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 October 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: (781) 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 @ October 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 6 - Exhibits and Reports on Form 8-K 10
Signatures 13
3
Part I Financial Information
Item 1. Financial Statements
BGS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 31, January 31,
1997 1997
---------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 11,308,078 $ 9,995,787
Marketable securities 2,780,000 3,010,000
Accounts receivable, less allowances of
$365,000 at October 31, 1997 and January
31, 1997 for doubtful accounts 15,353,386 14,471,847
Prepaid expenses and other assets 1,806,824 1,309,325
Prepaid income taxes - 172,413
Deferred income taxes 282,728 282,728
----------- ----------
Total current assets 31,531,016 29,242,100
----------- ----------
Capitalized software 1,671,563 1,282,813
Equipment:
Land 2,258,360 2,258,360
Building 6,290,284 6,244,604
Furniture and fixtures 1,499,288 1,311,118
Computer equipment 6,530,700 5,700,204
---------- ----------
16,578,632 15,514,286
Less accumulated depreciation 6,019,019 5,104,874
----------- -----------
10,559,613 10,409,412
----------- -----------
Total Assets $43,762,192 $40,934,325
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 406,871 $ 1,562,500
Accrued expenses 1,292,676 1,975,772
Accrued compensation and employee benefits 2,433,160 1,758,230
Deferred revenue 17,035,103 16,402,902
Federal and state income taxes payable 865,094 -
Billings in excess of costs and earnings on
uncompleted contracts - 486,960
----------- -----------
Total current liabilities 22,032,904 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 14,366,904 14,156,285
Retained earnings 8,126,011 6,410,407
Equity adjustment from foreign currency
translation (590,078) (1,090,124)
---------- ----------
22,545,808 20,119,539
Less cost of 113,122 shares (160,614 shares
in 1997) of common stock in treasury 1,322,102 1,877,160
---------- ----------
Total stockholders' equity 21,223,706 18,242,379
---------- ----------
Total liabilities and stockholders' equity $43,762,192 $40,934,325
=========== ===========
FORM 10-Q
4
BGS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
October 31, October 31,
1997 1996 1997 1996
REVENUES:
License fees $10,687,522 $ 6,813,400 $23,951,599 $18,366,699
Maintenance fees 4,594,637 4,484,157 14,215,647 13,366,570
Other 742,545 742,066 2,140,812 2,113,288
------------ ------------ ------------ ------------
16,024,704 12,039,623 40,308,058 33,846,557
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Costs of software 1,416,865 723,461 3,684,329 2,848,501
Costs of maintenance & support 2,308,849 2,801,587 6,572,621 6,884,540
Costs of consulting, develop-
ment contracts and other 467,704 272,487 1,083,311 831,508
Sales and marketing 4,611,881 3,444,488 10,658,681 9,986,230
General and administrative 1,163,361 918,277 3,116,115 2,692,976
Research and development 1,406,136 746,358 3,882,196 1,531,010
---------- --------- ---------- ------------
11,374,796 8,906,658 28,997,25 24,774,765
---------- ---------- ---------- ------------
OPERATING INCOME 4,649,908 3,132,965 11,310,805 9,071,792
Investment income:
Interest income, net 87,277 127,117 337,687 411,119
Other (expense),income (355,193) 181,268 (409,028) 418,520
--------- --------- --------- ---------
(267,916) 308,385 (71,341) 829,639
-------- --------- --------- --------
INCOME BEFORE TAXES 4,381,992 3,441,350 11,239,464 9,901,431
Income taxes 1,557,985 1,226,596 3,863,715 3,410,928
---------- --------- ---------- ---------
NET INCOME $ 2,824,007 $ 2,214,754 $ 7,375,749 $ 6,490,503
========== ========== ========== ===========
Net income per share $ .44 $ .35 $ 1.14 $ 1.03
========== ========== =========== ==========
Weighted average number of
shares outstanding 6,456,402 6,361,442 6,447,015 6,325,932
========== ========== ========== ==========
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)
October 31,
1997 1996
----------------------------
OPERATING ACTIVITIES:
Net income $ 7,375,749 $ 6,490,503
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 915,385 777,365
Amortization of capitalized software 600,585 342,187
Gain on sales of
available-for-sale securities (248) -
Changes in operating assets and
liabilities:
Accounts receivable (563,215) 4,112,721
Billings in excess of costs & estimated
earnings on uncompleted contracts (486,960) (213,111)
Other current assets (416,522) (565,425)
Accounts payable and accrued expenses (824,205) (1,856,836)
Deferred revenue 644,010 (2,235,976)
Federal and state income taxes 866,776 (979,965)
Foreign currency transaction - 122,868
------------ ------------
Net cash provided by operating activities 8,111,355 5,994,331
------------ ------------
INVESTING ACTIVITIES:
Purchases of available-for-sale securities (2,290,000) (1,180,000)
Proceeds from maturity of available-for-sale
securities 2,270,000 -
Proceeds from sale of available-for-sale
securities 250,248 -
Additions to capitalized software costs (900,585) (482,813)
Additions to equipment (1,057,822) (1,480,476)
------------ ------------
Net cash used in investing activities (1,728,159) (3,143,289)
------------ ------------
FINANCING ACTIVITIES:
Purchases of common stock for treasury - 36,672
Proceeds from issuance of common stock 765,677 134,599
Dividends paid (5,660,143) (3,907,540)
------------ ------------
Net cash used in financing activities (4,894,466) (3,736,269)
------------ ------------
Effect of exchange rate changes on cash and
cash equivalents (176,439) 146,281
Net increase (decrease) in cash and cash
equivalents 1,312,291 (738,946)
Cash and cash equivalents at beginning of
fiscal year 9,995,787 11,228,411
------------ ------------
Cash and cash equivalents at end of period $11,308,078 $10,489,465
============ ============
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 26, 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 10K
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 first nine months and the third quarter of fiscal
year1998 were 19% and 33% above the levels of the comparable periods of the
prior fiscal year. The Company's products for distributed systems continued
their growth trend and pushed license fee growth to 57% for the third quarter
and 30% for the nine-month period. License fee revenue from these products
accounted for 68% of the total license fee revenue for the nine month period
and 72% of the total license fee revenue for the third quarter. Sales of the
Company's Datacenter products continued to show weakness in both the third
quarter and the nine-month period. The Company's international operations
rebounded in the third quarter based solely upon the strength of the Company's
UK operations. The balance of the Company's international operations
continued to post license fee revenue at levels below the comparable periods
last year. Growth in license fee revenue would have been approximately 1%
higher in both periods had it not been for the adverse effects of the
strengthening dollar. The Company's domestic and UK operations were both
helped by the receipt of large orders that will be recognized over the next
several years. The unpredictable nature of the frequency and size of these
orders continues to be of concern because of the increased potential for
unevenness in the total revenue of the Company, as has been the case over the
last several quarters.
Maintenance fee revenue grew approximately 6% in the nine month period and 2% in
the third quarter over the comparable periods of the prior year. The Company's
overall maintenance renewal rate is below the levels of the prior fiscal year.
In particular, the maintenance revenue from our more mature products
continued to decline as the Company's customers transition to newer
technology. Growth in maintenance fee revenue at exchange rates comparable
to the prior year's would have been 8% for the nine month period and 5% for
the third quarter.
Other revenue for both the nine-month period and the third quarter was
essentially even with the levels of the comparable periods of the prior fiscal
year. While customers continue to require additional installation and other
consulting services, a lack of consulting resources has placed a strain on the
Company's ability to produce growth in this area. The level of third party
development contract revenue continues at a minimum maintenance level and is not
expected to vary significantly in the foreseeable future.
Aggregate costs and expenses for the third quarter and the nine-month period
increased 28% and 17% over the comparable periods of the prior year. Sales and
marketing expenses were higher for both periods primarily as a result of the
increased levels of software sales. General and administrative expenses
increased primarily as the result of normal salary increases and an increase in
professional fees. During the quarter, the Company's internal counsel left to
pursue other opportunities and the Company has been undergoing the transition to
the usage of external counsel.
8
FORM 10-K
The cost of software increased substantially in both periods. The combination
of a shortage of qualified software engineers and an expanding amount of
development work continues to be the driving force behind this. A continuation
of this shortage of qualified software engineers will continue to increase the
Company's product development cost and may result in delays in the release of
new products. The cost of maintenance and support declined in both periods
from the comparable levels of the prior fiscal year. These costs were higher
than normal in the third quarter of last year due to the release of new
products and enhancements to existing products. For the current quarter, these
costs were more in line with the current quarterly run rate after accounting
for normal inflationary increases. The cost of the consulting, development
contracts and other revenue increased primarily as a result of the increased
use of outside contractors to complete a portion of the consulting work.
The Gross margin for software the nine-month period was 85% for both fiscal
years. The 31% growth in license fee revenue for the nine month period funded
the Company's continued additional investment in the development and enhancement
of an increasing breadth of products and product iterations. A continuation of
this investment and an elevation of the cost to employ qualified software
engineers will put pressure on the Company's margin throughout the next fiscal
year. Gross margins for maintenance improved for both the third quarter and the
nine month period principally as a result of the lack of the aforementioned one
time costs in the third quarter of fiscal year 1997. The gross margin for
consulting and other revenue declined primarily as a result of the increased use
of outside consultants to carry out consulting assignments. During the third
quarter, the Company reduced the use of outside consultants to assist on
research and development projects. For the nine month period the Company has
capitalized $900,000 of software development costs and amortized $600,000.
While the investment in new products will continue to increase as the Company
continues its expansion into the distributed systems market, the growth in
this area should moderate over the next few quarters.
Investment income declined from both periods last year as the level of
marketable securities was lower due to the purchase and renovation of the
Company's new headquarters and the payment of a higher quarterly dividend than
in the past. Other expense was primarily a result of exchange losses on long
term intercompany debt that was reclassified to currently payable. The Company
does not enter into any forward exchange contracts.
Net income grew approximately 14% for the nine month period and 28% for the
third quarter, while earnings per share grew 11% for the nine-month period
and 26% for the third quarter. The effective tax rate was approximately 34%
for both year's.
Material Changes in Financial Condition/Liquidity
Cash and marketable securities increased $1,082,000 as current year earnings
were offset by an increase in the payment and rate of the quarterly dividends
and the purchase of new computer equipment. The increase in accounts
receivable over the balance at January 31 is primarily due to the increased
level of revenue produced in the third quarter. Accounts payable and accrued
expenses both declined as a result of the decline in outstanding amounts due
relating to both the renovation of the Company's headquarters and amounts due
to outside consultants. Deferred revenue increased as a result of the receipt
of several orders for which revenue will be recognized over the next several
fiscal years.
9
FORM 10-K
The Company's cash resources are considered sufficient to finance the Company's
growth in the foreseeable future.
Trends and Uncertainties
As noted in our filing of Form 10Q for the period ended July 31, 1997, the
Company has committed to have all of its products year 2000 compliant by the
end of April 1998. This has been done through documents detailing product
direction and also is included in a number of our contracts with customers.
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 financial penalties.
10
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.
11
FORM 10-Q
INDEX TO EXHIBITS
Exhibits Page Number
11 Statement regarding Computation
of per share earnings Page 12
27 Financial Data Schedule Page 14
13
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 02254-9111
Date: December 12, 1997 By: /S/ HAROLD S. SCHWENK, JR.
Harold S. Schwenk, Jr.
President and Chief Executive Officer
Date: December 12, 1997 By: /S/ NORMAND BILODEAU
Normand Bilodeau
Chief Financial Officer