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, 1999
[ ]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
802 Douglas Road
North Tower, 6th Floor
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, 1999, there were 7,627,881 shares of the
Registrant's Common Stock, $ .01 par value, outstanding.
The exhibit index is on page 14.
Page 1 of 15.
EXPERT SOFTWARE, INC.
INDEX TO FORM 10-Q
Three Months Ended March 31, 1999
Page
------
Part I - Financial Information
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998..........................3..
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and 1998....................4..
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998....................5..
Notes to Condensed Consolidated Financial Statements............6..
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations..................................
Part II -- Other Information
Item 5. Other Information.......................................13..
Item 6. Exhibits and Reports on Form 8-K ......................14..
Signatures.......................................................15..
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 Operating
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)
March 31, December
31,
1999 1998
--------------------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and equivalents............... $1,605 $1,595
Accounts receivable, net........... 5,258 5,411
Inventories, net................... 2,655 2,830
Income taxes receivable............ 65 65
Prepaid expenses................... 683 854
--------------------
Total current assets............ 10,266 10,755
PROPERTY AND EQUIPMENT, net........... 692 854
OTHER ASSETS, net..................... 5 5
--------------------
Total assets.................... $10,963 $11,614
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................... $ $3,914
2,672
Accrued expenses................... 4,470 3,594
----------
----------
Total current liabilities....... 7,142 7,508
--------------------
STOCKHOLDERS' EQUITY:
Preferred stock.................... -- --
Common stock....................... 76 76
Additional paid-in capital......... 23,719 23,693
Accumulated deficit................ (19,974) (19,663)
--------------------
Total stockholders' equity...... 3,821 4,106
====================
Total liabilities and $10,963 $11,614
stockholders' equity..................
====================
The accompanying notes to condensed consolidated 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,
------------------
1999 1998
-------- ---------
NET REVENUES................... $7,394 $9,290
-------- ---------
OPERATING COSTS AND EXPENSES:
Cost of revenues............. 3,112 3,743
Marketing and sales.......... 2,686 2,752
General and administrative... 1,506 1,297
Development 414 613
Total operating costs and 7,718 8,405
expenses.......................
- -------------------------------- ---------
- --------------------------------
Operating income (loss).... (324) 885
Other income, net.............. 13 169
-------- ---------
Income (loss) before (311) 1,054
provision for income
taxes.....
Provision for income taxes..... --0 390
-------- ---------
Net income (loss)............ $(311) $ 664
======== =========
Earnings (Loss) per Share:
Basic........................ $ (.04) $ .09
======== =========
Diluted...................... $ (.04) $ .08
======== =========
The accompanying notes to condensed consolidated 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,
----------------------
860999975 1999 1998
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................... $ (311) $ 664
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation of property and 162 181
equipment.............................
Amortization of acquired intangibles -- 24
Compensation expense on stock 26 391
option grants.........................
Deferred income tax provision....... -- 21
Changes in current assets and
liabilities:
(Increase) decrease in accounts 153 (2,045)
receivable............................
(Increase) decrease in income tax -- 1,859
receivable............................
(Increase) decrease in inventories.. 175 (139)
(Increase) decrease in prepaid 171 147
expenses..............................
Increase (decrease) in accounts (1,242) (1,054)
payable...............................
Increase (decrease) in accrued 876 (423)
expenses..............................
Increase (decrease) in income taxes -- 92
payable
----------- ----------
Net cash provided by (used in) 10 (282)
operating activities..................
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment. -- (2)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised............. -- 4
Payments on capital lease -- (13)
obligations...........................
----------- ----------
Net cash provided by (used in) -- (9)
financing activities..................
----------- ----------
Net increase (decrease) in cash 10 (293)
and equivalents.......................
CASH AND EQUIVALENTS, beginning of 1,595 5,685
period................................
----------- ----------
CASH AND EQUIVALENTS, end of period... $1,605 $5,392
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for $ -- 4
interest..............................
=========== ==========
Cash paid during the period for $ -- $ --
income taxes..........................
=========== ==========
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, 1999
(Unaudited)
1. 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 interests 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.
2. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of December 31, 1998,
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, 1998.
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 March
31, 1999, and the results of operations and cash flows for the
periods presented herein. Results of operations and cash flows for
the period ending March 31, 1999, 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, 1998 included
in the Form 10-K.
3. INVENTORIES
Inventories consisted of the following as of March 31, 1999 and
December 31, 1998 (in thousands):
1999 1998
---------- ---------
Finished goods............ $1,917 $2,009
Raw materials............. 738 821
--------------------
$2,655 $2,830
====================
4. EARNINGS PER SHARE
Earnings per share are computed in accordance with the requirements
of SFAS 128. Basic earnings per common share were computed by
dividing income available to common shareholders by the weighted
average number of shares of common stock outstanding during the
period. Diluted earnings per share were determined by including
assumptions of stock option conversions. For periods in which the
Company reports a loss from continuing operations, diluted earnings
per share do not include stock options as their effect would be
antidilutive. Shares used in the computations for the three months
ended March 31, 1999 and 1998 are as follows:
(In thousands, except per share Per-Share
amounts) Income Shares Amount
Three Months Ended March 31,
-----------------------------------------------------------------
1999
Basic Earnings Per Share
Income (loss) available to common $(311) 7,628 $(.04)
shareholders..........................
========
1998
Basic Earnings Per Share
Income available to common $ 664 7,605 $ .09
shareholders..........................
========
Options assumed to be converted.... -- 626
------------------
Diluted Earnings Per Share
Income available to common
shareholders plus assumed $ 664 8,231 $ .08
............conversions...............
==========================
5. PENDING MERGER AGREEMENT
On March 3, 1999, the Company announced the execution of an
Agreement and Plan of Merger ( as amended and restated on April 19,
1999 collectively, the "Merger Agreement" ) by and among Expert,
Activision, Inc., a Delaware corporation ("Activision") and Expert
Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of Activision ("Merger Sub"). The Merger Agreement
anticipates that the Merger Sub will be merged with and into Expert
( the "Merger"). After the Merger, Expert will continue as the
surviving corporation and shall be a wholly-owned subsidiary of
Activision. Upon completion of the Merger, Expert's stockholders
will receive $2.65 in cash in exchange for each outstanding share of
Expert common stock they own.
The foregoing description is a brief summary of the Merger
Agreement, and is qualified in its entirety by reference to the
Merger Agreement attached as Exhibit 2.2 to the Company's Form 8-K
filed on March 9, 1999.
As contemplated by the Merger Agreement, Expert executed an
amendment (the "Amendment") to that certain Shareholders' Rights
Agreement dated as of November 9, 1995 between Expert and Bank of
Boston, N.A. (the "Rights Agreement"), which Amendment modified the
Rights Agreement to provide that such Rights Agreement would not be
triggered by the execution or operation of the Merger Agreement. The
foregoing description is a brief summary of the terms and conditions
of the Amendment, and is qualified in its entirety by reference to
the Amendment attached as Exhibit 4.1 to the Company's Form 8-K
filed on March 9, 1999.
6. COMMITMENTS AND CONTINGENCIES
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 in
October 1992, and related amortization and other deductions with
respect to the acquired assets. In June 1997, the IRS proposed
assessments for additional taxes of $412,000, $553,000 and $857,000
for the tax years 1992, 1993 and 1994, respectively, plus penalties
totaling $371,000 and interest to the date of payment. If the IRS
prevailed on all issues, such interest through March 31, 1999 would
total approximately $735,000. The preliminary adjustments proposed
by the IRS would also reduce the Company's federal income taxes for
the years 1995, 1996 and 1997 by $242,000, $68,000 and $55,000,
respectively. The Company believes that it has properly reported its
income and paid its taxes in accordance with applicable laws and
intends to contest the proposed adjustments vigorously. The Company
believes that the ultimate resolution of this matter will not have a
material adverse effect on its financial position.
The Company's federal tax filing with respect to the year ended
December 31, 1996 is presently being reviewed by the IRS, which has
questioned the allocation of the purchase price made by the Company
in connection with the acquisition of Swfte International, Ltd. in
November 1995, and related amortization and other deductions. The
IRS has not proposed any assessment from their review, nor has it
indicated when it expects to conclude its audit or if 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, if any, 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.
7. 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. A valuation allowance was recorded
to offset 100% of the Company's net deferred tax asset as of
September 30, 1998. The net deferred tax asset is comprised of tax
basis net operating losses and the estimated tax effect of expected
future temporary differences related to charges taken for book
purposes that are not deductible for federal income tax purposes
until the amounts are realized in the future. Management believes
that, due to recent financial results, it is appropriate to record a
full valuation allowance until such time as it becomes more likely
than not that the Company will realize some or all of the benefit of
the net deferred tax assets.
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
Ended
March 31,
--------------
1999 1998
--------------
Net revenues....................... 100% 100%
--------------
Operating costs and expenses:
Cost of revenues................. 42 40
Marketing and sales.............. 36 30
General and administrative....... 20 14
Development...................... 6 6
--------------
104 90
--------------
Operating income (loss)............ (4) 10
Other income (expense)............. -- 1
-------
-------
Income (loss) before provision for (4) 11
income taxes.......................
Provision for income taxes......... -- 4
--------------
Net income (loss).................. (4)% 7%
==============
Comparison of Three Months Ended March 31, 1999 and 1998
Net Revenues. Net revenues for the three months ended March 31
decreased to $7.4 million in 1999 from $9.3 million in 1998, a
decrease of $1.9 million, or 20%. The decrease in net revenues was
due primarily to decreased units shipped domestically, partially
offset by higher average selling prices.
International revenues represented 23% and 13% of net revenues in
1999 and 1998, respectively. International markets have been
subject to economic trends, including currency exchange rate
fluctuations, outside of the Company's control and, as a result,
there can be no assurance as to whether international activity
will increase or decrease in the future.
Net revenues consist of gross sales net of allowances for returns
and discounts, and royalty income related to licensing of products.
The Company adjusts its allowance for returns as it deems
appropriate. The Company may accept substantial product returns or
make other concessions to maintain its relationships with retailers
and distributors and its access to distribution channels. If the
Company chooses to accept product returns, some of that product may
be defective, shelf-worn or damaged and may not therefore be salable
in the ordinary course of business. There can be no assurance, that
the Company will not experience significant returns, which could be
greater than the Company's provision for returns or could have a
material adverse affect on the Company's results of operations. In
accordance with its policy, the Company will continue to reassess
market conditions and adjust its provision for returns as it deems
appropriate.
Cost of Revenues. Cost of revenues decreased to $3.1 million in 1999 from
$3.7 million in 1998, a decrease of $0.6 million, or 17%, due primarily to
decreased gross sales and product costs. As a percentage of net
revenues, cost of revenues represented 42% and 40% of net revenues
in 1999 and 1998, respectively. This increased percentage was due
primarily to higher royalty expenses as a result of higher royalty
rates on certain product lines; provisions for inventory losses
due to damaged or obsolete products and increased provisions for
returns. The Company expects cost of revenues may vary from period
to period based on the relative mix of products sold, the level of
promotional sales in a given period, inventory losses due to
damaged or obsolete inventory and other market factors.
Cost of revenues consists primarily of product cost, freight
charges, royalties to outside programmers and content providers, as
well as amortization of software licenses, storage and returns
processing charges, and an inventory provision for damaged and
obsolete products, if any. Product costs consist of the costs to
purchase the underlying materials, print both boxes and manuals,
media costs (CD-ROM's and disks) and fulfillment (assembly and
shipping).
Marketing and Sales. Marketing and sales expense decreased to $2.7 million
in 1999 from $2.8 million in 1998, a decrease of $0.1 million, or 2%, and
increased as a percentage of net revenues to 36% of net revenues in 1999
from 30% in 1998. The decrease in amount was related primarily to decreased
general advertising costs and lower costs associated with the design
and release of new and revised packaging for products as the number
of product upgrades and new releases were lower for the three months
ended March 31 1999 than during the same period in 1998; and a
decline in commission and merchandising costs. These decreased costs
were partially offset by increases in international distribution
costs and domestic co-op marketing activities to promote the
Company's products and brand names.
General and Administrative. General and administrative expense
increased to $1.5 million in 1999 from $1.3 million in 1998, an
increase of $0.2 million, or 16%. This increase was primarily due to
the Company incurring $0.5 million in professional fees and other
costs associated with the proposed merger with Activision offset by
a reduction in both compensation costs and bad debt provision.
Development. Development expense decreased to $0.4 million in 1999
from $0.6 million in 1998, a decrease of $0.2 million, or 33%, and
remained as a percentage of net revenues at 6% of net revenues in
both 1999 and 1998. The reduction in expenses is primarily due to
lower compensation costs as a result of lower staffing and reduced
new product development costs. Development expense includes
expenses related to product upgrades, new products development
activities, quality control and customer service support. The
Company currently believes that development expenses may increase
over current levels in future periods due to additional costs to
develop new brands and titles, including the development of products
to take advantage of the Internet and other on-line capabilities,
operating system upgrades such as Windows 98, and the adaptation of
product for international sales.
Other Income. Other income, which includes interest income and interest
expense, decreased to $13,000 in 1999 from $169,000 in 1998, primarily due
to the decreased balance of interest bearing deposits and investments and
the receipt in 1998 of interest of approximately $117,000 in
connection with the refund of prior years' income tax payments.
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. A valuation allowance was recorded
to offset 100% of the Company's net deferred tax asset as of
September 30, 1998. The net deferred tax asset is comprised of tax
basis net operating losses and the estimated tax effect of expected
future temporary differences related to charges taken for book
purposes that are not deductible for federal income tax purposes
until the amounts are realized in the future. Management believes
that, due to recent financial results, it is appropriate to record a
full valuation allowance until such time as it becomes more likely
than not that the Company will realize some or all of the benefit of
the net deferred tax assets.
Liquidity and Capital Resources
As of March 31, 1999, the Company had $3.1 million in working
capital, including $1.6 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 from operating activities
was $10,000 for the three months ended March 31, 1999, primarily due
to an increase in accrued expenses, and a decrease in both
inventories and accounts receivable; offset by a net reduction in
accounts payable and the operating loss during the period,
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 $2.5 million through May 31, 1999, the maturity date.
The loan agreement contains customary restrictive covenants. As a
result of the loss during the first quarter of 1999, the Company is
no longer in compliance with the certain loan convenants and the
Company has entered discussions with the bank to obtain a waiver of
such convenants that would allow the Company to borrow on the line
in the future. There can be no assurance that the Company will
obtain the waiver or that the Company's future results of operations
will continue to be in compliance with the line of credit convenants
which among other things, requires the Company to have quarterly net
income of at least $100,000 or that the line of credit would be
otherwise available to the Company. To date, there have been no
borrowings under the line.
The Company has also entered into discussions with the bank to
extend the maturity date of the line of credit to enable the
Company to assess it's financing needs, if any, after the
Stockholder vote on the Merger with Activision. At this time, the
Company has not sought financing from any alternative source and,
accordingly, cannot give any assurances that financing will be
available, if at all, on acceptable terms. Without any additional
financing, management believes the Company's existing capital
resources are sufficient to meet working capital and capital
expenditure requirements through at least the end of 1999.
As a result of recent losses, management has reason to believe that
the Company may not meet certain requirements for continued listing
on the Nasdaq National Market, including the requirement to maintain
total net tangible assets of at least $4 million. In the event that
the Company's Common Stock is no longer listed on the Nasdaq
National Market and is ineligible to be listed on the Nasdaq
SmallCap Market, sales of the Company's Common Stock would likely be
conducted in the over-the-counter market or potentially in regional
exchanges. This may negatively impact the liquidity and price of the
Common Stock and investors may find it more difficult to purchase or
dispose of, or to obtain accurate quotations as to the market value
of, the Company's Common Stock.
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 in
October 1992, and related amortization and other deductions with
respect to the acquired assets. In June 1997, the IRS proposed
assessments for additional taxes of $412,000, $553,000 and $857,000
for the tax years 1992, 1993 and 1994, respectively, plus penalties
totaling $371,000 and interest to the date of payment. If the IRS
prevailed on all issues, such interest through March 31, 1999 would
total approximately $735,000. The preliminary adjustments proposed
by the IRS would also reduce the Company's federal income taxes for
the years 1995, 1996 and 1997 by $242,000, $68,000 and $55,000,
respectively. The Company believes that it has properly reported its
income and paid its taxes in accordance with applicable laws and
intends to contest the proposed adjustments vigorously. The Company
believes that the ultimate resolution of this matter will not have a
material adverse effect on its financial position.
The Company's federal tax filing with respect to the year ended
December 31, 1996 is presently being reviewed by the IRS, which has
questioned the allocation of the purchase price made by the Company
in connection with the acquisition of Swfte International, Ltd. in
November 1995, and related amortization and other deductions. The
IRS has not proposed any assessment from their review, nor has it
indicated when it expects to conclude its audit or if 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, if any, 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.
As previously disclosed, the Company engaged a financial advisor to
assist it in assessing strategic alternatives to enhance shareholder
value. In March 1999, the Company entered into a merger agreement
with Activision. In connection with the negotiations and due
diligence procedures leading to that agreement, the Company has
incurred, and will continue to incur, costs related to its financial
advisor and other professionals. Currently, the Company has incurred
costs totaling approximately $0.5 million. Additional costs will be
incurred as the Company undertakes the proxy solicitation and other
regulatory and other filings required in connection with submitting
the proposed merger to the Company's shareholders for a vote, likely
in the summer of 1999.
Year 2000 Readiness
The statements in the following section include "Year 2000 readiness
disclosures" within the meaning of the Year 2000 Information and
Readiness Disclosure Act.
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable
year. Software that is not compliant with the Year 2000 issue is
time-sensitive and may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system
failure or miscalculations resulting in disruptions of operations,
including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities.
The Company has established a comprehensive Year 2000 compliance
program designed to (1) identify information technology ("IT") and
non-information technology ("non-IT") systems that may fail at the
turn of the century, (2) upgrade or replace non-compliant systems,
and (3) evaluate the Year 2000 readiness of key customers,
suppliers and service providers. IT systems include computer
systems (hardware and software) used to process business data such
as customer orders and accounting information. Non-IT systems
include technology such as telephone switching systems and other
devices that employ embedded chip technology in the function and
design. The progress of the Year 2000 program is as follows:
Phase I, the identification of IT and non-IT systems that may fail
at the turn of the century, is substantially completed. The
Company's primary computer system and its phone switching system
were identified as the most critical systems needed to be upgraded
to be Year 2000 compliant.
Phase II, upgrading or replacing non-compliant systems, is
approximately 80% complete. The Company recently converted to a
Year 2000 compliant version of the same application software it
has been using since 1995. The same version of the software is
operating successfully at other companies. Upgraded hardware and
software will be installed on the phone switch later during 1999
to make it Year 2000 compliant. The Company is currently assessing
the potential effects of, and costs of, remediating the Year 2000
problem on its office equipment; however, such costs are not
expected to be material.
Phase III, evaluating the Year 2000 readiness of critical
suppliers and service providers, has begun and is approximately
90% complete. The Company is soliciting input from its key
customers, suppliers and service providers regarding their Year
2000 status. The Company will determine which, if any, pose a
threat to the uninterrupted operation of its business in the event
that they experience system errors or failures.
The Company estimates that it is approximately 80% complete with
regard to Year 2000 remediation. To date, the Company has incurred
about $0.5 million in connection with such remediation, and
anticipates additional costs of approximately $100,000 to complete
this work. All expenditures related to the Year 2000 issue have
been and likely will continue to be made from internally generated
funds.
The Company believes it has no material exposure to contingencies
related to the Year 2000 issue for products it has sold.
Management has assessed the most reasonably likely worst case Year
2000 scenario. Given its efforts to minimize the risk of Year 2000
failure by its internal systems, the Company believes the worst
case scenario would occur if its primary telecommunications
vendors and/or its electric supplier experiences a Year 2000
failure which results in an outage. The Company is in the process
of developing a contingency plan and anticipates having such a
plan in place by the third quarter of 1999.
While the Company believes that it has an effective program in
place to resolve the Year 2000 issue in a timely manner, there can
be no assurance that the failure of the Company or of the third
parties with whom the Company transacts business to adequately
address their respective Year 2000 issues will not have a material
adverse affect on the Company's business, financial condition,
cash flows and results of operations.
PART II - OTHER INFORMATION
Item 5. Other Information.
Factors That May Affect Future Operating Results
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, as amended, the Company is
providing the following cautionary statements identifying important
factors, some of which are beyond the Company's control, that in the
past have caused or in the future 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.
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
their inventories 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 affinity of the public for Internet
based sales and any limitations of the Company's ability to
cultivate such e-commerce , may also affect the Company's financial
results The Company's financial 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, both domestically and internationally, 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. Competition for retail space
has increased as retailers continue to focus on sales per square
foot of shelf space and other measures of product performance. 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 financial 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 its 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
software 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, and
evolving distribution channels. The growth in popularity of the
Internet and other new technologies has impacted the distribution
and purchase of software and there can be no assurance that the
Company will utilize such new technologies in the most effective
manner.
Other Factors
In addition to the important factors discussed above, the Company
may be impacted by, among other factors, future cash flow and
working capital requirements, the results of the stockholder vote on
the merger with Activision, the continued listing of the Company's
Common Stock on the Nasdaq National Market, 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. The
stock prices for many companies in the technology sector have
experienced wide fluctuations which often have been unrelated to
their operating performance. Such fluctuations may adversely affect
the market price of the Company's Common Stock.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27.
Financial Data Schedule (EDGAR filing only).
(b) Reports on Form 8 K.
On January 15, 1999, the Company filed a report on Form 8-K in
regard to its announcement of a change in its auditing firm (Item 4).
On March 9, 1999, the Company filed a report on Form 8-K in regard
to its announcement of an Agreement and
Plan of Merger dated as of March 3, 1999 by and among Expert,
Activision, Inc. and Expert Acquisition Corp., a
Delaware corporation and wholly owned subsidiary of Activision, Inc.
The company also reported signing an Amendment to a certain
Shareholder Rights Agreement dated as of November 9, 1995 between
the Company and Bank of Boston N.A.. (Items 5, 7).
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.
______________________
Kenneth P. Currier
Chief Executive Officer and
Acting Chief Financial Officer
(Principal Financial and
Accounting Officer)
Dated: May 14, 1999