-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JLRF39DdyuqZgg4oibIK4612CdeKScQv3ow2kiqM5sosuLFmtz8AsXaeREvNpamv t0+J/4X1lD5e8Hg5At2P+Q== 0000950135-97-003550.txt : 19970815 0000950135-97-003550.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950135-97-003550 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFINIUM SOFTWARE INC CENTRAL INDEX KEY: 0001002044 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 042734036 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27030 FILM NUMBER: 97663792 BUSINESS ADDRESS: STREET 1: 25 COMMUNICATIONS WAY STREET 2: DRAWER 6000 CITY: HYANNIS STATE: MA ZIP: 02601 BUSINESS PHONE: 5087782000 FORMER COMPANY: FORMER CONFORMED NAME: SOFTWARE 2000 INC /MA/ DATE OF NAME CHANGE: 19960322 FORMER COMPANY: FORMER CONFORMED NAME: SOFTWARE 2000 INC /MA/ DATE OF NAME CHANGE: 19951012 10-Q 1 INFINIUM SOFTWARE 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 9-MOS SEP-30-1997 OCT-01-1996 JUN-30-1997 1 15,155 23,984 21,315 1,400 0 66,131 25,487 19,043 83,195 43,969 0 0 0 120 38,538 83,195 0 60,284 0 19,476 45,326 299 0 (3,293) (1,151) (2,142) 0 0 0 (2,142) (0.18) (0.18)
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