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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended December 31, 1996
[ ] 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 0-27030
SOFTWARE 2000, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2734036
------------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
25 Communications Way, Hyannis, MA 02601
(Address of principal executive offices, including Zip Code)
(508) 778-2000
(Registrant's telephone number, including area code)
----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 12 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
--- ---
The number of shares outstanding of the registrant's Common Stock on December
31, 1996 was 11,116,150.
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SOFTWARE 2000, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet
at September 30, 1996 and December 31, 1996............... 3
Condensed Consolidated Statement of Income
for the three months ended December 31, 1995 and 1996..... 4
Condensed Consolidated Statement of Cash Flows
for the three months ended December 31, 1995 and 1996..... 5
Notes to Condensed Consolidated Financial Statements........ 6
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations........... 8
PART II - OTHER INFORMATION
ITEMS 1. - 5. Not applicable
ITEM 6. Exhibits and Reports on Form 8-K............................. 14
SIGNATURES.............................................................. 15
EXHIBIT INDEX........................................................... 16
EXHIBITS................................................................ 17
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOFTWARE 2000, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1996 1996
---- ----
(UNAUDITED)
-----------
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 7,817 $ 7,909
Marketable securities at fair market value ........................ 35,520 33,307
Accounts receivable, less allowance for doubtful accounts of $1,250
and $1,350 at September 30, 1996 and December 31, 1996,
respectively .................................................... 12,354 15,935
Deferred income taxes ............................................. 2,427 2,427
Prepaid expenses and other current assets ......................... 3,569 3,804
------- -------
Total current assets ...................................... 61,687 63,382
Property and equipment, net ......................................... 6,047 5,850
Capitalized software development costs, net ......................... 6,171 6,314
Other assets ........................................................ 1,799 1,854
------- -------
Total assets .............................................. $75,704 $77,400
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 4,495 $ 3,737
Accrued expenses .................................................. 7,300 6,623
Income taxes payable .............................................. 1,368 1,862
Deferred revenue .................................................. 24,853 26,564
------- -------
Total current liabilities ................................. 38,016 38,786
------- -------
Deferred income taxes ............................................... 2,038 2,005
------- -------
Commitments
Common stock, $.01 par value; authorized 40,000 shares, issued and
outstanding 11,114 and 11,116 shares at September 30, 1996 and
December 31, 1996, respectively ..................................... 111 111
Additional paid-in capital .......................................... 27,394 27,401
Retained earnings ................................................... 8,145 9,076
Cumulative translation adjustment ................................... -- 21
------- -------
Total stockholders' equity ................................ 35,650 36,609
------- -------
Total liabilities and stockholders' equity ................ $75,704 $77,400
======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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SOFTWARE 2000, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
------------------
DECEMBER 31, DECEMBER 31,
------------ ------------
1995 1996
---- ----
Revenue:
Software license fees .............................. $ 4,802 $ 5,334
Service revenue .................................... 11,519 12,946
------- -------
Total revenue .............................. 16,321 18,280
------- -------
Costs and expenses:
Cost of software license fees ...................... 935 1,026
Cost of services ................................... 4,052 4,722
Research and development ........................... 3,366 3,635
Sales and marketing ................................ 5,515 6,288
General and administrative ......................... 1,629 1,703
------- -------
Total operating costs and expenses ......... 15,497 17,374
------- -------
Income from operations ............................... 824 906
Other income, net .................................... 295 526
------- -------
Income before provision for income taxes ............. 1,119 1,432
Provision for income taxes ........................... 400 501
------- -------
Net income ........................................... $ 719 $ 931
======= =======
Per share data:
Net income per share ............................ $ 0.07 $ 0.08
======= =======
Weighted average common and common equivalent
shares outstanding ................................... 10,356 11,772
======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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SOFTWARE 2000, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
------------------
DECEMBER 31, DECEMBER 31,
------------ ------------
1995 1996
---- ----
Cash flows from operating activities:
Net income ........................................................... $ 719 $ 931
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ..................................... 1,134 1,364
Allowance for doubtful accounts ................................... 150 137
Deferred income taxes ............................................. 7 (33)
Changes in operating assets and liabilities:
Accounts receivable ............................................. 486 (3,718)
Prepaid expenses and other current assets ....................... (956) (235)
Other assets .................................................... (56) (55)
Accounts payable ................................................ (1,009) (758)
Accrued expenses ................................................ (888) (677)
Income taxes payable ............................................ (690) 494
Deferred revenue ................................................ (709) 1,711
-------- --------
Net cash used in operating activities ....................... (1,812) (839)
-------- --------
Cash flows from investing activities:
Purchase of marketable securities .................................... (14,070) (20,397)
Sale of marketable securities ........................................ 9,341 22,610
Purchase of property and equipment ................................... (651) (410)
Capitalization of software development costs ......................... (862) (900)
-------- --------
Net cash (used in) provided by investing activities ......... (6,242) 903
-------- --------
Cash flows from financing activities:
Proceeds from initial public offering of Common Stock ................ 12,828 --
Proceeds from exercise of stock options .............................. 89 7
Proceeds from repayments of notes receivable - stockholders .......... 379 --
Principal payments under capital lease obligations ................... (45) --
-------- --------
Net cash provided by financing activities ................... 13,251 7
-------- --------
Effect of foreign exchange rate changes on cash ........................ -- 21
-------- --------
Net increase in cash and cash equivalents .............................. 5,197 92
Cash and cash equivalents, beginning of quarter ........................ 8,161 7,817
-------- --------
Cash and cash equivalents, end of quarter .............................. $ 13,358 $ 7,909
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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SOFTWARE 2000, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION
The information at December 31, 1995 and 1996 and for the three-month
periods then ended is unaudited, but includes all adjustments (consisting only
of normal recurring entries) which the Company's management believes to be
necessary for the fair presentation of the financial position, results of
operations, and changes in cash flows for the periods presented. The
accompanying interim financial statements should be read in conjunction with the
financial statements and related notes included in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1996. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the Securities and Exchange Commission rules and
regulations. Interim results of operations for the three-month period ended
December 31, 1996 are not necessarily indicative of operating results for the
full fiscal year.
2. FOREIGN CURRENCY TRANSLATION
As a result of economic factors relating to the Company's UK subsidiary, the
functional currency of the subsidiary has been redesignated to the British Pound
effective October 1, 1996. Accordingly, the assets and liabilities of the UK
subsidiary have been translated into the U.S. dollar at the current exchange
rate, equity at the historical rate and income and expense items at an average
exchange rate for the period. Translation adjustments have been reported as a
cumulative translation adjustment within the equity section of the balance
sheet.
All other foreign subsidiaries have retained the U.S. dollar as their
functional currency. Accordingly, monetary assets and liabilities of these
subsidiaries are translated into the U.S. dollar at the exchange rate in effect
at period end and nonmonetary assets and liabilities are remeasured at historic
exchange rates. Income and expenses are remeasured at the average exchange rate
for the period. Translation gains and losses are reflected in the consolidated
statement of income.
3. NET INCOME PER SHARE
Net income per share is determined by dividing net income applicable to
Common Stock by the weighted average number of common shares and common
equivalent shares outstanding during the period. Common share equivalents are
computed using the treasury stock method and consist of common stock which may
be issuable upon exercise of outstanding common stock options and warrants to
purchase common stock, when dilutive. Fully diluted per share amounts are not
presented as the effect is not material. The computation of the weighted average
number of shares outstanding for the three months ended December 31, 1995 and
1996 is as follows:
THREE MONTHS ENDED
DECEMBER 31,
------------
1995 1996
---- ----
Weighted average common and
common equivalent shares:
Common stock outstanding ..... 8,925 11,115
Common stock equivalents ..... 1,431 657
------ ------
10,356 11,772
====== ======
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SOFTWARE 2000, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. OTHER INCOME, NET
Other income, net consists of the following:
THREE MONTHS ENDED
------------------
DECEMBER 31, DECEMBER 31,
------------ ------------
1995 1996
---- ----
Interest income ..... $333 $548
Interest expense .... (2) --
Foreign exchange loss (36) (22)
---- ----
$295 $526
==== ====
5. SUBSEQUENT EVENTS
On January 6, 1997, the Company acquired all of the outstanding capital
stock of Time (Open Systems) Limited, a UK-based privately held software concern
which develops and markets a suite of financial applications, including
applications targeted for the Microsoft NT Server platform. The transaction,
which will be accounted for as a purchase, was consummated for $2,793 in cash
and 770 shares of the Company's Common Stock (the "Company Shares"). The
Company Shares were issued by the Company pursuant to an exemption from
registration provided by Regulation S under the Securities Exchange Act of
1933. The Company expects a significant portion of the purchase price to be
allocated to in-process research and development and written off during the
second quarter of fiscal 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
All statements contained herein that are not historical facts, including
but not limited to, statements regarding anticipated future expense levels and
capital requirements, the Company's future product development and marketing
plans, the Company's ability to obtain debt, equity or other financing, and the
Company's ability to generate cash from operations, are based on current
expectations. These statements are forward looking in nature and involve a
number of risks and uncertainties, as more fully described under "Factors
Affecting Future Performance." Actual results may differ materially from those
described in the forward-looking statements.
RESULTS OF OPERATIONS
Software 2000 was founded in 1981 and offers a broad range of financial
management, human resource management and materials management business software
applications that run on the IBM AS/400 hardware platform. The Company also
offers a specialized manufacturing system designed to manage process
manufacturing operations. The Company's revenue is derived from two sources:
software license fees and service revenue. Software license fees includes
revenue from noncancellable software license agreements entered into between the
Company and its customers with respect to both the Company's products and third
party products distributed by the Company. Software license fee revenue is
recognized upon shipment of the software and when all significant contractual
obligations have been satisfied. The Company's service revenue is comprised of
software maintenance fees and fees for consulting services. Maintenance fees are
billed separately and are recognized ratably over the period of the maintenance
agreement, which is typically one year. Consulting service revenue is recognized
as the services are performed.
As discussed in Note 5 to the condensed consolidated financial statements,
the Company acquired all of the outstanding capital stock of Time (Open Systems)
Limited, a UK-based privately held software concern which develops and markets a
suite of financial applications, including applications for the Microsoft NT
Server platform (the "Time Products"). The Company expects to introduce the
versions of the Time Products for the Microsoft NT Server platform in North
America and other international markets in mid-1997, upon the completion of
additional product development. These products, along with the Microsoft NT
Server-based Human Resources Management product line now being developed by the
Company, will form the basis for the Company's expansion into the emerging
market for business applications designed for Windows NT servers.
The following table sets forth for the periods indicated the Company's
consolidated income statement data expressed as a percentage of total revenue
and the percentage of dollar increase period over period for the three months
ended December 31, 1995 and 1996.
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
% OF TOTAL REVENUE % OF DOLLAR INCREASE
------------------ --------------------
1995 1996 1995 VS. 1996
--------- -------- --------------------
Revenue:
Software license fees ........................ 29.4% 29.2% 11.1%
Service revenue .............................. 70.6 70.8 12.4
----- ----- ----
Total revenue ............................. 100.0 100.0 12.0
----- ----- ----
Costs and expenses:
Cost of software license fees ................ 5.7 5.6 9.7
Cost of services ............................. 24.8 25.8 16.5
Research and development ..................... 20.7 19.9 8.0
Sales and marketing .......................... 33.8 34.4 14.0
General and administrative ................... 10.0 9.3 4.5
----- ----- ----
Total operating costs and expenses ....... 95.0 95.0 12.1
----- ----- ----
Income from operations ......................... 5.0 5.0 10.0
----- ----- ----
Other income, net .............................. 1.8 2.8 78.3
----- ----- ----
Income before provision for income taxes ....... 6.8 7.8 28.0
Provision for income taxes ..................... 2.4 2.7 25.3
----- ----- ----
Net income ..................................... 4.4% 5.1% 29.5%
===== ===== ====
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QUARTER ENDED DECEMBER 31, 1996 COMPARED TO QUARTER ENDED DECEMBER 31, 1995
REVENUE. Total revenue, consisting of software license fees and service
revenue, increased 12.0%, from $16.3 million for the quarter ended December 31,
1995 to $18.3 million for the quarter ended December 31, 1996.
Software license fee revenue increased 11.1%, from $4.8 million for the
quarter ended December 31, 1995 to $5.3 million for the quarter ended December
31, 1996. The growth was generated from across all geographic regions and is
attributable in part to the continued market acceptance of the Company's
Infinium client/server software products. The Company believes that the software
license fee growth reflects a continuation of the trend experienced when the
Infinium products were introduced in the second half of fiscal 1995.
Service revenue increased 12.4%, from $11.5 million for the quarter ended
December 31, 1995 to $12.9 million for the quarter ended December 31, 1996. The
Company's service revenue is comprised of software maintenance fees and fees for
consulting services. The increase was primarily attributable to an increase in
maintenance fee revenue due to an increase in the installed base of customers.
The following table sets forth a comparative breakout of the components of
service revenue.
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
(IN THOUSANDS) % OF DOLLAR INCREASE
1995 1996 1995 VS. 1996
--------- --------- --------------------
Maintenance fee revenue ................ $ 7,024 $ 8,154 16.1%
Consulting services revenue ............ 4,495 4,792 6.6
------- ------- ----
Total service revenue ................ $11,519 $12,946 12.4%
======= ======= ====
COST OF SOFTWARE LICENSE FEES. Cost of software license fees consists
primarily of the cost of product media, manuals, shipping and amortization
expense related to capitalized software development costs. Cost of software
license fees increased 9.7%, from $0.9 million for the quarter ended December
31, 1995 to $1.0 million for the quarter ended December 31, 1996. Cost of
software license fees as a percentage of software license fee revenue decreased
slightly from 19.5% for the quarter ended December 31, 1995 to 19.2% for the
quarter ended December 31, 1996. The decrease as a percentage of software
license fees is attributed to continued decreases in documentation-related
expenses offset by an increase of amortization of capitalized software
development costs.
COST OF SERVICES. Cost of services consists of costs to provide training,
technical support and implementation consulting services to licensees of
Software 2000 products. Cost of services increased 16.5%, from $4.1 million for
the quarter ended December 31, 1995 to $4.7 million for the quarter ended
December 31, 1996. Cost of services as a percentage of service revenue increased
from 35.2% for the quarter ended December 31, 1995 to 36.5% for the quarter
ended December 31, 1996. The increase in the dollar amount of such costs and as
a percentage of service revenue resulted primarily from increased staffing and
to an increase in the use of third party consultants in response to continued
growth in the customer base.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of engineering personnel costs reduced by capitalized software
development costs and, when applicable, research funding. Research and
development expenses increased 8.0%, from $3.4 million for the quarter ended
December 31, 1995 to $3.6 million for the quarter ended December 31, 1996.
Research and development expenses as a percentage of total revenue were 20.7%
for the quarter ended December 31, 1995 and 19.9% for the quarter ended December
31, 1996. Research and development spending, defined as research and development
expenses before capitalized software development costs and research funding,
increased 10.0%, from $4.2 million for the quarter ended December 31, 1995 to
$4.7 million for the quarter ended
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December 31, 1996. The increase in research and development expense and spending
was due primarily to increased utilization of contract labor. The Company
capitalized $0.9 million of software development costs for each of the quarters
ended December 31, 1995 and 1996. The Company also received $0.5 million in
research funding from a business partner in November, 1996 of which $0.1 million
of this funding was reflected as a reduction of research and development
expenses in the first quarter of fiscal 1997. There was no external funding in
fiscal 1996.
The Company has numerous product development initiatives underway and
anticipates that expenditures in future periods will increase. In addition to
its traditional AS/400 platform efforts, major product initiatives are currently
underway on the Microsoft NT Server platform as a result of the recent
acquisition of Time (Open Systems) Limited with respect to financial management
applications. The Company is also making substantial investments to develop a
new Human Resources Management product line designed exclusively for the
Microsoft NT Server market.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions, royalties, travel, promotional expenses, and facilities
and computers and communications costs for direct sales offices. Sales and
marketing expenses increased 14.0%, from $5.5 million for the quarter ended
December 31, 1995 to $6.3 million for the quarter ended December 31, 1996. Sales
and marketing expenses as a percentage of total revenue increased from 33.8% for
the quarter ended December 31, 1995 to 34.4% for the quarter ended December 31,
1996. The increase in dollar amount as well as percentage of total revenues was
attributable to increased staffing in the direct sales force and an increase in
the expansion of its distribution channels, both domestically and
internationally, with an emphasis on certain international markets throughout
Asia and Latin America. Sales and marketing expenses on an absolute basis and as
a percentage of revenue may continue to increase in the future due to these
initiatives.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries of executive, administrative, financial and legal
personnel, as well as provisions for doubtful accounts, insurance and outside
professional fees. General and administrative expenses increased 4.5%, from $1.6
million for the quarter ended December 31, 1995 to $1.7 million for the quarter
ended December 31, 1996. General and administrative expenses as a percentage of
total revenue decreased from 10.0% for the quarter ended December 31, 1995 to
9.3% for the quarter ended December 31, 1996. The increase in general and
administrative expenses related primarily to additional costs and professional
fees related to operating as a public company.
PROVISION FOR INCOME TAXES. The provisions for federal, state and foreign
income taxes were $0.4 million and $0.5 million for the quarter ended December
31, 1995 and for the quarter ended December 31, 1996, respectively. The
effective tax rates were 35.7% for the quarter ended December 31, 1995 and 35.0%
for the quarter ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash, cash equivalents and
marketable securities of $41.2 million. During the first quarter of fiscal 1997,
the Company used a net $2.1 million of cash, cash equivalents and marketable
securities mainly to fund operations, fund software development, and to purchase
computers and equipment. The principal source of cash, cash equivalents and
marketable securities was income from operations and an increase in deferred
revenue. In October, 1996, the Company's $5.0 million working capital revolving
line of credit with a bank expired and the Company does not currently plan to
negotiate another line. The Company had not made any borrowings under the
facility.
The Company's accounts receivable balance, net of the allowance for
doubtful accounts, was $15.9 million at December 31, 1996 and $12.4 million at
September 30, 1996. Days sales of receivables outstanding was 77 days at
December 31, 1996 compared to 54 days at September 30, 1996. Days sales of
receivables outstanding typically increases for the first quarter of the fiscal
year following the increased
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activity of the fourth quarter of the prior year as a result of the cyclical
nature of sales. A net increase of $1.7 million in deferred revenue also
contributed to the increase. Deferred revenue was $26.6 million at December 31,
1996 and $24.9 million at September 30, 1996. The increase in deferred revenue
was primarily due to an increase in deferred maintenance fee revenue as a result
of continued growth in the customer base and, to a lesser extent, customers
electing to prepay for multiyear maintenance in lieu of normal annual increases.
Included in the December 31, 1996 deferred revenue balance was $15.4 million of
deferred maintenance revenue, $8.6 million of deferred consulting services
revenue and $2.6 million of deferred software license fee revenue.
The Company believes that cash, cash equivalents and marketable securities
on hand and cash flows from operations will be sufficient to fund its operations
at least through fiscal 1997. While operating activities may provide cash in
certain periods, to the extent the Company experiences growth in the future, the
Company anticipates that its operating and investing activities may use cash,
and consequently such growth may require the Company to obtain additional
sources of financing. In addition, although there are no current agreements or
negotiations with respect to additional material acquisitions of complementary
businesses, products or technologies, such transactions could, if they were to
occur, require additional sources of financing.
FACTORS AFFECTING FUTURE PERFORMANCE
The Company's quarterly revenue and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. Such fluctuations may result in volatility in the price
of the Company's Common Stock. Quarterly revenue and operating results may
fluctuate as a result of a variety of factors, including the Company's lengthy
sales cycle, the proportion of revenue attributable to license fees versus
service revenue, changes in the level of operating expenses, demand for the
Company's products, the introduction of new products and product enhancements by
the Company or its competitors, changes in customer budgets, competitive
conditions in the industry and general economic conditions. Further, the
purchase of the Company's products often involves a significant commitment of
capital by its customers with the attendant delays frequently associated with
large capital expenditures and authorization procedures within an organization.
For these and other reasons, the sales cycles for the Company's products are
typically lengthy and subject to a number of significant risks over which the
Company has little or no control. The Company historically has operated with
little software license backlog because its software products are generally
shipped as orders are received. The Company has often recognized a substantial
portion of its revenue in the last month of the quarter and often in the last
week of that month. As a result, license fees in any quarter are substantially
dependent on orders booked and shipped in the last month or last week of that
quarter. Accordingly, a small variation in the timing of recognition of revenue
for specific transactions is likely to adversely and disproportionately affect
the Company's operating results for a quarter because the Company establishes
its expenditure levels on the basis of its expected future revenue and only a
small portion of the Company's expenses vary with its revenue. Accordingly, the
Company believes that period to period comparisons of results of operations are
not necessarily meaningful and should not be relied upon as indicative of future
performance. Although the Company has been profitable for the previous sixteen
quarterly periods, there can be no assurance that the Company will remain
profitable on a quarterly basis, if at all.
The Company's business has experienced and is expected to continue to
experience significant seasonality. In recent years, the Company has had greater
demand for its products in its fourth fiscal quarter and has experienced lower
revenues in its succeeding first and second fiscal quarters. The fluctuations
are caused primarily by customer purchasing patterns and the Company's sales
recognition programs which reward and recognize sales personnel on the basis of
achievement of annual performance quotas. Due to the foregoing factors and the
factors set forth under "Results of Operations" above, it is likely that in some
future quarter the Company's operating results will be below the expectations of
the Company and public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially adversely affected.
11
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The business applications software market is characterized by rapid
technological change, frequent new product introductions, evolving industry
standards and changes in customer demands. The introduction of products
embodying new technologies and the emergence of new industry standards can
render existing products obsolete and unmarketable. The Company's future success
will depend in part on its ability to enhance existing products and services and
to develop and introduce new products and services to meet changing client
requirements. There can be no assurance that the Company will be successful in
developing and marketing product enhancements or new products that respond to
technological change or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products and enhancements, or that any new
products and product enhancements it may introduce will achieve market
acceptance. In addition, there can be no assurance that the Company will not
encounter product development delays in the future or that, despite testing by
the Company, errors will not be found in new products or product enhancements
after commencement of commercial shipments, resulting in loss of market share,
delay in market acceptance, or warranty claims which could have a material
adverse effect upon the Company's business, operating results and financial
condition.
The majority of the Company's products, maintenance and other services
related thereto, are presently designed for users of IBM AS/400 mid-range
computers. Future revenue from licenses of present products and sales of
services and recurring maintenance revenue are therefore dependent on new sales
and continued widespread use of the AS/400 and the continued support of such
computers by IBM. Because the Company's primary current source of revenue comes
from customers using IBM mid-range computers, a significant shift in the way the
Company's customers use computers may have a material adverse effect on the
Company's business. In addition, because the Company's primary product line
requires the use of IBM's OS/400 operating system, the Company may be required
to adapt those products to any changes made in such operating system in the
future. The Company's inability to adapt to future changes in the OS/400
operating system, or delays in doing so, could have a material adverse effect on
the Company's business, operating results and financial condition.
Although the Company is developing its software applications to operate
over the Internet and within corporate intranets, there can be no assurance
that the Company will be successful in developing and implementing such
capabilities. In addition, the Company's development and implementation of new
human resources software applications to run on the Microsoft Windows NT
servers involve significant research and development expenditures and more
intense competition from a larger number of competitors. There can be no
assurance that the Company will be successful in developing and marketing these
products or will be able to compete successfully against current or future
competitors.
In addition, the Company recently acquired, in January 1997, all of the
outstanding capital stock of Time (Open Systems) Limited, a UK-based, privately
held company which develops and markets a suite of financial applications,
including applications targeted to the Microsoft NT Server platform. There can
be no assurance that the Company will be successful in integrating the acquired
business into its operations or that the Company will be successful in
developing and marketing the products and technologies which it acquired as a
result of such acquisition. Although the Company expects to introduce certain
of the Time Products in North America and other international markets in
mid-1997, there can be no assurance that it will complete the product
enhancements necessary for such introductions within that period.
The business applications software market is highly competitive and rapidly
changing. A number of companies offer products similar to the Company's products
and target the same customers as the Company. The Company believes its ability
to compete depends upon many factors within and outside its control, including
the timely development and introduction of new products and product
enhancements, product functionality, performance, price, reliability, customer
service and support, sales and marketing efforts and product distribution. The
Company believes that competition in its industry is undergoing rapid
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change and that the barriers to competition between market segments that have
previously existed are decreasing. Due to the relatively low barriers to entry
in the software market, the Company expects additional competition from other
established and emerging companies as the client/server business applications
software market continues to develop and expand. Increased competition may
result in price reductions, reduced gross margins and loss of market share, any
of which would have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures will not have a material adverse
effect on the Company's business, operating results, and financial condition.
Revenue from customers outside North America represented 8.7% and 10.6% of
the Company's total revenue in fiscal 1995 and fiscal 1996, respectively. The
Company believes that its revenue and future operating results will depend, in
part, on its ability to increase sales in international markets. There can be no
assurance that the Company will be able to maintain or increase its current
level of international revenue. An important part of the Company's strategy is
to expand its indirect marketing channels in international markets. There can be
no assurance that the Company will be able to attract and retain international
distributors and resellers that will be able to market the Company's products
effectively and will be qualified to provide timely and cost-effective customer
support and service. The inability to attract and retain important distributors
and resellers could materially and adversely affect the Company's international
business, operating results and financial condition. Other risks inherent to the
Company's international business activities generally include unexpected changes
in regulatory requirements, tariffs and other trade barriers, costs and
difficulties of localizing products for foreign countries, lack of acceptance of
localized products in foreign countries, longer accounts receivable payment
cycles, difficulty in managing international operations, potentially adverse tax
consequences including restrictions on the repatriation of earnings, the burdens
of complying with a wide variety of foreign laws and economic instability. There
can be no assurance that such factors would not have a material adverse affect
on the Company's future international revenue, and consequently, on the
Company's business, operating results and financial condition.
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PART II - OTHER INFORMATION
Items 1 - 5. Not applicable
Item 6. Exhibits and Reports on Forms 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
On January 21, 1997, the Company filed a Current Report on Form
8-K, Item 9, reporting the Company's acquisition of all of the
issued share capital of Time (Open Systems) Limited, a corporation
formed under the laws of the United Kingdom, in exchange for
$2,793,450 in cash and 769,867 shares of the Company's Common Stock
(the "Company Shares"). The Company Shares were issued by the
Company pursuant to an exemption from registration provided by
Regulation S under the Securities Act of 1933.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Software 2000 has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: February 11, 1997
SOFTWARE 2000, INC.
by:
/s/ DANIEL J. KOSSMANN
-----------------------
Daniel J. Kossmann
Chief Financial Officer
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SOFTWARE 2000, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
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27 Financial Data Schedule 17
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