FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-12192
BGS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2559993
(State of Incorporation) (I.R.S. Employer
Identification No.)
One First Avenue Waltham, Massachusetts 02254-9111
(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 891-0000
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
Number of shares outstanding of each of the issuer's classes of common stock.
Common stock, $.10 par value
Shares outstanding @ July 31, 1997.................................6,429,698
BGS Systems, Inc.
Table of Contents
Part I Financial Information: Page No.
Item 1 - Financial Statements:
Balance Sheets 3
Statements of Income 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 7-9
Part II Other Information:
Item 4 - Submission of Matters to a vote of 10
Security Holders
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures
3
Part I Financial Information
Item 1. Financial Statements
BGS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
July 31, January 31,
1997 1997
---------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 7,705,976 $ 9,995,787
Marketable securities 2,660,000 3,010,000
Accounts receivable, less allowances of
$365,000 at July 31, 1997 and January
31, 1997 for doubtful accounts 13,889,881 14,471,847
Prepaid expenses and other assets 1,682,266 1,309,325
Prepaid income taxes - 172,413
Deferred income taxes 282,728 282,728
---------- ----------
Total current assets 26,220,851 29,242,100
----------- ----------
Capitalized software 1,482,813 1,282,813
Equipment:
Land 2,258,360 2,258,360
Building 6,254,442 6,244,604
Furniture and fixtures 1,460,755 1,311,118
Computer equipment 6,354,859 5,700,204
----------- -----------
16,328,416 15,514,286
Less accumulated depreciation 5,681,738 5,104,874
----------- -----------
10,646,678 10,409,412
----------- -----------
Total Assets $38,350,342 $40,934,325
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,316,739 $ 1,562,500
Accrued expenses 496,172 1,975,772
Accrued compensation and employee benefits 932,465 1,758,230
Deferred revenue 14,307,505 16,402,902
Federal and state income taxes payable 422,985 -
Billings in excess of costs and earnings on
uncompleted contracts 41,960 486,960
----------- -----------
Total current liabilities 18,517,826 22,186,364
----------- -----------
Deferred income taxes 505,582 505,582
Stockholders' equity:
Common stock, $.10 par value-authorized
10,000,000 shares; issued and outstanding
6,429,698 shares 642,971 642,971
Capital in excess of par value 14,231,671 14,156,285
Retained earnings 7,196,977 6,410,407
Equity adjustment from foreign currency
translation (1,131,801) (1,090,124)
----------- -----------
20,939,818 20,119,539
Less cost of 138,002 shares (160,614 shares
in 1997) of common stock in treasury 1,612,884 1,877,160
----------- -----------
Total stockholders' equity 19,326,934 18,242,379
----------- -----------
Total liabilities and stockholders' equity $38,350,342 $40,934,325
=========== ===========
4
FORM 10-Q
BGS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
July 31, July 31,
1997 1996 1997 1996
REVENUES:
License fees $ 7,134,564 $ 6,272,251 $ 13,264,077 $ 11,553,299
Maintenance fees 4,889,078 4,424,534 9,621,010 8,882,413
Other 645,372 621,107 1,398,267 1,371,222
------------ ------------ ------------ ------------
12,669,014 11,317,892 24,283,354 21,806,934
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Costs of software 1,173,738 1,095,161 2,267,464 2,125,040
Costs of maintenance & support 2,122,847 2,156,716 4,263,772 4,082,954
Costs of consulting, develop-
ment contracts and other 383,738 352,906 615,607 559,021
Sales and marketing 3,110,831 3,406,551 6,046,800 6,541,742
General and administrative 1,039,957 960,840 1,952,754 1,774,699
Research and development 1,370,043 373,606 2,476,060 784,652
------------ ---------- ----------- ----------
9,201,154 8,345,780 17,622,457 15,868,108
------------ ---------- ----------- ----------
OPERATING INCOME 3,467,860 2,972,112 6,660,897 5,938,826
Investment income:
Interest income, net 122,330 140,966 250,410 284,001
Other(expense), income (53,464) 173,139 (53,835) 237,252
----------- ----------- ---------- ---------
68,866 314,105 196,575 521,253
----------- ----------- ---------- ---------
INCOME BEFORE TAXES 3,536,726 3,286,217 6,857,472 6,460,079
Income taxes 1,199,613 1,112,100 2,305,730 2,184,332
---------- ----------- ---------- ----------
NET INCOME $ 2,337,113 $2,174,117 $4,551,742 $4,275,747
============ =========== ========== ==========
Net income per share $ .36 $ .34 $ .71 $ .68
============ =========== ========== ===========
Weighted average number of
shares outstanding 6,445,327 6,326,448 6,442,321 6,308,178
========== ========== ========= =========
Net income per share: The computations of income per share are based on the
weighted average number of shares of Common Stock outstanding during the
periods, including the dilutive effect of stock options.
5
FORM 10-Q
BGS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
July 31,
1997 1996
-----------------------------
OPERATING ACTIVITIES:
Net income $ 4,551,742 $ 4,275,747
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 603,659 503,885
Amortization of capitalized software 400,390 228,125
Gain on sales of
available-for-sale securities (248) -
Changes in operating assets and
liabilities:
Accounts receivable 638,036 3,560,503
Billings in excess of costs & estimated
earnings on uncompleted contracts (445,000) (213,111)
Other current assets (213,861) (329,324)
Accounts payable and accrued expenses (1,536,703) (1,777,883)
Deferred revenue (2,054,126) (1,237,551)
Federal and state income taxes 418,780 150,588
Foreign currency transaction - 8,511
------------ ------------
Net cash provided by operating activities 2,362,669 5,169,490
------------ ------------
INVESTING ACTIVITIES:
Purchases of available-for-sale securities (1,085,000) (660,000)
Proceeds from maturity of available-for-sale
securities 1,185,000 -
Proceeds from sale of available-for-sale
securities 250,248 -
Additions to capitalized software costs (600,390) (284,375)
Additions to property, plant & equipment (860,276) (686,241)
----------- ------------
Net cash used in investing activities (1,110,418) (1,630,616)
------------ ------------
FINANCING ACTIVITIES:
Purchases of common stock for treasury - 36,672
Proceeds from issuance of common stock 339,662 134,599
Dividends paid (3,765,170) (2,342,797)
------------ ------------
Net cash used in financing activities (3,425,508) (2,171,526)
------------ ------------
Effect of exchange rate changes on cash and
cash equivalents (116,554) 105,895
Net increase (decrease) in cash and cash ----------- ------------
equivalents (2,289,811) 1,473,243
Cash and cash equivalents at beginning of
fiscal year 9,995,787 11,228,411
----------- ------------
Cash and cash equivalents at end of period $ 7,705,976 $12,701,654
============ ============
6
FORM 10-Q
BGS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
I. Accounting Comments
With respect to the unaudited statements for the interim periods included
in this report, management of the Company believes that all adjustments
necessary for fair presentation of the results for such interim periods have
been included, and are of a normal recurring nature.
Reference is made to the registrant's Annual Report on Form 10-K, filed
with the Securities and Exchange Commission on April 25, 1997, which
incorporates the financial statements and notes thereto, including a summary
of significant accounting policies, for the fiscal years ended January 31, 1997
and January 31, 1996.
The results for the interim periods are not necessarily indicative of the
results for the entire year.
7
FORM 10-Q
Part 1-Item 2
BGS SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Material Changes in Results of Operations
Operating revenues for the second quarter of fiscal year 1998 grew 12% to
$12,669,000. For the first six months of fiscal year 1998 operating revenues
increased 11% to $24,283,000. The Company's domestic operations continued to
perform well and posted a 36% growth in license fee revenue over both last
year's second quarter and six-month results. These gains were offset by a
substantial decline in license fee revenue from the Company's German operations
and to a lesser extent, a decline in license fee revenue from the Company's
French operations. The Company has begun to replace certain members of the
German operation's sales team in an effort to reverse the current sales trend.
The Company's operations in France appear to be transitioning from selling
exclusively mainframe products to selling a mix including the Company's newer
distributed systems offerings.
License fee revenue from the Company's newer offerings, for distributed
systems, grew 28% in the second quarter and 35% in the six-month period and
now account for approximately 60% of the Company's license fee revenue.
Sales of the Company's Datacenter and mainframe Visualizer products showed
some weakness as the sales force focused more effort on the Company's newer
product offerings. Additionally, this was the second consecutive quarter that
the Company's results were tempered because it did not have an exceptionally
large value license fee sale. The Company has noted in the past that the
timing, dollar value and frequency of these sales could produce uneven growth
in revenues and profits.
Maintenance fee revenue increased 8% for the six-month period and 10% for the
second quarter. Maintenance renewals of the Company's older product lines
such as VM, SNA and Crystal continue to decline at an accelerated rate and
will soon account for less than 10% of total maintenance revenue. Other
revenue, including consulting services, and third party development contracts
for both periods was substantially even with the levels of the comparable
periods last year.
Aggregate costs and expenses for the second quarter grew by 10% and were
approximately 11% greater than the six-month period last year. Sales and
marketing expenses were below both periods of the prior fiscal year as the
Company reduced its product introduction marketing efforts relating to the
Company's newer distributed systems products. Selling and marketing expenses
should be more comparable with levels of last year in the third and fourth
quarters of this fiscal year with increased trade show and marketing activity.
The cost of software for both periods increased 7% over the comparable periods
of last year and reflects both the increased cost of qualified labor in the
current tight labor market and the continuation of the increased investment
in equipment required for the Company to develop and enhance products for
distributed systems. The Company expects the costs of qualified software
engineers to continue to escalate and increase its cost to develop software
8
FORM 10-Q
products. The cost of maintenance and support has remained at a level of
approximately $2,100,000 for the past two quarters. The Company expects that
these costs will gradually increase as new products are released that will
require technical support people with different skill sets. Margins for both
license fee revenue and maintenance revenue improved as the revenue increased
at a faster pace than expenses. The Company capitalized $600,000 and $295,000
of software development costs and amortized $400,000 and $200,000 during the
first six months and the second quarter of fiscal year 1998, respectively.
Research and development costs continued to escalate as development of a new
product required the use of outside consultants to supplement the Company's
existing labor force.
The growth in general and administrative expenses was primarily due to normal
inflation and some additional infrastructure costs related to the Company's
new headquarters and is expected to continue to grow slowly for the near term.
The cost of consulting and other revenue increased as a result of the
temporary acquisition of additional resources for providing the revenue
related services.
Interest income declined for both periods as both the amount of funds
available for investment and interest rates were below the prior years levels.
Other expense was primarily intercompany currency transaction losses.
The Company does not enter into any forward exchange contracts.
Net income grew approximately 6% over last year's first six months and 7% over
last year's second quarter. The effective tax rate was approximately 34% for
both years.
Material Changes in Financial Condition/Liquidity
Cash and marketable securities decreased $2,640,000 principally as a result of
the payment of fiscal year 1997 incentives in the first quarter of the current
fiscal year and the payment of two quarterly dividends. The decrease in
accounts receivable from January 31 is primarily due to the collection of
outstanding accounts and the lower sales levels in the first and second
quarters of the current fiscal year versus the normal increased sales activity
during the fourth quarter.
The Company's cash resources are considered sufficient to finance the
Company's growth in the foreseeable future.
Accounts payable and accrued expenses declined primarily as a result of a
lower level of spending in the second quarter as compared to the fourth
quarter and earlier payment of vendor invoices at the end of the second
quarter. Accrued compensation declined as a result of the payment of
year-end bonuses in the first quarter of the current fiscal year. Deferred
revenue declined as revenue from maintenance contracts pre-billed last year
was partially recognized during the first two quarters of the current fiscal
year.
9
FORM 10-Q
Trends and Uncertainties
Through documents detailing product direction and also contractually with a
number of our customers, the Company has committed to have all of its products
year 2000 compliant by the end of April 1998. As of this point in time, the
Company's mainframe and Visualizer products are not year 2000 compliant.
While the Company does expect to have all of its products year 2000 compliant
by the aforementioned date, if it were to be delayed, the Company could face
significant financial penalties.
The Company continues to struggle with underperforming segments of its
international operations. In the latter part of fiscal year 1997, the
Company's international operations appeared to have reversed the trend of
disappointing quarterly results with its German operations posting acceptable
revenue gains for the period. In order for the Company to again attain
acceptable levels of revenue growth, it is necessary for our international
operations to regain the momentum of the second half of last fiscal year.
As we have experienced in the first six months of the current fiscal year, the
frequency or lack of large software purchases by the Company's customers
continues to impact the performance of one or more of the Company's operating
units each quarter. This continues to be of concern because of the increased
potential for unevenness in the total revenue and profitability of the
Company for the foreseeable future.
10
FORM 10-Q
BGS SYSTEMS, INC.
Part II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
(a), (c) At the Annual Meeting of Stockholders held on June 10, 1997, the
stockholders of the Company voted to fix the number of directors at four and
elected Judith N. Goldberg to serve as the Class II director for a term of
three years. The other directors whose terms continued after the meeting are
Jeffrey P. Buzen and Paul R. Duncan (Class III directors whose terms expire at
the Annual Meeting of Stockholders in 1999) and Harold S. Schwenk, Jr.
(Class I director whose term expires at the Annual Meeting of Stockholders in
1998). A total of 5,556,422 shares were voted in favor of the election of
Judith N. Goldberg, with 212,067 votes withheld.
In addition, the stockholders of the Company approved the adoption of the 1997
Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") as described
in the Company's Proxy Statement dated June 10, 1997, and filed with the
Commission on May 1, 1997 (the "Proxy Statement"). A complete description of
the Employee Stock Purchase Plan is set forth on Exhibit A to the Proxy
Statement which is incorporated herein by reference. A total of 4,102,611
shares voted for the proposal with 264,400 shares against, 1,240,165
abstentions and 161,313 broker non-votes.
The stockholders of the Company also approved the adoption of an amendment to
the Company's 1993 Stock Option Plan (the "Stock Option Plan") as described in
the Proxy Statement. A complete description of the Stock Option Plan is set
forth on Exhibit B to the Proxy Statement which is incorporated herein by
reference. A total of 4,821,116 shares voted for the proposal with 476,062
shares against, 309,998 abstentions and 161,313 broker non-votes.
Furthermore, the stockholders of the Company approved the adoption of an
amendment to the Company's 1993 Outside Director Stock Option Plan
(the "Outside Director Stock Option Plan") as described in the Proxy
Statement. A complete description of the Outside Director Stock Option Plan
is set forth on Exhibit C to the Proxy Statement which is incorporated
herein by reference. A total of 4,673,223 shares voted for the proposal
with 619,430 against, 314,523 abstentions and 161,313 broker non-votes.
11
FORM 10-Q
BGS SYSTEMS, INC.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The exhibits filed as part of this Form 10-Q are
listed on the Exhibit Index immediately preceding such
exhibits and are incorporated herein by reference.
(b) Form 8-K. The Registrant did not file any reports on
Form 8-K during the quarter for which this report is filed.
12
FORM 10-Q
INDEX TO EXHIBITS
Exhibits Page Number
11 Statement regarding Computation
of per share earnings
27 Financial Data Schedule
FORM 10-Q
BGS SYSTEMS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BGS Systems, Inc.
One First Avenue
Waltham, Massachusetts 02254
Date: September 12, 1997 By: /S/ HAROLD S. SCHWENK, JR.
Harold S. Schwenk, Jr.
President and Chief Executive Officer
Date: September 12, 1997 By: /S/ NORMAND BILODEAU
Normand Bilodeau
Chief Financial Officer