1
================================================================================
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 June 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 0-27030
INFINIUM SOFTWARE, 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 June 30,
1997 was 12,020,878.
================================================================================
2
INFINIUM SOFTWARE, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheet
at June 30, 1997 and September 30, 1996................... 3
Condensed Consolidated Statement of Operations
for the three and nine months ended June 30, 1997
and 1996.................................................. 4
Condensed Consolidated Statement of Cash Flows for
the nine months ended June 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.......... 9
PART II - OTHER INFORMATION
ITEMS 1.- 5. Not applicable
ITEM 6. Exhibits and Reports on Form 8-K............................... 17
SIGNATURES................................................................ 18
EXHIBIT INDEX............................................................. 19
EXHIBITS.................................................................. 20
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFINIUM SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, SEPTEMBER 30,
1997 1996
---------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash, cash equivalents and marketable
securities ................................................ $39,139 $43,337
Accounts receivable, less allowance
for doubtful accounts of $1,400
and $1,250 at June 30, 1997 and
September 30, 1996, respectively .......................... 19,915 12,354
Deferred income taxes ....................................... 2,716 2,427
Prepaid expenses and other current assets ................... 4,361 3,569
------- -------
Total current assets ................................... 66,131 61,687
Property and equipment, net ................................... 6,444 6,047
Capitalized software development costs, net ................... 6,670 6,171
Goodwill and other intangibles, net ........................... 2,015 --
Other assets .................................................. 1,935 1,799
------- -------
Total assets ........................................... $83,195 $75,704
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 4,622 $ 4,495
Accrued expenses ............................................ 9,174 7,300
Income taxes payable ........................................ 2,002 1,368
Deferred revenue ............................................ 28,171 24,853
------- -------
Total current liabilities .............................. 43,969 38,016
------- -------
Deferred income taxes ......................................... 568 2,038
------- -------
Stockholders' equity:
Common stock, $.01 par value; authorized
40,000 shares, issued and outstanding 12,021
and 11,114 shares at June 30, 1997 and
September 30, 1996, respectively .......................... 120 111
Additional paid-in capital .................................. 32,520 27,394
Retained earnings ........................................... 6,001 8,145
Cumulative translation adjustment ........................... 17 --
------- -------
Total stockholders' equity ............................. 38,658 35,650
------- -------
Total liabilities and stockholders' equity ............. $83,195 $75,704
======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
4
INFINIUM SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
------- ------- -------- -------
Revenue:
Software license fees ......................... $ 7,508 $ 6,400 $ 18,501 $15,912
Service revenue ............................... 14,686 11,952 41,783 35,268
------- ------- -------- -------
Total revenue ......................... 22,194 18,354 60,284 51,180
------- ------- -------- -------
Operating costs and expenses:
Cost of software license fees ................. 1,396 994 3,435 2,819
Cost of services .............................. 5,864 4,035 16,041 12,139
Research and development ...................... 4,748 3,372 12,418 10,174
Sales and marketing ........................... 7,961 5,963 21,069 17,260
General and administrative .................... 1,741 1,604 5,292 5,050
Write-off of in-process research and
development acquired (Note 5) .............. -- -- 6,846 --
------- ------- -------- -------
Total operating costs and expenses .... 21,710 15,968 65,101 47,442
------- ------- -------- -------
Income (loss) from operations ................... 484 2,386 (4,817) 3,738
Other income, net ............................... 529 435 1,524 1,064
------- ------- -------- -------
Income (loss) before provision (benefit)
for income taxes .............................. 1,013 2,821 (3,293) 4,802
Provision (benefit) for income taxes ............ 355 1,015 (1,151) 1,728
------- ------- -------- -------
Net income (loss) ............................... $ 658 $ 1,806 $ (2,142) $ 3,074
======= ======= ======== =======
Per share data:
Net income (loss) per share ................ $ 0.05 $ 0.15 $ (0.18) $ 0.28
======= ======= ======== =======
Weighted average common and common
equivalent shares outstanding ................. 12,540 11,810 11,635 11,140
======= ======= ======== =======
The accompanying notes are an integral part of the condensed consolidated
financial statements
4
5
INFINIUM SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
-----------------------
JUNE 30, JUNE 30,
1997 1996
-------- --------
Cash flows from operating activities:
Net income (loss) .............................................. $ (2,142) $ 3,074
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities
Depreciation and amortization ............................... 4,345 3,489
Allowance for doubtful accounts ............................. 229 479
Deferred income taxes ....................................... (1,759) 195
Write-off of in-process research and
development acquired ...................................... 6,846 --
Changes in operating assets and liabilities,
net of effects from the acquisition of Time
(Open Systems) Limited:
Accounts receivable ..................................... (7,244) (172)
Prepaid expenses and other current assets ............... (760) (775)
Other assets ............................................ (136) (192)
Accounts payable ........................................ (146) 559
Accrued expenses ........................................ 1,271 533
Income taxes payable .................................... 633 99
Deferred revenue ........................................ 2,340 (500)
-------- --------
Net cash provided by operating activities ............. 3,477 6,789
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ............................. (2,157) (2,828)
Capitalization of software development costs ................... (2,713) (2,593)
Acquisition of Time (Open Systems) Limited (Note 5) ............ (3,443) --
-------- --------
Net cash used for investing activities ................. (8,313) (5,421)
-------- --------
Cash flows from financing activities:
Proceeds from public offerings of common stock ................ -- 19,464
Proceeds from exercise of stock options and
employee stock purchase plan ................................. 621 2,870
Proceeds from repayments of notes receivable - stockholders .... -- 379
-------- --------
Net cash provided by financing activities .............. 621 22,713
-------- --------
Effect of foreign exchange rate changes on cash .................. 17 --
-------- --------
Net increase (decrease) in cash, cash equivalents and
marketable securities .......................................... (4,198) 24,081
Cash, cash equivalents and marketable securities,
beginning of period ............................................ 43,337 16,183
-------- --------
Cash, cash equivalents and marketable securities,
end of period .................................................. $ 39,139 $ 40,264
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
6
INFINIUM SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION
The information at June 30, 1997 and 1996 and for the three and nine 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 notes 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 and nine month periods ended June 30, 1997 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 subsidiaries,
the functional currency of the subsidiaries has been redesignated to the British
Pound effective October 1, 1996. Accordingly, the assets and liabilities of the
UK subsidiaries 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 and branches have retained the U.S. dollar
as their functional currency. Accordingly, monetary assets and liabilities of
these subsidiaries and branches 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 and nine months ended June 30, 1997
and 1996 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1997 1996 1997 1996
------ ------ ------ ------
Weighted average common and
common equivalent shares:
Common stock outstanding 11,984 10,508 11,635 9,732
Common stock equivalents 556 1,302 -- 1,408
------ ------ ------ ------
12,540 11,810 11,635 11,140
====== ====== ====== ======
6
7
INFINIUM SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. NET INCOME PER SHARE, CONTINUED
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per
Share." This Statement establishes and simplifies standards for computing and
presenting earnings per share. SFAS 128 will be effective for the Company's
first quarter of fiscal 1998, and requires restatement of all previously
reported earnings per share data that are presented. Early adoption of this
Statement is not permitted. SFAS 128 replaces primary and fully diluted earnings
per share with basic and diluted earnings per share. The Company expects that
basic earnings per share amounts will be accretive compared to the primary
earnings per share amounts, and diluted earnings per share amounts will not be
materially different from the fully diluted earnings per share amounts.
4. OTHER INCOME, NET
Other income, net consists of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ ------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
---- ---- ------ ------
Interest income ........... $549 $433 $1,587 $1,127
Foreign exchange loss ..... (20) 2 (63) (63)
---- ---- ------ ------
$529 $435 $1,524 $1,064
==== ==== ====== ======
5. ACQUISITION
On January 6, 1997, the Company acquired all of the outstanding capital
stock of Time (Open Systems) Limited ("Time"), a UK-based privately held
software concern which developed and marketed a suite of client/server financial
applications. The transaction was consummated for $2,793 in cash, approximately
770 shares of the Company's common stock which was issued at the closing of the
acquisition and is being held pursuant to an escrow agreement under which the
shares will be released ratably over a three year period and $650 of related
acquisition costs. The value ascribed to the shares issued was $4,514.
The acquisition was accounted for as a purchase. Accordingly, the results
of operations of Time and the fair market values of the acquired assets and
assumed liabilities were included in the Company's financial statements as of
the date of the acquisition. The purchase price was allocated to the acquired
assets and assumed liabilities as follows:
7
8
INFINIUM SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. ACQUISITION, CONTINUED
Accounts receivable $ 546
Other current assets 32
Property and equipment 132
In-process research and development 6,846
Acquired software 312
Assembled workforce 468
Goodwill 1,477
Current liabilities (1,856)
------
$7,957
======
The amount allocated to in-process research and development was determined
by an independent appraiser and represented technology which had not reached
technological feasibility and had no alternative future use. Accordingly, this
amount of $6,846 was charged to operations at the acquisition date. The amounts
allocated to intangible assets are being amortized on a straight line basis over
their expected useful lives of 2-7 years.
Pro forma statements of operations are not shown as they would not differ
materially from reported results.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company will implement SFAS No. 130 and
No. 131 as required in fiscal 1999 which will require the Company to report and
display certain information related to comprehensive income and operating
segments.
8
9
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, the
Company's ability to generate cash from operations, and the Company's ability to
attract and retain employees, 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
Infinium Software, Inc., ("the Company"), formally known as Software 2000,
Inc., was founded in 1981 and offers a broad range of financial management,
human resource management and materials management business software
client-server 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,
in January, 1997, the Company acquired all of the outstanding capital stock of
Time (Open Systems) Limited ("Time"), a UK-based privately held software concern
which developed and marketed a suite of client/server financial application
software products (the "Time Products"). The Company has introduced beta
versions of the Time Products for the Microsoft NT Server platform in North
America and other international markets with a planned generally available
release date of later this fiscal year. These products, along with the Microsoft
NT Server-based Human Resources Management product line under development by the
Company, will form the basis for the Company's planned expansion into the
emerging market for business applications designed for Windows NT servers.
Substantially all revenue recognized to date is associated with AS/400
platform transactions.
The following table sets forth for the periods indicated the Company's
condensed consolidated statement of operations data expressed as a percentage of
total revenue and the percentage of dollar increase period over period for the
three and nine months ended June 30, 1997 and 1996.
9
10
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
---------------------------- ------------------------------
% OF TOTAL % OF $ % OF TOTAL % OF $
REVENUE INCREASE REVENUE INCREASE
--------------- -------- ---------------- --------
1997 1996 96 TO 97 1997 1996 96 TO 97
---- ---- -------- ---- ---- --------
Revenue:
Software license fees .............. 34% 35% 17% 31% 31% 16%
Service revenue .................... 66 65 23 69 69 18
---- ---- ---- ---- ---- ----
Total revenue ................... 100 100 21 100 100 18
---- ---- ---- ---- ---- ----
Operating costs and expenses:
Cost of software license fees ...... 6 5 40 6 5 22
Cost of services ................... 27 22 45 27 24 32
Research and development ........... 21 18 41 20 20 22
Sales and marketing ............... 36 33 34 35 34 22
General and administrative ......... 8 9 9 9 10 5
Write-off of in-process research
and development acquired ......... -- -- N/A 11 -- N/A
---- ---- ---- ---- ---- ----
Total operating costs and
expenses .................... 98 87 35 108 93 37
---- ---- ---- ---- ---- ----
Income (loss) from operations ........ 2 13 (80) (8) 7 (229)
---- ---- ---- ---- ---- ----
Other income, net .................... 3 2 22 3 2 43
---- ---- ---- ---- ---- ----
Income (loss) before provision
(benefit) for income taxes ......... 5 15 (64) (5) 9 (169)
Provision (benefit) for income taxes . 2 5 (65) (2) 3 (167)
---- ---- ---- ---- ---- ----
Net income (loss) .................... 3% 10% (64)% (3)% 6% (170)%
==== ==== ==== ==== ==== ====
Included in operating costs and expenses above, and further discussed in
Note 5 to the condensed consolidated financial statements, is a one-time charge
of $6.8 million for the nine months ended June 30, 1997 as a result of the
write-off of in-process research and development acquired in connection with the
acquisition of Time. Also included in fiscal year 1997 operating costs and
expenses are significant expenditures incurred by the Company with respect to
the development efforts of the Microsoft NT Server products as well as
expenditures attributed to the hiring and training of personnel to market and
service this new product offering.
QUARTER ENDED JUNE 30, 1997 COMPARED TO QUARTER ENDED JUNE 30, 1996
REVENUE. Total revenue, consisting of software license fees and service
revenue, increased 21%, to $22.2 million for the quarter ended June 30, 1997
from $18.4 million for the quarter ended June 30, 1996.
Software license fee revenue increased 17%, to $7.5 million for the quarter
ended June 30, 1997 from $6.4 million for the quarter ended June 30, 1996. The
software license fee growth reflects a continued market acceptance of the
products and the efforts of target marketing into the process manufacturing and
healthcare markets.
Service revenue increased 23%, to $14.7 million for the quarter ended June
30, 1997 from $12.0 million for the quarter ended June 30, 1996. The Company's
service revenue is comprised of software maintenance fees and fees for
consulting services. Overall, the increase was attributable to an increase in
the installed base of customers and an increase in larger consulting service
engagements as well as increased service offerings including greater project
management demand.
The following table sets forth a comparative breakout of the components of
service revenue.
10
11
THREE MONTHS ENDED JUNE 30,
--------------------------------------
(IN THOUSANDS) % OF $ INCREASE
---------------
1997 1996 96 TO 97
------- ------- ---------------
Maintenance fee revenue $ 8,483 $ 7,791 9%
Consulting services revenue 6,203 4,163 49
------- ------- ----
Total service revenue $14,686 $11,954 23%
======= ======= ====
COST OF SOFTWARE LICENSE FEES. Cost of software license fees consists
primarily of royalties on the sales of third party products, amortization
expense related to capitalized software development costs and the cost of
product media, manuals and shipping. Cost of software license fees increased
40%, to $1.4 million for the quarter ended June 30, 1997 from $1.0 million for
the quarter ended June 30, 1996. Cost of software license fees as a percentage
of software license fee revenue increased to 19% for the quarter ended June 30,
1997 from 16% for the quarter ended June 30, 1996. The increase in the dollar
amount and as a percentage of software license fees is attributed to an increase
in royalties of third party product sales and to an increase of amortization of
capitalized software development costs offset by a decrease in
documentation-related expenses.
COST OF SERVICES. Cost of services consists of costs to provide product
and technical support, implementation consulting services and training services
to licensees of Infinium Software products. Cost of services increased 45%, to
$5.9 million for the quarter ended June 30, 1997 from $4.0 million for the
quarter ended June 30, 1996. Cost of services as a percentage of service revenue
increased to 40% for the quarter ended June 30, 1997 from 34% for the quarter
ended June 30, 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 service providers as for delivery of
consulting services in response to continued growth in the customer base and to
the increased demand for consulting services.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of engineering personnel and contractor costs reduced by capitalized
software development costs and, when applicable, research funding. Research and
development expenses increased 41%, to $4.7 million for the quarter ended June
30, 1997 from $3.4 million for the quarter ended June 30, 1996. Research and
development spending, defined as research and development expenses before
capitalization of software development costs and, if applicable, research
funding, increased 34%, to $5.7 million for the quarter ended June 30, 1997 from
$4.3 million for the quarter ended June 30, 1996. Research and development
spending as a percentage of total revenue was 26% for the quarter ended June 30,
1997 and 23% for the quarter ended June 30, 1996. The increase in research and
development expense and spending was due primarily to increased NT platform
development for the current period. The Company capitalized $1.0 million of
software development costs for the quarter ended June 30, 1997 compared to $0.9
million for the quarter ended June 30, 1996.
In addition to traditional AS/400 platform development efforts, the
Company is making substantial investments to develop a new Human Resources
Management product line designed exclusively for the Microsoft NT Server market.
The Company also continues to make substantial investment to enhance the
Microsoft NT Server financial management applications acquired as a result of
the acquisition of Time.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions, travel, promotional expenses, and facilities, computers
and communications costs for direct sales offices. Sales and marketing expenses
increased 34%, to $8.0 million for the quarter ended June 30, 1997 from $6.0
million for the quarter ended June 30, 1996. Sales and marketing expenses as a
percentage of total revenue increased to 36% for the quarter ended June 30, 1997
from 33% for the quarter ended June 30, 1996. The increase was attributable to
increased staffing in the direct sales force and additional marketing activities
in preparation for the launch of the NT products.
11
12
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, investor
relations and outside professional fees. General and administrative expenses
increased 9%, to $1.7 million for the quarter ended June 30, 1997 from $1.6
million for the quarter ended June 30, 1996. The increase in dollar amount of
general and administrative expenses related primarily to incremental general and
administrative costs associated with Time since the acquisition as well as
additional investor relation costs offset in part by a decrease in the provision
for doubtful accounts. General and administrative expenses as a percentage of
total revenue decreased to 8% for the quarter ended June 30, 1997 from 9% for
the quarter ended June 30, 1996. The decrease as a percent of revenue is
attributable to ongoing cost containment efforts throughout the general and
administrative areas.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision for federal, state and
foreign income taxes was $0.4 million for the quarter ended June 30, 1997
compared to $1.0 million for the quarter ended June 30, 1996. The effective
income tax rate was 35% for the quarter ended June 30, 1997 compared to 36% for
the quarter ended June 30, 1996. The decrease in the effective income tax rate
from 1997 to 1996 is due primarily to a decrease in the provision for state
income taxes.
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO NINE MONTHS ENDED JUNE 30, 1996
REVENUE. Total revenue increased 18%, to $60.3 million for the nine months
ended June 30, 1997 from $51.2 million for the nine months ended June 30, 1996.
Software license fee revenue increased 16%, to $18.5 million for the nine months
ended June 30, 1997 from $15.9 million for the nine months ended June 30, 1996.
The software license fee growth reflects a continued market acceptance of the
AS/400 products and the efforts of target marketing into the process
manufacturing and healthcare markets. Service revenue increased 18%, to $41.8
million for the nine months ended June 30, 1997 from $35.3 million for the nine
months ended June 30, 1996. The increase was primarily attributable to an
increase in the installed base of customers and an increase in large consulting
service engagements.
The following table sets forth a comparative breakout of the components of
service revenue.
NINE MONTHS ENDED JUNE 30,
------------------------------------
(IN THOUSANDS) % OF $
INCREASE
1997 1996 96 TO 97
------- ------- --------
Maintenance fee revenue $25,015 $22,257 12%
Consulting services revenue 16,768 13,011 29
------- ------- ----
Total service revenue $41,783 $35,268 18%
======= ======= ====
COST OF SOFTWARE LICENSE FEES. Cost of software license fees increased
22%, to $3.4 million for the nine months ended June 30, 1997 from $2.8 million
for the nine months ended June 30, 1996. Cost of software license fees as a
percentage of software license fee revenue increased to 19% for the nine months
ended June 30, 1997 from 18% for the nine months ended June 30, 1996. The
increase in the dollar amount and as a percentage of software license fees is
attributed to an increase in royalties of third party product sales and to an
increase of amortization of capitalized software development costs offset by a
decrease in documentation-related expenses.
COST OF SERVICES. Cost of services increased 32%, to $16.0 million for the
nine months ended June 30, 1997 from $12.1 million for the nine months ended
June 30, 1996. Cost of services as a percentage of service revenue increased to
38% for the nine months ended June 30, 1997 from 34% for the nine months ended
June 30, 1996. The increase in the dollar amount of such costs and as a
percentage of service revenue resulted primarily from an increase in staffing
and the use of third party service providers for
12
13
delivery of consulting services into the customer base in response to continued
growth in the customer base and to the increased demand for consulting services.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 22%,
to $12.4 million for the nine months ended June 30, 1997 from $10.2 million for
the nine months ended June 30, 1996. Research and development spending increased
20%, to $15.4 million for the nine months ended June 30, 1997 from $12.8 million
for the nine months ended June 30, 1996. Research and development spending as a
percentage of total revenue was 25% for the each of the nine months ended June
30, 1997 and 1996. The increase in research and development expense and spending
was due primarily to NT platform development initiatives during the current
fiscal year. The Company capitalized $2.7 million of software development costs
for the nine months ended June 30, 1997 compared to $2.6 million for the nine
months ended June 30, 1996.
SALES AND MARKETING. Sales and marketing expenses increased 22%, to $21.1
million for the nine months ended June 30, 1997 from $17.3 million for the nine
months ended June 30, 1996. Sales and marketing expenses as a percentage of
total revenue increased to 35% for the nine months ended June 30, 1997 from 34%
for the nine months ended June 30, 1996. The increase was attributable to
increased staffing in the direct sales force and additional marketing activities
in preparation for the launch of NT products as well as to the roll-out of the
new corporate identity of Infinium Software from that of Software 2000 during
the second quarter of the current fiscal year.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
5%, to $5.3 million for the nine months ended June 30, 1997 from $5.1 million
for the nine months ended June 30, 1996. General and administrative expenses as
a percentage of total revenue decreased to 9% for the nine months ended June 30,
1997 from 10% for the nine months ended June 30, 1996. The increase in dollar
amount of general and administrative expenses related primarily to additional
investor relation costs and incremental costs following the Time acquisition
offset by a decrease in the provision for doubtful accounts.
WRITE-OFF OF RESEARCH AND DEVELOPMENT ACQUIRED. As discussed in Note 5 to
the condensed consolidated financial statements, the Company recorded a one-time
charge to operations of $6.8 million for the write-off of in-process research
and development acquired in connection with the acquisition of Time.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision (benefit) for federal,
state and foreign income taxes was ($1.2) million for the nine months ended June
30, 1997 compared to $1.7 million for the nine months ended June 30, 1996. The
effective income tax rate was 35% for the nine months ended June 30, 1997
compared to 36% for the nine months ended June 30, 1996. The decrease in the
effective income tax rate from 1997 to 1996 is due primarily to a decrease in
the provision for state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had cash, cash equivalents and marketable
securities of $39.1 million. During the first nine months of fiscal 1997, the
Company used a net $4.2 million of cash, cash equivalents and marketable
securities of which $3.4 million was attributed to the acquisition of Time.
Other uses were to fund software development and to purchase computers and
equipment. The principal sources of cash, cash equivalents and marketable
securities was provided by operating activities and proceeds from the exercise
of stock options under the Company's stock option plans and employee stock
purchase plan. 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.
13
14
The Company's accounts receivable balance, net of the allowance for
doubtful accounts, was $19.9 million at June 30, 1997 compared to $12.4 million
at September 30, 1996. Days sales outstanding ("DSO") was 81 days at June 30,
1997 compared to 54 days at September 30, 1996. The Company calculates DSO as
the ratio of accounts receivable, net of allowance for doubtful accounts, to the
current quarters revenue, multiplied by 90. The increase in DSO resulted
primarily from the increase in accounts receivable due to a large volume of
deals being consummated towards the end of the quarter.
Deferred revenue increased to $28.2 million at June 30, 1997 from $24.9
million at September 30, 1996. The increase in deferred revenue was primarily
due to an increase in deferred maintenance revenue and consulting services
revenue as a result of continued growth in the customer base and to an increased
demand for consulting services.
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 1998. 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, the Company's ability to attract and retain
employees, 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.
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 factors set forth in this
section, 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.
14
15
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 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 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.
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 continues to make substantial investment to
enhance the Microsoft NT Server financial management applications acquired as a
result of the acquisition of Time. Although the Company expects to introduce
enhanced generally available versions of the Time Products in North America and
other international markets in fiscal year 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 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
15
16
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.
16
17
PART II - OTHER INFORMATION
Items 1 - 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
None
17
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Infinium Software, Inc. has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: August 14, 1997
INFINIUM SOFTWARE, INC.
By: /s/ DANIEL J. KOSSMANN
-------------------------------
Daniel J. Kossmann
Chief Financial Officer
18
19
INFINIUM SOFTWARE, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
27 Financial Data Schedule 20
19