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 September 30, 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 October 31, 1997, there were 7,548,494 shares of the Registrant's Common
Stock, $ .01 par value, outstanding.
The exhibit index is on page 13.
Page 1 of 15.
EXPERT SOFTWARE, INC.
INDEX TO FORM 10-Q
Nine Months Ended September 30, 1997
Page
------
Part I - Financial Information
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996.....................3
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 1997
and 1996.....................................................4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 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 5. Factors That May Affect Future Results.................12
Item 6. Exhibits and Reports on Form 8-K.......................13
Signatures......................................................13
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 That May Affect
Future Results" on page 12 of this Form 10-Q.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
EXPERT SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September December 31,
30,
1997 1996
--------- ---------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and equivalents............... $4,979 $2,959
Accounts receivable, net........... 4,430 3,775
Inventories, net................... 2,453 1,256
Income taxes receivable............ 1,864 2,397
Prepaid expenses................... 534 425
Deferred income taxes.............. 1,874 2,616
-------- --------
Total current assets............ 16,134 13,428
PROPERTY AND EQUIPMENT, net........... 1,344 1,897
DEFERRED INCOME TAXES................. 3,586 3,586
ACQUIRED INTANGIBLES, net............. 63 166
-------- --------
Total assets.................... $21,127 $19,077
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................... $3,629 $3,226
Accrued expenses................... 5,632 5,038
Current portion of capital lease
obligations........................ 57 88
-------- --------
Total current liabilities....... 9,318 8,352
-------- --------
OTHER OBLIGATIONS, net of current
portion............................... -- 300
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock.................... -- --
Common stock....................... 75 75
Additional paid-in capital......... 23,319 23,198
Accumulated deficit................ (11,585) (12,848)
-------- --------
Total stockholders' equity...... 11,809 10,425
======== ========
Total liabilities and
stockholders' equity........... $21,127 $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 and share data)
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
1997 1996 1997 1996
-------- -------- -------- ---------
NET REVENUES...................... $9,035 $6,041 $24,136 $22,778
-------- -------- -------- ---------
OPERATING COSTS AND EXPENSES:
Cost of revenues................ 3,503 2,408 9,287 13,152
Marketing and sales............. 2,719 2,150 7,414 7,445
General and administrative...... 1,162 3,953 3,485 8,735
Development..................... 724 978 2,107 2,728
Loss on impairment of
intangible assets.............. -- -- -- 5,700
-------- -------- -------- ---------
Total operating costs and
expenses.................... 8,108 9,489 22,293 37,760
-------- -------- -------- ---------
Operating income (loss)....... 927 (3,448) 1,843 (14,982)
Other income, net................. 84 20 162 89
-------- -------- -------- ---------
Income (loss) before provision
(benefit) for income taxes.... 1,011 (3,428) 2,005 (14,893)
Provision (benefit) for income
taxes........................ 374 -- 742 (4,268)
-------- -------- -------- ---------
Net income (loss).............. $637 (3,428) $ 1,263 $(10,625)
======== ======== ======== =========
Net income (loss) per share of
common stock..... $ .08 $ (.46) $ .16 $ (1.38)
======== ======== ======== =========
Weighted average number of
common stock and stock
equivalents outstanding........ 8,263 7,481 8,059 7,675
======== ======== ======== =========
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)
Nine Months Ended
September 30,
----------------------
1997 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $1,263 $(10,625)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation of property and equipment.. 601 881
Amortization of acquired intangibles.... 103 508
Loss on impairment of assets............ -- 5,700
Deferred income tax provision (benefit) 742 (3,472)
Imputed compensation on stock options... 41 --
Changes in current assets and liabilities:
(Increase) decrease in accounts
receivable............................ (655) 2,688
(Increase) decrease in income tax
receivable............................ 532 (1,401)
(Increase) decrease in inventories...... (1,197) 2,199
(Increase) decrease in prepaid expenses. (108) (293)
(Increase) decrease in other assets..... -- 10
Increase (decrease) in accounts payable. 402 (873)
Increase (decrease) in accrued expenses. 595 2,316
Increase (decrease) in income taxes
payable............................... (1) (2,144)
Increase (decrease) in other
obligations........................... (300) --
---------- ----------
Net cash provided by (used in)
operating activities................. 2,018 (4,506)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of marketable securities..... -- 6,222
Purchases of property and equipment..... (48) (750)
---------- ----------
Net cash provided by (used in)
investing activities................ (48) 5,472
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised................. 81 43
Borrowings under capital lease
obligations............................ -- 102
Payments on capital lease obligations... (31) (100)
---------- ----------
Net cash provided by financing
activities........................... 50 45
---------- ----------
Net increase in cash and equivalents 2,020 1,010
CASH AND EQUIVALENTS, beginning of period 2,959 912
---------- ----------
CASH AND EQUIVALENTS, end of period....... $4,979 $ 1,922
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for
interest............................... $ 4 $ 27
========== ==========
Cash paid during the period for income
taxes.................................. $ -- $ 2,748
========== ==========
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
EXPERT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 necessary to present fairly the financial
position of the Company as of September 30, 1997, and the results of operations
and cash flows for the three months and nine months ended September 30, 1997 and
1996. In addition to the normal recurring accruals, as previously reported,
material adjustments were recorded to the financial statements for the nine
months ended September 30, 1996. As more fully discussed in Part I, Item 2,
these adjustments included recognizing a loss from the impairment of intangible
assets, recording inventory losses, and providing additional allowances against
accounts receivable for possible future returns from customers and for doubtful
accounts. Results of operations and cash flows for the period ending September
30, 1997, are not necessarily indicative of the results of operations of the
entire fiscal year.
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 sells its products directly to large retailers, as well as to
distributors.
3. INVENTORIES
Inventories consisted of the following as of September 30, 1997, and December
31, 1996, (in thousands):
1997 1996
---------- ---------
Finished goods............ $2,036 $1,101
Raw materials............. 417 155
---------- ---------
$2,453 $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 effect of all potential common
stock.
The pro forma basic and diluted earnings per share computed according to SFAS
No. 128 for the quarter ended September 30, 1997, are $.08 each. The pro forma
basic and diluted earnings per share computed according to SFAS No. 128 for the
quarter ended September 30, 1996 are $(.46) each.
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 revenues, for comparative purposes, for the periods indicated.
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- ---------------
1997 1996 1997 1996
------ ------ ------ -------
Net revenues....................... 100% 100% 100% 100%
------ ------ ------ -------
Operating costs and expenses:
Cost of revenues................. 39 40 38 58
Marketing and sales.............. 30 36 31 33
General & administrative......... 13 65 14 38
Development...................... 8 16 9 12
Loss on impairment of intangible
assets.......................... -- -- -- 25
------ ------ ------ ------
90 157 92 166
------ ------ ------ ------
Operating income (loss)............ 10 (57) 8 (66)
Other income (expense)............. 1 -- -- 1
----- ------ ------ ------
Income (loss) before provision
(benefit) for income taxes......... 11 (57) 8 (65)
Provision (benefit) for income
taxes.............................. 4 -- 3 (18)
------ ------ ------ ------
Net income (loss).................. 7% (57)% 5% (47)%
====== ====== ====== ======
General Comments Regarding 1996 Results of Operations
Results for the three months ended June 30, 1996, included provisions for
potential excess inventories of $2.6 million and a reduction in the estimated
inventory value for product returned of $1.4 million; an increase in estimated
product returns that exceeded expectations by $0.5 million; an increase in the
provision for doubtful accounts of $1.0 million; and losses recorded in
connection with the Swfte acquisition totaling $5.7 million. The slowdown in
retail sales resulted in the Company not meeting sales objectives, which
contributed to excess inventories. In addition, the Company experienced
temporary difficulties in the implementation of new management information
systems which contributed to purchasing higher levels of inventory than were
necessary in the normal course of business. Additionally, higher levels of
returns resulted in increased inventory. Based on the foregoing, management
determined that the value assigned to the returned goods should be lower than
that assigned in prior periods, and reserves for potential excess inventories
should be increased, causing an increase in the cost of revenues.
Additionally, the products obtained in the Swfte acquisition were selling at
levels substantially below projected levels. Together with other developments
which are described below under "Loss on Impairment of Intangibles", these
events led management to record during the second quarter of 1996 a material
loss on the impairment of the intangible assets arising from the Swfte
acquisition. This loss included additional reserves for returns and marketing
allowances against the acquired accounts receivable, additional reserves against
the acquired inventories, adjustments to fixed assets, and accruals for
guaranteed royalty agreements entered into prior to the acquisition that are not
expected to be recouped in the ordinary course of business. See the discussion
at "Loss on Impairment of Intangibles" below for further information on these
adjustments.
Comparison of Three Months Ended September 30, 1997 and 1996
Net Revenues. Net revenues for the three months increased to $9.0 million in
1997 from $6.0 million in 1996, an increase of $3.0 million, or 50%. Net
revenues increased both domestically and internationally, due primarily to
increased units sold. International revenues represented 23% of net revenues in
1997 and 1996.
Cost of Revenues. Cost of revenues for the three months increased to $3.5
million in 1997 from $2.4 million in 1996, an increase of $1.1 million, or 46%,
due primarily to increased sales volume. As a percentage of net revenues, cost
of revenues represented 39% and 40% of net revenues in 1997 and 1996,
respectively. Cost of revenues 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 revenues in
future periods will increase over those in the prior year due to anticipated mix
changes favoring boxed products, which have higher packaging and freight costs.
The Company believes that retailers prefer such boxed products due to their
additional marketing content and appeal.
Marketing and Sales. Marketing and sales expense for the three months increased
to $2.7 million in 1997 from $2.1 million in 1996, an increase of $0.6 million,
or 26%, and decreased as a percentage of net revenues to 30% in 1997 from 36% in
1996. This decrease was primarily the result of lower promotional and
advertising costs. As a result of not meeting sales expectations in 1996,
marketing costs represented a higher percentage of revenues in 1996 than in
1997. The Company's marketing spending consists principally of activities to
promote the Company's products and brand name, including costs to promote and
support the Company's growing international sales, in-store promotions, and
personnel costs. The Company 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 and as a
percentage of revenues in the future.
General and Administrative. General and administrative ("G&A") expense for the
three months decreased to $1.1 million in 1997 from $3.9 million in 1996, a
decrease of $2.8 million, or 71%, and decreased as a percentage of net revenues
to 13% in 1997 from 65% in 1996, primarily due to decreased legal costs. Legal
costs decreased due to the settlement in the fourth quarter of 1996 of
litigation involving the former owners 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 for the three months decreased to $0.7 million
in 1997 from $0.9 million in 1996, a decrease of $0.2 million, or 26%, and
decreased as a percentage of net revenues to 8% of net revenues in 1997 from 16%
in 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. The Company therefore expects development expenses will increase
in future periods.
Other Income. Other income, which includes interest income and interest expense,
increased to $84,000 in 1997 from $20,000 in 1996, primarily due to the
increased balance of interest bearing deposits and investments.
Provision (Benefit) 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.
Comparison of Nine Months Ended September 30, 1997 and 1996
Net Revenues. Net revenues for the nine months increased to $24.1 million in
1997 from $22.8 million in 1996, an increase of $1.3 million, or 6%. Domestic
net revenues in 1997 increased due primarily to increased units sold.
International net revenues decreased due to lower sales in the United Kingdom as
the Company is transitioning to a new distributor. International revenues
represented 20% and 24% of net revenues in 1997 and 1996, respectively.
Cost of Revenues. Cost of revenues for the nine months decreased to $9.3 million
in 1997 from $13.2 million in 1996, a decrease of $3.9 million, or 29%, and
decreased as a percentage of net revenues to 38% in 1997 from 58% in 1996. This
decrease was primarily due to the provisions of $2.6 million and $1.4 million
recorded in 1996 and discussed under General Comments above. Cost of revenues
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 revenues in future periods will increase over those in
the current quarter due to anticipated mix changes favoring boxed products,
which have higher packaging and freight costs. The Company believes that
retailers prefer such boxed products due to their additional marketing content
and appeal.
Marketing and Sales. Marketing and sales expense for the nine months were $7.4
million in 1997 and 1996, and decreased as a percentage of net revenues to 31%
of net revenues in 1997 from 33% in 1996. As a result of not meeting sales
expectations in 1996, marketing costs represented a higher percentage of
revenues in 1996 than in 1997. The Company's marketing spending consists
principally of activities to promote the Company's products and brand name,
including costs to promote and support the Company's growing international
sales, in-store promotions and personnel costs. The Company 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 and as a percentage of revenues in the future.
General and Administrative. General and administrative ("G&A") expense for the
nine months decreased to $3.5 million in 1997 from $8.7 million in 1996, a
decrease of $5.2 million, or 60%, and decreased as a percentage of net revenues
to 14% from 38%, respectively. This decrease was primarily due to decreased
provisions for doubtful accounts, decreased legal costs, and decreased
amortization expense. Provisions for doubtful accounts in 1996 included the
additional $1.0 million adjustment discussed under General Comments above. 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 for the nine months decreased to $2.1 million
in 1997 from $2.7 million in 1996, a decrease of $0.6 million, or 23%, and
decreased as a percentage of net revenues to 9% of net revenues in 1997 from 12%
in 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.
Loss on Impairment of Intangibles. During the three months ended June 30, 1996,
management reevaluated the carrying value of the intangible assets recorded in
connection with the November 1995 acquisition of Swfte. These intangible assets
consisted of acquired software technology, a license agreement to use the
BicycleAE brand name in certain card game software, the assembled workforce
acquired, and Swfte's customer list. This reevaluation of the intangible assets
was necessitated by management's determination based on then-recent results of
operations that the expected sales and cash flows from the acquired assets would
be substantially lower than had been previously expected.
The acquired Swfte products originally projected to generate the most
significant sales and cash flows were selling at substantially lower than
expected rates. Certain of those titles faced new competition from other
publishers, which had taken market share away from those titles. In particular,
the card games category had become more competitive as a result of marketing
efforts by Sierra On Line and others. Additionally, certain other acquired
titles were released shortly before the acquisition of Swfte. Based on low sales
rates, some retailers were discontinuing certain of these titles and management
determined their expected future sales were minimal.
A significantly higher level of returns was experienced with the products
acquired in the acquisition over the rate of returns experienced with the
Company's other products. Management believes that certain titles were sold into
the distribution and retail channel prior to the acquisition at higher rates
than were supported by sales through to the end users. This prompted
distributors and retailers to return these products. This overstock of product
and returns experience had, in management's judgment, damaged the market
receptiveness to the acquired products and reduced their expected future sales
levels.
Lower than expected acceptance of the acquired products, together with the
terminations of personnel in connection with closing the Swfte facilities in
Delaware to consolidate all operations at the Company's headquarters in Florida,
caused management to write-off the value originally ascribed to the workforce in
place.
Value was originally ascribed to Swfte's customer list based upon management's
assessment of the value of Swfte's experience in dealing with certain
educational channels and bookstores. Due to the lower than expected sales rates
and higher than expected returns rates for the acquired products, management no
longer believed this to be true, and accordingly wrote-off the costs assigned to
the customer list.
These factors were determined not to be short-term or temporary in nature,
causing management to reduce the carrying value of the intangible assets by $3.5
million. Management also determined that the lower demand for the acquired
products and customer claims for pre-acquisition cooperative marketing and price
protection credits required an additional provision for reserves for returns of
$1.1 million higher than originally provided on the acquired accounts
receivable; and a provision for reserves $0.2 higher than originally provided on
the acquired inventory. Such provisions were recorded during the three months
ended June 30, 1996, and are included in the stated loss on impairment of
intangibles. Additionally, the lower than expected sales and higher than
expected returns levels on the acquired products indicated that the minimum
royalties required under certain contracts and prepaid royalties would not be
recouped in the ordinary course of business. Approximately $0.3 million of such
royalties were therefore accrued as part of the loss on impairment of
intangibles as of June 30, 1996. Similarly, losses on fixed assets and certain
other assets determined to have lower values than originally assigned were
accrued as part of the loss on impairment of intangibles as of June 30, 1996.
Other Income. Other income, which includes interest income and interest expense,
increased to $162,000 in 1997 from $89,000 in 1996, primarily due to the
increased 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
As of September 30, 1997, the Company had $6.8 million in working capital,
including $5.0 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 $2.0 million for the nine months ended
September 30, 1997, primarily due to profitable results of operations and
receipt of $0.5 million of income tax refunds from taxes paid in 1996.
Management believes that it has adequate financial resources for its planned
operations through the next twelve months.
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 royalty and amortization
deductions with respect to the acquired assets. In June 1997, the IRS proposed
assessments for additional taxes and penalties of approximately $2.0 million
plus interest to date of payment. The Company and its special tax counsel
believe that it has properly reported its income and paid its taxes in
accordance with applicable laws and intends to contest the proposed adjustments
vigorously. Management does not believe that the final resolution of the IRS
claims will have a material adverse impact on the Company's financial position.
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.
PART II - OTHER INFORMATION
Item 5. Factors That May Affect Future Results
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is providing the following cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from its historical operating results and from
those projected in any forward-looking statements made by, or on behalf of, the
Company.
The Company wishes to caution readers that the following important factors,
among others, in some cases have affected, and in the future could affect, the
Company's actual results and could cause the Company's actual results throughout
1997 and beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.
General Business and Economic Conditions
General business and economic conditions have an impact on the Company's
financial results. The Company's customer base, which is largely retailers and
distributors for resale to retailers, may be impacted by weak economic
conditions and, as a result, may reduce required inventory levels of products
purchased from the Company. The Company's customers are not contractually
required to make future purchases of the Company's products and therefore could
discontinue carrying the Company's products in favor of a competitor's products
or for any other reason. The Company's results could be affected by the size and
rate of growth of the consumer software market and consumer PC market. The
consumer software business is seasonal due primarily to the increased demand for
consumer software during the year-end holiday buying season. General business
and economic conditions and consumer confidence may impact retail sales of
consumer software. Currency fluctuations associated with international sales and
accounts receivable may also affect the Company's financial results.
Competition
The market for the Company's products is intensely and increasingly competitive.
Existing consumer software companies may broaden their product lines to compete
with the Company's products and potential new competitors, including computer
hardware and software manufacturers, diversified media companies and book
publishing companies, may enter or increase their focus on the consumer software
market, resulting in even greater competition for the Company. There has been a
consolidation among competitors in the market for the Company's products, and
many of the companies with which the Company currently competes or may compete
in the future have greater financial, technical, marketing, sales and customer
support resources, as well as greater name recognition and better access to
consumers, than the Company. The competition for retail space is also likely to
increase due to the proliferation of consumer software products and companies.
Dependence on Retailers and Distributors
Retailers and distributors compete in a volatile industry that is subject to
rapid change, consolidation, financial difficulty and increasing competition
from new distribution channels. Due to increased competition for limited shelf
space, retailers and distributors are increasingly in a better position to
negotiate favorable terms of sale, including price discounts, promotional
support and product return policies. The Company's results may be impacted by
the accuracy of retailers' forecasts of consumer demand, the timing of the
receipt of orders from major customers, account cancellations or delays in
shipment, competitors' marketing strategies and promotions, changes in pricing
strategies by the Company or its competitors and the collectibility of accounts
receivable. Furthermore, 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 is net revenues for the quarter or to
quickly adapt its spending levels within a quarter to reflect changes in demand
for its products.
Uncertainty of Market Acceptance; Changes in Technology and Industry
Standards
The consumer software industry is undergoing rapid changes, including evolving
industry standards, frequent product introductions and changes in consumer
requirements and preferences. Consumer preferences are difficult to predict, and
few consumer products achieve sustained market acceptance. The Company's
financial results will be impacted by market acceptance of the Company's
products and those of its competitors, development and promotional expenses
relating to the introduction of new products, new versions of existing products
or new operating systems, evolving distribution channels, and the growth in
popularity of the Internet and other new technologies which could impact the
distribution and purchase of software.
Other Factors
In addition to the important factors discussed above, the Company's financial
results, financial position and cash flows may be impacted by, among other
factors, future cash flow and working capital requirements, 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 the acquisitions of new businesses by the Company and
related charges and write-offs. 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.
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).
(c)Reports on Form 8 K. None.
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: November 14, 1997