U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to________
Commission file number: 1-14076
SOFTWARE PUBLISHING CORPORATION HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 22-3270045
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
3A Oak Road, Fairfield, New Jersey 07004
(Address of principal executive offices)
(973) 808-1992
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 3,966,954 shares of Common
Stock as of November 13, 1998.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
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<PAGE>
PART I. FINANCIAL INFORMATION
Item Page
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September
30, 1998 (Unaudited) and December 31, 1997. . . . . . . . . . . . . . . . .3
Condensed Consolidated Statements of Operations for
the Three and Nine Months Ended September 30, 1998
and 1997 (Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the Nine Months Ended
September 30, 1998 (Unaudited). . . . . . . . . . . . . . . . . . . . . . .5
Condensed Consolidated Statements of Cash Flows for
the Three and Nine Months Ended September 30,
1998 and 1997 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . .6
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . . . . .7
Item 2. Management's Discussion and Analysis. . . . . . . . . . . . . . . .9
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<PAGE>
SOFTWARE PUBLISHING CORPORATION HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited) (Note)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . $ 1,504,749 $ 2,586,753
Restricted cash . . . . . . . . . . . . . . . . 100,000 --
Marketable securities . . . . . . . . . . . . . -- 173,600
Accounts receivable, net. . . . . . . . . . . . 1,361,733 1,324,102
Inventories . . . . . . . . . . . . . . . . . . 485,473 567,336
Prepaid expenses and other current assets . . . 517,314 329,591
------------- ------------
Total current assets . . . . . . . . . . . 3,969,269 4,981,382
Property and equipment, net. . . . . . . . . . . 393,243 568,888
Acquired software, net . . . . . . . . . . . . . 2,720,000 4,446,750
Goodwill, net. . . . . . . . . . . . . . . . . . 212,350 268,559
Restricted cash. . . . . . . . . . . . . . . . . 200,000 300,000
Other assets . . . . . . . . . . . . . . . . . . 96,422 63,923
------------- ------------
Total assets . . . . . . . . . . . . . . . $ 7,591,284 $ 10,629,502
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . $ 3,201,249 $ 3,015,198
Accrued liabilities . . . . . . . . . . . . . . 1,454,408 4,112,267
Current portion of long-term debt . . . . . . . 112,236 173,866
------------- ------------
Total current liabilities. . . . . . . . . 4,767,893 7,301,331
Long-term debt, less current maturities. . . . . 124,836 184,765
------------- ------------
Total liabilities. . . . . . . . . . . . . 4,892,729 7,486,096
Commitments and contingencies. . . . . . . . . . -- --
Stockholders' equity:
Serial Preferred Stock, authorized 1,939,480
shares: none issued and outstanding. . . . . . -- --
Class B Voting Preferred Stock, Series A, 60,520
shares authorized, none issued and outstanding -- --
Common stock, par value $.001 per share,
authorized 30,000,000 shares: issued 3,970,049
shares at September 30, 1998 and 3,003,767 shares
at December 31, 1997 . . . . . . . . . . . . . 3,970 3,004
Additional paid-in capital . . . . . . . . . . . 44,290,458 42,971,820
Accumulated deficit. . . . . . . . . . . . . . . (41,585,478) (39,831,418)
------------- ------------
2,708,950 3,143,406
Less treasury shares(3,095 at September 30,
1998), at cost . . . . . . . . . . . . . . . . (10,395) --
------------- ------------
Total stockholders' equity . . . . . . . . 2,698,555 3,143,406
------------- ------------
Total liabilities and stockholders' equity $ 7,591,284 $ 10,629,502
------------- ------------
<FN>
Note: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
</FN>
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
SOFTWARE PUBLISHING CORPORATION HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(Note) (Note) (Note)
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . $ 4,223,325 $ 4,032,609 $12,226,304 $ 12,127,172
Cost of goods sold . . . . . . . 1,103,873 951,371 2,807,174 2,730,740
------------ ------------ ------------ -------------
Gross profit. . . . . . . . . . 3,119,452 3,081,238 9,419,130 9,396,432
Selling, general and administrative
expenses. . . . . . . . . . . . (2,962,769) (4,375,128) (8,375,433) (12,103,144)
Amortization of acquired software and
goodwill and depreciation . . . (575,988) (847,847) (1,942,837) (2,537,384)
Product development. . . . . . . (154,780) (794,071) (927,356) (2,440,809)
Other income - net . . . . . . . 18,071 24,971 72,436 133,228
------------ ------------ ------------ -------------
Net loss . . . . . . . . . . . . $ (556,014) $(2,910,837) $(1,754,060) $ (7,551,677)
------------ ------------ ------------ -------------
Net loss per common share:
Net loss per common share -
basic and diluted. . . . . . . . $ (.14) $ (1.08) $ (.50) $ (2.83)
------------ ------------ ------------ -------------
Weighted average number of
common shares outstanding -
basic and diluted. . . . . . 3,940,357 2,683,475 3,513,780 2,670,543
------------ ------------ ------------ -------------
<FN>
Note: Net loss per common share and weighted average number of common
shares outstanding for all periods presented have been adjusted to reflect the
Company's one-for-three (1:3) reverse stock split made effective May 27, 1998.
</FN>
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
SOFTWARE PUBLISHING CORPORATION HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Stock Treasury Shares Paid-In Accumulated Stockholders'
$.001 Par Value (At Cost) Capital Deficit Equity
Shares Amount Shares Amount
(Note)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 . .3,003,767 $ 3,004 $42,971,820 $(39,831,418) $ 3,143,406
Issuance of common stock
in payment of liability
in connection with business
combination . . . . . . . . . . 10,616 11 31,239 31,250
Issuance of common stock
in payment of liabilities
for services in connection
with business combinations. . . 27,299 27 49,112 49,139
Issuance of common stock in
payment of liabilities for
services. . . . . . . . . . . . 20,670 21 36,697 36,718
Issuance of common stock and
warrants for services
rendered. . . . . . . . . . . . 113,333 113 164,137 164,250
Sale of common stock and
warrants. . . . . . . . . . . . 333,333 333 499,667 500,000
Sale of common stock in
private placement - net . . . . 461,031 461 537,786 538,247
Acquisition of treasury
shares. . . . . . . . . . . . . 3,095 $(10,395) (10,395)
Net loss . . . . . . . . . . . . (1,754,060) (1,754,060)
---------- ------- ------ --------- ------------ ------------- ------------
Balance at September 30,
1998 . . . . . . . . . . . . . 3,970,049 $ 3,970 3,095 $(10,395) $44,290,458 $(41,585,478) $ 2,698,555
---------- ------- ------ --------- ------------ ------------- ------------
<FN>
Note: All issuances of common stock through May 27, 1998 have been adjusted
to reflect the Company's one-for-three (1:3) reverse stock split made effective
May 27, 1998.
</FN>
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
SOFTWARE PUBLISHING CORPORATION HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
<S> <C> <C>
Operating activities
Net cash used in operations. . . . . . . . . . . . $(1,943,140) $(3,014,633)
------------ ------------
Investing activities
Purchase of property and equipment . . . . . . . . (45,157) (581,139)
------------ ------------
Financing activities
Proceeds from sale of common stock . . . . . . . . 1,038,247 --
Acquisition of treasury shares . . . . . . . . . . (10,395) --
Proceeds from issuance of notes payable. . . . . . -- 104,239
Repayment of notes . . . . . . . . . . . . . . . . (121,559) (1,805,273)
------------ ------------
906,293 (1,701,034)
------------ ------------
Net (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . (1,082,004) (5,296,806)
Cash and cash equivalents at beginning
of period . . . . . . . . . . . . . . . . . . . . 2,586,753 6,483,454
------------ ------------
Cash and cash equivalents at end
of period . . . . . . . . . . . . . . . . . . . . $ 1,504,749 $ 1,186,648
------------ ------------
Supplemental disclosure of non-cash financing and investing activities:
Common stock issued in payment of liabilities. . . $ 107,107 $ --
------------ ------------
Common stock issued for services . . . . . . . . . $ 174,250 $ --
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
-6-
<PAGE>
SOFTWARE PUBLISHING CORPORATION HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997.
2. Accounting Principles.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and displaying comprehensive income and its
components in financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The adoption of
SFAS No. 130 has had no impact on the Company's consolidated results of
operations, financial position or cash flows. The Company presently has no items
of other comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. Financial statement disclosures for prior
periods are required to be restated. The Company is in the process of evaluating
the disclosure requirements. The adoption of SFAS No. 131 is expected to have no
impact on the Company's consolidated results of operations, financial position
or cash flows.
3. Loss Per Share.
Basic loss per share is computed based upon the weighted average number of
common shares outstanding during each period presented. Stock options and
warrants did not have an effect on the computation of diluted earnings per share
in the three and nine month periods ended September 30, 1998 and 1997 since they
were anti-dilutive.
4. Inventories.
Inventories consist principally of finished goods.
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<PAGE>
5. Stockholders' Equity.
In March 1998, the Company authorized 100,000 shares of Junior
Participating Preferred Stock, Series A, par value $.001 per share. The Junior
Preferred Stock has preferential voting, dividend and liquidation rights over
the Common Stock. On March 31, 1998, the Company declared a dividend
distribution, payable April 30, 1998, of one Preferred Share Purchase Right
("Right") on each share of Common Stock. Each Right, when exercisable, entitles
the registered holder thereof to purchase from the Company one one-thousandth of
a share of Junior Preferred Stock at a price of $1.00 per one one-thousandth of
a share (subject to adjustment). The one one-thousandth of a share is intended
to be the functional equivalent of one share of the Common Stock. The Rights
will not be exercisable or transferable apart from the Common Stock until an
Acquiring Person, as defined in the Rights Agreement, dated as of March 31,
1998, between the Company and American Stock Transfer & Trust Company, without
the prior consent of the Company's Board of Directors, acquires 20% or more of
the voting power of the Common Stock or announces a tender offer that would
result in 20% ownership. The Company is entitled to redeem the Rights, at $.001
per Right, any time before a 20% position has been acquired or in connection
with certain transactions thereafter announced. Under certain circumstances,
including the acquisition of 20% of the Common Stock, each Right not owned by a
potential Acquiring Person will entitle its holder to purchase, at the Right's
then-current exercise price, shares of Common Stock having a market value of
twice the Right's exercise price. Holders of a Right will be entitled to buy
stock of an Acquiring Person at a similar discount if, after the acquisition of
20% or more of the Company's voting power, the Company is involved in a merger
or other business combination transaction with another person in which its
common shares are changed or converted, or the Company sells 50% or more of its
assets or earning power to another person. The Rights expire on April 20, 2008.
On May 26, 1998, the stockholders of the Company granted the Board of
Directors of the Company authority to amend the Company's Certificate of
Incorporation to authorize either a one-for-two (1:2), one-for-three (1:3) or
one- for-five (1:5) reverse stock split of the Common Stock. Following such
stockholder action, the Company's Board of Directors authorized a one-for-three
(1:3) reverse stock split (the "Reverse Stock Split") of the Common Stock and
directed that a Certificate of Amendment of the Certificate of Incorporation of
the Company (the "Certificate of Amendment") effectuating the Reverse Stock
Split be filed with the Delaware Secretary of State. The Certificate of
Amendment was filed with the Delaware Secretary of State on May 27, 1998. In
accordance with the Certificate of Amendment, the Reverse Stock Split became
effective as of the close of business on May 27, 1998. All issuances of Common
Stock through May 27, 1998 have been adjusted to reflect the Company's
one-for-three (1:3) reverse stock split made effective May 27, 1998.
6. Pending Legal Matters
The action , titled Howard Milstein and Ronald Altman v. Software
Publishing Corporation Holdings, Inc., Mark E. Leininger and Barry A. Cinnamon,
commenced by certain purchasers of Common Stock seeking recission of their
aggregate $919,495 investment in the Company and certain other relief, and in
which the Company has made certain counterclaims, is in the discovery stage.
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<PAGE>
Item 2. Management's Discussion and Analysis.
Statements contained in this Quarterly Report on Form 10-QSB that are not
based upon historical fact are "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements included
in this Form 10-QSB involve known and unknown risks, uncertainties and other
factors which could cause actual results, performance (financial or operating)
or achievements expressed or implied by such forward looking statements not to
occur or be realized. Such forward looking statements generally are based upon
the best estimates by Software Publishing Corporation Holdings, Inc. (the
"Company") of future results, performance or achievement, based upon current
conditions and the most recent results of operations. Forward-looking statements
may be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "believe," "estimate," "anticipate," "continue," or similar
terms, variations of those terms or the negative of those terms.
The Company acquired three operating software companies in 1996 and
conducted a restructuring of its management and operations in late 1997 and
early 1998 with the expectation that such transactions and restructuring will
result in long-term strategic benefits. While the Company has substantially
implemented its integration and restructuring plans, there can be no assurance
that the expected long-term strategic benefits of the acquisitions and
restructuring will be realized. Additional potential risks and uncertainties
include, among other things, such factors as the overall level of business and
consumer spending for computer software, the market acceptance and amount of
sales of the Company's products, the extent that the Company's direct mail
programs achieve satisfactory response rates, the efficiency of the Company's
telemarketing operations, the competitive environment within the computer
software and direct mail industries, the Company's ability to raise additional
capital, the ability of the Company to continue to implement its reorganization
plan efficiently and achieve the anticipated results therefrom, the
cost-effectiveness of the Company's product development activities, the extent
to which the Company is successful in developing, acquiring or licensing
successful products, and other factors and information disclosed and discussed
in this "Item 2. Management's Discussion and Analysis or Plan of Operation" and
in other sections of this Form 10-QSB. Readers of this Form 10- QSB should
carefully consider such risks, uncertainties and other information, disclosures
and discussions which contain cautionary statements identifying important
factors that could cause actual results to differ materially from those provided
in the forward looking statements.
General
The Company is an international developer, publisher and supplier of
proprietary computer software applications primarily targeted towards the visual
communications market segment through desktop publishing, presentation graphics,
graphics/drawing and business productivity software for the corporate, small
office/home office ("SOHO") and consumer markets. The Company's products produce
documents through its easy-to-use desktop publishing, drawing and presentation
graphics applications, and also improve the graphical appeal and overall
effectiveness of documents produced by either the Company's or third parties'
desktop publishing, presentation graphics, web page, e-mail, word processing and
other similar applications. The Company currently offers eighteen products,
primarily Serif PagePlus(TM) and Harvard Graphics(R), that operate on the
Windows 98, Windows 95, Windows NT(R) , Windows(R) 3.1 and DOS operating systems
for IBM personal computers and compatibles. The Company has established a
multi-channel distribution system utilizing direct mail, telemarketing, retail,
corporate and OEM sales channels and also disseminates its software programs
over the Internet. The Company currently derives substantially all of its net
sales from products sold directly to end-users by its direct mail and
telemarketing centers, and to retailers, distributors and corporate purchasers
by its internal corporate and retail sales force and independent sales
representatives. In the third quarter of 1998, the Company also commenced
selling certain computer hardware and digital imaging equipment, manufactured by
third parties, through the Company's direct mail sales channel.
In July 1996, the Company acquired Serif Inc. and Serif (Europe) Limited
(collectively, the "Serif companies"), which significantly expanded the
Company's product line to include desktop publishing titles Serif PagePlus and
Serif DrawPlus, among others. In December 1996, the Company acquired all of the
outstanding capital stock of Software Publishing Corporation ("SPC"), as a
result of which the Company's product line expanded further to include SPC's
presentation graphics and other visual communications and business productivity
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<PAGE>
software products. The Company continues to operate the Serif companies and SPC
as wholly-owned subsidiaries. Since January 1998, the operations of SPC have
been significantly reduced.
North America and international net revenues for the Company's three month
and nine month periods ended September 30, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
----------------- ----------------- ----------------- ------------------
$ % $ % $ % $ %
---------- ----- ---------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North America . . $2,013,761 47.7 $3,160,929 78.4 $ 5,844,355 47.8 $ 6,935,474 57.2
International . . 2,209,564 52.3 871,680 21.6 6,381,949 52.2 5,191,698 42.8
---------- ----- ---------- ----- ----------- ----- ----------- -----
Total . . . . . . $4,223,325 100.0 $4,032,609 100.0 $12,226,304 100.0 $12,127,172 100.0
</TABLE>
The Company believes that end users are continuing to migrate from the
Windows 3.1 and Windows 95 to the Windows NT and Windows 98 platforms and
potentially may migrate to Internet computing. The Company expects increased
competition, including price competition, in the Windows 3.1, Windows 95,
Windows 98 and Windows NT markets in the future. Several of the Company's
competitors have introduced suites of products which include products that
directly compete with the Company's products. The Company believes that these
offerings of product suites adversely affect net revenues and will continue to
adversely affect sales of the Company's products in the future as the individual
products within the suites continue to gain increased levels of
inter-operability and functionality. The Company currently does not offer a
suite of general purpose office products; however, the Company currently offers
one product suite, Serif Publishing Power Suite, as well as products that
complement competitive suite products. The Company believes that in order to
increase its net revenues, it must continue to develop and introduce new
technologies and products internally, obtain additional technologies and
products through strategic alliances and acquisitions and introduce new
marketing strategies. Any inability or delay in executing these strategies,
difficulties encountered in introducing new products or marketing programs, or
failures of the Company's current and future products to compete successfully
with products offered by other vendors, could adversely affect the Company's net
revenues and profitability. The Company's growth is expected to require
increases in the number of the Company's employees, expenditures for new product
development, the acquisition of product rights, sales and marketing expenses,
and general and administrative expenses.
Results of Operations
Three Month Period Ended September 30, 1998 Compared to the Three Month
Period Ended September 30, 1997
Net Sales. Net sales increased approximately $190,000, or 5%, from
$4,033,000 in the three month period ended September 30, 1997 to $4,223,000 in
the three month period ended September 30, 1998, principally as a result of
increased international software sales as well as the inclusion of digital
imaging equipment in the Company's product offerings. The Company provided for
returns in the three month period ended September 30, 1998 at approximately 10%
of gross sales as compared to 11% in the three month period ended September 30,
1997 due to a shift in product sales from retail sales to direct channels, which
historically have exhibited lower returns than the retail sales channels. As at
September 30, 1998, the Company had approximately $173,000 in confirmed back
log.
Cost of Goods Sold. Cost of goods sold increased approximately $153,000, or
16%, from $951,000 in the three month period ended September 30, 1997 to
$1,104,000 in the three month period ended September 30, 1998, primarily as a
result of an increase in sales of digital imaging equipment, which generally
have lower gross margins than software. As a percentage of net sales, cost of
goods sold increased from approximately 24% of net sales in the three month
period ended September 30, 1997 to 26% of net sales in the three month period
ended September 30, 1998. Cost of goods sold consists primarily of product
costs, freight charges, royalties and inventory allowances for damaged and
obsolete products. Product costs consist of the costs to purchase the underlying
materials and print both boxes and manuals, media costs (CD-ROM's and other
media) and assembly.
The Company's gross margins and operating income may be affected in
particular periods by the timing of product introductions, promotional pricing
and rebate offers, as well as by return privileges and marketing promotions in
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<PAGE>
connection with new product introductions and upgrades. These promotions may
have a negative influence on average selling prices and gross margins. Gross
margins have also been, and may continue to be, adversely affected by
competitive pricing strategies in the industry as a whole, including competitive
upgrade pricing, the OEM business and alternative licensing arrangements.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses decreased by approximately $1,412,000, or 32%,
from $4,375,000 in the three month period ended September 30, 1997 to $2,963,000
in the three month period ended September 30, 1998, primarily as a result of the
implementation of the Company's restructuring program, which included closing
the Company's San Jose, California office. Total selling expenses (not including
salaries) decreased approximately $761,000, or 35%, from $2,155,000 in the three
month period ended June 30, 1997 to $1,394,000 in the three month period ended
September 30, 1998, primarily as a result of a decrease in the level of
advertising and sales promotion activities within the retail distribution
channels.
The Company establishes several of its marketing expenditure levels based
on expected net revenues. If orders and shipments do not occur when expected,
expenditure levels could be disproportionately high compared to recognized
revenues for the reported period and the Company's operating results could be
adversely affected. The Company periodically reviews and adjusts its variable
expenditure levels based on actual sales volumes. In the future, the Company's
net revenues and operating results could be adversely affected by these and
other factors, such as delays in new product introductions, the availability of
suitable mailing lists and the successful utilization thereof, the mix of
product sales or distribution channels and customer choices regarding operating
systems.
Amortization of Acquired Software and Goodwill and Depreciation.
Depreciation and amortization decreased to approximately $576,000 in the three
month period ended September 30, 1998 from approximately $848,000 for the three
month period ended September 30, 1997 due to the elimination of certain goodwill
in 1997.
Product Development. Product development expenses decreased approximately
$639,000, or 81%, from $794,000 in the three month period ended September 30,
1997 to $155,000 in the three month period ended September 30, 1998, principally
as a result of the reduction in product development staff located in California
and the Company's shift in focus toward acquiring or licensing products
developed by third parties. As a percentage of net sales, the Company's product
development costs were approximately 4% in the three month period ended
September 30, 1998 as compared to 20% in the three month period ended September
30, 1997. The Company expects that development expenses will increase in dollar
amount in the future to the extent the Company expands its development
activities, although the Company's long-term goal is to continue to maintain
product development costs as a low percentage of sales. All product development
costs have been expensed in the period incurred.
Other Income. Other income decreased from approximately $25,000 in the
three month period ended September 30, 1997 to $18,000 in the three month period
ended September 30, 1998, primarily as a result of lower average cash balances
during the 1998 period, which was partially offset by lower average debt
balances in the 1998 period.
Nine Month Period Ended September 30, 1998 Compared to the Nine Month
Period Ended September 30, 1997
Net Sales. Net sales increased approximately $99,000, or 1%, from
$12,127,000 in the nine month period ended September 30, 1997 to $12,226,000 in
the nine month period ended September 30, 1998, primarily as a result of sales
of digital imaging equipment. The Company provided, in the nine month period
ended September 30, 1998, for returns at approximately 8% of gross sales as
compared to 14% in the nine month period ended September 30, 1997, due to a
shift in product sales from primarily retail sales to direct channels, which
historically have exhibited fewer returns than the retail sales channels.
Cost of Goods Sold. Cost of goods sold increased approximately $76,000, or
3%, from $2,731,000 for the nine month period ended September 30, 1997 to
$2,807,000 in the nine month period ended September 30, 1998 primarily as a
result of an increase in sales of digital imaging equipment, which generally
have lower gross margins than software. As a percentage of net sales, cost of
goods sold remained at approximately 23% for each of the nine month periods
ended September 30, 1997 and 1998.
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<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by approximately $3,728,000, or 31%, from
$12,103,000 in the nine month period ended September 30, 1997 to $8,375,000 in
the nine month period ended September 30, 1998, primarily as a result of a
decrease in advertising expenses and the implementation of the Company's
restructuring, which resulted in reduced personnel costs of approximately
$1,050,000 and decreases in rental and other occupancy costs, partially offset
by an increase in professional fees. General and administrative expenses
decreased approximately $362,000, or 20%, from $1,801,000 in the nine month
period ended September 30, 1997 to $1,439,000 in the nine month period ended
September 30, 1998. Total selling expenses (not including salaries) decreased
approximately $1,766,000, or 31%, from $5,766,000 in the nine month period ended
September 30, 1997 to $4,000,000 in the nine month period ended September 30,
1998, primarily as a result of the Company's restructuring program.
Amortization of Acquired Software and Goodwill and Depreciation. In the
nine month period ended September 30, 1997, the Company recorded approximately
$2,537,000 in amortization of acquired software and goodwill and depreciation
compared to $1,943,000 incurred in the nine month period ended September 30,
1998. This decrease was a result primarily of the elimination of certain
goodwill in 1997.
Product Development. Product development expenses decreased approximately
$1,514,000, or 62%, from $2,441,000 in the nine month period ended September 30,
1997 to $927,000 in the nine month period ended September 30, 1998, principally
as a result of the Company's restructuring program. As a percentage of net
sales, the Company's product development costs decreased to approximately 8% in
the nine month period ended September 30, 1998 as compared to 20% in the nine
month period ended September 30, 1997. The Company expects that development
expenses will increase in dollar amount in the future to the extent the Company
expands its development activities, although the Company's long-term goal is to
continue to maintain product development costs as a low percentage of sales. All
development costs have been expensed in the period incurred.
Other Income. Other income decreased approximately $57,000, or 43%, from
$133,000 in the nine month period ended September 30, 1997 to $72,000 in the
nine month period ended September 30, 1998, primarily as a result of lower
average cash balances in the 1998 period, which was partially offset by lower
average debt balances in the 1998 period.
Liquidity and Capital Resources
During the nine-month period ended September 30, 1998, the Company's cash
and cash equivalents decreased by approximately $1,082,000 from $2,587,000 at
December 31, 1997 to $1,505,000 at September 30, 1998, primarily as a result of
using $1,943,000 in operations, $122,000 to pay certain debt and $45,000 to
purchase property and equipment, partially offset by the sale of Company
securities in April and May 1998, with net proceeds to the Company of
$1,038,000. The Company had a working capital deficit of approximately $799,000
at September 30, 1998, a reduction of $1,521,000 from the Company's working
capital deficit at December 31, 1997, which resulted primarily from the
Company's sale of securities referred to above and reductions in liabilities.
The Company has a letter of credit facility of $300,000 relating to certain
lease obligations collateralized by $300,000 of restricted cash and has a debt
facility of approximately $100,000 with its primary bank in the United Kingdom,
of which approximately $100,000 was outstanding at September 30, 1998. The
Company intends to continue to pursue a possible offering of its equity or debt
securities; however, there can be no assurance that the Company will be
successful in completing such an offering. The Company believes that its
existing cash and cash equivalents and cash generated from operations should be
sufficient to meet its currently anticipated liquidity and capital expenditure
requirements for approximately the next three months. Proceeds from the
anticipated sale of the Company's securities would be expected to provide the
Company with additional capability to meet the Company's anticipated liquidity
requirements. There can be no assurance, however, that the Company will be
successful in attaining its sales goals, or be successful in selling its
securities, nor that attaining such goals or selling such securities will have
the desired effect on the Company's cash resources.
The Company's operating activities for the first nine months of 1998 used
cash of approximately $1,943,000 primarily related to costs associated with
sales and marketing of the Company's products, an increase in accounts
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<PAGE>
receivable and a reduction of accrued expenses. The Company intends to continue
to utilize its working capital in 1998 for product development, marketing and
advertising, to finance the higher level of inventory and accounts receivable
necessary to support an anticipated increase in sales, for acquisition,
licensing or entering into joint ventures for additional products and technology
and for internal and external software development. However, the Company's cash
requirements may change depending upon numerous factors, including, without
limitation, the need to finance direct marketing programs and the licensing or
acquisition of third party software, as well as increased inventory and accounts
receivable arising from the sale and shipment of new products. The Company
intends to continue to seek additional working capital funding to expand certain
direct marketing programs, including its Go Digital Photo Pak package of a
digital camera and digital imaging software.
In the nine-month period ended September 30, 1998, approximately 52.2% of
the Company's total sales were generated outside the United States. The Company
expects this pattern to continue as it continues to expand its foreign sales
operations. The Company's exposure to foreign currency gains and losses is
partially mitigated as the Company incurs operating expenses in the principal
foreign currency in which it invoices foreign customers. As of September 30,
1998 the Company had no foreign exchange contracts outstanding. The Company's
foreign exchange gains and losses may be expected to fluctuate from period to
period depending upon the movement in exchange rates. Foreign exchange gains and
losses in 1998 have been immaterial.
Seasonality
The computer software market is characterized by significant seasonal
swings in demand, which typically peak in the fourth quarter of each calendar
year. This seasonal pattern is due primarily to the increased demand for
software during the year-end holiday buying season and reduced retail and
corporate demand for business software during the summer vacation period,
particularly in Europe. The Company expects its net sales and operating results
to continue to reflect this seasonality. The Company's revenues may also
experience substantial variations as a result of a number of factors, such as
consumer and business preferences and introduction of competing titles by
competitors, as well as limited time promotional offers. There can be no
assurance that the Company will achieve consistent growth or profitability on a
quarterly or annual basis.
Inflation
The Company believes that inflation has generally not had a material impact
on its operations.
Year 2000 Compliance Issues
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish twenty-first century dates
from twentieth century dates. As a result, in less than two years, computer
systems and software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements. The Company is in the process of
implementing a review of issues related to the Company's Year 2000 compliance.
This review is intended to determine the effect of the turn of the century on
the operability of the Company's products, internal and external information
technology ("IT") systems, non-IT systems the Company utilizes to conduct its
business and other internal and external processes which may impact the
Company's operations. In connection with this evaluation, the Company also
intends to review the Company's vendors and suppliers for Year 2000 compliance
and to effect changes where necessary.
The Company believes that this review process will be conducted in three
phases. The first phase is anticipated to encompass a review of all of the
Company's products, internal and external systems/processes and vendors and
suppliers for Year 2000 compliance. The second phase is expected to correct all
items identified as non-compliant and essential to the operations of the
Company. The third phase is contemplated to be a second review to ensure year
2000 compliance and interoperability of all systems/processes.
The Company anticipates conducting its review with its current resources
and expects that it has sufficient resources to complete the review process in a
timely manner. The Company has not determined, at this time, what total costs it
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<PAGE>
will incur to conduct the review process and to implement any necessary
corrections. The Company has identified one IT system which it believes will
need to be replaced at a cost of approximately $25,000.
The Company produces computer application software and has determined that
the products it has developed within the last several years are Year 2000
compliant. The Company is currently reviewing products sold by the Company prior
to 1994 for Year 2000 compliance. The Company currently believes that it has no
liability concerning any of its products with respect to Year 2000 requirements.
The Company does not know, at this time, of any product, process or system,
which, if found to be non-Year 2000 compliant, would have any significant impact
on the Company's business, financial condition or results of operations.
-14-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is hereby made to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1997, Item 3 (pages 11-12), filed April 15,
1998, Quarterly Report on Form 10-QSB for the quarter ended March 31, 1998, Item
1 of Part II (page 13), filed May 13, 1998, and Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1998, Item 1 of Part II (page 14), filed August
14, 1998 (Commission File No.: 1-14076), and to the references therein, for a
discussion of all material pending legal proceedings to which the Company or any
of its subsidiaries are parties.
The action titled Howard Milstein and Ronald Altman v. Software Publishing
Corporation Holdings, Inc., Mark E. Leininger and Barry A. Cinnamon is currently
in the discovery stage.
Item 2. Changes in Securities and Use of Proceeds.
In August 1998, the Company issued 60,000 shares (the "P-B Shares") of
Common Stock to Parker Bromley Ltd. in payment for consulting services valued at
$64,000. The issuance of the P-B Shares was a private transaction exempt from
registration under Section 4(2) of the Securities Act.
Effective August 1998, the Company acquired an aggregate 3,095 shares of
Common Stock, of which 1,237 shares were held by a former employee of one of the
Company's subsidiaries and 1,858 shares were held by a trust for the benefit of
certain of the employees of such subsidiary. The Company is holding such 3,095
shares in its treasury.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
In October 1998, a Nasdaq Listing Qualifications Panel (the "Panel")
determined to continue the listing of the Company's Common Stock on The Nasdaq
SmallCap Market. The Company is in compliance with the Nasdaq SmallCap Market's
net tangible assets/market capitalization/net income requirements. The Panel
determined to continue the Company's Common Stock's listing on the Nasdaq
SmallCap Market subject to the condition that the Company file a current report
on Form 8-K with the Securities and Exchange Commission on or prior to December
15, 1998, indicating net tangible assets (including acquired software costs) of
not less than $3,500,000 as of October 31, 1998, adjusted on a pro forma basis
for any significant events or transactions occurring on or before the filing
date. Such significant events would include additional equity financing, which
the Company is pursuing. The Company had $2,486,205 of net tangible assets
(including acquired software costs) as of September 30, 1998. The Panel has also
imposed on the Company the requirement that the bid price for the Company's
Common Stock meet or exceed $1.00 per share on or prior to January 21, 1999, and
thereafter have a closing bid price of $1.00 or more per share for a minimum of
ten consecutive trading days. Until such time as Nasdaq determines that the
Company meets such Panel's net tangible asset and bid price requirements, the
Nasdaq symbol for the Company's Common Stock will be SPCOC.
-15-
<PAGE>
In the event that the Company is deemed to have met the terms of these
conditions, as well as all requirements for continued listing, its Common Stock
shall continue to be listed on The Nasdaq SmallCap Market. The Company believes
that it can meet these conditions; however, there can be no assurance that it
will do so. If at some future date, the Company's securities should cease to be
listed on The Nasdaq SmallCap Market, they may continue to be listed on the OTC
Bulletin Board. Any delisting of the Company's securities from Nasdaq could
cause a decline in the market value of the Company's securities and adversely
affect the liquidity of the Company's securities.
Effective July 17, 1998, the Company repriced to $1.375 per share of Common
Stock, 75% of all options granted under the Company's various stock incentive
plans to current employees, officers and directors of the Company.
In October 1998, Robert Gordon resigned as the Vice-President - Marketing
and Sales of the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Set forth below are all exhibits to this Quarterly Report on Form 10-QSB.
Exhibit
Number Description
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SOFTWARE PUBLISHING
CORPORATION HOLDINGS, INC.
Dated: November 13, 1998 By:/s/ Mark E. Leininger
Mark E. Leininger
President and Chief Executive Officer
(Principal Executive Officer)
Dated: November 13, 1998 By:/s/ Kevin D. Sullivan
Kevin D. Sullivan
Vice President - Finance, Treasurer
and Chief Financial Officer
(Principal Financial Officer)
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<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
27 Financial Data Schedule.
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the condensed
financial statements for the period ended September 30, 1998 and is qualified in
its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,504,749
<SECURITIES> 0
<RECEIVABLES> 1,361,733
<ALLOWANCES> 0
<INVENTORY> 485,473
<CURRENT-ASSETS> 3,969,269
<PP&E> 393,243
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,591,284
<CURRENT-LIABILITIES> 4,767,893
<BONDS> 0
0
0
<COMMON> 3,970
<OTHER-SE> 2,694,585
<TOTAL-LIABILITY-AND-EQUITY> 7,591,284
<SALES> 12,226,304
<TOTAL-REVENUES> 12,226,304
<CGS> 2,807,174
<TOTAL-COSTS> 2,807,174
<OTHER-EXPENSES> 2,870,193
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (72,436)
<INCOME-PRETAX> (1,754,060)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,754,060)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,754,060)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
</TABLE>
