<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 1996
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 33-97866
SOFTWARE 2000, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2734036
------------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
25 COMMUNICATIONS WAY, HYANNIS, MA 02601
(Address of principal executive offices, including Zip Code)
(508) 778-2000
(Registrant's telephone number, including area code)
----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 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
--- ---
The number of shares outstanding of the registrant's Common Stock on June 30,
1996 was 10,983,399.
========================================================================
<PAGE> 2
SOFTWARE 2000, INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at September 30, 1995,
and June 30, 1996........................................ 3
Consolidated Statements of Income for the three months
and nine months ended June 30, 1995 and 1996............. 4
Consolidated Statements of Cash Flows for the nine
months ended June 30, 1995 and 1996...................... 5
Notes to Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................... 13
SIGNATURES........................................................ 14
EXHIBIT INDEX..................................................... 15
EXHIBIT........................................................... 16
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOFTWARE 2000, INC.
<TABLE>
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
SEPTEMBER 30, JUNE 30,
1995 1996
------------- --------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................... $ 8,161 $ 6,606
Marketable securities at fair market value ........ 8,022 33,658
Accounts receivable, less allowance for doubtful
accounts of $1,145 and $1,200 at September 30,
1995, and June 30, 1996, respectively .............. 11,836 11,529
Deferred income taxes ............................. 2,583 2,563
Prepaid expenses and other current assets ......... 2,444 3,219
------- -------
Total current assets ...................... 33,046 57,575
Property and equipment, net ......................... 4,053 5,385
Capitalized software development costs, net ......... 5,371 5,971
Other assets ........................................ 1,534 1,726
------- -------
Total assets .............................. $44,004 $70,657
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. 3,165 3,724
Accrued expenses .................................. 7,158 7,691
Income taxes payable .............................. 2,375 856
Deferred revenues ................................. 25,017 24,517
------- -------
Total current liabilities ................. 37,715 36,788
------- -------
Deferred income taxes ............................... 1,457 1,632
------- -------
Commitments:
Stockholders' equity:
Common stock, $.01 par value; authorized 40,000
shares, issued and outstanding 8,258 and 10,983
shares at September 30, 1995, and June 30,
1996, respectively ................................ 83 110
Additional paid-in capital ........................ 2,573 26,498
Retained earnings ................................. 2,555 5,629
Notes receivable -- stockholders .................. (379) --
------- -------
Total stockholders' equity ................ 4,832 32,237
------- -------
Total liabilities and stockholders' equity $44,004 $70,657
======= =======
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
3
<PAGE> 4
SOFTWARE 2000, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1995 1996 1995 1996
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Software license fees ..................... $ 5,324 $ 6,400 $12,552 $15,912
Service revenues .......................... 10,482 11,954 31,006 35,268
------- ------- ------- -------
Total revenues .................... 15,806 18,354 43,558 51,180
------- ------- ------- -------
Costs and expenses:
Cost of software license fees ............. 960 994 2,844 2,819
Cost of services .......................... 3,852 4,035 11,414 12,139
Research and development .................. 3,144 3,372 9,163 10,174
Sales and marketing ....................... 4,720 5,963 13,501 17,260
General and administrative ................ 1,792 1,604 4,533 5,050
------- ------- ------- -------
Total operating costs and expenses 14,468 15,968 41,455 47,442
------- ------- ------- -------
Income from operations ...................... 1,338 2,386 2,103 3,738
Other income (expense), net ................. 119 435 130 1,064
------- ------- ------- -------
Income before provision for income taxes .... 1,457 2,821 2,233 4,802
Provision for income taxes .................. 511 1,015 783 1,728
------- ------- ------- -------
Net income .................................. $ 946 $ 1,806 $ 1,450 $ 3,074
======= ======= ======= =======
Net income per share ........................ $ 0.10 $ 0.15 $ 0.16 $ 0.28
======= ======= ======= =======
Weighted average common and common equivalent
shares outstanding .......................... 9,270 11,810 9,395 11,140
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
4
<PAGE> 5
SOFTWARE 2000, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
NINE MONTHS ENDED
-----------------
JUNE 30, JUNE 30,
1995 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................... $ 1,450 $ 3,074
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization .............................. 3,553 3,489
Provisions for doubtful accounts ........................... 620 479
Deferred income taxes ...................................... (137) 195
Changes in operating assets and liabilities:
Accounts receivable ...................................... (2,021) (172)
Prepaid expenses and other current assets ................ (117) (775)
Other assets ............................................. (196) (192)
Accounts payable ......................................... 539 559
Accrued expenses ......................................... 636 615
Income taxes payable ..................................... 730 99
Deferred revenues ........................................ 528 (500)
------- --------
Net cash provided by operating activities ............. 5,585 6,871
======= ========
Cash flows from investing activities:
Purchase of marketable securities ............................. (9,991) (49,787)
Sale of marketable securities ................................. 9,023 24,151
Purchase of property and equipment ............................ (1,147) (2,828)
Capitalization of software development cost ................... (1,752) (2,593)
------- --------
Net cash used in investing activities ................. (3,867) (31,057)
======= ========
Cash flows from financing activities:
Proceeds from public offering of common stock ................. -- 19,464
Proceeds from exercise of stock options ....................... 26 2,870
Proceeds from repayments of notes receivable -- stockholders .. 70 379
Principal payments under capital lease obligations ............ (587) (82)
------- --------
Net cash provided by (used in) financing activities ... (491) 22,631
------- --------
Net increase (decrease) in cash and cash equivalents ............ 1,227 (1,555)
Cash and cash equivalents, beginning of period .................. 3,270 8,161
------- --------
Cash and cash equivalents, end of period ........................ $ 4,497 $ 6,606
======= ========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
5
<PAGE> 6
SOFTWARE 2000, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The information at June 30, 1995 and 1996 and for the three and nine month
periods then ended is unaudited, but includes all adjustments (consisting only
of normal recurring entries) which the Company's management believes to be
necessary for the fair presentation of the financial position, results of
operations, and of cash flows for the periods presented. The accompanying
interim financial statements should be read in conjunction with the financial
statements and related notes for fiscal year ended September 30, 1995, included
in the Company's registration statements filed on Form S-1 dated November 17,
1995, (No. 33-97866) and May 9, 1996, (No. 333-3940) as well as the Company's
quarterly reports filed on Form 10-Q for the periods ended December 31, 1995,
and March 31, 1996. Certain information and disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations. Interim results of operations for the
three and nine month periods ended June 30, 1996, are not necessarily indicative
of operating results for any future period.
2. PER SHARE INFORMATION
Net income per share is determined by dividing net income applicable to
Common Stock by the weighted average number of common shares and common
equivalent shares outstanding during the period. Common share equivalents are
computed using the treasury stock or modified treasury stock method as
applicable and consist of Common Stock which may be issuable upon exercise of
outstanding Common Stock options and warrants to purchase Common Stock.
3. STOCKHOLDERS' EQUITY
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 $12,800, net of underwriting discounts and offering
expenses. Additionally, the Company completed a secondary 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 $6,650, net of underwriting discounts and offering expenses.
4. OTHER INCOME (EXPENSE), NET
<TABLE>
Other income (expense), net consists of the following:
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income ............ $152 $434 $ 293 $1,131
Interest expense ........... (11) (1) (39) (4)
Foreign exchange gain (loss) (22) 2 (124) (63)
---- ---- ----- ------
$119 $435 $ 130 $1,064
==== ==== ===== ======
</TABLE>
6
<PAGE> 7
SOFTWARE 2000, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
5. CASH EQUIVALENTS AND MARKETABLE SECURITIES
<TABLE>
Following is a summary of the fair market value of available-for-sale
securities, by balance sheet classification:
<CAPTION>
September 30, June 30,
1995 1996
------------- --------
(Unaudited)
<S> <C> <C>
Cash equivalents:
U.S. Government obligations .. $ 1,984 $ --
Corporate debt obligations ... 1,496 998
Foreign government obligations 497 --
Money market fund ............ 890 3,581
Marketable securities:
U.S. Government obligations .. 7,922 30,548
Corporate debt obligations ... -- 3,010
Other ........................ 100 100
------- -------
$12,889 $38,237
======= =======
</TABLE>
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. All of the Company's
marketable securities are classified as current as these funds are highly liquid
and are available to meet working capital needs and to fund current operations.
At September 30, 1995, available-for-sale securities classified as
marketable securities with fair market values of $7,018, $500, and $504 have
contractual maturities of less than one year, two years, and ten years,
respectively. Gross unrealized gains and losses as of September 30, 1995, and
realized gains and losses on sales of securities for the year ended September
30, 1995, were not significant.
At June 30, 1996, (unaudited), available-for-sale securities classified as
marketable securities with fair market values of $30,656, $1,502, and $1,500
have contractual maturities of less than one year, two years and greater than
ten years, respectively. Gross unrealized gains and losses as of June 30, 1996,
and realized gains and losses of securities for the nine months ended June 30,
1996, were not significant.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Software 2000 was founded in 1981 and offers a broad range of financial
management, human resource management and materials management business software
applications that presently run on the IBM AS/400 hardware platform. The Company
also offers a specialized manufacturing system designed to manage process
manufacturing operations. The Company's revenues are derived from two sources:
software license fees and service revenues. License fees include revenues from
noncancellable software license agreements entered into between the Company and
its customers with respect to both the Company's products and third party
products distributed by the Company. License fee revenues are recognized upon
shipment of the software and when all significant contractual obligations have
been satisfied. The Company's service revenues are comprised of software
maintenance fees and fees for consulting services. Maintenance fees are billed
separately and are recognized ratably over the period of the maintenance
agreement, which is typically one year. Consulting service revenues are
recognized as the services are performed.
<TABLE>
The following table sets forth for the periods indicated the Company's
consolidated income statement data expressed as a percentage of total revenues.
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Software license fees .................... 33.7% 34.9% 28.8% 31.1%
Service revenues ......................... 66.3 65.1 71.2 68.9
----- ----- ----- -----
Total revenues ........................ 100.0 100.0 100.0 100.0
===== ===== ===== =====
Costs and expenses:
Cost of software license fees ............ 6.1 5.4 6.5 5.5
Cost of services ......................... 24.3 22.0 26.2 23.7
Research and development ................. 19.9 18.4 21.0 19.9
Sales and marketing ...................... 29.9 32.5 31.1 33.7
General and administrative ............... 11.3 8.7 10.4 9.9
----- ----- ----- -----
Total operating costs and expenses .... 91.5 87.0 95.2 92.7
===== ===== ===== =====
Income from operations ..................... 8.5 13.0 4.8 7.3
Other income (expense), net ................ 0.7 2.3 0.3 2.1
----- ----- ----- -----
Income before provision for income taxes.... 9.2 15.3 5.1 9.4
Provision for income taxes ................. 3.2 5.5 1.8 3.4
----- ----- ----- -----
Net income ................................. 6.0% 9.8% 3.3 6.0
===== ===== ===== =====
</TABLE>
QUARTER ENDED JUNE 30, 1996 COMPARED TO QUARTER ENDED JUNE 30, 1995
REVENUES. Total revenues, consisting of software license fees and service
revenues, increased 16.1%, from $15.8 million for the quarter ended June 30,
1995, to $18.4 million for the quarter ended June 30, 1996. Revenues in North
America increased 8.8%, from $14.8 million for the quarter ended June 30, 1995,
to $16.1 million for the quarter ended June 30, 1996. International revenues
grew 127.5%, from $1.0 million for the quarter ended June 30, 1995 to $2.3
million for the quarter ended June 30, 1996.
License fee revenues increased 20.2%, from $5.3 million for the quarter
ended June 30, 1995, to $6.4 million for the quarter ended June 30, 1996. The
growth was due primarily to continued market acceptance of the Company's
Infinium client/server products and continued growth in international revenues,
primarily in the Asia/Pacific Region. Service revenues increased 14.0%, from
$10.5 million for the quarter ended June 30, 1995, to $12.0 million for the
quarter ended June 30, 1996. The increase was primarily attributable to an
increase in the installed base of customers resulting in an increase in
maintenance revenues and, to a lesser extent, consulting services revenues.
COST OF SOFTWARE LICENSE FEES. Cost of software license fees consists
primarily of the cost of product media, manuals, shipping and amortization of
capitalized software development costs. Cost of software license fees increased
3.5%, from $960,000 for the quarter ended June 30, 1995, to $1.0 million for the
quarter ended June 30, 1996. Cost of software license fees as a percentage of
software license fee revenues decreased from 18.0% for the quarter ended June
8
<PAGE> 9
30, 1995, to 15.5% for the quarter ended June 30, 1996. The increase in dollar
amount was primarily due to an increase in the amortization expense resulting
from capitalized software development costs.
COST OF SERVICES. Cost of services consists of costs to provide training,
technical support and implementation consulting services to licensees of
Software 2000 products. Cost of services increased 4.8%, from $3.9 million for
the quarter ended June 30, 1995, to $4.0 million for the quarter ended June 30,
1996. Cost of services as a percentage of service revenues decreased from 36.7%
for the quarter ended June 30, 1995, to 33.8% for the quarter ended June 30,
1996. The increase in dollar amount of such costs resulted primarily from the
hiring of additional consulting services and customer support personnel as well
as normal salary increases.
RESEARCH AND DEVELOPMENT. Research and development expenses (net of
capitalized software development costs) consist primarily of engineering
personnel costs. Research and development expenses increased 7.3%, from $3.1
million for the quarter ended June 30, 1995, to $3.4 million for the quarter
ended June 30, 1996. Research and development expenses as a percentage of total
revenues were 19.9% for the quarter ended June 30, 1995 and 18.4% for the
quarter ended June 30, 1996. The increase in research and development expenses
was due primarily to the hiring of software engineers as well as normal salary
increases. The Company capitalized $848,000 of software development costs for
the quarter ended June 30, 1995, and $896,000 for the quarter ended June 30,
1996.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions, travel, promotional expenses, facilities and computers
and communications costs for direct sales offices. Sales and marketing expenses
increased 26.3%, from $4.7 million for the quarter ended June 30, 1995, to $6.0
million for the quarter ended June 30, 1996. Sales and marketing expenses as a
percentage of total revenues increased from 29.9% for the quarter ended June 30,
1995, to 32.5% for the quarter ended June 30, 1996. The increase in dollar
amount as well as a percentage of total revenues was attributable to increased
staffing in the direct sales force and an increase in commissions expense due to
increased software license fees, including an increase in the sale of Software
2000 products by business partners in international markets which typically
carry higher commission costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries of executive, administrative, financial and legal
personnel, as well as provisions for doubtful accounts and outside professional
fees. General and administrative expenses decreased 10.5%, from $1.8 million for
the quarter ended June 30, 1995, to $1.6 million for the quarter ended June 30,
1996. General and administrative expenses as a percentage of total revenues
decreased from 11.3% for the quarter ended June 30, 1995 to 8.7% for the quarter
ended June 30, 1996. The decrease in dollar amount as well as a percentage of
total revenues related primarily from certain expenses, such as consulting and
training costs related to the Company's ISO 9001 certification process, incurred
in the quarter ended June 30, 1995, that did not reoccur in the quarter ended
June 30, 1996.
PROVISION FOR INCOME TAXES. The provisions for federal, state, and foreign
income taxes were $511,000 and $1.0 million for the quarter ended June 30, 1995,
and for the quarter ended June 30, 1996, respectively. The effective tax rates
were 35.0% for the quarter ended June 30, 1995, and 36.0% for the quarter ended
June 30, 1996. The increase in the effective tax rate was due primarily to an
increase in the provision for state income taxes.
NINE MONTHS ENDED JUNE 30, 1996, COMPARED TO NINE MONTHS ENDED JUNE 30, 1995
REVENUES. Total revenues increased 17.5%, from $43.6 million for the nine
months ended June 30, 1995, to $51.2 million for the nine months ended June 30,
1996. Revenues in North America increased 13.8%, from $40.2 million for the nine
months ended June 30, 1995, to $45.8 million for the nine months ended June 30,
1996. International revenues grew 60.9%, from $3.4 million for the nine months
ended June 30, 1995, to $5.4 million for the nine months ended June 30, 1996.
License fee revenues increased 26.8%, from $12.6 million for the nine
months ended June 30, 1995, to $15.9 million for the nine months ended June 30,
1996. The growth was due primarily to continued market acceptance of the
Company's Infinium client/server products and continued growth in international
revenues, primarily in the Asia/Pacific Region. Service revenues increased
13.7%, from $31.0 million for the nine months ended June 30, 1995, to $35.3
million for the nine months ended June 30, 1996. The increase was primarily
attributable to an increase in the installed base of customers resulting in an
increase in both maintenance revenues and consulting services revenues.
9
<PAGE> 10
COST OF SOFTWARE LICENSE FEES. Cost of software license fees were $2.8
million for both the nine months ended June 30, 1995, and June 30, 1996. Cost of
software license fees as a percentage of software license fee revenues decreased
from 22.7% for the nine months ended June 30, 1995, to 17.7% for the nine months
ended June 30, 1996. The lack of increase in the cost of software fees given
that software license fees increased was primarily due to a $160,000 write-off
of certain capitalized software development costs in the first fiscal quarter of
1995 offset by increased capitalized software amortization in fiscal 1996.
COST OF SERVICES. Cost of services increased 6.4%, from $11.4 million for
the nine months ended June 30, 1995, to $12.1 million for the nine months ended
June 30, 1996. Cost of services as a percentage of service revenues decreased
from 36.8% for the nine months ended June 30, 1995, to 34.4% for the nine months
ended June 30, 1996. The increase in dollar amount as well as the percentage of
total revenues resulted primarily from the hiring of additional consulting
services and customer support personnel as well as normal salary increases.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
11.0%, from $9.2 million for the nine months ended June 30, 1995, to $10.2
million for the nine months ended June 30, 1996. Research and development
expenses as a percentage of total revenues were 21.0% for the nine months ended
June 30, 1995, and 19.9% for the nine months ended June 30, 1996. The increase
in research and development expense was due primarily to the hiring of software
engineers as well as normal salary increases. The Company capitalized $1.8
million of software development costs for the nine months ended June 30, 1995,
and $2.6 million for the nine months ended June 30, 1996. The Company received
$1.1 million in research funding from a business partner in the first nine
months of fiscal 1995 which resulted in lower net research and development
expenses and lower than normal capitalized software development costs in that
period. There was no external funding in fiscal 1996. The Company is currently
developing versions of its principal products designed both to run on hardware
platforms that use the Microsoft Windows NT operating system and to take
advantage of World Wide Web technologies and anticipates that research and
development expenditures in future periods may increase.
SALES AND MARKETING. Sales and marketing expenses increased 27.8%, from
$13.5 million for the nine months ended June 30, 1995, to $17.3 million for the
nine months ended June 30, 1996. Sales and marketing expenses as a percentage of
total revenues increased from 31.1% for the nine months ended June 30, 1995, to
33.7% for the nine months ended June 30, 1996. The increase in dollar amount as
well as the percentage of total revenues was attributable to increased staffing
in the direct sales force and an increase in commissions expense due to
increased software license fees, including an increase in the sale of Software
2000 products by business partners in international markets which typically
carry higher commission costs. The Company is in the process of expanding its
distribution channels, both domestically and internationally, with an emphasis
on the Asia/Pacific, Western Europe, and Latin American markets. Accordingly,
sales and marketing expenses may continue to increase in the future.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
11.4%, from $4.5 million for the nine months ended June 30, 1995, to $5.1
million for the nine months ended June 30, 1996. General and administrative
expenses as a percentage of total revenues decreased from 10.4% for the nine
months ended June 30, 1995, to 9.9% for the nine months ended June 30, 1996. The
increase in dollar amount of general and administrative expenses was related
primarily due to an increase in the provision for doubtful accounts and
additional costs and professional fees related to operating as a public company.
PROVISION FOR INCOME TAXES. The provisions for federal, state and foreign
income taxes were $783,000 and $1.7 million for the nine months ended June 30,
1995, and June 30, 1996, respectively. The effective tax rates were 35.0% for
the nine months ended June 30, 1995, and 36.0% for the nine months ended June
30, 1996. The increase in the effective tax rate was due primarily to an
increase in the provision for state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
From inception through the beginning of fiscal 1996, the Company financed its
operations principally through cash flows from operating activities and, to a
lesser extent, equipment financing arrangements. In the quarter ended December
31, 1995, the Company completed an initial public offering of Common Stock,
raising $12.8 million after underwriting discounts and offering expenses. On May
9, 1996, the Company completed a secondary offering of Common Stock, raising
$6.7 million after underwriting discounts and offering expenses.
10
<PAGE> 11
As of June 30, 1996, the Company had cash, cash equivalents and marketable
securities of $40.3 million, an increase of $24.1 million from the $16.2 million
of cash, cash equivalents and marketable securities held at September 30, 1995.
During the first nine months of fiscal 1996, the principal source of cash were
the net proceeds from the Company's Common Stock offerings as well as cash
provided by operating activities. The principal uses of cash during the period
were net purchases of marketable securities, expenditures to fund software
development, and purchases of computers and equipment.
The Company presently has available a $5.0 million working capital
revolving line of credit with a bank, which is secured by the Company's accounts
receivable. This facility is limited to the lesser of a percentage of the
Company's qualifying accounts receivable or $5.0 million and will expire in
October 1996. The agreement under which the line of credit was established
contains certain covenants, including provisions requiring the Company to
maintain specified financial ratios. The Company has not made any borrowings
under this facility and no amounts were outstanding at June 30, 1996.
The Company's accounts receivable balances, net of the allowance for
doubtful accounts, were $11.5 million at June 30, 1996, and $11.8 million at
September 30, 1995. Days sales of receivables outstanding increased to 57 days
at June 30, 1996, from 54 days at September 30, 1995. The increase in days sales
outstanding is attributable to several large contracts concluded in the last
quarter of the prior fiscal year that were collected in full in that quarter.
The Company expects its days sales outstanding to continue to increase as its
international revenues grow due to longer payment periods typically associated
with international sales. Deferred revenues were $24.5 million at June 30, 1996,
and $25.0 million at September 30, 1995.
The Company believes that cash and marketable securities, cash flows from
operations and funds available under the line of credit will be sufficient to
fund its operations at least for the next twelve months.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
The Company's quarterly revenues 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 revenues and operating results may
fluctuate as a result of a variety of factors, including the Company's lengthy
sales cycle, the proportion of revenues attributable to license fees versus
service revenues, changes in the level of operating expenses, demand for the
Company's products, the introduction of new products and product enhancements by
the Company or its competitors, changes in customer budgets, competitive
conditions in the industry and general economic conditions. Further, the
purchase of the Company's products often involves a significant commitment of
capital by its customers with the attendant delays frequently associated with
large capital expenditures and authorization procedures within an organization.
For these and other reasons, the sales cycles for the Company's products are
typically lengthy and subject to a number of significant risks over which the
Company has little or no control. The Company historically has operated with
little software license backlog because its software products are generally
shipped as orders are received. The Company has often recognized a substantial
portion of its revenues 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 revenues
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 revenues and only a
small portion of the Company's expenses vary with its revenues. Accordingly, the
Company believes that period to period comparisons of results of operations are
not necessarily meaningful and should not be relied upon as indicative of future
performance. Although the Company has been profitable in recent quarterly
periods, there can be no assurance that the Company will remain profitable on a
quarterly basis, if at all.
The Company's business has experienced and is expected to continue to
experience significant seasonality. In recent years, the Company has had greater
demand for its products in its fourth fiscal quarter and has experienced lower
revenues in its succeeding first and second fiscal quarters. The fluctuations
are caused primarily by customer purchasing patterns and the Company's sales
recognition programs which reward and recognize sales personnel on the basis of
achievement of annual performance quotas. Due to the foregoing factors and the
factors set forth under "Results of Operations" above, it is likely that in some
future quarter the Company's operating results will be below
11
<PAGE> 12
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 existing products and services and
to develop and introduce new products and services to meet changing client
requirements. There can be no assurance that the Company will be successful in
developing and marketing product enhancements or new products that respond to
technological change or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products and enhancements, or that any new
products and product enhancements it may introduce will achieve market
acceptance. In addition, there can be no assurance that the Company will not
encounter product development delays in the future or that, despite testing by
the Company, errors will not be found in new products or product enhancements
after commencement of commercial shipments, resulting in loss of market share,
delay in market acceptance, or warranty claims which could have a material
adverse effect upon the Company's business, operating results and financial
condition.
The Company's products, and maintenance and other services related thereto,
are presently designed for users of IBM AS/400 mid-range computers. Future
revenues from licenses of present products and sales of services and recurring
maintenance revenues are, therefore, dependent on continued widespread use of
the AS/400 and the continued support of such computers by IBM. Because the
Company's primary current source of revenues comes from customers using IBM
mid-range computers, a significant shift in the way the Company's customers use
computers may have a material adverse effect on the Company's business. In
addition, because the Company's current 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.
Although the Company is developing versions of its software applications
for additional hardware platforms and operating systems, such as the Microsoft
Windows NT operating system, as well as to operate over the Internet and within
corporate intranets, there can be no assurance that the Company will be
successful in developing and implementing such capabilities.
The business applications software market is highly competitive and rapidly
changing. A number of companies offer products similar to the Company's products
and target the same customers as the Company. The Company believes its ability
to compete depends upon many factors within and outside its control, including
the timely development and introduction of new products and product
enhancements, product functionality, performance, price, reliability, customer
service and support, sales and marketing efforts and product distribution. The
Company believes that competition in its industry is undergoing rapid change and
that the barriers to competition between market segments that have previously
existed are decreasing. Due to the relatively low barriers to entry in the
software market, the Company expects additional competition from other
established and emerging companies as the client/server business applications
software market continues to develop and expand. Increased competition may
result in price reductions, reduced gross margins, and loss of market share, any
of which would have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures will not have a material adverse
effect on the Company's business, operating results, and financial condition.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 6.1. Computation of net income per common share.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Software 2000, Inc. has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: August 14, 1996
SOFTWARE 2000, INC.
by:
/S/ ROBERT A. PEMBERTON
----------------------------------------
Robert A. Pemberton
Chief Executive Officer
/S/ DANIEL J. KOSSMANN
----------------------------------------
Daniel J. Kossmann
Chief Financial Officer
14
<PAGE> 15
SOFTWARE 2000, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
6.1 Computation of Net Income Per Common Share................... 16
15
<PAGE> 1
EXHIBIT 6.1
SOFTWARE 2000, INC.
<TABLE>
COMPUTATION OF NET INCOME PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income ................................. $ 946 $ 1,806 $1,450 $ 3,074
Net interest income pursuant to APB 15,
paragraph 38(b) ............................ 12 -- 53 --
------ ------- ------ -------
Net income attributable to common shares ... $ 958 $ 1,806 $1,503 $ 3,074
====== ======= ====== =======
Weighted average common and common
equivalent shares outstanding
a. Shares attributable to common stock
outstanding ............................ 8,252 10,508 8,248 9,732
b. Shares attributable to common stock
options and warrants pursuant to APB 15,
paragraph 38(a) ........................ 712 1,302 841 1,408
c. Shares attributable to common stock
options pursuant to SAB 83 ............ 306 -- 306 --
------ ------- ------ -------
Weighted average common and common
equivalent shares outstanding .............. 9,270 11,810 9,395 11,140
====== ======= ====== =======
Net income per share ....................... $ 0.10 $ 0.15 $ 0.16 $ 0.28
====== ======= ====== =======
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
ART. 5 FDS FOR 3RD QUARTER 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 6,606
<SECURITIES> 33,658
<RECEIVABLES> 12,729
<ALLOWANCES> 1,200
<INVENTORY> 0
<CURRENT-ASSETS> 57,575
<PP&E> 21,860
<DEPRECIATION> 16,475
<TOTAL-ASSETS> 70,657
<CURRENT-LIABILITIES> 36,788
<BONDS> 0
<COMMON> 110
0
0
<OTHER-SE> 32,127
<TOTAL-LIABILITY-AND-EQUITY> 70,657
<SALES> 15,912
<TOTAL-REVENUES> 51,180
<CGS> 2,819
<TOTAL-COSTS> 47,442
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 479
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 4,802
<INCOME-TAX> 1,728
<INCOME-CONTINUING> 3,074
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,074
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
