SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission File Number 0-25646
EXPERT SOFTWARE, INC.
State of Delaware - I.R.S. Employer Identification No.: 65-0359860
800 Douglas Road
Executive Tower, Suite #750
Coral Gables, FL 33134
(305) 567-9990
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 [ ]
As of April 30, 1997 there were 7,514,679 shares of the Registrant's Common
Stock, $ .01 par value, outstanding.
The exhibit index is on page 11.
Page 1 of 12.
EXPERT SOFTWARE, INC.
INDEX TO FORM 10-Q
Three months ended March 31, 1997
Page
----
Part I - Financial Information
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996..........................3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and 1996....................4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996....................5
Notes to Condensed Consolidated Financial Statements............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................7
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K........................10
Signatures.......................................................10
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Factors that might cause such
a difference are discussed in the section entitled "Factors Affecting Future
Operating Results" on page 10 of this Form 10-Q.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
EXPERT SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
1997 1996
--------- -----------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and equivalents............... $4,111 $2,959
Accounts receivable, net........... 3,034 3,775
Income taxes receivable............ 1,895 2,397
Inventories........................ 736 1,256
Prepaid expenses................... 634 425
Deferred income taxes.............. 2,380 2,616
--------- ----------
Total current assets............ 12,790 13,428
PROPERTY AND EQUIPMENT, net........... 1,696 1,897
ACQUIRED INTANGIBLES, net............. 132 166
DEFERRED INCOME TAXES................. 3,586 3,586
--------- ----------
Total assets.................... $18,204 $19,077
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................... $ 1,432 $ 3,226
Accrued expenses................... 5,761 5,038
Current portion of capital lease
obligations..................... 78 88
---------- ----------
Total current liabilities....... 7,271 8,352
---------- ----------
OTHER OBLIGATIONS, net of current
portion......................... 100 300
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock.................... -- --
Common stock....................... 75 75
Additional paid-in capital......... 23,204 23,198
Accumulated deficit................ (12,446) (12,848)
---------- ----------
Total stockholders' equity...... 10,833 10,425
========== ==========
Total liabilities and
stockholders' equity......... $18,204 $19,077
========== ==========
The accompanying notes to condensed financial statements are an integral part
of these balance sheets.
EXPERT SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months
Ended March 31
------------------
1997 1996
-------- ---------
NET SALES....................... $8,027 $10,383
-------- ---------
OPERATING COSTS AND EXPENSES:
Cost of sales................. 3,134 3,893
Marketing and sales........... 2,427 2,663
General and administrative.... 1,215 1,753
Development................... 641 860
-------- ---------
Total operating costs and
expenses................... 7,417 9,169
-------- ---------
Operating income............ 610 1,214
Other income, net............... 28 40
-------- ---------
Income before provision for
income taxes................. 638 1,254
Provision for income taxes...... 236 459
-------- ---------
Net income....................$ 402 $ 795
======== =========
Net income per share of
common stock................$ .05 $ .10
======== =========
Weighted average number of
common stock and stock
equivalents outstanding....... 7,896 8,064
======== =========
The accompanying notes to condensed financial statements are an integral part
of these statements.
EXPERT SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
----------------------
1997 1996
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................. $ 402 $ 795
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation of property and
equipment........................... 201 231
Amortization of acquired software
technology.......................... 24 391
Amortization of acquired intangibles.. 10 83
Deferred income tax provision
(benefit)............................ 236 (35)
Changes in current assets and
liabilities:
(Increase) decrease in accounts
receivable.......................... 741 (1,716)
(Increase) decrease in income tax
receivable.......................... 501 --
(Increase) decrease in inventories.... 520 (2,089)
(Increase) decrease in prepaid
expenses............................ (209) (223)
(Increase) decrease in other assets... -- (80)
Increase (decrease) in accounts
payable............................. (1,793) 1,008
Increase (decrease) in accrued
expenses............................ 723 (355)
Increase (decrease) in income taxes
payable............................. -- (1,803)
Increase (decrease) in other
obligations......................... (200) --
----------- ----------
Net cash provided by (used in)
operating activities............... 1,156 (3,793)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of marketable securities... -- 4,271
Purchases of property and equipment... -- (245)
----------- ----------
Net cash provided by investing
activities......................... -- 4,026
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised............... 6 --
Payments on capital lease
obligations.......................... (10) (38)
----------- ----------
Net cash provided by (used in)
financing activities............... (4) (38)
----------- ----------
Net increase in cash and
equivalents........................ 1,152 195
CASH AND EQUIVALENTS, beginning of
period............................. 2,959 912
----------- ----------
CASH AND EQUIVALENTS, end of period..... $4,111 $ 1,107
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for
interest............................ $ 1 $ 15
=========== ==========
Cash paid during the period for
income taxes........................ $ -- $ 2,527
=========== ==========
The accompanying notes to condensed consolidated financial statements are
an integral part of these statements.
EXPERT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of December 31, 1996, which has been
derived from audited financial statements, and the unaudited interim condensed
consolidated financial statements included herein, have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with the financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
In the opinion of the Company, the accompanying condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position of the Company as
of March 31, 1997, and the results of operations and cash flows for the three
months ended March 31, 1997 and 1996. Results of operations and cash flows for
the period ending March 31, 1997 are not necessarily indicative of the results
of operations of the entire fiscal year or other future periods.
The accounting policies followed for quarterly financial reporting purposes are
the same as those disclosed in the Company's audited financial statements for
the year ended December 31, 1996, included in the Form 10-K.
2. THE ORGANIZATION
Expert Software, Inc. (the "Company") publishes and distributes computer
software under the "Expert" trade name. The Company's products address a broad
range of consumer interest and everyday tasks for the productivity, lifestyle,
small office/home office, entertainment and education market categories. The
Company primarily sells its products directly to large retailers, as well as to
distributors.
3. INVENTORIES
Inventories consisted of the following as of March 31, 1997 and December 31,
1996 (in thousands):
1997 1996
--------- ---------
Finished goods.......... $ 685 $1,101
Raw materials............ 51 155
--------- ---------
$ 736 $1,256
========= =========
4. NEWLY ISSUED ACCOUNTING STANDARD
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share, which is required to be adopted as of December 31, 1997.
Upon adoption, all prior earnings per share amounts are required to be
retroactively restated.
The computation under SFAS No. 128 differs from the primary and fully diluted
earnings per share computed under APB Opinion No. 15 primarily in the manner in
which potential common stock is treated. Basic earnings per share is computed by
dividing net income by the weighted-average number of common shares outstanding.
In the computation of diluted earnings per share, the weighted-average number of
common shares outstanding is adjusted for the affect of all potential common
stock.
The pro forma basic and diluted earnings per share computed according to SFAS
No. 128 for the quarter ended March 31, 1997 are $0.05 each. The pro forma basic
and diluted earnings per share computed according to SFAS No. 128 for the
quarters ended March 31, 1996 are $0.11 and $0.10, respectively.
Item 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
The following table sets forth certain statement of operations data as a
percentage of net sales, for comparative purposes, for the periods indicated.
Three Months
Ended
March 31,
------ -------
1997 1996
------ -------
Net sales.......................... 100% 100%
------ -------
Operating costs and expenses:
Cost of sales.................... 39 37
Marketing and sales.............. 30 26
General & administrative......... 15 17
Development...................... 8 8
------ -------
92 88
------ -------
Operating income................... 8 12
Other income (expense)............. -- --
------ -------
Income before provision for income 8 12
taxes..............................
Provision for income taxes......... 3 4
------ -------
Net income......................... 5% 8%
====== =======
Comparison of Three Months Ended March 31, 1997 and 1996
Net Sales. Net sales for the three months ended March 31 decreased to $8.0
million in 1996 from $10.4 million in 1996, a decrease of 2.4 million, or 23%.
Domestic net sales in 1997 decreased as a result of a number of factors,
including increased competition, a more pronounced seasonality in the business,
retailers keeping tighter inventory levels and higher provisions for returns.
International net sales decreased due to lower sales in the United Kingdom as
the Company is transitioning to a new distributor. Average selling prices
declined due to increased competition for shelf space at retail outlets. Average
selling prices for the balance of 1997 are not expected to change significantly,
however the sales of new premium products beginning in the third quarter are
expected to be at higher price points. The Company expects the second quarter of
the year to have lower net sales than the first quarter, consistent with the
prior two years, due to seasonal trends in sales of consumer software, while
third quarter sales are expected to exceed those of the second quarter due to
new product releases and seasonal factors.
Cost of Sales. Cost of sales decreased to $3.1 million in 1997 from $3.9 million
in 1996, a decrease of $0.8 million, or 19%, due primarily to lower sales
volume, amortization of acquired software technology and royalties, partially
offset by a reduction in the value assigned to returned goods. Amortization
decreased due to the write-off in second quarter of 1996 of a substantial
portion of software technology associated with the acquisition of Swfte. As a
percentage of net sales, cost of sales increased to 39% in 1997 from 37% in
1996, due primarily to increased provisions for returns, which reduced net
sales, and the decrease in the value assigned to returned goods. Cost of sales
consists primarily of product costs (printed material, boxes, disk and CD costs,
assembly and shipping), freight charges, reserves for excess and obsolete
inventories, and royalties to outside programmers and content providers. The
Company expects cost of sales as a percentage of net sales in 1997 will be
comparable to the percentage for this quarter.
Marketing and Sales. Marketing and sales expense decreased to $2.4 million in
1997 from $2.7 million in 1996, and increased as a percentage of net sales to
30% of net sales in 1997 from 26% in 1996. The increase as a percentage of net
sales was primarily due to increased marketing activities to promote the
Company's products and brand name, including personnel costs and promotional
costs paid to retailers. The Company expects competition for shelf space to
continue and intends to continue to launch new marketing promotions and to hire
additional personnel as needed. As a result, the Company expects marketing and
sales expenses to increase in dollar amount.
General and Administrative. General and administrative expense decreased to $1.2
million in 1997 from $1.7 million in 1996 a decrease of $0.5 million, or 31%,
and decreased as a percentage of net sales to 15% in 1997 from 17% in 1996. This
decrease was primarily due to lower legal costs and amortization of acquired
intangible assets. Legal costs decreased due to the settlement in the fourth
quarter of 1996 of litigation involving the former owners of Swfte. Amortization
decreased due to the write-off in the second quarter of 1996 of a substantial
portion of the intangible assets associated with the acquisition of Swfte. The
Company expects general and administrative expenses to decrease in 1997 as
compared to 1996 as a result of the settlement of the Swfte litigation, and
lower bad debt expenses and personnel costs.
Development. Development expense decreased to $0.6 million in 1997 from $0.9
million in 1996, a decrease of $0.3 million, or 25%, due primarily to reduced
personnel costs related to the closing of the Swfte operations, and represented
8% of net sales in 1997 and 1996. Development expense includes expenses related
to product upgrades, new product activities, quality control and customer
service support. During the fourth quarter of 1996, the Company reduced
development personnel and did not renew the lease for the facilities previously
occupied by Swfte, which will help to contain development expenses in future
periods. The Company currently believes that the steps taken to reduce
development expenses in 1996 will be partially offset by additional costs to
develop new brands and titles, including the development of products to take
advantage of the Internet and other on-line capabilities.
Other Income. Other income, which includes interest income and interest expense,
decreased to $28,000 in 1997 from $40,000 in 1996, primarily due to the reduced
balance of interest bearing deposits and investments.
Provision for Income Taxes. The Company accounts for income taxes under SFAS No.
109, Accounting for Income Taxes, which requires that deferred income taxes be
recognized for the tax consequences in future years of differences between the
tax basis of assets and liabilities and their financial reporting basis at rates
based on enacted tax laws and statutory tax rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The effective tax rate used in recording the
provision for income taxes was approximately 37% in 1997 and 1996.
Liquidity and Capital Resources
During 1996, the Company experienced a reduction in its stockholders' equity,
working capital and ratio of current assets to current liabilities, primarily as
a result of net losses realized during that period. Management has responded by
reducing expenses, including, among other actions, reducing personnel
significantly. With these actions and assuming the continued availability of the
Company's revolving line of credit, management believes that it has adequate
financial resources for its planned operations through 1997.
As of March 31, 1997, the Company had $5.5 million in working capital, including
$4.1 million in cash. To date, the Company has not invested in any financial
instruments that involve a high level of complexity or risk. Net cash provided
by operating activities was $1.2 million for the three months ended March 31,
1997, primarily due to profitable results of operations, decreased investments
in accounts receivable and inventories, and receipt of $0.5 million of income
tax refunds from taxes paid in 1996.
The Company believes that cash generated by operations may be affected by an
increase in working capital requirements as it continues to expand operations.
In response to such growth in working capital requirements, the Company entered
into a loan agreement with a bank which provides for a revolving line of credit
collateralized by substantially all of the Company's assets. Borrowings under
the line are limited to a percentage of eligible receivables as defined in the
agreement and may not exceed $5.0 million through May 31, 1998, the maturity
date. The loan agreement contains restrictive covenants. There can be no
assurance that the Company's results of operations will continue to be in
compliance with the line of credit covenants which, among other things, prohibit
two consecutive quarterly losses, or that the line of credit would be otherwise
available to the Company.
The Company's federal tax filings with respect to the year ended December 31,
1992 and subsequent years are presently being reviewed by the Internal Revenue
Service ("IRS"). The IRS has questioned the allocation of the purchase price
made by the Company in connection with the acquisition of assets and business of
the Predecessor from Bloc in October 1992, and related amortization and other
deductions with respect to the acquired assets. The IRS has not proposed any
assessment from their review, but it is expected to conclude its audit in the
near future and has indicated that it intends to propose adjustments to the
Company's federal income tax returns claiming additional tax due. At this time,
it is not possible to quantify the amount of additional taxes the IRS will claim
are due. There can be no assurance that the Company will prevail in its
position, or that the appeals, if any, and final resolution of any IRS claims
will not have a material adverse impact on the Company's liquidity, financial
position, or results of operations.
From time to time, the Company evaluates potential acquisitions of products,
businesses and technologies that would complement or expand the Company's
business. The Company currently does not have any commitments or agreements with
respect to any such acquisitions. There can be no assurance that any such
acquisitions will be made or, if made, will be successfully integrated.
Factors Affecting Future Operating Results
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company's actual results could differ materially from its
historical operating results and from those set forth in the forward-looking
statements and may fluctuate between operating periods. Factors that might cause
such a differences and fluctuations include, without limitation, the following:
the size and rate of growth of the consumer software market, consolidation of
the software industry among both customers and competitors, market acceptance of
the Company's products and those of its competitors, competitors' marketing
strategies and promotions, development and promotional expenses relating to the
introduction of new products, new versions of existing products or new operating
systems, evolving distribution channels, currency fluctuations associated with
international sales and accounts receivable, the growth in popularity of the
Internet and other new technologies which could impact the distribution and
purchase of software, product returns, acquisitions of new businesses by the
Company and related charges and write-offs, the collectibility of accounts
receivable, changes in pricing policies by the Company and its competitors, the
accuracy of retailers' forecasts of consumer demand, competition for retail
space, consumer confidence, the timing of the receipt of orders from major
customers, account cancellations or delays in shipment, future cash flow and
working capital requirements, payment of the Company's obligations under the
settlement of the litigation with the former owners of Swfte, implementation and
expansion of the Company's systems and operations to accommodate the Company's
anticipated future revenues, the outcome of current and future examinations by
taxing authorities, and other factors. In addition, the consumer software
business is seasonal due primarily to the increased demand for consumer software
during the year-end holiday buying season. Further, a significant portion of
sales within a quarter is typically not realized until late in that quarter. As
a result, it may be difficult for the Company to predict its net sales for the
quarter or to quickly adapt its spending levels within a quarter to reflect
changes in demand for its products. The market price of the Company's Common
Stock has been, and in the future will likely be, subject to significant
fluctuations in response to variations in quarterly operating results and other
factors, such as announcements of technological innovations or new products by
the Company or its competitors, or other events.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 11.
Statement regarding computation of earnings per share.
(b) Exhibit 27.
Financial Data Schedule (EDGAR filing only).
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, thereto duly authorized.
Expert Software, Inc.
/s/ Charles H. Murphy
Charles H. Murphy,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: May 15, 1997