-----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, ALEJ27bZGJILEHEsnIZYa5P2Gly+VC9+iNJIkVXejgUpSCLJ29TEtqwPVIBgGPCw +FNXvRCqiGSdCdD+zjeyzw== 0000950135-98-006399.txt : 19990113 0000950135-98-006399.hdr.sgml : 19990113 ACCESSION NUMBER: 0000950135-98-006399 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFINIUM SOFTWARE INC CENTRAL INDEX KEY: 0001002044 STANDARD INDUSTRIAL CLASSIFICATION: 7373 IRS NUMBER: 042734036 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-27030 FILM NUMBER: 98775039 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-K 1 INFINIUM SOFTWARE 1 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 OR [ ] 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 INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 25 COMMUNICATIONS WAY, HYANNIS, MA 02601 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 778-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $0.01 (TITLE OF CLASS) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the registrant based upon the closing price of such stock as reported on the Nasdaq National Market on November 19, 1998, was $71,762,474. As of November 19, 1998, 12,606,745 shares of the registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Specifically identified information in the registrant's definitive proxy statement for its Annual Meeting of Stockholders which is currently expected to be held on February 5, 1999, to be filed pursuant to Regulation 14A, is incorporated by reference into Part III of this Form 10-K. Portions of the registrant's 1998 Annual Report to Stockholders for the fiscal year ended September 30, 1998 are incorporated by reference into Parts II and IV hereof. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS All statements contained herein that are not historical facts, including but not limited to, statements regarding anticipated future capital requirements, the Company's future products and product development plans, the Company's ability to obtain debt, equity or other financing, and the Company's ability to generate cash from operations, are based on current expectations. These statements are forward looking in nature and involve a number of risks and uncertainties, as more fully described under "Factors Affecting Future Performance" in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Actual results may differ materially. Infinium Software, Inc. (the "Company", "Infinium Software" or "Infinium") develops, markets and supports enterprise-level business software applications for dynamic growing organizations (typically companies with revenues of $25 million to $5 billion). The Company has two primary product lines. One product line is designed exclusively for AS/400 servers. These applications capitalize on native IBM AS/400 capabilities to automate the financial management, human resource management and materials management functions of organizations in a broad range of industries worldwide. The Company also offers a specialized AS/400 manufacturing system designed to manage process manufacturing operations. The Company's second product line is designed exclusively for Microsoft Windows NT servers. These applications capitalize on native Microsoft Windows NT capabilities to automate the financial management and human resource management operations of service organizations. Additional Microsoft Windows NT applications are under development and expected to be available during 1999. The Company's more than 1,800 customers include Abbott Laboratories, Circus Circus Enterprises, Coca-Cola Enterprises, Warner Bros. Records, Mirage Resorts, and MCA/Universal Studios. INDUSTRY BACKGROUND For many years businesses have used packaged software applications to cost-effectively automate back-office accounting and payroll functions. Recently, heightened competitive pressures and rapidly changing market conditions have forced many organizations to reduce costs, increase the productivity of their personnel and become more responsive to customer requirements. In addition, many dynamic growing companies have expanded their operations and now require software applications that support more product lines, international operations and a larger workforce. These businesses also are demanding applications that take advantage of the capabilities of the Internet to manage relationships with their employees, customers, partners and suppliers. As a result, businesses are replacing their existing accounting, human resource and payroll software applications with new, more flexible systems. These new systems are designed to not only keep track of basic accounting records but also provide best practice capabilities to monitor and measure the operational performance of the business. There have also been advances in technology which have stimulated the replacement and augmentation of enterprise business applications. Network centric computing has become the standard business computing environment, incorporating personal computers for user interaction networked together with large servers for database computing, internet access, email routing, workflow processing, and other capabilities. IBM commonly refers to this collection of technologies as e-Business. Microsoft commonly refers to this technology as DNA, Distributed iNternet Architecture. The network centric environment facilitates widespread access from both within the organization and from outside the organization via the Internet by business professionals seeking access to corporate information. This information is presented through an easy-to-use graphical user interface and integrates with commonly used desktop productivity tools such as spreadsheets, all while allowing the enterprise business applications to be more readily customized to meet changes in business requirements. In addition, there is a preference among users of enterprise business systems to acquire entire suites of integrated applications that are designed to work together rather than to purchase single components, such as a general ledger or accounts payable system. 1 3 The requirement for more flexible business applications and the resulting shift to network centric computing has created a strong demand for new software applications for financial management, human resources and other areas of business. For example, International Data Corporation ("IDC") estimates that the worldwide market for accounting software across all platforms is in excess of $6.12 billion in 1998 and is predicted to grow at a 14.8% compounded annual rate through 2002 with projected spending of approximately $10.5 billion in 2002. There is an additional factor driving the demand for new business application software packages. Many businesses today use financial, human resources and other application software systems that were either developed by their own internal information systems staff or were acquired in the 1970's or 1980's. Such systems may not be able to process transactions beginning in the year 2000, since they were programmed to assume that every year begins with '19xx'. These systems must now be revised or replaced in order to prevent a business interruption. Many businesses are choosing to replace their older or internally developed systems with purchased application software that has been designed to support processing in the year 2000 and beyond. With over 500,000 systems installed, the IBM AS/400 is one of the world's most popular business computing systems. Shipments of new AS/400 systems in 1998 are estimated at approximately 60,000 units, partly as the result of new models introduced by IBM which offer improved price performance and more industry standard "open" features. These new models include networking capabilities to facilitate electronic commerce, multi-processor architectures and expanded interoperability with other systems, all of which facilitate the use of the AS/400 as a server in a network centric computing architecture. The Company believes that the AS/400 is widely used because of the large number of business application software packages available for it and because fewer skilled technical professionals are required to implement and maintain it, resulting in a lower cost of ownership compared to other systems. This is important in today's market, where organizations must implement and support business applications with fewer, more productive resources than ever before. The Microsoft Windows NT server is currently the fastest growing computing platform for business applications. The Company believes that NT will rapidly become the most popular application software platform for dynamic growing organizations. According to IDC, the markets for NT based financial and human resources applications are expected to grow at an annual rate of 32% and 46%, respectively, through the year 2002. The Company believes that Microsoft Windows NT is being widely accepted because of the market dominance of Microsoft, the low cost of ownership of NT servers, and the benefits of integration with other Microsoft technologies and software applications. THE INFINIUM SOFTWARE SOLUTION Infinium Software is a provider of enterprise-level business software applications for dynamic growing organizations. The Company offers two separate application product lines. It provides applications for the financial management, human resource management and materials management functions of dynamic growing organizations that use IBM AS/400 servers. The Company also offers a fully integrated solution for process manufacturing operations. Infinium's AS/400 products run in either a network centric or a traditional host/terminal configuration. In 1997, the Company began offering applications that automate the finance operations of organizations that utilize the Microsoft Windows NT servers. In June 1998, the Company launched an NT Human Resource product line, designed to automate workforce management, and acquired an NT Payroll solution. The Company's products enable businesses to automate their financial management, human resource management, materials management and process manufacturing operations with highly functional software 2 4 products that afford them the flexibility and ease of use of network centric computing while retaining low cost of ownership. Infinium's products are designed based on the following principles: AS/400 PRODUCT LINE: - ROBUST FUNCTIONALITY AND SCALABILITY. Infinium's products are designed to provide high-end features and transaction processing functionality while providing flexibility and ease of use features that have not been attained on mainframe platforms. In addition, the Company's products operate in integrated suites of applications which provide users with a consistent user interface and the ability to easily access data and perform operations that span multiple applications. The Company's products are scalable to support increasing and changing levels of operations as customers' businesses expand. - HIGH DEGREE OF FLEXIBILITY. Infinium's products are designed to function within a wide range of organizations. Infinium enables individual users to customize their desktop environments to respond to business changes and to streamline their daily operations. For example, the Company believes the flexible chart of accounts scheme within its General Ledger product facilitates monitoring the performance of a wide range of operating and financial measurements as well as record keeping for accounting and financial statement purposes. - YEAR 2000 SUPPORT. The Company's financial management and human resources product lines have been designed from the beginning to support processing in the Year 2000 and beyond. The Company's materials management and process manufacturing product lines have been revised to support Year 2000 processing. The Company is continuing to validate its products' ability to support Year 2000 processing. - SUPERIOR DATA ACCESS AND ANALYSIS THROUGH OBJECT-ORIENTED USER INTERFACE. The Company's AS/400 product line is designed to allow business professionals to "mine" the information contained in the application databases without knowledge of the underlying database structure. The Company's "drag and drop" object-oriented user interface represents the underlying data in the form of graphical icons and allows the end user to interactively access data by manipulating the icons. - INTERNET/INTRANET EXTENSIONS. The Company's e-Business extensions allow Infinium customers to extend application functionality to their employees, customers, partners and suppliers through the Internet or their internal intranet. For example, employees are provided with secure access to their personnel information via the Internet/Intranet. Infinium e-Business extensions utilize IBM's Lotus Domino technology, running on the AS/400 or other supported Domino platforms, to extend the functionality of Infinium business to connect employees, customers, partners and suppliers to manage relationships, lower transaction costs and optimize business practices. - PRODUCTS OPTIMIZED FOR THE AS/400. Infinium Software currently has a line of products specifically designed for the AS/400 computing environment. The Company's products take full advantage of the many unique characteristics of the AS/400 operating system and database to maximize performance for its customers. WINDOWS NT PRODUCT LINE: The Company's product line for Windows NT servers is the result of a combination of internal development and acquired technology. In January 1997, the Company acquired Time Open Systems, Ltd. ("Time"), a privately-held application software company based in Chatham, England. The products acquired from Time form the foundation for the Company's Financials for Microsoft Windows NT product line and its OneBook design. Subsequent to the acquisition, Infinium significantly enhanced the product and introduced Infinium Financials for Microsoft Windows NT in September 1997. In June 1998, the Company introduced its new Human Resource Management application, Infinium Human Resources for Microsoft Windows NT. The product's OneForce design offers unique capabilities in 3 5 workforce management, giving companies using it the ability to track the skills and competencies of their entire workforce, including employees, applicants, contractors, and retirees. The OneForce design enables strategic management of individuals and dynamic, cross-functional teams. In June 1998, the Company acquired Cort Directions, Inc. ("Cort"), a privately held application software vendor based in Bend, Oregon which offered a robust payroll application for Microsoft Windows NT servers. The payroll system complements the OneForce design of the human resource management system. In addition to Infinium Financials for Microsoft Windows NT and Infinium Human Resources for Microsoft Windows NT, the Company is currently developing new purchasing and inventory systems specifically designed and optimized for Microsoft Windows NT. The design principals behind the Windows NT applications include: - TOTAL TEAM MANAGEMENT THROUGH THE ONEFORCE DESIGN. Infinium's Human Resources for Microsoft Windows NT features a design that delivers instant access to one integrated source of workforce information from anywhere, at any time. The OneForce design provides up-to-the-minute, multiple profile access of an individual in an organization's workforce, regardless of current employment status, that flows back to a single portfolio of available talent. This design gives managers the knowledge and power to build and deploy world-class teams at the click of a mouse. Infinium believes service-based, team-oriented organizations looking to optimize the utilization of available workforce talent, skills, and knowledge will benefit from this design. - LOW COST, BEST-PRACTICE SELF-SERVICE CAPABILITIES. Infinium's Human Resources for Microsoft Windows NT offers employee and manager self-service capabilities including Internet, intranet, and kiosks to enable remote users to easily retrieve data, update employee records and communicate with managers. The self-service capabilities help organizations dramatically reduce costs and errors associated with manual procedures. In addition, the OneForce design features time saving, collaborative workflow processes triggered by user-defined events. - BEST-PRACTICE ACCOUNTING THROUGH THE ONEBOOK DESIGN. Infinium's Financials for Microsoft Windows NT features a design that delivers real-time financial management to dynamic growing organizations. All subledgers (such as accounts payable, accounts receivable) immediately post to the General Ledger system giving operating and financial managers the ability to always know where the company stands as of the last transaction without having to go through time consuming batch updates and adjustments at month end closes. The major advantage of this OneBook design is that time-consuming monthly closing cycles are substantially reduced. - PROJECT ACCOUNTING & CUSTOMER PROFITABILITY. The Company's Financials for Microsoft Windows NT product has been designed for dynamic growing project-oriented service businesses. Companies that need to determine customer profitability by attributing associated revenues and expenses to a particular project or customer can easily do so with the Job Management module of the Company's Financials for Microsoft Windows NT product. - FLEXIBLE BUSINESS RULES. The Company's Financials for Microsoft Windows NT products can be tailored to meet the specific needs of an organization quickly with business rules that are delivered with the applications. The application business rules can be modified by customers without changing the source code of the application. This design allows changes to be made without corrupting future enhancements delivered by the Company. - OPTIMIZED FOR MICROSOFT WINDOWS NT. The Company has chosen to design and optimize its products exclusively on the Microsoft Windows NT operating system. The applications are built on Microsoft's DNA (Distributed iNternet Architecture) and take full advantage of Microsoft's Backoffice suite of products and technologies. The Company believes that optimizing its applications for use solely on Windows NT servers gives it an advantage over competitors whose applications are ported from UNIX or other operating systems. 4 6 - YEAR 2000 SUPPORT. The Company's Microsoft Windows NT products are designed to support processing in the year 2000 and beyond. The Company is continuing to validate its products' ability to support Year 2000. STRATEGY Infinium Software's objective is to be a leading provider of business software applications for dynamic growing organizations. The Company believes that the Microsoft Windows NT and the IBM AS/400 servers will be the two most popular application software platforms for dynamic growing organizations because they offer customers the lowest cost-of-ownership. These integrated computing platforms shield customers from significant systems integration work and are valued by resource-constrained organizations. The Company's AS/400 products are specifically designed and optimized for use on the AS/400 operating system and database platforms for enterprise-level use. Likewise, the Company's NT products are specifically designed and optimized for use on the Microsoft Windows NT operating system and accompanying components. The Company believes that application software products deliver the best performance and reliability only when they are designed for specific target computing platforms, and that products written in a "one size fits all" manner to run on multiple platforms perform poorly on platforms other than the one for which they were designed. The Company is committed to enhancing its core competencies in the areas of financial management, human resource management, materials management and process manufacturing and delivering systems which can interoperate with other applications within an organization. The key elements of the Company's strategy are: - BECOME A LEADING APPLICATION SOFTWARE SUPPLIER TO SERVICES INDUSTRIES. The Company's strategy is to increase its marketing activities and focus them on gaining market share in selected services industry sectors. The Company believes that the effective management of professional knowledge workers is becoming a critical requirement for success among service organizations, especially business and professional service organizations. Consequently, the Company believes its NT-based product line, revolving around its innovative human resource management system written with the OneForce design, offers significant competitive advantage to companies using it to make sure they match the right skills and competencies with the needs of their clients. - PROVIDE NETWORK CENTRIC SOLUTIONS TO THE AS/400 MARKET. The Company targets dynamic growing organizations that use the IBM AS/400 server and plan to capitalize on network centric capabilities. The Company's server products were initially designed for the AS/400 and the Company had traditionally served the AS/400 market exclusively. The Company has added new capabilities to its AS/400 products supporting network computing. The Company believes that it has established a strong reputation and a loyal base of more than 1,400 customers within the AS/400 market, which it intends to continue to leverage with its new products. - PROVIDE INDUSTRY-LEADING APPLICATIONS FOR MICROSOFT WINDOWS NT SERVERS. The Company's strategy is to focus a significant part of its new product development efforts on the Microsoft Windows NT server market, similar to the strategy it used to establish its position in the AS/400 market. The Company introduced its Financials for Windows NT series of products in fiscal 1997, its Human Resources and Payroll applications in fiscal 1998, and intends to build as well as acquire additional application products for the Microsoft Windows NT platform in fiscal 1999. - BUILD LONG TERM COMPETITIVE ADVANTAGE FOR ITS MICROSOFT WINDOWS NT PRODUCTS THROUGH USE OF NATIVE MICROSOFT CORE TECHNOLOGIES. The Company believes that as the Microsoft Windows NT environment becomes more mature as an enterprise application software platform, customers will demand that applications take maximum advantage of all of NT's system capabilities. To deliver optimal systems capabilities, Infinium is designing its new internally-developed applications to be native to the Windows NT "DNA" technologies. The Company believes this design strategy will become an increasingly important purchasing criteria in the market for NT business applications, and that cross-platform applications or applications ported from UNIX will be at a disadvantage to applications designed expressly for the Microsoft DNA environment. 5 7 - INVEST TO DELIVER PRODUCT FEATURE/FUNCTION LEADERSHIP. The Company plans to continuously enhance its products to respond to changes in customer requirements, improve functionality and performance, and incorporate relevant new technologies. In particular, the Company plans to deliver numerous enhancements to its Windows NT products, and incorporate Domino-based workflow and e-Business extensions for its AS/400 products. - PROVIDE WORLD CLASS IMPLEMENTATION CAPABILITIES. The Company is continuing to invest in its people, infrastructure, and methodology to insure that our applications are implemented in a rapid, professional manner, as well as aggressively hiring experienced consulting professionals to maintain the growth and quality of the services business. The Company believes that customers select Infinium for its ability to provide a total solution with the right combination of software, consulting services, and professional customer support. - EXTEND THE CAPABILITIES OF PRODUCTS THROUGH COMPLEMENTARY RELATIONSHIPS AND ALLIANCES. The Company will continue to develop relationships with third parties that provide software products that add value to the solution offered by the Company. Furthermore, the Company will continue to develop relationships with service providers who can supplement the Company's staff and assist in installing and customizing the Company's products and addressing customers' networking needs. - INCORPORATE INTERNET TECHNOLOGIES. Infinium's Human Resources for Microsoft Windows NT is a complete Internet application. Through the Company's e-Business extensions, the Company has released enhancements to its AS/400 products that will enable them to operate over the Internet and within corporate intranets. The Company is also utilizing World Wide Web technologies to provide its customers with rapid and low-cost access to customer support and service applications through its electronic customer support offerings called Infinium Link and Infinium Weblink. PRODUCTS Infinium Software offers enterprise-level business software applications designed to automate the back-office operations of dynamic growing organizations. The Company's products can function as stand-alone applications or as integrated suites of applications and may be interfaced with products from other vendors. The Company offers business applications that automate the financial management, human resources management, materials management and process manufacturing functions. AS/400 PRODUCT LINE The Company's AS/400 series of products are server-based products that can function in a traditional host/terminal configuration or in a network centric configuration with a graphical user interface on the users' desktop. The Company's Infinium Advanced Desktop object-oriented software products can be added to the AS/400-based Financial Management, Human Resources or Materials Management product lines to provide a network centric computing architecture. In this configuration, some of the product functions traditionally provided by the AS/400 host application are distributed to the users' personal computers, providing more intuitive data access and analytical capabilities. The Infinium Advanced Desktop and Desktop Manager products run under the Microsoft Windows 3.1, Windows 95, Windows 98, and Windows NT operating systems for personal computers. The Infinium Advanced Desktop product line is designed to allow business professionals to "mine" the information contained in the application databases without knowledge of the underlying database structure. The Company believes that Infinium's "drag and drop" object-oriented user interface is an advance over standard graphical user interfaces because it represents the underlying data in the form of graphical icons and allows the user to interactively access data by manipulating the icons. For example, a user can simply drag the Vendor icon and drop it on an Invoice icon to see the invoice data for that particular company. Successive drag and drop operations can take the user to successively lower levels of detail as needed. In addition, the data in an Infinium application can be easily moved into popular spreadsheets or word processors for incorporation into reports or presentations. As a result, users spend less time searching for data and can devote more time to 6 8 analysis and decision making. The Company believes that its object-oriented user interface represents a competitive advantage in the business application software market. The Company believes that the Infinium Advanced Desktop and Desktop Manager architecture, which allows the Company's AS/400 applications to function as either traditional host/terminal applications or object-oriented network centric applications, provides the Company's base of more than 1,400 customers with a means of migrating to network centric without replacing their existing Infinium AS/400 business applications. This also offers a competitive solution to customers seeking to combine the benefits of network centric computing with the performance, stability and low cost of ownership of an AS/400 server-based architecture. The AS/400 product suites and included applications currently offered by Infinium Software are as follows: FINANCIAL MANAGEMENT Infinium FM Advanced General Ledger Payables Ledger Accounts Receivable Fixed Assets Currency Management Global Taxation Project Accounting MATERIALS MANAGEMENT Infinium MM Advanced Purchase Management Inventory Control Order Processing HUMAN RESOURCES/PAYROLL Infinium HR Advanced Payroll Human Resources Flexible Benefits Training Administration Occupational Health PROCESS MANUFACTURING Regulatory Management Formula Management Advanced Planning Manufacturing Control Laboratory Analysis FINANCIAL MANAGEMENT. The Company's Financial Management products provide key financial management and accounting functions for dynamic growing organizations and business units of large companies. Infinium Financial Management provides these applications with icon-based user access to the underlying accounting, statistical and performance data through graphical "drag and drop" operations. The Company's primary Financial Management applications are currently available in English, French, German, Dutch and Spanish versions for multi-national and international businesses. The current list license fees for Financial Management server products range from $8,000 to $300,000 per application. License fees vary based on a number of factors, including hardware configuration, number of users and application options licensed. HUMAN RESOURCES/PAYROLL. The Company's Human Resources/Payroll products are designed to handle the requirements of dynamic growing organizations and business units of large companies. For example one customer produces payroll for more than 160,000 employees weekly using Infinium Software's Human Resources products. Infinium HR Advanced provides these applications with icon-based user access to the underlying accounting, statistical and performance data through graphical "drag and drop" operations. While the Company offers versions of its Human Resources systems for use around the world, the Payroll system is localized and currently available for use in the United States, Canada, United Kingdom, Australia, New Zealand, Spain, Sweden, Indonesia, Malaysia, Philippines, and Thailand. The current list license fees for Human Resources/Payroll server products range from $9,000 to $292,000 per application. License fees vary based on a number of factors, including hardware configuration, number of users and application options licensed. MATERIALS MANAGEMENT. The Company's Materials Management products are targeted mainly to non-manufacturing businesses, such as hospitals, hotels, transportation companies, service organizations and utilities. These products integrate closely with the Financial Management product line, and are often considered an extension of the core financial applications. The current list license fees for Materials 7 9 Management products range from $15,000 to $191,000 per application. License fees vary based on a number of factors, including hardware configuration, number of users and application options licensed. PROCESS MANUFACTURING. The Company's Process Manufacturing products cover a full range of formula-based process manufacturing operations. These products are fully integrated with the Company's Financial Management product line. The current list license fees for Process Manufacturing products range from $15,000 to $191,000 per application. License fees vary based on a number of factors, including hardware configuration, number of users and application options licensed. WINDOWS NT PRODUCT LINE The Company offers enterprise-level business software applications for Microsoft Windows NT servers designed to automate the back-office and workforce management operations of dynamic growing organizations. The Company's products can function as stand-alone applications or as integrated suites of applications and may be interfaced with products from other vendors. The Company currently offers internally developed Microsoft Windows NT business applications that automate the human resource management, payroll and financial management functions, and is currently developing its purchasing and inventory applications for Microsoft Windows NT. The Company's Microsoft Windows NT series of products are designed and built for a Microsoft-standard architecture. Infinium's applications take full advantage of Microsoft Back Office technologies, including Windows NT, ActiveX, and Microsoft Transaction Server. The applications operate with the Microsoft SQL Server database on Windows NT. In addition, the Company's Windows NT applications will operate with the Oracle database on all supported Oracle platforms, including Microsoft Windows NT. The Company's Financials for Windows NT applications are designed to give corporate accounting departments and end users the ability to make better business decisions and give faster responses, improving an organization's ability to react quickly to changes in their business. Infinium's OneBook design provides users with a single unified accounting system that improves the efficiency and quality of information while significantly reducing the time and costs of the monthly accounting closing cycle. All transactions recorded in the detail ledgers (such as accounts payable, accounts receivable, etc.) are immediately posted to the summary records in the general ledger. In this way, the books are always up-to-date. Separate closing and reconciliation steps are significantly removed. Accounting and operating managers can see business activity and results at any time without needing to wait for a monthly closing and reporting cycle. The OneBook design turns accounting systems into a real time financial management system. The Company believes that the OneBook capabilities provide a competitive advantage both to Infinium and to its customers. The Company released its Human Resources for Windows NT applications in 1998. They allow businesses to automate the management of their entire workforce using the OneForce design. The applications have been designed to include features that support many of the emerging trends in human resource management, including numerous sophisticated compensation planning and management features, skill and competency-based tracking and querying, robust performance management and monitoring features for both individuals and teams, extensive use of Internet/intranet capabilities, employee and manager self service and numerous other capabilities. Infinium has optimized the Human Resource solution for professional service organizations whose primary asset is human capital -- the skills and knowledge of their workforce. Infinium's Human Resources for NT allows users to search their talent pool and manage relationships within the entire workforce to strategically deploy the right team to the right project at the right time. Infinium's acquisition of Cort in 1998 added a comprehensive payroll system to augment the Human Resources for Microsoft Windows NT application suite. The Cort Payroll system is designed to easily manage the most complex payroll requirements, including job-based pay, cash and non-cash compensation processing, multi-state taxing issues, retroactive pay, and non-standard pay cycles. The payroll system features user-defined, rules based processing capabilities, allowing users to customize the system for their unique requirements without the need for custom programming or IS department support. 8 10 Infinium believes that there have been dramatic changes in the workforce over the past few years. Use of third party workers at all levels has risen dramatically, yet most Human Resource systems are designed for tracking and managing only employees or potential employees. Likewise, employee compensation and benefit policies have changed and are no longer driven by longevity of employment. Many industries are facing a shortage of skilled workers. The Infinium Human Resources for NT product line was designed to help dynamic growing organizations manage these and many other human resource management issues as we approach the 21st century. INFINIUM FINANCIALS FOR MICROSOFT WINDOWS NT HUMAN RESOURCES FOR MICROSOFT WINDOWS NT Infinium Ledger Infinium Personnel Infinium Payables Infinium Benefits Administration Infinium Receivables Infinium Skill & Competency Management Infinium Job Management Infinium Performance Management Infinium Cash Book Infinium Recruiting Infinium Compensation Management Infinium Payroll
CUSTOMER SUPPORT AND PRODUCT MAINTENANCE The Company believes that providing a high level of support to its customers is a critical requirement for customer satisfaction and the long-term success of the Company. The Company believes that it has established a strong history of responsiveness to customer requirements and a high level of support, which has resulted in a loyal customer base. As of September 30, 1998, the Company had 94 employees in its customer support operations. The Company provides product updates and enhancements and customer support services under an annual maintenance agreement. Initial maintenance fees are based on a percentage of the list price of the licensed software products. The renewal rate for annual maintenance agreements with customers for the Company's products has been in excess of 90% for each of the previous three fiscal years. The Company's primary customer support center is located at the Company's headquarters in Hyannis, Massachusetts. The Company also maintains support operations in Bend, Oregon supporting the NT Payroll customers, and in its United Kingdom and Singapore offices, servicing customers outside North America. First-line support services for customers outside North America and the United Kingdom are typically provided by the Company's independent distributors for those areas. The Company also offers an electronic support capability, called "Infinium Link," which is accessible over the Internet. It allows customers to have 24 hour, 7 day per week access to product release information, product bulletins and updates, and tip and technique information as well as to pursue ordinary customer support dialogues. CONSULTING AND EDUCATION SERVICES Infinium Software's consulting services organization provides fee-based services, including implementation assistance, project management, application extension or customization, integration with existing customer applications and similar services to the Company's customers. The Company also trains and certifies third-party organizations, such as consulting firms and system integrators, to complement the Company's own service operation. The Company has developed an implementation methodology called the ROI Methodology ("Return On Investment") which offers a structure for companies together with Infinium to rapidly implement the Company's solutions. The objective of the methodology is to provide a proven implementation roadmap, that together with the Company's business know how and expertise, facilitates a rapid implementation which accelerates an organization's return on its software investment. The Company believes that it is able to differentiate itself on its level of service, the speed of implementation and the quality of personnel that it provides to customers during the implementation cycle. The Company had 130 employees in its consulting services organization as of September 30, 1998. 9 11 The Company offers a comprehensive series of fee-based training courses to its customers. Courses can be taken at the Company's headquarters in Hyannis, Massachusetts, or at regional training centers in the Atlanta, Boston, Chicago, Los Angeles, Oregon, London and Toronto metropolitan areas. Course offerings can also be delivered at a customer's site. CUSTOMERS The Company's products are used by more than 1,800 customers in a wide range of industries. No single customer accounted for 10% or more of revenue in fiscal years 1996, 1997 or 1998. A representative list of current major customers, segmented by industry concentration, who are currently active on maintenance with the Company and who have generated at least $100,000 in total revenue during the last five years, is shown below: AUTOMOTIVE Discount Auto Parts Mazda Motor of America Porsche Cars North America Rolls-Royce Motor Cars Volvo North America CONSUMER PRODUCTS Nintendo of America NordicTrack Playtex Apparel Timberland Lost Arrow FINANCIAL AND INSURANCE SERVICES Blue Cross and Blue Shield of Maryland Countrywide Credit Industries The FINOVA Group Texas Workers Insurance Compensation Fund Experian Information Systems HEALTH CARE Tenet Healthcare Catholic Healthcare West Landmark Medical Center Optima Health York County Hospital MANUFACTURING Alberta-Pacific Forest Industries Crown Cork & Seal Company General Electric Canada Harley-Davidson Saint Gobain Corporation RESTAURANTS Arby's Baskin Robbins Brinker International McDonalds Red Robin COMMUNICATIONS Hearst Magazines MCA/Universal Studios/MCA Records Newsweek Data Center USA Network Warner Bros. Records DISTRIBUTION AND TRANSPORTATION BOC Distribution Services Burlington Motor Carriers M.S. Carriers Caliber Logistic Systems Maverick Transportation FOOD AND BEVERAGE PROCESSING Blue Diamond Growers Coca-Cola Enterprises Sunkist Growers Sysco Universal Foods HOSPITALITY Circus Circus Enterprises Promus Hotels Harrah's MGM Grand Hotel Mirage Resorts BUSINESS AND PROFESSIONAL SERVICES Wackenhut Corporation Keane Todd AO Corporation Woodbridge Engineering BPI Financial Corporation UTILITIES Northwestern Public Service Company Southern Union Company Florida Public Utilities Co. Buckeye Pipeline Company Pacific Energy 10 12 SALES AND MARKETING The Company offers its products and services through direct sales and business partner channels throughout the world. Regional sales and consulting services offices are located in Atlanta, Boston, Chicago, Los Angeles, Oregon, London, Toronto and Singapore. In addition, the Company has authorized resellers that license Infinium applications directly to customers. The Company also has a telesales operation that markets training and consulting services to the Company's existing customer base. The Company conducts comprehensive marketing programs that include advertising, direct mail, telemarketing, seminars, public relations, trade shows and customer relations. The Company's sales and marketing organizations consisted of 182 employees as of September 30, 1998. The Company believes that its continued growth and profitability will require it to expand its existing domestic and international sales channels. The Company's strategy is to substantially expand its direct sales operations and its network of independent distributors to provide a greater worldwide sales and marketing presence for its products. The Company currently has relationships with distributors, agents, and resellers world-wide. PRODUCT DEVELOPMENT The Company devotes substantial resources to research and development in order to enhance and maintain the competitiveness of its products. The Company's research and development priorities fall into two principal areas: first, the development of versions of the Company's products that operate on Microsoft Windows NT, including development of new features and functions for the existing NT applications, development of new NT applications and integration with third party products running on Windows NT; and second, AS/400 product enhancements, including the development of new product features and functions, the incorporation of Internet/intranet-related technologies, the further internationalization of the Company's product lines and integration with third party complementary products. The Company maintains multiple research and development operations, located in Hyannis, Massachusetts; Lexington, Massachusetts; London, England; Chatham, England; and Paris, France. In addition, the Company uses outsourcing relationships to supplement its internal development resources. For example, a portion of the development activity on the Company's Human Resources for Windows NT product line is currently being outsourced to NIIT in Delhi, India. The Company has also entered into a development relationship with Cambridge Technology Partners to develop new Microsoft Windows NT purchasing and inventory applications. As of September 30, 1998, the Company had 165 employees in its research and development operations, exclusive of contractors and consultants. The Company's research and development spending was approximately $17.3 million, $20.5 million, and $24.2 million for the fiscal years ended September 30, 1996, 1997 and 1998, respectively. STRATEGIC RELATIONSHIPS IBM RELATIONSHIP Infinium Software has maintained a strategic relationship with IBM in a number of key areas, including sales, marketing and research and development. The Company participates in several formal and informal programs with IBM that the Company believes affords it valuable experience with IBM's AS/400 products and insights into IBM's marketing plans. The Company is one of IBM's designated "Premier Business Partners" and has, in recent years, received numerous awards and recognitions from IBM, including IBM's Mark of Quality for its high-quality management practices and standards, the International Rightsizing Leadership Award and the IBM National Business Partner of the Year Award. The Company is a member of IBM's Market Development Program and has received funding and other assistance from IBM for the purposes of jointly marketing the Company's products and IBM AS/400 systems. In 1998, the Company participated in IBM's announcement of its pre-loaded "Infinium Custom Server", which offers customers the ability to purchase an AS/400 server with Infinium Applications preloaded and 11 13 shipped from IBM's manufacturing facility. In addition, in 1998 Infinium earned "Server Proven" status for the Company's NT applications running on IBM's Netfinity NT servers. As a prime provider of AS/400 business solutions, the Company has served as a test site for new IBM AS/400 products, obtaining valuable early experience with these technologies. The Company is a member of IBM's "Partners in Development" program, providing IBM with feedback regarding the design and development of the database and operating system of the AS/400 Advanced Server. MICROSOFT RELATIONSHIP Infinium Software has entered into a relationship with Microsoft Corporation as part of the Company's overall strategy to provide a line of application products for the Windows NT server platform. The relationship includes participation in the Windows ISV Advisory Board, Microsoft Solution Developers Program, Solution Providers Program, the Microsoft Global Summit and other less formal programs. In 1998, the Company participated in the keynote address at Microsoft's Internet World Conference to over 5,000 customers, developers and press. The Company's Human Resources for Windows NT application is currently running in the Microsoft Executive Briefing Center that Microsoft uses to showcase Infinium and Microsoft technologies. SALES AND MARKETING RELATIONSHIPS The Company has entered into arrangements with several third party software vendors to market their products along with the Infinium network centric product lines in order to provide a more comprehensive solution to Infinium Software customers. Those vendors include: FOR AS/400 PRODUCTS: - SHOWCASE CORPORATION, for its Strategy Server, Query and Report Writer products, which provide a network centric, graphical user interface for AS/400 query and report writing - FRX SOFTWARE CORPORATION, a provider of financial report writing, with remote distribution of reports via email or Internet - RIPPE AND KINGSTON SYSTEMS, INC., for its plant and facility maintenance/management and fleet management applications - PREMENOS CORPORATION, for its EDI/400 product line used in conjunction with the Infinium Software Materials Management and Process Manufacturing product suites - SKILLSET CORPORATION, for its Lotus Domino recruiting and applicant management software - MOMENTUM CORPORATION, for its Lotus Domino based automated employee expense reporting software - TIMELINE CORPORATION, a provider of budgeting and financial reporting products - KRONOS CORPORATION, a provider of time and attendance management products FOR WINDOWS NT PRODUCTS: - COGNOS CORPORATION, for its Impromptu query and reporting product and PowerPlay data analysis product - FRX SOFTWARE CORPORATION, a provider of financial report writing, with remote distribution of reports via e-mail or Internet - CONDUIT CORPORATION, for its Internet-based employee self service application for Human Resource Management 12 14 - TIMELINE CORPORATION, a provider of budgeting and financial reporting products - BEST! SOFTWARE, a provider of asset management products COMPETITION 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's primary competitors are presently J.D. Edwards & Company, Lawson Software, PeopleSoft and SAP AG. The Company believes, however, that competition in its industry is undergoing rapid change and that the barriers to competition between market segments that have previously existed are decreasing. For example, SAP AG and PeopleSoft, which are currently major competitors within the UNIX and the Microsoft Windows NT market, have entered the AS/400 market. Due to the relatively low barriers to entry in the software market, the Company expects additional competition from these and other emerging companies as the business application software market continues to develop and expand. Many of the Company's existing and potential competitors are substantially larger than the Company and have significantly greater financial, technical and marketing resources and have established extensive direct and indirect channels of distribution. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than the Company. The Company also expects that competition will increase as a result of software industry consolidation. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. 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, results of operations and financial condition. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressure will not have a material adverse effect on the Company's business, operating results and financial condition. INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES The Company regards certain features of its internal operations, software and documentation as confidential and proprietary, and relies on a combination of contract, copyright, trademark and trade secret laws and other measures to protect its proprietary intellectual property. The Company has no patents, and existing copyright laws afford only limited protection. The Company believes that, because of the rapid rate of technological change in the computer software industry, trade secret and copyright protection are less significant than factors such as the knowledge, ability and experience of the Company's employees, frequent product enhancements and the timeliness and quality of support services. The Company provides its products to customers under non-exclusive, nontransferable licenses. The Company generally licenses its products solely for the customer's internal operations and only on designated computers. In certain circumstances, the Company makes available enterprise-wide licenses. The Company provides source code to its customers for certain of its products and has escrowed its source code with a commercial bank for the benefit of all its customers. The Company's provision of source code to its customers may increase the likelihood of misappropriation or other misuse of the Company's intellectual property. From time to time, the Company licenses software from third parties for use with its products. The Company believes that no such license agreement to which it is presently a party is material and that if any such license agreement were to terminate for any reason, the Company would be able to obtain a license or otherwise acquire other comparable technology or software on terms that would not be materially adverse to the Company. 13 15 EMPLOYEES As of September 30, 1998, the Company had 658 full-time-equivalent employees, including 182 in sales and marketing, 165 in product development, 224 in customer support and field services, and 87 in administration. The Company's success will depend in large part upon its ability to continue to attract and retain qualified employees. None of the Company's employees is represented by a labor union or is subject to a collective bargaining agreement. The Company believes that its relations with its employees are good. ITEM 2. PROPERTIES The Company is headquartered in Hyannis, Massachusetts, where it leases an aggregate of 58,200 square feet of space. Administrative, marketing, product development and customer support operations are located in the Hyannis space. The Company is currently expanding this facility by 13,000 square feet to accommodate growth in these functions. The Company also leases 30,900 square feet of space in Lexington, Massachusetts and 12,000 square feet of space in London, England which are shared for product development, marketing, and field operations (sales and consulting services). The locations in Chatham, England and Paris, France, where the Company leases 6,000, and 1,200 square feet, respectively, are also used for product development operations. In addition, the Company leases an aggregate of 53,500 square feet predominately for use by field operations located in Atlanta, Chicago, Houston, Irvine, Louisville, Toronto, Singapore and South Africa. Office facilities and suites are also being leased for field representatives throughout various locations in North America aggregating 2,000 square feet. The Cort Payroll Unit is located in Bend, Oregon, in which the Company leases 12,300 square feet of space for support, field operations, training, marketing, and administration of the Company's payroll product for Windows NT. The Company believes that its existing facilities are adequate to meet current needs and that suitable additional space will be available as needed to accommodate any further physical expansion of corporate operations and for additional sales and service field offices. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. The Company is not a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on the Company's results of operations or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year ended September 30, 1998 to a vote of security holders of the Company, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item may be found in the section captioned "Stock Information" appearing in the 1998 Annual Report to Stockholders, and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this item may be found in the section captioned "Selected Financial Data" appearing in the 1998 Annual Report to Stockholders, and is incorporated herein by reference. 14 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item may be found in the section captioned " Management's Discussion and Analysis of Financial Condition and Results of Operations " appearing in the 1998 Annual Report to Stockholders, and is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information with respect to this item may be found in the 1998 Annual Report to Stockholders, and is incorporated herein by reference and indexed by reference under Item 14(a)(1) and (2) below. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants on accounting or financial disclosure matters. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item with respect to the directors of the Company is hereby incorporated by reference from the information contained under the heading "Election of Directors" in the Company's definitive proxy statement of the Company's 1998 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year (the "Definitive Proxy Statement"). Certain information concerning directors and executive officers is hereby incorporated by reference to the information contained under the headings "Occupations of Directors and Executive Officers" and "Section 16(a) Beneficial Ownership Compliance Reporting" in the Definitive Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is hereby incorporated by reference to the information contained under the heading "Compensation of Executive Officers" in the Definitive Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is hereby incorporated by reference to the information contained under the heading "Management and Principal Holders of Voting Securities" in the Definitive Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is hereby incorporated by reference to the information contained under the heading "Certain Relationships and Related Transactions" in the Definitive Proxy Statement. 15 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K (A)(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following Consolidated Financial Statements of the Company are included in the Company's 1998 Annual Report to Stockholders and are incorporated herein by reference: Report of independent accountants; Consolidated balance sheet at September 30, 1997 and 1998; Consolidated statement of operations for the years ended September 30, 1996, 1997 and 1998; Consolidated statement of stockholders' equity for the years ended September 30, 1996, 1997 and 1998; Consolidated statement of cash flows for the years ended September 30, 1996, 1997 and 1998; Notes to consolidated financial statements. The Company's 1998 Annual Report to Stockholders is not to be deemed filed as part of this report except for those parts thereof specifically incorporated herein by reference. (A)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES The following Financial Statement Schedules of the Company are filed as part of this Report:
PAGE ---- Schedule I Report of Independent Accountants on Financial Statement Schedule........................................ S-1 Schedule II Valuation and Qualifying Accounts and Reserves.................................................. S-2
Schedules not listed above have been omitted because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or the notes thereto. (A)(3) INDEX TO EXHIBITS See attached Index to Exhibits. (B) REPORTS ON FORM 8-K No reports on Form 8-K have been filed during the last quarter of fiscal 1998. 16 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 23rd day of December 1998. INFINIUM SOFTWARE, INC. By: /s/ DANIEL J. KOSSMANN -------------------------------------- Daniel J. Kossmann Vice President and Chief Financial Officer We the undersigned officers and directors of Infinium Software, Inc., hereby severally constitute and appoint Frederick J. Lizza and Daniel J. Kossmann, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities to do all things in our names and on behalf in such capacities to enable Infinium Software, Inc. to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities Exchange Commission. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROBERT A. PEMBERTON Chairman of the Board and December 23, 1998 - - ------------------------------------------------ Director Robert A. Pemberton /s/ FREDERICK J. LIZZA President, Chief Executive December 23, 1998 - - ------------------------------------------------ Officer and Director Frederick J. Lizza (Principal Executive Officer) /s/ DANIEL J. KOSSMANN Chief Financial Officer, December 23, 1998 - - ------------------------------------------------ (Principal Financial and Daniel J. Kossmann Accounting Officer) /s/ R. STEPHEN CHEHEYL Director December 23, 1998 - - ------------------------------------------------ R. Stephen Cheheyl /s/ MANUEL CORREIA Director December 23, 1998 - - ------------------------------------------------ Manuel Correia /s/ ROLAND D. PAMPEL Director December 23, 1998 - - ------------------------------------------------ Roland D. Pampel /s/ ROBERT P. SCHECHTER Director December 23, 1998 - - ------------------------------------------------ Robert P. Schechter
17 19 SCHEDULE I REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENTS SCHEDULE To the Board of Directors of Infinium Software, Inc.: Our audits of the consolidated financial statements referred to in our report dated October 20, 1998 appearing on page 26 of the 1998 Annual Report to Shareholders of Infinium Software, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Boston, Massachusetts October 20, 1998 F-1 20 SCHEDULE II INFINIUM SOFTWARE, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS) - - --------------------------------------------------------------------------------
COLUMN C COLUMN A COLUMN B CHARGED TO CHARGED TO COLUMN D COLUMN E COLUMN F DESCRIPTION BEGINNING EXPENSE OTHER DEDUCTIONS OTHER ENDING - - -------------------------------------------------------------------------------------------------------------------- FY 1998 Allowance for Doubtful Accounts... $1,569 $977 $-- $(916) $ 20 $1,650 FY 1997 Allowance for Doubtful Accounts... 1,250 397 -- (243) 165 1,569 FY 1996 Allowance for Doubtful Accounts... 1,145 662 -- (557) 1,250
S-1 21 INFINIUM SOFTWARE, INC. INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - - ------- ----------- 3.1 -- Second Restated Articles of Organization of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, Registration No. 33-97866). 3.2 -- Articles of Amendment of the Company (incorporated by reference to Exhibit 3(I) to the Company's Form 10-Q for the quarterly period ended March 31, 1997). 3.3 -- Third Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3(I) to the Company's Form 10-Q for the quarterly period ended March 31, 1997). 4.1 -- Specimen certificate representing the Common Stock (incorporated by reference to Exhibit 4 to the Company's Form 10-Q for the quarterly period ended March 31, 1997) 10.1* -- 1984 Incentive Stock Option Plan, as amended as of August 23, 1988 (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1, Registration No. 33-97866). 10.2* -- 1989 Stock Option Plan, as amended as of October 1, 1994 (incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1, Registration No. 33-97866). 10.3* -- 1995 Stock Plan (incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1, Registration No. 33-97866). 10.4* -- 1995 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on From S-1, Registration No. 33-97866). 10.5* -- 1995 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1, Registration No. 33-97866). 10.6 -- Lease dated March 31, 1995 between the Registrant and Independence Park Associates Realty Trust as of August 1995 (incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1, Registration No. 33-97866). 10.7* -- Form of Executive Compensation Plan (incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-1, Registration No. 33-97866). 10.8 -- IBM Assistance Agreement, as amended as of June 30, 1995, between the Registrant and International Business Machines Corporation (incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, Registration No. 33-97866). 10.9* -- Form of 1995 Stock Plan Option Agreement (incorporated by reference to Exhibit 10.16 to the Registrant's Registration Statement on Form S-1, Registration No. 33-97866). 10.10* -- Register of Amendments, Subsections 3.1 and 7.3.4, 1989 Stock Option Plan (incorporated by reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-1, Registration No. 33-97866). 10.11* -- Register of Amendments, Article 5, 1995 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.18 to the Registrant's Registration Statement on Form S-1, Registration No. 33-97866). 13.1 -- 1998 Annual Report to Stockholders (which shall be deemed filed only with respect to those portions specifically incorporated by reference herein). 21.1 -- Subsidiaries of the Registrant. 23.1 -- Consent of PricewaterhouseCoopers LLP. 24.1 -- Power of Attorney (included on page 17). 27 -- Financial Data Schedule
- - --------------- * Indicates a management contract or any compensatory plan, contract or arrangement required to be filed as an exhibit to Item 14(c). X-1 EX-13 2 ANNUAL REPORT 1 [LOGO] INFINIUM SOFTWARE 1998 ANNUAL REPORT WHAT IS IT ABOUT THESE PEOPLE? 2 [LOGO] INFINIUM SOFTWARE Infinium Software, Inc. is a $114-million company with more than 650 employees, and offices in the US, Canada, the UK, France, and Singapore. Infinium(R) produces innovative market-leading solutions for financial, human resources, and materials management, and process manufacturing. Infinium's software is optimized for organizations that require quick installation, sophisticated, flexible functionality, and ease of use in an affordable solution. One of the first companies to introduce applications for the AS/400, Infinium is leading the way again with sophisticated Windows NT solutions based on the latest Microsoft technology. 3 INFINIUM is a global company of individuals genuinely dedicated to helping today's businesses run more efficiently and creatively by supplying them with business software that does more than expected. Infinium people are passionate about what they do, and our 1,800 customers notice. That's why we enjoy a customer retention rate in excess of 90% and consistently win Midrange Systems Buyers Choice Awards. It's also why we achieved record-setting revenue growth in 1998. We'd like to tell you about our successful year in 1998, put the spotlight on what our customers have to say about us, and let you in on our growth plans for 1999 and beyond. | | I | 4 TO OUR STOCKHOLDERS: Fiscal year 1998 was a remarkable growth and transition year for Infinium Software. We accelerated growth in our IBM(R) AS/400(R) business, especially in consulting and training operations, and added new desktop and Internet capabilities to our AS/400 software using IBM's Lotus(R) Domino(TM) technology. In addition, we launched our flagship human resources application for Microsoft(R) Windows NT(R), an application based on the newest Microsoft technologies, which has often been featured in Microsoft's technical conferences as a model for future NT applications. We also acquired an exciting NT payroll application. Both of these applications help us accelerate the growth of our emerging Windows NT application software business. Due to these and other successes, we enjoyed outstanding financial results and set a host of new financial records. INFINIUM SOFTWARE'S BUSINESS Infinium Software specializes in providing high-quality enterprise financial management, human resources, materials management, and process manufacturing applications and services to growing organizations. Our typical customers are individual companies or divisions of larger organizations in the $25 million to $5 billion revenue range, although we have customers both larger and smaller. Our goal is to deliver applications that provide these customers not only with solutions to their business application requirements but also low cost of ownership. To that end, we target only those computing platforms that offer integrated environments supporting low cost of ownership: IBM AS/400 and Microsoft Windows NT servers. Our applications are designed, developed, and optimized exclusively for these platforms, allowing Infinium to develop a core of service and support expertise particular to those environments. Our belief is that these are, and will remain, the primary platforms of choice for customers to run their packaged application software systems. Infinium Software is committed to helping our customers successfully manage all of their critical business application issues. For example, we are investing considerable time and resources to adapt our financial applications to support the complex requirements for handling multiple currency transactions in the European Monetary Union. We have grown the number of people in our consulting operation by 50% during the fiscal year to address our customers' need for additional help in a labor market where it is increasingly difficult to find and retain technical staff. | | 2 | 5 [PICTURES] INFINIUM FRED LIZZA President and CEO [PHOTO OF FRED LIZZA] "Infinium has demonstrated that it is a world-class organization with products for the future." -- Barry Humby Systems Development Manager, Air Ontario | | 3 | 6 RECORD FINANCIAL PERFORMANCE FOR FISCAL YEAR 1998 Fiscal year 1998 financial results, described in detail in the attached financial statements, reflected another year of accelerated total revenue growth--31% overall compared with 21% revenue growth in fiscal year 1997. While we did meet some unexpected slowness in closing deals in the fourth quarter, for the year, we grew our application software license fees by 37%, versus 23% last year; and we increased the consulting and training services revenue by 50% in FY 1998, compared with 34% growth in FY 1997. The addition of Windows NT financial applications in September 1997 and human resources and payroll applications for Windows NT in June 1998, the expansion of our sales and consulting services organizations, and increased market demand for applications that are Year 2000-compliant all contributed to the Company's FY 1998 revenue growth. On the strength of this growing revenue, we maintained solid operating profitability (excluding acquisition related write-offs) while making substantial investments to enter the NT market--a source of future growth for Infinium. Our balance sheet remains strong, including approximately $46 million in cash, cash equivalents and marketable securities, and no debt other than normal trade payables and accruals. We continue to attract top new technical, sales, and managerial talent to the Company despite an increasingly competitive labor market. We grew to a total market of 658 employees as of September 30, 1998, and increased our productivity--measured by revenue per employee--to $174,000, up from $158,000 in FY 1997. In short, we became stronger, larger, and more efficient during the past year. INFINIUM [PHOTO OF BEATRIX PADRON] "Our account executive was extremely honest, open, and candid while we investigated our options. Her integrity was refreshing, and it helped us work out exactly the kind of system we needed." -- Lissette Lacomba, Controller, Caribbean Restaurants | | 4 | 7 President and CEO [PHOTO] "Thanks to their web specialists, Infinium has an incredibly useful on-line technical resource center called WebLink, which helps us solve 85% of our technical problems without calling customer support. That INFINIUM saves us staff time KEITH BIRR and money." Customer Support -- Scott Bremer, Web Specialist IS Project Manager, Hoag Memorial [PHOTO] Hospital | | 5 | 8 Account Executive [PHOTO] "During the implementation plan, our Infinium consultant was our eyes in the dark. She knew Infinium inside and out, and helped us design what we believe will be the perfect system for our company." INFINIUM -- Kim Lemon, CAROLINE ASHLEE Head of Employee Professional Services Services, Consultant Burmah Castrol Trading Ltd. [PHOTO] | | 6 | 9 President and CEO [PHOTO] CONTINUING GROWTH FOR THE AS/400 BUSINESS The AS/400 continues to sell well in the market, retaining and building a loyal customer following. We believe its Customer Support continued popularity is due to the AS/400's extremely high Web Specialist degree of reliability, its overall simplicity--allowing customers to implement enterprise-scale applications rapidly [PHOTO] with fewer resources than other platforms--and its consistent low cost of ownership. Customers needing to implement Year 2000-compliant applications in a short time frame view the AS/400 as a safe, dependable alternative to accomplish that goal. All of these factors contributed to another successful year for our AS/400 software business. We added a major new program to our AS/400 product development activities during the year--new desktop and Internet capabilities using IBM's Lotus Domino technology. A large portion of our new AS/400 development activity is now focused on adding new capabilities to the Infinium AS/400-based applications that allow our customers to use the Internet to complete transactions with their customers and suppliers, route transaction documents through their workforce, and resolve issues electronically. Several of these capabilities were previewed to over 1,200 customers at our Infinium World User Conference in June 1998 and received an enthusiastic response. Most of these "e-Business" features are now scheduled for availability in late calendar 1998 or early 1999. Late in the fiscal year, we acquired a new project accounting system, extending the depth and breadth of our AS/400 suite of applications. This system is being integrated into the suite for FY 1999. The combination of rapid implementation to address Year 2000 requirements, new e-Business functionality using Lotus Domino, and our new project accounting system give us a positive outlook for our AS/400 business in FY 1999. | | 7 | 10 President and CEO [PHOTO] ESTABLISHING AND GROWING THE WINDOWS NT BUSINESS In late fiscal year 1996, we made a decision to focus substantial product development efforts on a new human resource management product line designed exclusively for Microsoft Windows NT servers. We delivered on that commitment during fiscal year 1998, when we shipped the first release of Infinium Human Resources for Windows NT in June 1998. This HR system is based on the latest Microsoft technologies. In fact, Microsoft has demonstrated it at technical conferences to show what future NT-based applications can be. The Infinium Human Resources system for Windows NT provides customers with an innovative approach to managing their workforce by focusing on skills and competencies rather than the particular title or job level of an individual--a capability especially useful to service-oriented companies whose workforce is their most critical asset. Customer Support Web Specialist Human Resources for Windows NT is now complemented by the NT payroll system we added in June 1998 through [PHOTO] the acquisition of Cort Directions, Inc. We welcome to the Infinium family the more than 300 customers who use the Cort payroll system. This NT-based payroll system offers unbelievable power and flexibility without sacrificing reliability. We believe our Windows NT-based suite of workforce management products will become known as the best in the industry and will be the core of a growing offering of innovative applications for service industry customers. In early 1998, Infinium entered into a relationship with Cambridge Technology Partners to jointly develop additional software applications for our Windows NT-based product line. Purchasing and inventory management applications are currently in development, adding further value to our Infinium financial applications for Windows NT. We increased our investment in building a dedicated sales force for the Windows NT-based product line, and we started to see positive results from that move in the second half of the fiscal year when revenue from these products grew to 21% of our total fourth quarter software license fees. During FY 1999, we plan to grow both our sales and services operation as we look to increase our NT market share. | | 8 | 11 Account Executive [PHOTO] INFINIUM JEFF ERNST Product Strategist [PHOTO] "Infinium's product strategists displayed an extensive knowledge of the NT platform, which gave us confidence in their ability to produce quality applications for this new technology." -- Dave Fraedrich, Director of Application Support, Prison Fellowship Ministries Professional Services Consultant [PHOTO] | | 9 | 12 INFINIUM TEAM [GROUP PHOTO] "We chose Infinium for a variety of reasons, but the main reason was the people we met and their high degree of professionalism. Essentially, we bought into Infinium's people." - - -- Bob Gilbert, Manager of Information Services, Crestbrook Forest Industries Ltd. LOOKING AHEAD TO FISCAL YEAR 1999 Infinium Software continues its growth program as we transition into a larger, multi-platform, global application software vendor. We are entering the new fiscal year with a clear strategy, a capable, motivated management team and workforce, and a healthy financial condition. We have a sizable AS/400 business, a rapidly growing Windows NT business, and a large and growing services operation. We now have more than 1,800 customers, and we continue to grow our customer base. We have new products in development and have launched a major new marketing campaign to enhance the awareness and visibility of Infinium in the market. All of us at Infinium Software remain committed to deliver on our mission: To provide the best, most cost-effective business software and services to growing companies around the world. /s/ Frederick J. Lizza Frederick J. Lizza President and CEO | | 10 | 13 FINANCIALS Financial Highlights 12 Selected Financial Data 14 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Report of Independent Accountants 26 Consolidated Balance Sheet 27 Consolidated Statement of Operations 28 Consolidated Statement of Stockholders' Equity 29 Consolidated Statement of Cash Flows 30 Notes to Consolidated Financial Statements 31 Stock Information 41 Corporate Information 42 | | II | 14 INFINIUM SOFTWARE, INC. FINANCIAL HIGHLIGHTS Infinium's fiscal year, which ended on September 30, 1998, was highlighted by outstanding financial performance. It included accelerated growth, record revenue, record profits (before acquisition related write-offs), and increased financial strength. ANNUAL REVENUE GROWTH RATES Infinium's fiscal year 1998 revenue grew 31% vs. a growth rate of 21% in FY 1997. This is the highest total revenue growth rate the Company has enjoyed since FY 1992. Strong demand for the Company's proven AS/400 products, the early customer acceptance of Infinium's new products designed for Windows NT, coupled with an increased demand for the Company's award winning services and support were the primary growth drivers. In FY 1998, software license fees grew 37%, consulting services revenue grew 50%, and maintenance revenue grew 14%. [CHART] TOTAL REVENUE GROWTH RATES 35% 30% 25% 20% 15% 10% 5% 0% FY '94 FY '95 FY '96 FY '97 FY '98 A BALANCED BUSINESS MODEL Infinium's mix of revenue is well balanced. Approximately one third of Infinium's revenue is derived from the licensing of the Company's software products, one third from the Company's consulting and training services, and one third from maintenance and support services. The balance between Infinium's revenue sources and our large loyal customer base provide Infinium with financial stability and resilience. With the addition of our new products designed and optimized for Windows NT servers, we have diversified our product line. We now offer competitive application software products for customers using either Microsoft NT or IBM AS/400 servers. Of the $40.7 million in software license fees generated in FY 1998, $35.2 million came from the licensing of Infinium's products designed and optimized for IBM's AS/400 line of computers, a 20% increase over the prior year. License fees from our new Windows NT-based products totaled $5.5 million in FY 1998, up from only $0.5 million in FY 1997. [CHART} REVENUE ($ millions) 120 100 80 60 40 20 0 FY '94 FY '95 FY '96 FY '97 FY '98 - Software License Fees - Consulting and Training Services - Maintenance | | 12 | 15 INFINIUM SOFTWARE, INC. EARNINGS Net Income for FY 1997 and FY 1998 has been dramatically impacted by our aggressive strategy to grow our application software business on Microsoft's Windows NT servers. In FY 1997, Infinium acquired a Windows NT-based Financial Management application software company and invested heavily to design and build a Windows NT-based Human Resources Management System. We also increased marketing, sales, services, and support costs to begin selling and supporting these new NTproducts. Acquisition related write-offs totaled $6.8 million ($4.4 million after tax) and NT product related costs totaled $11.2 million ($7.2 million after tax). The net result was a dilution of the Company's earnings from the prior year. In FY 1998, we acquired a Windows NT-based payroll application software company and also acquired technology which is being used to build a Windows NT-based Purchasing and Inventory system. These two transactions resulted in $11.2 million in write-offs ($7.6 million after tax). Infinium continued to ramp up sales, services, and support costs in FY 1998 to sell and support its new Windows NT-based products. These investments in our NT business generated incremental NT revenue, which helped us grow FY 1998 net income (before acquisition related write-offs) by 63% to $7.8 million ($0.57 per share). [CHART] NET INCOME (EXCLUDING ACQUISITION RELATED WRITE-OFFS) ($ millions) 8 7 6 5 4 3 2 1 0 FY '94 FY '95 FY '96 FY '97 FY '98 FINANCIAL STRENGTH Despite aggressive investments in FY 1998, Infinium improved its financial strength. Total assets grew to over $106 million, and the Company remains free of debt other than normal trade payables and accruals. Cash and marketable securities as of September 30, 1998 totaled $46.3 million. [CHART] TOTAL ASSETS ($ millions) 120 100 80 60 40 20 0 FY '94 FY '95 FY '96 FY '97 FY '98 Our financial results for fiscal year 1998 were outstanding. We not only posted strong results but also invested heavily in the Company's future. With our balanced business model, solid AS/400 business, emerging NT business, the momentum we have built up, and our strong balance sheet, we are well positioned to continue to thrive. | | 13 | 16 INFINIUM SOFTWARE, INC. SELECTED FINANCIAL DATA CONSOLIDATED STATEMENT OF OPERATIONS DATA (in thousands, except per share data)
Fiscal Year Ended August 31,(1) Fiscal Year Ended September 30,(1) -------------------------------- ---------------------------------------- 1994 1995 1996 1997 1998 - - ---------------------------------------------------------------------------------------------------------------------- REVENUE: Software license fees $20,163 $21,080 $24,115 $29,781 $ 40,704 Services revenue 36,637 42,083 47,693 57,220 73,676 ---------------------------------------------------- TOTAL REVENUE 56,800 63,163 71,808 87,001 114,380 - - ---------------------------------------------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES: Cost of software license fees 2,845 3,829 3,823 5,070 7,210 Cost of services 13,396 15,333 16,562 22,400 32,330 Research and development 12,980 12,725 13,775 16,614 19,071 Sales and marketing 20,008 19,651 23,822 30,449 36,632 General and administrative 5,330 6,245 6,616 7,336 9,351 Write-off of in-process research and development acquired(2) -- -- -- 6,846 11,196 ---------------------------------------------------- TOTAL OPERATING COSTS AND EXPENSES 54,559 57,783 64,598 88,715 115,790 ---------------------------------------------------- INCOME (LOSS) FROM OPERATIONS 2,241 5,380 7,210 (1,714) (1,410) Other income (expense), net (83) 293 1,526 1,923 1,744 ---------------------------------------------------- INCOME BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,158 5,673 8,736 209 334 Provision for (benefit from) income taxes 916 1,989 3,146 (148) 106 ---------------------------------------------------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 1,242 3,684 5,590 357 228 Cumulative effect of change in accounting principle 260 -- -- -- -- ---------------------------------------------------- NET INCOME $ 1,502 $ 3,684 $ 5,590 $ 357 $ 228 - - ---------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE: Basic $ 0.15 $ 0.45 $ 0.56 $ 0.03 $ 0.02 Weighted average shares outstanding-basic 9,870 8,252 10,051 11,777 12,399 Diluted $ 0.15 $ 0.42 $ 0.49 $ 0.03 $ 0.02 Weighted average shares outstanding-diluted 10,227 8,812 11,378 12,539 13,808 - - ----------------------------------------------------------------------------------------------------------------------
| | 14 | 17
INFINIUM SOFTWARE, INC. CONSOLIDATED BALANCE SHEET DATA (in thousands) August 31,(1) September 30,(1) -------------- --------------------------------------- 1994 1995 1996 1997 1998 - - ------------------------------------------------------------------------------------------------------------ Cash, cash equivalents, and marketable securities $ 15,222 $16,183 $43,337 $48,319 $ 46,293 - - ------------------------------------------------------------------------------------------------------------ Total assets 43,495 44,004 75,704 91,307 106,415 - - ------------------------------------------------------------------------------------------------------------ Deferred revenue 22,531 25,017 24,853 31,990 37,577 - - ------------------------------------------------------------------------------------------------------------ Total liabilities 35,635 39,172 40,054 49,368 63,453 - - ------------------------------------------------------------------------------------------------------------ Mandatorily redeemable common stock (3) 7,752 -- -- -- -- - - ------------------------------------------------------------------------------------------------------------ Treasury stock at cost -- -- -- -- (1,293) - - ------------------------------------------------------------------------------------------------------------ Stockholders' equity $ 108 $ 4,832 $35,650 $41,939 $ 42,962 - - ------------------------------------------------------------------------------------------------------------
(1) The Company changed its fiscal year end to September 30, effective with the fiscal year ended September 30, 1995. (2) In connection with the acquisition of Time Open Systems Ltd. in 1997 and Cort Directions, Inc. in 1998, $6,846 and $7,796, respectively, allocated to in-process research and development had not reached technological feasibility and was charged to operations at the acquisition date. Also in 1998, the Company acquired software code developed by a third party for $3,400 and determined that it had not reached technological feasibility. Accordingly, $3, 400 was written off at the acquisition date, aggregating a write-off of $11,196 of in-process research and development acquired in 1998. (See Note 6 to consolidated financial statements.) (3) The Company repurchased 1,632 shares of common stock from venture capital investors in September 1994. See Note 8 to consolidated financial statements. | | 15 | 18 INFINIUM SOFTWARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All statements contained in this annual report that are not historical facts, including but not limited to, statements regarding anticipated future revenue and expense levels and capital requirements, future product development and marketing plans, the ability to generate cash from operations, and the ability to attract and retain employees, are based on current expectations. These statements are forward looking in nature, involve a number of risks and uncertainties, as more fully described under "Factors Affecting Future Performance," and are made pursuant to the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those described in the forward-looking statements. OVERVIEW Founded in 1981, Infinium Software develops, markets, and supports enterprise-level business software applications for growing organizations (typically companies with revenue of $25 million to $5 billion). The Company has two primary product lines. One product line, designed for AS/400 servers, automates the financial management, human resource management, and materials management functions of organizations in a broad range of industries worldwide. The Company also offers a specialized AS/400 manufacturing system designed to manage process-manufacturing operations. The Company's second product line is designed for use by customers using Microsoft Windows NT servers. These products also automate the financial management and human resource management operations of customer organizations. Additional NT-based applications are under development. In January 1997, the Company acquired all the outstanding capital stock of Time Open Systems Ltd. (Time), a UK-based privately held software concern which developed and marketed a suite of client/server financial management application software products. Since the acquisition of Time, the Company continues to invest in the development and marketing of these products for Microsoft NT servers. The Company released Infinium Financials for Microsoft Windows NT servers for general availability in September 1997. In late fiscal year 1996, Infinium began developing a new workforce management product line. In the third quarter of fiscal 1998, the Company announced the availability of these new products called Infinium Human Resources for Microsoft Windows NT. In addition, in June 1998, the Company acquired Cort Directions, Inc. (Cort), which primarily develops and markets a payroll application for Microsoft Windows NT servers. Together these products comprise Infinium's suite of human resource management products for Microsoft Windows NT servers. The Company continues to invest in these products. The Company is developing purchasing and inventory applications that will complement existing financial and human resource management applications for the Microsoft Windows NT environment. The Company's revenue is derived from two sources: software license fees and service revenue. Software license fees include revenue from non-cancelable software license agreements entered into between the Company and its customers with respect to both the Company's products and third party products marketed and/or distributed by the Company. Software license fee revenue is recognized in accordance with Statement of Position 97-2, Software Revenue Recognition, which requires evidence of an arrangement, shipment of the software, that fees be fixed and determinable, and that collection be considered probable. The Company's service revenue comprises software maintenance fees and fees for consulting and training 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, which is not essential to the functionality of the software products, is recognized as the services are performed. | | 16 | 19 INFINIUM SOFTWARE, INC. RESULTS OF OPERATIONS Included in operating costs and expenses are charges of $6.8 million for fiscal year 1997 and $11.2 million for fiscal year 1998, as a result of the write-off of in-process research and development acquired in connection with acquisitions. See Note 6 to the consolidated financial statements. On a pro forma basis, exclusive of the write-offs of in-process research and development acquired, discussed above, results of operations would be comparatively reported as follows (in thousands except per share and percentage data):
Fiscal Year Ended % of Total % of $ September 30, Revenue Increase -------------------------------------------- 1997 1998 1997 1998 97-98 - - -------------------------------------------------------------------------- Total revenue $87,001 $114,380 100% 100% 31% Operating costs and expenses 81,869 104,594 94 91 28 ----------------------------------- Income from operations 5,132 9,786 69 9 1 Other income, net 1,923 1,744 2 1 (9) ----------------------------------- Income before provision for income taxes 7,055 11,530 8 10 63 Provision for income taxes 2,247 3,689 3 3 64 - - ----------------------------------------------------------------- NET INCOME $ 4,808 $ 7,841 5% 7% 63% ----------------------------------- Earnings per share: Basic $ 0.41 $ 0.63 54% -------------------- Weighted shares outstanding - basic 11,777 12,399 -------------------- Diluted $ 0.38 $ 0.57 50% -------------------- Weighted shares outstanding - diluted 12,539 13,808 - - --------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1998, COMPARED TO YEAR ENDED SEPTEMBER 30, 1997 REVENUE Total revenue increased 31%, from $87.0 million for the year ended September 30, 1997, to $114.4 million for the year ended September 30, 1998. The increase was primarily due to greater market acceptance of the Company's products including the addition of revenue from Windows NT products. This growth is further attributed to the increased demand for the Company's application software products, which were designed to be Year 2000 compliant. Generally, in addition to software license fees attained with each license agreement entered into, consulting services and maintenance commitments are typically also contracted, resulting in an increase to service revenue as these contracted services are delivered. Revenue in North America (United States and Canada) increased 37%, from $77.1 million for the year ended September 30, 1997, to $106.0 million for the year ended September 30, 1998. This is representative of 89% of total revenue for fiscal 1997 and 93% for fiscal 1998. EMEA (Europe, Middle East and Africa) revenue decreased from $8.2 million for the year ended September 30, 1997, to $7.0 million for the year ended September 30, 1998, which was 9% and 6% of total revenue for fiscal 1997 and 1998, respectively. Other international regions, including Asia Pacific and Latin America, contributed 2% of total revenue for fiscal 1997 compared to 1% for fiscal 1998. Software license fee revenue increased 37%, from $29.8 million for the year ended September 30, 1997, to $40.7 million for the year ended September 30, 1998. For fiscal year 1998, software license fee revenue derived from Windows NT products was $5.5 million compared to $0.5 million in fiscal year 1997. All other software license fee revenue was predominantly derived from sale of applications for IBM AS/400 servers. Service revenue increased 29%, from $57.2 million for the year ended September 30, 1997, to $73.7 million for the year ended September 30, 1998. The increase was primarily attributable to an increase in the installed base of customers resulting in an increase in both maintenance and consulting services revenue. Also contributing to the increase in consulting services revenue was an increase in larger consulting service engagements as well as expanded service offerings including increased project management and programming services. The table below summarizes the composition and growth in the Company's service revenue.
Fiscal Year Ended % of $ September 30, Increase ----------------------------- (in thousands) 1997 1998 97-98 - - ------------------------------------------------------------- Software maintenance revenue $33,886 $38,716 14% Consulting services revenue 23,334 34,960 50 - - -------------------------------------------------- TOTAL SERVICE REVENUE $57,220 $73,676 29% - - -------------------------------------------------------------
| | 17 | 20 INFINIUM SOFTWARE, INC. COST OF SOFTWARE LICENSE FEES Cost of software license fees consists primarily of amortization expense related to capitalized software development costs, royalties on the sale of third-party products, and the cost of product media, manuals, and shipping. Cost of software license fees increased 42%, from $5.1 million for the year ended September 30, 1997, to $7.2 million for the year ended September 30, 1998. Cost of software license fees as a percentage of software license fee revenue increased from 17% for the year ended September 30, 1997, to 18% for the year ended September 30, 1998. The increase in the dollar amount of such costs and as a percentage of software license fees resulted primarily from an increase in third-party royalty expense. COST OF SERVICES Cost of services consists of costs to provide support, implementation, consulting, and training services to licensees. Cost of services increased 44%, from $22.4 million for the year ended September 30, 1997, to $32.3 million for the year ended September 30, 1998. Cost of services as a percentage of service revenue increased from 39% for the year ended September 30, 1997, to 44% for the year ended September 30, 1998. The increase in the cost of services as a percentage of service revenue is attributed to a relatively greater increase in the amount of consulting service revenue versus maintenance revenue which carries a lower gross margin than maintenance revenue. The increase in cost of services resulted primarily from increased staffing and contracting in the consulting services organization in response to greater demand for consulting services as a result of the increase in the installed base of customers. RESEARCH AND DEVELOPMENT Research and development expense consists primarily of engineering personnel costs, contractor costs, and related facilities, computers and communications overhead, reduced by capitalized internal software development costs and research funding. The foll owing table sets forth for the periods indicated the relationship between the Company's research and development expense as recorded on its consolidated statements of income and its total research and development spending.
Fiscal Year Ended September 30, ------------------------------- (in thousands) 1997 1998 - - -------------------------------------------------------------------------------- Research and development expense $16,614 $19,071 Capitalized internal software development costs 3,594 4,698 Funded research 255 430 - - -------------------------------------------------------------------------------- RESEARCH AND DEVELOPMENT SPENDING $20,463 $24,199 - - --------------------------------------------------------------------------------
Research and development expense increased 15%, from $16.6 million for the year ended September 30, 1997, to $19.1 million for the year ended September 30, 1998. Research and development expense as a percentage of total revenue was 19% for the year ended September 30, 1997, and 17% for the year ended September 30, 1998. The Company capitalized $3.6 million of software development costs for the year ended September 30, 1997, and $4.7 million for the year ended September 30, 1998. Additionally, research and development spending increased 18%, from $20.5 million for the year ended September 30, 1997, to $24.2 million for the year ended September 30, 1998. The Company continues to make significant investments in research and development. The Company believes that this significant level of research and development spending is critical to building long-term product and technology advantages in the market. SALES AND MARKETING Sales and marketing expense consists primarily of salaries, commissions, travel, promotional expenses, and facilities, computers, and communications overhead costs. Sales and marketing expense increased 20%, from $30.4 million for the year ended September 30, 1997, to $36.6 million for the year ended September 30, 1998. Sales and marketing expense as a percentage of total revenue decreased from 35% for the year ended September 30, 1997, to 32% for the year ended September 30, 1998. The increase in sales and marketing expense was attributable to an increase in staffing of the direct sales operation as well as an increase in commission expense due to increased software license fees. In connection with the roll-out of the Microsoft Windows NT product lines, additional direct sales personnel were added during fiscal 1998, and the Company is continuing to add additional sales personnel to market both its AS/400 and NT products. The Company is also expanding its indirect distribution channels, both domestically and internationally, with an emphasis on agent and distributor channel partnering. Accordingly, sales and marketing expense is expected to continue to increase in the future. Sales and marketing expense decreased as a percentage of total revenue as the services component of total revenue grew at a greater rate than the software license fee component. From a sales and marketing expense perspective, services revenue carries a lower cost of origination than that of software license fees. | | 18 | 21 INFINIUM SOFTWARE, INC. GENERAL AND ADMINISTRATIVE General and administrative expense consists primarily of compensation of executive and administrative personnel, associated facilities, computers, and communications overhead, provision for doubtful accounts, amortization of intangible assets, insurance, and outside professional fees. General and administrative expense increased 27%, from $7.3 million for the year ended September 30, 1997, to $9.4 million for the year ended September 30, 1998. General and administrative expense remained consistent as a percentage of total revenue at 8% for both years ended September 30, 1997 and 1998. The increase in general and administrative expense was attributed to an increase in the provision for doubtful accounts, incremental costs associated with the acquisition of Cort, including the amortization of intangible assets, and an increase in overhead commensurate with the Company's growth. WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT ACQUIRED As discussed in Note 6 to the consolidated financial statements, the Company recorded a charge to operations of $6.8 million during the year ended September 30, 1997, and $11.2 million during the year ended September 30, 1998, representing purchased in-process research and development. In fiscal year 1997, the company acquired Time Open Systems Ltd., whereby the Company immediately expensed $6.8 million of in-process research and development that had not yet reached technological feasibility and had no alternative future use. This amount ascribed to in-process research and development was determined by an independent appraiser. The value was determined by estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate includes a factor that takes into account the uncertainty surrounding the successful development of the purchased in-process technology. If these projects are not successfully developed, future revenue and profitability of the Company may be adversely affected. In fiscal year 1998, the company acquired Cort Directions, Inc. Upon consummation of the Cort acquisition, the Company expensed $7.8 million of in-process research and development that had not yet reached technological feasibility and had no alternative future use as determined by an independent appraiser. The value was determined by estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate includes a factor that takes into account the uncertainty surrounding the successful development of the purchased in-process technology. If these projects are not successfully developed, future revenue and profitability of the Company may be adversely affected. The resulting net cash flows from the aforementioned projects are based on management's estimates of revenue, cost of sales, research and development costs, sales and marketing costs, general and administrative costs, and income taxes from such projects. If these projects are not successfully developed, the revenue and profitability of the Company may be adversely affected in future periods. Additionally, the value of goodwill and other intangible assets acquired may become impaired. Also in fiscal year 1998, the Company acquired software code that will support and enable operation of transaction-based functionality specific to Microsoft NT server-based applications (the research and development) for $3.4 million. The research and development as received had not met technological feasibility as defined by Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Accordingly, the acquisition of the research and development for $3.4 million was written off upon delivery. OTHER INCOME, NET Other income, net consists of interest income, interest expense, and foreign exchange loss. Other income, net decreased 9%, from $1.9 million for the year ended September 30, 1997, to $1.7 million for the year ended September 30, 1998. The decrease was primarily attributed to lower interest income earned on invested funds as a result of lower rates of return in fiscal 1998 compared to fiscal 1997. PROVISION (BENEFIT) FOR INCOME TAXES The provision (benefit) for federal, state, and foreign income taxes was ($148,000) and $106,000 for the years ended September 30, 1997, and 1998, respectively. The tax benefit realized during fiscal 1997 was attributed to the charge to operations of $6.8 million for the write-off of in-process research and development acquired, which, when combined with the benefit of research and development credits, resulted in an overall tax benefit. The effective tax rate was 32% for the year ended September 30, 1998. See Note 8 to the consolidated financial statements. | | 19 | 22 INFINIUM SOFTWARE, INC. YEAR ENDED SEPTEMBER 30, 1997, COMPARED TO YEAR ENDED SEPTEMBER 30, 1996 REVENUE Total revenue increased 21%, from $71.8 million for the year ended September 30, 1996, to $87.0 million for the year ended September 30, 1997. Revenue in North America (United States and Canada) increased 20%, from $64.2 million for the year ended September 30, 1996, to $77.1 million for the year ended September 30, 1997. This is representative of 89% of total revenue for fiscal 1996 and 88.6% for fiscal 1997. EMEA (Europe, Middle East, and Africa) revenue grew 8%, from $7.6 million for the year ended September 30, 1996, to $8.2 million for the year ended September 30, 1997, predominantly due to greater market penetration within the region. Other international regions, including Asia Pacific and Latin America, contributed 3% of total revenue for fiscal 1996 compared to 2% for fiscal 1997. Software license fee revenue increased 24%, from $24.1 million for the year ended September 30, 1996, to $29.8 million for the year ended September 30, 1997. The growth was due primarily to continued acceptance of the Company's products. For fiscal 1997, software license fee revenue derived from Windows NT products was $0.5 million. All other software license fee revenue was derived from sale of applications for IBM AS/400 servers. Service revenue increased 20%, from $47.7 million for the year ended September 30, 1996, to $57.2 million for the year ended September 30, 1997. The increase was primarily attributable to an increase in the installed base of customers resulting in an increase in both maintenance and consulting services revenue. The table below summarizes the composition and growth of the Company's service revenue.
Fiscal Year Ended September 30, ------------------------------- (in thousands) 1996 1997 - - ---------------------------------------------------------------- Software maintenance revenue $30,300 $33,886 Consulting services revenue 17,393 23,334 - - ---------------------------------------------------------------- TOTAL SERVICE REVENUE $47,693 $57,220 - - ----------------------------------------------------------------
COST OF SOFTWARE LICENSE FEES Cost of software license fees increased 33%, from $3.8 million for the year ended September 30, 1996, to $5.1 million for the year ended September 30, 1997. Cost of software license fees as a percentage of software license fee revenue increased from 16% for the year ended September 30, 1996, to 17% for the year ended September 30, 1997. The increase in cost of software license fees resulted primarily from an increase in third-party royalty expense and an increase in amortization of capitalized software development costs. The increase in the cost of software license fees as a percentage of software license fee revenue was primarily due to an increase in third-party royalty expense offset in part by a decrease in amortization of capitalized software development costs. COST OF SERVICES Cost of services increased 35%, from $16.6 million for the year ended September 30, 1996, to $22.4 million for the year ended September 30, 1997. Cost of services as a percentage of service revenue increased from 35% for the year ended September 30, 1996, to 39% for the year ended September 30, 1997. The increase in the cost of services as a percentage of service revenue is attributed to a relatively greater increase in the amount of consulting services versus maintenance which carries a lower gross margin than maintenance revenue. The increase in cost of services resulted primarily from increased staffing in the consulting and support organizations in response to increased demand for consulting services, a continued growth in the customer base and an increase in payments to third-party contractors. RESEARCH AND DEVELOPMENT Research and development expense increased 21%, from $13.8 million for the year ended September 30, 1996, to $16.6 million for the year ended September 30, 1997. Research and development expense as a percentage of total revenue was 19% for the years ended September 30, 1996 and 1997. The Company capitalized $3.5 million of software development costs for the year ended September 30, 1996, and $3.6 million for the year ended September 30, 1997. Additionally, research and development spending increased 18%, from $17.3 million for the year ended September 30, 1996, to $20.5 million for the year ended September 30, 1997. The following table sets forth for the periods indicated the relationship between the Company's research and development expenses as recorded on its consolidated statements of income and its total research and development spending.
Fiscal Year Ended September 30, ------------------------------- (in thousands) 1996 1997 - - -------------------------------------------------------------------------------- Research and development expense $13,775 $16,614 Capitalized internal software development costs 3,544 3,594 Funded research -- 255 - - -------------------------------------------------------------------------------- RESEARCH AND DEVELOPMENT SPENDING $17,319 $20,463 - - --------------------------------------------------------------------------------
| | 20 | 23 INFINIUM SOFTWARE, INC. SALES AND MARKETING Sales and marketing expense increased 28%, from $23.8 million for the year ended September 30, 1996, to $30.4 million for the year ended September 30, 1997. Sales and marketing expense as a percentage of total revenue increased from 33% for the year ended September 30, 1996, to 35% for the year ended September 30, 1997. The increase in dollar amount as well as the percentage of total revenue was attributable to an increase in staffing as well as an increase in commission expense due to increased software license fees. In connection with the roll-out of the Microsoft Windows NT product lines, additional direct sales personnel were added during fiscal 1997 and the Company incurred various incremental promotional costs. GENERAL AND ADMINISTRATIVE General and administrative expense increased 11%, from $6.6 million for the year ended September 30, 1996, to $7.3 million for the year ended September 30, 1997. General and administrative expenses as a percentage of total revenue decreased from 9% for the year ended September 30, 1996, to 8% for the year ended September 30, 1997. The increase in dollar amount of general and administrative expense was primarily attributed to incremental costs associated with the acquisition of Time including the amortization of intangible assets. WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT ACQUIRED As discussed in Note 6 to the consolidated financial statements, the Company recorded a charge to operations of $6.8 million during the year ended September 30, 1997, representing purchased in-process research and development. In fiscal year 1997, the company acquired Time Open Systems Ltd., whereby the Company immediately expensed $6.8 million of in-process research and development that had not yet reached technological feasibility and had no alternative future use. This amount ascribed to in-process research and development was determined by an independent appraiser. The value was determined by estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate includes a factor that takes into account the uncertainty surrounding the successful development of the purchased in-process technology. If these projects are not successfully developed, future revenue and profitability of the Company may be adversely affected. The resulting net cash flows from the aforementioned project are based on management's estimates of revenue, cost of sales, research and development costs, sales and marketing costs, general and administrative costs, and income taxes from such projects. If these projects are not successfully developed, the revenue and profitability of the Company may be adversely affected in future periods. Additionally, the value of goodwill and other intangible assets acquired may become impaired. OTHER INCOME, NET Other income, net consists of interest income, interest expense, and foreign exchange loss. Other income, net increased 26%, from $1.5 million for the year ended September 30, 1996, to $1.9 million for the year ended September 30, 1997. The increase is primarily attributed to interest income earned from invested funds attained in connection with the Company's public stock offerings during fiscal 1996, which were available to earn income throughout the full year during fiscal 1997. PROVISION (BENEFIT) FOR INCOME TAXES The provision (benefit) for federal, state, and foreign income taxes was $3.1 million and ($148,000) for the years ended September 30, 1996, and 1997, respectively. The effective tax rate was 36% for the year ended September 30, 1996. The tax benefit realized during fiscal 1997 was attributed to the charge to operations of $6.8 million for the write-off of in-process research and development acquired, which, when combined with the benefit of research and development credits, resulted in an overall tax benefit. See Note 8 to the consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1998, the Company had cash, cash equivalents, and marketable securities of $46.3 million resulting in a net use of cash, cash equivalents, and marketable securities of $2.0 million during fiscal year 1998. Operating and financing activities provided $17.4 million, while $5.5 million was used to fund capitalized software, $3.5 million for purchases of property and equipment, and $0.9 million invested in unaffiliated entities generating a net $7.5 million inflow of cash, cash equivalents, and marketable securites before the $9.4 million used in connection with acquisitions and effect of foreign exchange. Included in financing activities was the use of $2.9 million to repurchase common shares under a stock repurchase program which allows up to $6.0 million to be repurchased. | | 21 | 24 INFINIUM SOFTWARE, INC. Days sales outstanding ("DSO") increased to 73 days at September 30, 1998, compared to 64 days at September 30, 1997. The Company calculates DSO by dividing the ending accounts receivable balance, net of allowance for doubtful accounts, by the annualized revenue for the most recent quarter, multiplied by 360. The Company believes that this method of deriving DSO is indicative of actual results due to the cyclical nature of software license and service transactions, which are often consummated nearer the end of the quarter, as well as the fluctuation of transactions from one quarter to the next. The increase in DSO from fiscal 1997 to fiscal 1998 was primarily attributed to the increase in accounts receivable at the balance sheet date related to the growing services transactions in which the revenue is substantially recognized after this period. The Company's accounts receivable balances net of the allowance for doubtful accounts increased 45%, from $18.9 million at September 30, 1997, to $27.4 million at September 30, 1998. Deferred revenue increased $5.6 million, from $32.0 million at September 30, 1997, to $37.6 million at September 30, 1998. The increase in deferred revenue was primarily due to an increase in deferred maintenance and consulting services revenue as a result of continued growth in the customer base. The Company plans to continue expanding its offering of complementary products and technology via third-party software relationships and/or acquisition. Consummation of additional agreements may result in the use of cash, cash equivalents, and marketable securities for prepaid royalties, development funding, and acquisition. Although there are no current agreements with respect to additional material acquisitions of complementary businesses, such transactions could, if they were to occur, require additional sources of financing. In connection with the acquisition of Cort in June 1998, deferred consideration of $1.9 million is scheduled for payment within fiscal 1999. 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 1999. 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. IMPACT OF THE YEAR 2000 The Year 2000 issue relates primarily to computer software and operating systems in which dates have been abbreviated. Unless corrected, these systems may recognize the date of "January 1, 2000" as "January 1, 1900." As a result, computer software and operating systems used by many companies may need to be upgraded to comply with Year 2000 requirements. The Company has instituted a Year 2000 project in which Year 2000 issues are assessed and addressed in the development of its software systems, its relationships with third parties, and its internal operating systems. READINESS The human resource, financial management, materials management, and process manufacturing systems owned, developed, and marketed by the Company to run on the IBM AS/400 and the Microsoft Windows NT servers are designed to store four digit date formats for years and to process (calculate, compare, and sequence) date/time data from the twentieth century into the twenty-first century. Beginning in 1995, in anticipation of the Year 2000, the Company began testing its systems for defects in date formats. The Company has developed Year 2000 plans under which that testing will continue through the Year 2000 on currently available releases and as new releases of the software systems are developed. The Company is certified by the Information Technology Association of America (ITAA) regarding Year 2000 methods and processes used in the development of its AS/400 products. The Company has not sought ITAA certification for the methods and processes used in the development of its other software systems. Although the software systems developed by the Company are designed to be Year 2000 compliant and are being tested for compliance on an ongoing basis, there can be no assurance that such software systems do not contain undetected errors or defects or that, when combined or interoperating with other hardware, software, firmware, or modifications that are not fully compliant, will process data in a manner that is Year 2000 compliant. Additionally, some of the Company's customers are running older versions of the systems, which may have defects in date formats. The Company encourages its customers to migrate to current product versions so that they will get the benefit of all error and defect corrections that are currently available. The Company's financial management and human resource management internal business information systems are primarily made up of the same commercial application software products developed and marketed by the Company to end users. The Company does not expect any significant Year 2000 compliance issues to arise in connection with those primary internal business information systems. | | 22 | 25 INFINIUM SOFTWARE, INC. The Company has completed the first two phases of its Year 2000 project related to third parties with whom it has development, marketing, services, and other types of relationships, as well as third parties from whom the Company acquires supplies for its internal operations. Those phases were preparing an inventory of such third parties and assigning priorities for such third parties. Additionally, the Company is in the midst of the third phase of the project, which is to obtain from third parties that are material to the business of the Company responses to questionnaires regarding Year 2000 readiness of the third party and its products. This phase is expected to be completed by March 1999. In the final phases of this part of the Company's Year 2000 project, the Company will be testing material items (scheduled for completion by June 1999), repairing or replacing material items that are determined not to be Year 2000 compliant (scheduled for completion by September 1999), and designing and implementing contingency and business continuation plans (scheduled for completion by June 1999). COSTS The total cost associated with the Year 2000 project is not expected to be material to the Company's financial position. The Company has not separately tracked costs of the Year 2000 project but has, as part of its existing operating budget, budgeted the anticipated costs related to both efforts in the Research and Development organization to continue ongoing testing of the Company's systems and to begin testing of third party products, and efforts in its Internal Systems organization to test other third party products and repair or replace internal systems. RISKS The Company believes that the Year 2000 problem has resulted, on balance, in an increased demand for its software systems, because of the speed in which customers can implement the Company's systems. Such demand is subject to change as the Year 2000 draws closer and as the lead time to complete required system implementations precludes system replacement as a timely solution to the Year 2000 issue. Additionally, as the Year 2000 approaches, potential customers may consider outsourcing their systems needs to data center outsourcing and service bureau alternatives. Also, application software system acquisitions may slow down as potential customers decide to postpone acquisitions and implementations which are not required by their own Year 2000 projects. The Company's ability to accurately forecast the impact of these issues on the software industry and on its own quarter to quarter revenue is limited. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity, and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third parties, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity, or financial condition. None of the Company's customers, on its own, is considered material to the business of the Company and none are being contacted regarding its own Year 2000 readiness. Other third parties are being contacted as part of the Company's Year 2000 Project, as described above. The Year 2000 project is expected to significantly reduce the Company's level of uncertainty about the Year 2000 problem and, in particular, about the Year 2000 compliance and readiness of the material third parties with which it has a relationship. The Company believes that, with the implementation of new business systems and completion of the Year 2000 project as scheduled, the possibility of significant interruptions of normal operations should be reduced. EURO CONVERSION On January 1, 1999, eleven of the fifteen member countries of the European Union are scheduled to establish fixed conversion rates between their existing sovereign currencies and the euro. The participating countries have agreed to adopt the euro as their common legal currency on that date. The Company does not believe that the consequences of the euro conversion at January 1, 1999, will have a material impact on the Company's results of operations, liquidity, or financial condition.The Company's revenue from Europe was approximately 6% of the Company's revenue in fiscal 1998. The Company is in the process of modifying the financial, human resources, and materials management application software products it has developed and marketed to end users so that the systems, as modified, will substantially comply with the Euro currency requirements known generally as 'triangulation' and as 'no compulsion/no prohibition,' as described under Articles 3, 4, and 5 of Council Regulation (EC) No 1103/7 of 17 June 1997 on certain provisions relating to the introduction of the euro. Such modifications are expected to be made generally available to its customers by the end of December 1998. Despite the foregoing, there can be no assurance that such software products will not contain undetected errors or | | 23 | 26 INFINIUM SOFTWARE, INC. defects or that, when combined or interoperating with other hardware, software, firmware or modifications which have not been modified for euro conversion, will convert currency data in a manner compliant with the euro conversion adopted by the member countries. The Company's financial management and human resources management internal business information systems are primarily made of the same commercial application software products developed and marketed by the Company to end users. Once those systems have been modified as provided above, the Company does not expect significant euro conversion issues to arise in connection with those primary internal business information systems. The Company has begun to identify and ensure that all other euro conversion compliance issues are addressed. FACTORS AFFECTING FUTURE PERFORMANCE The Company's quarterly revenue and operating results have varied significantly in the past and are likely to vary substantially from quarter to quarter in the future. Such fluctuations may result in volatility in the price of the Company's common stock. Quarterly revenue and operating results may fluctuate as a result of a variety of factors, including the Company's lengthy sales cycle, the proportion of revenue attributable to license fees versus service revenue, changes in the level of operating expenses, demand for the Company's products, the introduction of new products and product enhancements by the Company or its competitors, changes in customer budgets, competitive conditions in the industry, the Year 2000 and euro conversion issues described above, 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. 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 revenue in its succeeding first and second fiscal quarters. The fluctuations are caused primarily by customer purchasing patterns and the Company's sales recognition programs which reward and recognize sales personnel on the basis of achievement of annual performance quotas. Due to the foregoing factors and the factors set forth under "Results of Operations" above, it is likely that in some future quarter the Company's operating results will be below the expectations of the Company and public market analysts and investors. In such event, the price of the Company's common stock would likely be materially adversely affected. 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 products and services and to develop and introduce new products and services to meet changing customer 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. | | 24 | 27 INFINIUM SOFTWARE, INC. As the Company's primary current source of revenue comes from customers using IBM midrange computers, future revenue from licenses of present products and sales of services and recurring maintenance revenue are therefore dependent on continued widespread use of the AS/400 and the continued support of such computers by IBM. In addition, because the Company's current AS/400 product line requires the use of IBM's OS/400 operating system, the Company may be required to adapt its 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 is continuing to develop software applications to operate on the Microsoft Windows NT operating system as well as to operate over the Internet and within corporate intranets. The Company's development and implementation of versions of its business software applications to run on Microsoft Windows NT servers involves more intense competition from a larger number of competitors. Although the Company has been successful in generating some revenue from these new products, there can be no assurance that the Company will continue to be able to compete successfully against current or future competitors. 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 successfull y against current or future competitors or that competitive pressures will not have a material adverse effect on the Company's business, operating results, and financial condition. Revenue from customers outside North America represented 11%, 11%, and 7% of the Company's total revenue in fiscal 1996, 1997, and 1998, 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 distribution 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 resellers could materially and adversely affect the Company's business, operating results, and financial condition. Other risks inherent in 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 payments cycles, difficulties 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 effect on the Company's future international revenue and, consequently, on the Company's business, operating results and financial condition. | | 25 | 28 INFINIUM SOFTWARE, INC. REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF INFINIUM SOFTWARE, INC. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Infinium Software, Inc. and its subsidiaries at September 30, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Boston, Massachusetts October 20, 1998 | | 26 | 29 INFINIUM SOFTWARE, INC. CONSOLIDATED BALANCE SHEET (in thousands, except per share amounts)
September 30, ---------------------- 1997 1998 - - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 9,779 $ 12,708 Marketable securities at fair market value 38,540 33,585 Accounts receivable, less allowance for doubtful accounts of $1,569 and $1,650 at September 30, 1997 and 1998, respectively 18,930 27,383 Deferred income taxes 1,167 2,482 Prepaid expenses and other current assets 4,946 6,103 ---------------------- TOTAL CURRENT ASSETS 73,362 82,261 ---------------------- Property and equipment, net 6,901 7,442 Capitalized software development costs, net 6,946 9,643 Goodwill and other intangible assets, net 1,656 2,245 Deferred income taxes 471 1,731 Other assets 1,971 3,093 ---------------------- TOTAL ASSETS $ 91,307 $ 106,415 ---------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 5,221 $ 8,136 Accrued expenses 9,763 14,672 Income taxes payable 2,394 3,068 Deferred revenue 31,662 35,991 ---------------------- TOTAL CURRENT LIABILITIES 49,040 61,867 ---------------------- Deferred revenue 328 1,586 ---------------------- TOTAL LIABILITIES 49,368 63,453 ---------------------- Commitments (Note 13) Common stock, $.01 par value; authorized 40,000 shares, issued 12,162 and 12,607 shares at September 30, 1997 and 1998, respectively 122 126 Additional paid-in capital 33,325 36,644 Retained earnings 8,502 7,804 Cumulative translation adjustment (10) (319) ---------------------- 41,939 44,255 ---------------------- Less: treasury stock at cost, none and 89 shares at September 30, 1997 and 1998, respectively -- (1,293) ---------------------- TOTAL STOCKHOLDERS' EQUITY 41,939 42,962 ---------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 91,307 $ 106,415 - - --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. | | 27 | 30 INFINIUM SOFTWARE, INC. CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share amounts)
Fiscal Year Ended September 30, ------------------------------- 1996 1997 1998 - - --------------------------------------------------------------------------------------------------------- REVENUE: Software license fees $24,115 $29,781 $ 40,704 Service revenue 47,693 57,220 73,676 ------------------------------- TOTAL REVENUE 71,808 87,001 114,380 - - --------------------------------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES: Cost of software license fees 3,823 5,070 7,210 Cost of services 16,562 22,400 32,330 Research and development 13,775 16,614 19,071 Sales and marketing 23,822 30,449 36,632 General and administrative 6,616 7,336 9,351 Write-off of in-process research and development acquired (Note 6) -- 6,846 11,196 ------------------------------- TOTAL OPERATING COSTS AND EXPENSES 64,598 88,715 115,790 ------------------------------- INCOME (LOSS) FROM OPERATIONS 7,210 (1,714 (1,410) Other income, net 1,526 1,923 1,744 ------------------------------- INCOME BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES 8,736 209 334 ------------------------------- Provision for (benefit from) income taxes 3,146 (148) 106 ------------------------------- NET INCOME $ 5,590 $ 357 $ 228 - - --------------------------------------------------------------------------------------------------------- BASIC PER SHARE DATA: Net income per share - basic $ 0.56 $ 0.03 $ 0.02 Weighted shares outstanding - basic 10,051 11,777 12,399 DILUTED PER SHARE DATA: Net income per share - diluted $ 0.49 $ 0 .03 $ 0.02 Weighted shares outstanding - diluted 11,378 12,539 13,808 - - --------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements
| | 28 | 31
INFINIUM SOFTWARE, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITI (in thousands, except per share amounts) COMMON ADDITIONAL NOTES CUMULATIVE TREASURY TOTAL SHARES COMMON PAID-IN RETAINED RECEIVABLE- TRANSLATION STOCK STOCKHOLDERS' ISSUED STOCK CAPITAL EARNINGS STOCKHOLDERS ADJUSTMENT AT COST EQUITY - - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1995 8,258 $ 83 $ 2,573 $ 2,555 $(379) $ -- $ -- $ 4,832 Stock issued in connection with initial public stock offering, net of offering expenses 1,334 13 12,814 12,827 Stock issued in connection with follow-on public stock offering, net of offering expenses 500 5 6,558 6,563 Stock issued upon exercise of stock options and warrants 974 10 3,052 3,062 Stock issued in connection with employee stock purchase plan 48 -- 447 447 Income tax benefit from exercise of stock options 1,950 1,950 Repayments of notes receivable-- stockholders 379 379 Net income for the year 5,590 5,590 - - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1996 11,114 111 27,394 8,145 -- -- -- 35,650 - - --------------------------------------------------------------------------------------------------------------------------------- Stock issued in connection with acquisition 770 8 4,506 4,514 Stock issued upon exercise of stock options 205 2 748 750 Stock issued in connection with employee stock purchase plan 73 1 528 529 Income tax benefit from exercise of stock options 149 149 Cumulative translation adjustment (10) (10) Net income for the year 357 357 - - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1997 12,162 122 33,325 8,502 -- (10) -- 41,939 - - --------------------------------------------------------------------------------------------------------------------------------- Stock issued upon exercise of stock options 405 4 1,990 1,994 Stock issued in connection with employee stock purchase plan 40 326 326 Income tax benefit from exercise of stock options 1,003 1,003 Purchase of treaury stock at cost (2,944) (2,944) Treasury stock reissued upon exercise of stock options and employee stock purchase plan (926) 1,651 725 Cumulative translation adjustment (309) (309) Net income for the year 228 228 - - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1998 12,607 $126 $36,644 $ 7,804 $ -- $(319) $(1,293) $42,962 - - --------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. | | 29 |
32 INFINIUM SOFTWARE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands, except per share amounts)
Fiscal Year Ended September, 30, ---------------------------------- 1996 1997 1998 - - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: - - ---------------------------------------------------------------------------------------------------------- Net income $ 5,590 $ 357 $ 228 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,801 5,939 6,780 Allowance for doubtful accounts 662 397 977 Deferred income taxes 737 (1,249) (2,575) Write-off of in-process research & development acquired (Note 6) -- 6,846 11,196 Changes in operating assets and liabilities, net of effects from acquisitions (Note 6) Accounts receivable (1,180) (6,427) (9,165) Prepaid expenses and other current assets (1,125) (1,345) (1,123) Other assets (265) (172) (272) Accounts payable 1,320 453 2,829 Accrued expenses 236 1,860 1,713 Income taxes payable 943 1,172 1,750 Deferred revenue (164) 6,159 5,029 - - ---------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 11,555 13,990 17,367 - - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (82,815) (78,185) (55,640) Sale of marketable securities 55,317 75,165 60,595 Purchase of property and equipment (4,051) (3,240) (3,528) Capitalization of software development costs (3,544) (3,594) (5,473) Acquisitions, net of cash acquired (Note 6) -- (3,443) (9,371) Investment in unaffiliated entities -- -- (850) - - ---------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (35,093) (13,297) (14,267) - - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from public stock offerings 19,390 -- -- Proceeds from the exercise of stock options, warrants, and employee stock purchase plan 3,509 1,279 3,021 Purchase of treasury stock -- -- (2,944) Principal payments under capital lease obligations (84) -- -- Proceeds from repayments of notes receivable -- stockholders 379 -- -- - - ---------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 23,194 1,279 77 - - ---------------------------------------------------------------------------------------------------------- EFFECT OF FOREIGN EXCHANGE RATE ON CASH -- (10) (248) - - ---------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (344) 1,962 2,929 - - ---------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,161 7,817 9,779 - - ---------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,817 $ 9,779 $ 12,708 - - ---------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements.
| | 30 | 33 INFINIUM SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) 1. THE COMPANY Founded in 1981, Infinium Software, Inc., develops, markets, and supports enterprise-level business software applications for growing organizations (typically companies with revenue of $25 million to $5 billion). The Company has two primary product lines. One product line, designed for AS/400 servers, automates the financial management, human resource management, and materials management functions of organizations in a broad range of industries worldwide. The Company also offers a specialized AS/400 manufacturing system designed to manage process-manufacturing operations. The Company's second product line is designed for use by customers using Microsoft Windows NT servers. These products automate the financial management and human resource management operations of growing organizations. Additional NT applications are under development. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned domestic and foreign subsidiaries. All significant intercompany transactions and balances have been eliminated. RECLASSIFICATION Certain amounts in the consolidated financial statements have been reclassified to conform to the current year presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. REVENUE RECOGNITION The Company recognizes revenue in accordance with the provisions of Statement of Position 97-2 Software Revenue Recognition. Revenue from software license fees is recognized when there is evidence of an arrangement, the product has been shipped, fees are fixed and determinable, and collection of the related receivable is probable. Revenue from sales through distributors is recorded net of distributor commissions. Maintenance revenue, including those bundled with the initial license fee, are deferred and recognized ratably over the service period. Consulting and training service revenue is recognized as the services are performed. CASH EQUIVALENTS AND MARKETABLE SECURITIES The Company invests its excess cash primarily in securities of government agencies, high-grade commercial paper, and mutual funds that invest primarily in the securities of government agencies. These investments are subject to minimal credit and market risk. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Marketable securities include securities purchased with an original maturity of greater than three months. The Company accounts for its investments under the provisions of Statement of Financial Accounting Standards No. 115 (SFAS 115), Accounting for Certain Investments in Debt and Equity Securities. SFAS 115 requires that, except for debt securities classified as held-to-maturity, investments in debt and equity securities should be reported at fair value. At September 30, 1997 and 1998, all of the Company's investments are classified as available-for-sale. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets. Leasehold improvements are depreciated over the lesser of the lease term or useful life of the assets. Repair and maintenance costs are expensed as incurred. CONCENTRATION OF CREDIT RISK Financial instruments that potentially expose the Company to concentrations of credit risk include accounts receivable. To minimize this risk, the Company generally requires a cash deposit upon contract signing. In addition, the Company maintains reserves for potential credit losses. Such losses, in the aggregate, have not exceeded management expectations. RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS Research and development expenses, other than certain software development costs, are charged to expense as incurred. In accordance with the provisions of Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, the Company capitalizes certain software development costs upon technological feasibility. Amortization of capitalized software development costs is provided upon commercial release of the products at the greater of the ratio of current product revenue to the total of current and anticipated product revenue or on a straight-line basis over the estimated economic life of the software, which the Company has determined is not more than five years. | | 31 | 34 INFINIUM SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) FOREIGN CURRENCY TRANSLATION Effective for fiscal 1997, the Company changed the functional currency of the UK subsidiary to that of the local currency. During fiscal 1998, the functional currency of the Canadian entity was also determined to be the local currency and changed from the U.S. dollar. During fiscal 1998 the Company commenced direct operations in South Africa. It was determined that the South Africa subsidiary's functional currency would be the local currency. Under this approach, assets and liabilities are translated at current exchange rates. Income and expense items are translated using average rates during the year. Translation adjustments are not included in determining consolidated net income but rather are accumulated and reported as a separate component of stockholders' equity. The functional currency of the Company's other foreign subsidiaries is the U.S. dollar. Monetary assets and liabilities of the subsidiaries are translated into U.S. dollars 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 Other income, net in the consolidated statement of operations. NET INCOME PER SHARE In February, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings per Share. This Statement, which the Company adopted with the quarter ended December 31, 1997, establishes and simplifies standards for computing and presenting earnings per share. SFAS 128 requires restatement of all previously reported earnings per share data that are presented. Basic earnings per share is determined by dividing net income applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined by dividing net income applicable to common stockholders by the weighted average number of common shares and common share equivalents outstanding during the period. Common share equivalents are included in the diluted earnings per share calculation when dilutive. Common share equivalents consisting of common stock issuable upon exercise of outstanding common stock options and warrants are computed using the treasury stock method. THE COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997, AND 1998 IS AS FOLLOWS:
Fiscal Year Ended September 30, 1996 1997 1998 - - ----------------------------------------------------------------------- --------------------------- --------------------------- Income Shares Per Share Income Shares Per Share Income Shares Per Share - - ----------------------------------------------------------------------- --------------------------- --------------------------- BASIC EARNINGS PER SHARE: Income available to common stockholders $5,590 10,051 $0.56 $357 11,777 $0.03 $228 12,399 $0.02 EFFECT OF DILUTIVE SECURITIES: Stock options 1,319 762 1,409 Warrants 8 -- -- - - ----------------------------------------------------------------------- --------------------------- --------------------------- DILUTED EARNINGS PER SHARE: Income available to common stockholders $5,590 11,378 $0.49 $357 12,539 $0.03 $228 13,808 $0.02 - - ----------------------------------------------------------------------- --------------------------- ---------------------------
| | 32 | 35 INFINIUM SOFTWARE, INC. STOCK COMPENSATION The Company's employee stock option plans are accounted for in accordance with Accounting Principle Board Opinion No. 25, Accounting for Stock Issued to Employees. In October 1996, the Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. (See Note 8) RECENTLY ISSUED ACCOUNTING STANDARDS In July 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. These statements are effective for fiscal years beginning after December 15, 1997 (October 1, 1998 for the Company). The Company will implement these statements as required. The future adoption of SFAS 130 and SFAS 131 is not expected to have a material effect on the Company's consolidated financial position or results of operations. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (October 1, 1999 for the Company). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company anticipates that the adoption of SFAS 133 will not have a significant effect on the results of operations or its financial position. 3. CASH EQUIVALENTS AND MARKETABLE SECURITIES FOLLOWING IS A SUMMARY OF THE FAIR MARKET VALUE OF AVAILABLE-FOR-SALE SECURITIES, BY BALANCE SHEET CLASSIFICATION, AS OF SEPTEMBER 30, 1997 AND 1998:
September 30, ------------------- 1997 1998 - - --------------------------------------------------------- CASH EQUIVALENTS: State government obligations $6,500 $ 2,566 Money market funds 2,292 5,957 MARKETABLE SECURITIES: U.S. government obligations 5,428 -- State government obligations 27,201 33,271 Corporate debt obligations 5,122 -- Foreign debt obligations 789 314 - - --------------------------------------------------------- $47,332 $42,108 - - ---------------------------------------------------------
Cash equivalents and marketable securities are carried at fair market value, which approximates amortized cost. The contractual maturities of all available - - -for-sale securities classified as cash equivalents are less than three months. Available-for-sale securities classified as marketable securities with fair market values of $4,484, $27,849, $0, and $1,252 have contractual maturities of less than one, one to five, five to ten, and greater than ten years, respectively. All of the Company's marketable securities are classified as current at September 30, 1997 and 1998, as these funds are highly liquid and are available to meet working capital needs and to fund current operations. Gross unrealized gains and losses as of September 30, 1997 and 1998, and realized gains and losses on sales of securities for the years ended September 30, 1997 and 1998, were not significant. 4. BALANCE SHEET COMPONENTS PROPERTY AND EQUIPMENT, NET CONSISTS OF THE FOLLOWING:
September 30, -------------------- USEFUL LIFE 1997 1998 - - ------------------------------------------------------------------------- Computer equipment 2 to 5 years $ 14,204 $ 15,200 Furniture and fixtures 5 years 1,960 1,656 Leasehold improvements Lease term 1,097 1,458 Land 287 287 - - ------------------------------------------------------------------------- 17,548 18,601 Less accumulated depreciation and amortization (10,647) (11,159) - - ------------------------------------------------------------------------- $ 6,901 $ 7,442 - - -------------------------------------------------------------------------
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET CONSISTS OF THE FOLLOWING:
September 30, -------------------- 1997 1998 - - ------------------------------------------------------------------------- Internal development costs $ 18,746 $ 23,444 Purchased from third parties 312 1,653 - - ------------------------------------------------------------------------- 19,058 25,097 Less accumulated amortization (12,112) (15,454) - - ------------------------------------------------------------------------- $ 6,946 $ 9,643 - - -------------------------------------------------------------------------
Included in capitalized software development costs at September 30, 1997 and 1998 are $1,892 and $3,526, respectively, related to products which had not yet been commercially released. Accordingly, amortization of these costs had not commenced. Amortization expense of capitalized software development costs for the years ended September 30, 1996, 1997, and 1998, amounted to $2,744, $2,998, and $3,341, respectively. | | 33 | 36 INFINIUM SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) GOODWILL AND OTHER INTANGIBLE ASSETS, NET CONSISTS OF THE FOLLOWING:
September 30, -------------------- 1997 1998 - - ------------------------------------------------------------------------ Goodwill, net of tax benefit of $62 and $144 at September 30, 1997 and 1998, respectively $1,415 $2,355 Workforce in place 468 468 - - ------------------------------------------------------------------------ 1,883 2,823 Less accumulated amortization (227) (578) - - ------------------------------------------------------------------------ $1,656 $2,245 - - ------------------------------------------------------------------------
ACCRUED EXPENSES CONSIST OF THE FOLLOWING:
September 30, -------------------- 1997 1998 - - ------------------------------------------------------------------------ Employee compensation and benefits $5,596 $ 7,132 Accrued royalties 1,283 1,537 Accrued professional fees 324 556 Deferred Cort acquisition (Note 6) -- 1,904 Other 2,560 3,543 - - ------------------------------------------------------------------------ $9,763 $14,672 - - ------------------------------------------------------------------------
5. OTHER INCOME, NET OTHER INCOME, NET CONSISTS OF THE FOLLOWING:
Fiscal Year Ended September 30, ---------------------------------- 1996 1997 1998 - - ------------------------------------------------------------------------ Interest income $1,620 $2,035 $ 1,891 Interest expense (4) (2) -- Foreign exchange loss (90) (110) (147) - - ------------------------------------------------------------------------ $1,526 $1,923 $ 1,744 - - ------------------------------------------------------------------------
Cash paid for interest totaled $4, $1, and $0 for the years ended September 30, 1996, 1997, and 1998, respectively. 6. ACQUISITIONS CORT DIRECTIONS, INC. On June 11, 1998, the Company acquired all of the outstanding capital stock of Cort Directions, Inc., (Cort), a privately held software concern which primarily developed and marketed a payroll application for the Microsoft NT platform. The transaction was consummated for $7,857 in cash of which $5,953 was paid upon closing, $952 to be paid February 1, 1999, and $952 on June 11, 1999, as well as $375 of acquisition costs. The acquisition was accounted for as a purchase. Accordingly, the results of operations of Cort 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 HAS BEEN ALLOCATED TO THE ACQUIRED ASSETS AND ASSUMED LIABILITIES AS FOLLOWS: - - ----------------------------------------------------------------- Accounts receivable $ 184 - - ----------------------------------------------------------------- Other current assets 23 - - ----------------------------------------------------------------- Property and equipment 109 - - ----------------------------------------------------------------- In-process research and development 7,796 - - ----------------------------------------------------------------- Acquired software 566 - - ----------------------------------------------------------------- Goodwill 1,022 - - ----------------------------------------------------------------- Current liabilities (1,468) - - ----------------------------------------------------------------- $ 8,232 - - ----------------------------------------------------------------- The amount allocated to in-process research and development was determined by an independent appraiser and represents technology which had not reached technological feasibility and had no alternative future use. Accordingly, this amount of $7,796 was charged to operations at the acquisition date. The amounts allocated to acquired software and goodwill are being amortized on a straight-line basis over the expected useful lives of three and five years, respectively. Pro forma statements of operations are not shown, as they would not differ materially from reported results. TIME OPEN SYSTEMS LIMITED On January 6, 1997, the Company acquired all of the outstanding 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. The shares were | | 34 | 37 INFINIUM SOFTWARE, INC. issued at the closing of the acquisition and are being held pursuant to an escrow agreement under which the shares are released ratably over a three year period, and $650 of related acquisition costs. The value ascribed to the shares issued was $4,514. The amount of $6,846 was allocated to in-process research and development and was charged to operations at the acquisition date. Goodwill of $1,477 was also acquired and is being amortized over the expected useful life of 7 years. Pro forma statements of operations are not shown as they would not differ materially from reported results. OTHER IN-PROCESS RESEARCH AND DEVELOPMENT ACQUIRED In 1998, the Company acquired software code that will support and enable the operation of transaction-based functionality specific to Microsoft NT server-based applications (the research and development) for $3,400. The research and development as received had not met technological feasibility as defined by Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Accordingly, the acquisition of the research and development for $3,400 was written off upon delivery. 7. INCOME TAXES THE COMPONENTS OF THE PROVISION (BENEFIT) FOR INCOME TAXES ARE AS FOLLOWS:
Fiscal Year Ended September 30, -------------------------------- 1996 1997 1998 - - -------------------------------------------------------------- CURRENT: Federal $2,496 $ 1,193 $ 2,370 State 143 77 249 Foreign 59 154 356 - - -------------------------------------------------------------- Total current 2,698 1,424 2,975 - - -------------------------------------------------------------- DEFERRED: Federal 382 (1,464) (2,694) State 66 (108) (175) - - -------------------------------------------------------------- Total deferred 448 (1,572) (2,869) - - -------------------------------------------------------------- $3,146 $ (148) $ 106 - - --------------------------------------------------------------
THE INCOME TAX PROVISION DIFFERS FROM AN AMOUNT COMPUTED BY APPLYING THE U.S. STATUTORY FEDERAL INCOME TAX RATE TO PRETAX INCOME AS FOLLOWS:
Fiscal Year Ended September 30, -------------------------------- 1996 1997 1998 - - ------------------------------------------------------------------ Statutory federal income tax $2,971 $ 71 $ 113 State income taxes 138 (22) 49 Research and development credits (139) (429) (942) Foreign tax rate differential (90) 028 246 Other 266 204 640 - - ------------------------------------------------------------------ $3,146 $(148) $ 106 - - ------------------------------------------------------------------
DEFERRED TAX ASSETS AND LIABILITIES ARE COMPRISED OF THE FOLLOWING:
September 30, ------------------ 1997 1998 - - ----------------------------------------------------------------- DEFERRED TAX ASSETS: Net operating loss carryforwards $ 108 $ 72 Intangible assets 2,396 4,265 Deferred revenue 1,817 2,951 Accrued expenses and reserves not currently deductible 468 499 Other 71 70 - - ----------------------------------------------------------------- Total deferred tax assets 4,860 7,857 - - ----------------------------------------------------------------- DEFERRED TAX LIABILITIES: Prepaid expenses deducted currently 925 773 Capitalized software development costs 2,290 2,851 Other 7 20 - - ----------------------------------------------------------------- Total deferred tax liabilities 3,222 3,644 - - ----------------------------------------------------------------- $1,638 $4,213 - - -----------------------------------------------------------------
As of September 30, 1998, the Company had federal net operating loss carryforwards of $212 which expire at various dates through 2010. Ownership changes, as defined in the Internal Revenue Code, may limit the amount of net operating loss and tax credit carryforwards that can be utilized to offset future taxable income or tax liability. The amount of the annual limitation is determined in accordance with Section 382 of the Internal Revenue Code. Provision has not been made for U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries because those earnings are intended to be permanently reinvested. | | 35 | 38 INFINIUM SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) Such earnings would become taxable upon the sale or liquidation of these foreign subsidiaries or upon the remittance of dividends. It is not practicable to estimate the amount of additional tax that might be payable on the foreign earnings. Upon remittance, certain foreign countries impose withholding taxes that are then available, subject to certain limitations, for use against the Company's U.S. tax liability. The amount of with- holding tax that would be payable upon remittance of the entire amount of undistributed earnings would not be material. Cash paid for income taxes, net of refunds received, totaled $1,707, $9, and $804 for the years ended September 30, 1996, 1997, and 1998, respectively. 8. STOCKHOLDERS' EQUITY RECAPITALIZATION On October 2, 1995, the Company's Board of Directors authorized 1,000 shares of $0.01 par value preferred stock. Preferred stock may be issued at the discretion of the Board of Directors of the Company (without stockholder approval) with such designations, rights, and preferences as the Board of Directors may determine from time to time. The preferred stock may have dividend, liquidation, redemption, conversion, voting or other rights which may be more expansive than the rights of the holders of the common stock. On October 2, 1995, the Company's Board of Directors approved an increase in the authorized number of shares of common stock from 10,000 shares to 40,000 shares. On November 13, 1995, the Company's Board of Directors declared a 1.4-for-1 stock split, effected in the form of a stock dividend paid to stockholders of record. All shares and per share amounts included in the consolidated financial statements have been adjusted to give retroactive effect to the stock split for all periods presented. PUBLIC OFFERINGS The Company completed an initial public offering of common stock on November 17, 1995. A total of 2,300 shares were sold at $11.00 per share, of which 1,334 were sold by the Company and 966 by selling stockholders. Proceeds to the Company were $12,827, net of underwriting discounts and offering expenses. Additionally, the Company completed a follow-on public offering of common stock on May 9, 1996. A total of 2,870 shares were sold at $14.75 per share, of which 500 were sold by the Company and 2,370 by selling stockholders. Proceeds to the Company were $6,563, net of underwriting discounts and offering expenses. STOCK OPTIONS In October 1995, the Board of Directors approved the 1995 Stock Plan (the 1995 Plan) which provides for the issuance of up to 3,500 shares of common stock pursuant to the grant of qualified and non-qualified stock options, stock awards or purchase rights to employees, consultants, directors, and officers of the Company. The options are generally exercisable over three-to five-year periods, as determined by the Compensation Committee. The Compensation Committee is comprised of two outside directors. The option price is set at the fair market value of the Company's stock on the date of the option grant, as determined by the Compensation Committee. The Company also has a 1989 Incentive Stock Option Plan (the 1989 Plan) and a 1984 Incentive Stock Option Plan (the 1984 Plan), with authorized options for 2,800 and 1,400 shares of common stock, respectively, under terms similar to those described in the preceding paragraph. In conjunction with the approval of the 1995 Plan, the Board of Directors formally terminated the 1989 Plan and, as such, no future grants will be made under this plan. Authority to grant additional options under the 1984 Plan has expired. In October 1995, the Board of Directors approved the 1995 Non-Employee Director Stock Option Plan (the Director Plan) under which options to purchase a maximum of 210 shares of the Company's common stock may be granted to non-employee directors. Under the Director Plan, each non-employee director will be granted an option to purchase 28 shares of common stock upon first joining the Board of Directors and 4 shares at each successive annual meeting of stockholders, beginning at the Company's annual meeting of stockholders for the fiscal year ended September 30, 1996, at an exercise price per share equal to the then fair market value per common share. Options granted under the Director Plan become exercisable in four equal annual installments commencing one year after the date of grant provided that the optionee then remains a director or consultant. The term of each option granted under the Director Plan will be for a period of ten years from the date of the grant. At September 30, 1998, the Company had 1,346 shares of its common stock available for future grant and had reserved 2,926 shares of its common stock for issuance upon exercise of outstanding stock options and warrants under the 1984, 1989, 1995, and Director Plans (the Plans). | | 36 | 39 INFINIUM SOFTWARE, INC. TRANSACTIONS UNDER THE PLANS DURING THE YEARS ENDED SEPTEMBER 30, 1996, 1997, AND 1998, ARE SUMMARIZED AS FOLLOWS:
- - --------------------------------------------------------------------------------------------------------------------------- 1996 1997 1998 - - --------------------------------------------------------------------------------------------------------------------------- Weighted average Weighted average Weighted average Shares exercise price Shares exercise price Shares exercise price - - --------------------------------------------------------------------------------------------------------------------------- OUTSTANDING AT BEGINNING OF PERIOD 2,397 $ 3.69 1,927 $ 5.74 3,036 $ 6.34 Granted 721 10.43 1,467 6.70 609 15.36 Exercised (974) 3.35 (206) 3.66 (475) 4.93 Cancelled (217) 8.23 (152) 5.83 (244) 8.55 - - --------------------------------------------------------------------------------------------------------------------------- OUTSTANDING AT END OF PERIOD 1,927 5.74 3,036 6.34 2,926 8.28 - - --------------------------------------------------------------------------------------------------------------------------- OPTIONS EXERCISABLE AT END OF PERIOD 539 3.63 800 4.87 1,196 6.03 - - --------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED DURING THE PERIOD $ 5.96 $ 4.08 $10.13 - - ---------------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE SUMMARIZES THE PLANS STOCK OPTIONS OUTSTANDING AT SEPTEMBER 30, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- ------------------------------- Weighted average Range of Number remaining Weighted average Number Weighted average Exercise prices outstanding contractual life exercise price exercisable exercise price - - ---------------------------------------------------------------------------------------------------------------- 2.85 - 4.10 597 5.5 $ 3.82 492 $ 3.79 - - ---------------------------------------------------------------------------------------------------------------- 5.17 - 7.63 1,140 8.1 6.22 419 6.00 - - ---------------------------------------------------------------------------------------------------------------- 8.00 - 12.00 607 7.6 9.74 276 9.83 - - ---------------------------------------------------------------------------------------------------------------- 12.06 - 18.00 570 9.3 15.26 9 14.46 - - ---------------------------------------------------------------------------------------------------------------- 19.38 - 22.38 012 9.5 20.00 0 0.00 - - ---------------------------------------------------------------------------------------------------------------- 2,926 1,196 - - ----------------------------------------------------------------------------------------------------------------
FAIR VALUE DISCLOSURES HAD COMPENSATION COST FOR THE COMPANY'S OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN BEEN DETERMINED BASED ON THE FAIR VALUE AT THE GRANT DATES, AS PRESCRIBED IN SFAS 123, THE COMPANY'S NET INCOME AND NET INCOME PER SHARE WOULD HAVE BEEN AS FOLLOWS:
Fiscal Year Ended September 30, -------------------------------------- 1996 1997 1998 - - -------------------------------------------------------------------------- NET INCOME: As reported $5,590 $ 357 $ 228 Pro forma 5,237 (931) (1,483) - - -------------------------------------------------------------------------- BASIC INCOME PER SHARE: As reported 0.56 0.03 0.02 Pro forma 0.52 (0.08) (0.12) - - -------------------------------------------------------------------------- DILUTED INCOME PER SHARE: As reported 0.49 0.03 0.02 Pro forma $ 0.46 $(0.08) $ (0.12) - - --------------------------------------------------------------------------
| | 37 | 40 INFINIUM SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) The fair value of each option grant is estimated on the date of grant using the Black Scholes method with the following assumptions used for grants during the applicable period: dividend yield of 0.0% for all periods; risk-free interest rates of 5.36% to 6.39% for options granted during the year ended September 30, 1996, 5.51% to 6.76% for options granted during the year ended September 30, 1997, and 4.62% to 5.93% for options granted during the year ended September 30, 1998; weighted average expected option term of 5 years for all periods; and volatilities of 68.06% for the year ended September 30, 1996, 65.67% for the year ended September 30, 1997, and 75.85% for the year ended September 30, 1998. 1995 EMPLOYEE STOCK PURCHASE PLAN On October 2, 1995, the Board of Directors approved the 1995 Employee Stock Purchase Plan (the Purchase Plan) which enables eligible employees to purchase shares of the Company's common stock. The Purchase Plan is administered by the Compensation Committee of the Board of Directors. Under the Purchase Plan, eligible employees may purchase common stock during six-month payment periods. The exercise price per share is 85% of the lesser of the market price per share on the first or last business day of the six-month period. The maximum number of shares of common stock that an employee may purchase in any six-month period is five hundred shares. An employee's rights under the Purchase Plan terminate upon voluntary withdrawal from the plan at any time or upon termination of employment. The Company has reserved 1,400 shares of common stock for issuance under the Purchase Plan. The first period commenced on November 17, 1995, (the effective date of the Company's initial public offering) and ended on June 30, 1996. Employees purchased 48 shares of stock at $9.35 per share. In subsequent six-month periods, employees purchased 40 shares of stock at $7.12 per share, 33 shares of stock at $7.44 per share, 39 shares of stock at $8.29 per share, and 32 shares of stock at $11.79 per share. COMMON STOCK WARRANTS In connection with a revolving line of credit agreement which expired October 1996, warrants were issued for the purchase of 49 shares of the Company's common stock. The warrants are exercisable at an initial per share price of $6.07, subject to adjustment under the terms of the agreement, and expire in June 1999. The value of the warrants at the issuance date was immaterial. In July 1996, the warrants were exercised in full and 31 shares were issued. STOCK REPURCHASE PROGRAM In February 1998, the Company announced that it would be initiating a stock repurchase program of up to $6,000 of common stock to use to meet requirements of its employee stock option and stock purchase plans. No minimum number or value of shares to be repurchased has been fixed nor has a time limit as to the duration of the program been established. During the year ended September 30, 1998, the Company repurchased 191 shares at a cost of $2,944. Through the period ended September 30, 1998, 102 shares were reissued in connection with employee stock option exercises and stock purchase plan distributions. 9. RETIREMENT SAVINGS PLAN The Company has a savings and profit-sharing plan covering all eligible employees which is qualified under Section 401(k) of the Internal Revenue Code of 1986, as amended. The Company may, at its option, provide matching contributions up to 50% of each participating employee's contributions to the plan, subject to a maximum of 21/2 % of compensation. Total contributions by the Company to the plan for the years ended September 30, 1996, 1997, and 1998, were $283, $553, and $705, respectively. In June 1996, a Group Personal Pension Plan was established for eligible employees in the United Kingdom allowing employees to contribute a percentage of their salary into a personal retirement savings plan. For those employees electing to contribute more than 3% of their salary into their plan, the Company contributes a fixed 3% on their behalf. Company contributions to individual plans aggregated $32, $83, and $81 for the years ended September 30, 1996, 1997, and 1998, respectively. A Registered Retirement Savings Plan was established in August 1997 allowing eligible employees in Canada to contribute a percentage of their compensation into a retirement savings plan. Total contributions by the Company to this plan for the years ended September 30, 1997 and 1998, were $11 and $32, respectively. | | 38 | 41 INFINIUM SOFTWARE, INC. 10. INDUSTRY SEGMENT, GEOGRAPHIC INFORMATION, AND CUSTOMER INFORMATION The Company operates in a single industry segment: the design, development, sale, service, and support of proprietary software products. THE COMPANY OPERATES IN DIVERSE GEOGRAPHIC AREAS. INCOME (LOSS) FROM OPERATIONS BY GEOGRAPHIC AREA IS AS FOLLOWS:
Fiscal Year Ended September 30, ------------------------------- 1996 1997 1998 - - ------------------------------------------------------------------------------- North America (principally the United States) $7,197 (485) $ 3,905 Europe (principally the United Kingdom) (272) (1,292) (4,407) Other international 285 63 (908) - - ------------------------------------------------------------------------------- $7,210 $(1,714) $(1,410) - - -------------------------------------------------------------------------------
No geographic area outside North America accounted for more than 10% of the Company's consolidated revenue or identifiable assets for the years ended September 30, 1996, 1997, and 1998. No single customer accounted for more than 10% of the Company's consolidated revenue for the years ended September 30, 1996, 1997, and 1998. 11. RELATED PARTY TRANSACTIONS NOTES RECEIVABLE -- STOCKHOLDERS In connection with a business combination in September 1991, which was accounted for as a purchase, the Company loaned an aggregate of $500 to two owners of the acquired company. Such owners became stockholders of the Company in connection with the business combination. The notes, which bore interest at 9.0%, were payable in minimum semi-monthly installments. In addition, any bonuses and severance pay earned by the holders and any proceeds to the holders from the sale of common stock of the Company were offset against the notes until the entire principal and interest due on the notes were paid. The notes were collateralized by, among other things, any proceeds from the sale of common stock by the holders and, accordingly, are included as a reduction of stockholders' equity in the consolidated balance sheets. The notes were repaid in full on November 24, 1995. LIFE INSURANCE TRUSTS One current principal stockholder and two former principal stockholders of the Company have split-dollar life insurance policies (the Policies). The Policies are owned by various trusts. The trusts have executed Collateral Assignment Agreements for the benefit of the Company. Under the Collateral Assignment Agreements, the Company originally paid the annual premiums under the Policies. Effective October 1, 1996, the Collateral Assignment Agreements for the two former principal stockholders were amended so that the trusts (rather than the Company) were obligated from that date to make all premium payments under the Policies. In March 1998, the Company paid the last premium payments required under the current principal stockholder's Policies to make them self-funding as of that date. The Company has made premium payments under the Policies of $263, $143, and $88 for the years ended September 30, 1996, 1997, and 1998, respectively. The premium payments made under the Policies are recorded as advances to the trusts and are secured by the cash surrender value of related insurance policies. Cash advances in excess of the cash surrender value of the related insurance policies were expensed when advanced. Total advances to the trusts of $1,799, $1,971, and $2,096 at September 30, 1996, 1997, and 1998, respectively, are included in other assets in the consolidated balance sheet. The Collateral Assignment Agreement for the current principal stockholder can be terminated at any time on 30 days' notice by either the Company or the related trust. Upon termination of the Collateral Assignment Agreement for the principal stockholder, (i) the Company, and the trust can agree on disposition of the Policy, (ii) the trust can repay the advances to the Company, or (iii) the net cash surrender value would be distributed to the Company to the extent of the advances with the balance of the net cash surrender value being paid to the trust. The Collateral Assignment Agreements for the two former principal stockholders can be terminated (i) by the trust on 30 days written notice to the Company, (ii) upon the failure of the trust to make annual premium payments, (iii) at the trust's election to receive a release of the assignment of the Policies from the Company, or (iv) by the Company if the cash surrender value declines and the Company is not willing to accept substitute collateral. Upon termination of the Collateral Assignment Agreement for either of the former principal stockholders, the trust must immediately repay to the Company the amount of premium advances made by the Company. If a Collateral Assignment Agreement is not terminated and the principal stockholder dies, the death benefits will be paid first to the Company to the extent of the advances. There is no agreement between the Company and the remaining principal stockholder as to whether the Collateral Assignment Agreement would be terminated on the disassociation of the stockholder from the Company. | | 39 | 42 INFINIUM SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) In October 1994, the three principal stockholders waived their right to the cash surrender value of the Policies through that date. Advances to the trusts equal to the cash surrender value at October 1, 1994, of $1,275, were recorded as other assets in the consolidated balance sheet as a noncash capital contribution. During 1995, the trusts borrowed $875 of the cash surrender value of the Policies. The trusts' obligations to repay those funds were secured by a pledge of an aggregate of 330 shares of the Company's common stock owned by the current and a former principal stockholder. The trusts assigned the stock pledges to the Company as replacement collateral. During fiscal 1996, the trusts repaid a net of $565 of those borrowings and released 232 shares of the Company's common stock from the pledge. During fiscal 1997, the trusts borrowed an additional $47. During fiscal 1998, all loans were repaid in full. 12. RESEARCH AND DEVELOPMENT AGREEMENT In August 1994, the Company entered into an arrangement whereby a third party agreed to fund certain research and development activities of the Company. Product development fees received under the agreement for research and development activities were recorded as a reduction of research and development expenses on a percentage-of-completion basis. Payments received for previously developed products were recorded as liabilities in light of the Company's future royalty obligations. Through September 30, 1995, the Company received cumulative product development fees of $1,911, of which $1,318 was recorded as a reduction of research and development expenses and $593 was recorded as a liability. There was no external funding in fiscal 1996 or 1997 under this agreement. The agreement provides for future royalty payments based on revenue generated by products resulting from the funded activities. Total payments, which are based on a percentage of the related product revenue, are limited to 130% of the funds received by the Company under the agreement. Royalties of $242, $296, and $371 were incurred during the years ended September 30, 1996, 1997, and 1998, respectively. During fiscal 1998, the Company and the third party amended the research funding agreement, releasing the Company from future royalty payments due on the sale of products after December 31, 1998, which the business partner helped fund. In return for the release of future royalty payments, the Company is obligated to develop certain e-Business extensions to existing products, as defined. The amendment also resulted in $400 of funded research offset against research and development expense that was previously recorded as liability in the consolidated balance sheet. In October, 1996, the Company entered into a research funding agreement with a business partner to fund development activities for enabling double byte character set capabilities of the Company's Human Resource product, as defined. The agreement provided $490 of assistance towards this initiative, of which $255 was recorded as a reduction of research and development expense and $235 was recorded as a liability during fiscal 1997. During 1998, an additional $30 of this amount was used as an offset to research and development expense. 13. COMMITMENTS AND CONTINGENCIES LEASES The Company has several operating lease agreements primarily involving real estate, computers, and equipment. These leases are noncancelable and expire on various dates through 2005 except for the Company's London, England facility lease, which expires in 2015; and its Chatham, England facility lease, which expires in 2019. FUTURE MINIMUM LEASE PAYMENTS UNDER OPERATING LEASES WITH INITIAL OR REMAINING TERMS OF ONE YEAR OR MORE ARE AS FOLLOWS: FISCAL YEAR - - ---------------------------------------------------------- 1999 $ 4,337 - - ---------------------------------------------------------- 2000 3,440 - - ---------------------------------------------------------- 2001 2,717 - - ---------------------------------------------------------- 2002 2,533 - - ---------------------------------------------------------- 2003 2,468 - - ---------------------------------------------------------- THEREAFTER 10,954 - - ---------------------------------------------------------- TOTAL FUTURE MINIMUM LEASE PAYMENTS $26,449 - - ---------------------------------------------------------- Total rent expense for operating leases was $4,515, $4,764, and $4,731 for the years ended September 30, 1996, 1997, and 1998, respectively. LEGAL MATTERS From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. The Company is not a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on the Company's results of operations or financial position. | | 40 | 43 INFINIUM SOFTWARE, INC. STOCK INFORMATION PRICE RANGE OF COMMON STOCK The Company's common stock is traded on the NASDAQ National Market under the symbol "INFM." Public trading of the common stock commenced on November 17, 1995 on the NASDAQ National Market under the symbol "SFWR" until February 18, 1997, when the Company changed the corporate name to Infinium Software, Inc. Prior to that time, there was no public market for the Company's common stock. THE FOLLOWING TABLE SETS FORTH THE HIGH AND LOW CLOSING PRICES, AS REPORTED BY NASDAQ, FOR THE PERIODS INDICATED. High Low ============================================================= FISCAL 1998 First Quarter $18 1/2 $10 1/4 - - ------------------------------------------------------------- Second Quarter 21 13/16 12 1/8 - - ------------------------------------------------------------- Third Quarter 22 3/8 9 7/8 - - ------------------------------------------------------------- Fourth Quarter 15 7/8 9 3/8 ============================================================= FISCAL 1997 - - ------------------------------------------------------------- First Quarter $10 3/8 $ 6 7/8 - - ------------------------------------------------------------- Second Quarter 8 3/4 5 1/2 - - ------------------------------------------------------------- Third Quarter 10 1/2 5 1/2 - - ------------------------------------------------------------- Fourth Quarter 14 13/16 9 5/8 ============================================================= FISCAL 1996 - - ------------------------------------------------------------- First Quarter (from November 17) $10 3/4 $ 7 1/8 - - ------------------------------------------------------------- Second Quarter 17 1/8 7 3/8 - - ------------------------------------------------------------- Third Quarter 19 3/8 12 3/4 - - ------------------------------------------------------------- Fourth Quarter 18 3/8 8 1/4 ============================================================= At November 19, 1998, there were 464 holders of record. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain future earnings to fund the development and growth of its business. STOCK LISTING NASDAQ National Market Trading Symbol: INFM INTERNET Additional corporate information is available on the World Wide Web at http://www.infinium.com ANNUAL MEETING The Annual Meeting of Stockholders of the Company will be held on Friday, February 5, 1999, at 3:00 p.m., local time, at the Sheraton Hyannis Resort, located at the West End Circle, Hyannis, Massachusetts. TRANSFER AGENT BankBoston, N.A. c/o Boston EquiServe, LP PO Box 8040 Boston, MA 02266-8040 INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP 160 Federal Street Boston, MA 02110 COUNSEL Hale and Dorr LLP 60 State Street Boston, MA 02109 ANNUAL REPORT ON FORM 10-K The Company's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, is available in print form without charge to stockholders upon request, and is available on the Company's Internet site: www.infinium.com. To obtain a printed copy, please contact Investor Relations, Infinium Software, Inc., 25 Communications Way, Hyannis, MA 02601, (508) 778-2000. | | 41 | 44 INFINIUM SOFTWARE, INC. CORPORATE INFORMATION
EXECUTIVE OFFICERS INFINIUM OFFICES ROBERT A. PEMBERTON CORPORATE HEADQUARTERS Chairman of the Board 25 Communications Way Hyannis, MA 02601 FREDERICK J. LIZZA Telephone: (508)778-2000 President and Chief Executive Officer www.infinium.com JOHN W. BAUMSTARK ATLANTA Senior Vice President, Field Operations 2500 NorthWinds Parkway Suite 600 DANIEL J. KOSSMANN Alpharetta, GA 30004 Chief Financial Officer, Vice President, and Treasurer Telephone: (678)319-4000 ANNE MARIE MONK BOSTON General Counsel, Vice President, Secretary, and Clerk 10 Maguire Road Lexington, MA 02421 FRANCIS J. TORBEY Telephone: (781)372-4500 Senior Vice President, Application Development CHICAGO ROBERT G. PARKER One Tower Lane Senior Vice President, Marketing Suite 2500 Oakbrook Terrace, IL 60181 Telephone: (630)573-0711 DIRECTORS LOS ANGELES ROBERT A. PEMBERTON 2010 Main Street Chairman of the Board, Suite 300 Infinium Software, Inc. Irvine, CA 92614 Telephone: (714)851-0490 FREDERICK J. LIZZA President and Chief Executive Officer, OREGON Infinium Software, Inc. 500 SW Bond Street Bend, OR 97702 R. STEPHEN CHEHEYL Telephone: (541)388-3800 MANUEL CORREIA CANADA Chief Operating Officer, 90 Allstate Parkway CoWare, Inc. Suite #101 Markham, ON L3R 6H3 ROLAND D. PAMPEL Telephone: (905)940-6700 ROBERT P. SCHECHTER SINGAPORE President, Chief Executive Officer and Director, 10 Science Park Road, #02-01 Natural MicroSystems Corporation The Alpha, Singapore Science Park II Singapore 117684 Telephone: +65-778-7337 INVESTOR INFORMATION UNITED KINGDOM GEOFF SPILLANE Crosby House, Meadowbank Corporate Communications Manager Furlong Road, Bourne End Telephone: (508)790-6863 Buckinghamshire SL8 5AJ geoff_spillane@infinium.com Telephone: +44(0)1628-850850
Trade names referenced are the servicemarks, trademarks, or registered trademarks of their respective manufacturers | | 42 | 45 [LOGO] INFINIUM SOFTWARE 25 Communications Way Hyannis, MA 02601 www.infinium.com EX-21.1 3 SUBSIDIARIES 1 EXHIBIT 21.1 SUBSIDIARIES The following lists all Infinium Software, Inc. subsidiaries:
Name of Subsidiary State of Organization Principal Business Address ------------------ --------------------- -------------------------- INFINIUM SOFTWARE EUROPE, INC. Massachusetts, United States 25 Communications Way Post Office Drawer 6000 Hyannis, MA 02601 INFINIUM CORP. Massachusetts, United States 25 Communications Way Post Office Drawer 6000 Hyannis, MA 02601 INFINIUM SOFTWARE ASIA/PACIFIC, INC. Massachusetts, United States 25 Communications Way Post Office Drawer 6000 Hyannis, MA 02601 CORT DIRECTIONS, INC. Oregon, United States Cort Payroll Unit 94 SE Wilson Avenue Bend, OR 97702 INFINIUM SOFTWARE LIMITED Buckinghamshire, United Kingdom Crosby House Unit A Meadowbank 74 Furlong Road Bourne End Buckinghamshire SL8 5AJ United Kingdom INFINIUM HOLDINGS LIMITED Buckinghamshire, United Kingdom Crosby House Unit A Meadowbank 74 Furlong Road Bourne End Buckinghamshire SL8 5AJ United Kingdom INFINIUM OPEN SYSTEMS LIMITED Kent, United Kingdom Montague Place, Quayside Chatham Maritime Kent, ME4 4QU United Kingdom INFINIUM SOFTWARE PROPRIETARY Johannesburg, South Africa Post Office Box 2880 LIMITED Rivonia-2128 Johannesburg Republic of South Africa INFINIUM INTERNATIONAL, INC. United States Virgin Islands 11A/11B Curacao Gade St. Thomas United States Virgin Islands 00804 DOMAIN SOFTWARE, B.V.(1) Amsterdam NL 1067 AZ (corporate seat) Amsterdam The Netherlands
- - ----------------------------- (1) Inactive and in the process of being dissolved. EX-23.1 4 CONSENT OF PRICE WATERHOUSE LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-05439) of Infinium Software, Inc. of our report dated October 20, 1998 appearing in the 1998 Annual Report to Stockholders which is incorporated by reference in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Boston, Massachusetts December 23, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 US DOLLARS 12-MOS SEP-30-1998 OCT-01-1997 SEP-30-1998 1 12,708 33,585 29,033 1,650 0 82,261 18,601 11,159 106,415 61,867 0 0 0 126 42,836 106,415 40,704 114,380 7,210 39,540 75,273 977 0 334 106 228 0 0 0 228 .02 .02
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