Stock Option Plan until the principal and
interest is paid in full. This Note may be prepaid at any time, in whole or in
part.
2. Payment.
Payment of principal shall be made at the address of Payee, or a any other place
Payee designates in writing from time to time, and shall be in lawful money of
the United States of America.
3. Acceleration of Payment.
The entire principal amount hereof shall immediately become due and payable
(without demand for payment, notice of nonpayment, presentment, notice of
dishonor, protest, notice of protest, or any other notice or demand, all of
which Maker hereby waives) if:
a. Maker, for any reason, ceases to be an employee of Payee.
b. Maker suspends payment of his obligations, or admits in
writing its inability to pay its debts generally as they
become due.
4. Costs of Collection.
<PAGE> 2
If Maker fails to make timely the payments required hereby, Maker shall
pay all cost of collection when incurred including, without limitation,
attorneys' fees and expenses and court costs. Such costs will be added to the
balance of principal and interest then due.
5. Failure or Delay Non-waiver.
Failure of the holder hereof to assert any right contained herein, or
delay in asserting any such right, shall not be deemed a waiver of that right.
6. Waiver of Defense on Transfer.
If this Note is transferred, assigned or pledged, Maker waives, as
against the transferee, assignee or pledgee, all defenses and counterclaims of
every kind and description that Maker may have against Payee.
7. Waiver of Procedural Defenses.
Maker waives demand for payment, notice of nonpayment, presentment,
notice of dishonor, protest, notice of protest, or any other notice or demand in
connection with this Promissory Note.
8. Modifications.
The Promissory Note may not be changed, modified or amended, or
terminated, nor may any of its provisions be waived, except by an agreement in
writing signed by the party against whom enforcement thereof is sought.
9. Choice of Law.
This Promissory Note shall be govern by and construed in accordance
with the laws of the Commonwealth of Massachusetts.
10. Promises Binding.
This Promissory Note shall be binding upon Maker and Maker's
successors, and assigns.
/s/ Robert F. Angelo
- -----------------------------------
Robert F. Angelo
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,240,110
<SECURITIES> 0
<RECEIVABLES> 5,074,612
<ALLOWANCES> 1,992,000
<INVENTORY> 0
<CURRENT-ASSETS> 10,834,198
<PP&E> 13,595,056
<DEPRECIATION> 7,387,112
<TOTAL-ASSETS> 19,955,132
<CURRENT-LIABILITIES> 7,601,285
<BONDS> 0
0
0
<COMMON> 268,838
<OTHER-SE> 11,505,442
<TOTAL-LIABILITY-AND-EQUITY> 19,955,132
<SALES> 6,608,740
<TOTAL-REVENUES> 6,608,740
<CGS> 3,746,330
<TOTAL-COSTS> 18,728,087
<OTHER-EXPENSES> 22,279
<LOSS-PROVISION> 600,000
<INTEREST-EXPENSE> 110,961
<INCOME-PRETAX> (12,157,837)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,157,837)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,157,837)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JUL-31-1997
<EXCHANGE-RATE> 1
<CASH> 9,395,518
<SECURITIES> 3,052,757
<RECEIVABLES> 18,053,437
<ALLOWANCES> 1,731,453
<INVENTORY> 0
<CURRENT-ASSETS> 41,984,172
<PP&E> 11,160,972
<DEPRECIATION> 5,200,700
<TOTAL-ASSETS> 54,791,281
<CURRENT-LIABILITIES> 7,291,946
<BONDS> 0
0
0
<COMMON> 265,310
<OTHER-SE> 45,591,984
<TOTAL-LIABILITY-AND-EQUITY> 54,791,281
<SALES> 24,420,008
<TOTAL-REVENUES> 25,381,962
<CGS> 5,262,705
<TOTAL-COSTS> 21,355,904
<OTHER-EXPENSES> (2,021)
<LOSS-PROVISION> 825,375
<INTEREST-EXPENSE> 44,237
<INCOME-PRETAX> 4,132,002
<INCOME-TAX> 1,363,626
<INCOME-CONTINUING> 2,768,376
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,768,376
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.10
</TABLE>
