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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _______to______
Commission File Number 0-27030
INFINIUM SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2734036
------------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
25 Communications Way, Hyannis, MA 02601
(Address of principal executive offices, including Zip Code)
(508) 778-2000
(Registrant's telephone number, including area code)
----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 12 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
The number of shares outstanding of the registrant's Common Stock on March 31,
1998 was 12,498,754.
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INFINIUM SOFTWARE, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheet
at September 30, 1997 and March 31, 1998.................... 3
Condensed Consolidated Statement of Operations
for the three and six months ended
March 31, 1997 and 1998..................................... 4
Condensed Consolidated Statement of Cash Flows for
the six months ended March 31, 1997 and 1998................ 5
Notes to Condensed Consolidated Financial Statements........... 6
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations.................................................. 8
PART II - OTHER INFORMATION
ITEMS 1. - 5 Not applicable
ITEM 6. Exhibits and Reports on Form 8-K ........................... 16
SIGNATURES.................................................................. 17
EXHIBIT INDEX............................................................... 18
EXHIBITS.................................................................... 19
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFINIUM SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------ ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and marketable securities ................... $48,319 $52,750
Accounts receivable, less allowance for doubtful
accounts of $1,569 and $1,456 at September 30, 1997
and March 31, 1998, respectively ................................. 18,930 18,644
Deferred income taxes .............................................. 1,167 1,154
Prepaid expenses and other current assets .......................... 4,946 5,801
------- -------
Total current assets ....................................... 73,362 78,349
Property and equipment, net .......................................... 6,901 6,825
Capitalized software development costs, net .......................... 6,767 7,268
Goodwill and other intangible assets, net ............................ 1,835 1,579
Deferred income taxes ................................................ 471 439
Other assets ......................................................... 1,971 2,286
------- -------
Total assets ............................................... $91,307 $96,746
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 5,221 $ 5,183
Accrued expenses ................................................... 9,763 9,662
Income taxes payable ............................................... 2,394 2,554
Deferred revenue ................................................... 31,990 33,350
------- -------
Total current liabilities .................................. 49,368 50,749
------- -------
Common stock, $.01 par value; authorized 40,000 shares,
issued and outstanding 12,162 and 12,499 shares at
September 30, 1997 and March 31, 1998, respectively .............. 122 125
Additional paid-in capital ......................................... 33,325 35,414
Retained earnings .................................................. 8,502 10,940
Cumulative translation adjustment .................................. (10) (82)
------- -------
41,939 46,397
Less: treasury stock at cost, none and 25,000 shares at
September 30, 1997 and March 31, 1998, respectively .............. -- (400)
------- -------
Total stockholders' equity ................................. 41,939 45,997
------- -------
Total liabilities and stockholders' equity ................. $91,307 $96,746
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
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INFINIUM SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ----------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1997 1998 1997 1998
------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenue:
Software license fees ....................... $ 5,659 $ 8,878 $10,993 $16,596
Service revenue ............................. 14,151 17,240 27,097 33,756
------- ------- ------- -------
Total revenue .......................... 19,810 26,118 38,090 50,352
------- ------- ------- -------
Operating costs and expenses:
Cost of software license fees ............... 1,013 1,487 2,039 3,036
Cost of services ............................ 5,455 7,879 10,177 14,795
Research and development .................... 4,035 4,484 7,670 8,510
Sales and marketing ......................... 6,820 8,559 13,108 16,814
General and administrative .................. 1,848 2,121 3,551 4,457
Write-off of in-process research and
Development acquired ..................... 6,846 -- 6,846 --
------- ------- ------- -------
Total operating costs and expenses ..... 26,017 24,530 43,391 47,612
------- ------- ------- -------
Income (loss) from operations ................. (6,207) 1,588 (5,301) 2,740
Other income, net ............................. 469 448 995 845
------- ------- ------- -------
Income (loss) before provision (benefit)
for income taxes ............................ (5,738) 2,036 (4,306) 3,585
Provision (benefit) for income taxes .......... (2,007) 651 (1,506) 1,147
------- ------- ------- -------
Net income (loss) ............................. $(3,731) $ 1,385 $(2,800) $ 2,438
======= ======= ======= =======
Basic earnings (loss) per share ............... $ (0.31) $ 0.11 $ (0.24) $ 0.20
======= ======= ======= =======
Diluted earnings (loss) per share ............. $ (0.31) $ 0.10 $ (0.24) $ 0.18
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
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INFINIUM SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
1997 1998
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................................... $(2,800) $ 2,438
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization ............................................ 2,832 3,203
Allowance for doubtful accounts .......................................... 210 458
Deferred income taxes .................................................... (1,759) 45
Write-off of in-process research and development acquired ................ 6,846 --
Changes in operating assets and liabilities, net of effects
from the acquisition of Time (Open Systems) Limited for 1997:
Accounts receivable .................................................. (2,679) (94)
Prepaid expenses and other current assets ............................ (640) (829)
Other assets ......................................................... (100) (328)
Accounts payable ..................................................... (999) (54)
Accrued expenses ..................................................... (98) (99)
Income taxes payable ................................................. 299 485
Deferred revenue ..................................................... 811 1,284
------- -------
Net cash provided by operating activities .......................... 1,923 6,509
------- -------
Cash flows from investing activities:
Purchase of property and equipment .......................................... (1,164) (1,457)
Capitalization of software development costs ................................ (1,725) (1,907)
Acquisition of Time (Open Systems) Limited .................................. (3,443) --
Net cash used for investing activities .............................. (6,332) (3,364)
------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock
purchase plan ............................................................. 451 1,783
Purchase of treasury stock .................................................. -- (400)
------- -------
Net cash provided by financing activities ........................... 451 1,383
------- -------
Effect of foreign exchange rate changes on cash ............................... 1 (97)
------- -------
Net increase (decrease) in cash, cash equivalents and marketable
securities .................................................................. (3,957) 4,431
Cash, cash equivalents and marketable securities, beginning of period ......... 43,337 48,319
------- -------
Cash, cash equivalents and marketable securities, end of period ............... $39,380 $52,750
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
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INFINIUM SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION
The information at March 31, 1997 and 1998 and for the three and six month
periods then ended is unaudited, but includes all adjustments (consisting only
of normal recurring entries) which the Company's management believes to be
necessary for the fair presentation of the financial position, results of
operations, and changes in cash flows for the periods presented. The
accompanying interim condensed consolidated financial statements should be read
in conjunction with the financial statements and related notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1997. Certain information and notes normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the Securities and Exchange Commission rules
and regulations. Interim results of operations for the three and six month
periods ended March 31, 1998 are not necessarily indicative of operating results
for the full fiscal year.
2. 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 effective immediately. 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. The Company
repurchased 25 shares at a cost of $400 during the quarter ended March 31, 1998.
No shares were repurchased in fiscal year 1997. The Company expects to use the
repurchased stock to meet requirements of its employee stock option and stock
purchase plans.
3. 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 are computed using the treasury
stock method.
For the three and six months ended March 31, 1997, potential common stock of
555 and 606, respectively, of common shares issuable upon the exercise of stock
options are antidilutive as a result of the net loss for the periods, and have
been excluded from the respective diluted earnings per share computations.
6
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INFINIUM SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. NET INCOME PER SHARE, CONTINUED
The computation of basic and diluted earnings per share for the three and
six months ended March 31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MARCH 31, 1997 MARCH 31, 1998
---------------------------- --------------------------
INCOME PER INCOME PER
(LOSS) SHARES SHARE (LOSS) SHARES SHARE
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income (loss) available to
common stockholders $(3,731) 11,901 $(0.31) $1,385 12,363 $0.11
======= ====== ====== =====
EFFECT OF DILUTIVE SECURITIES
Stock options n/a 1,508
------ ------
DILUTED EARNINGS PER SHARE
Income (loss) available to
common stockholders $(3,731) 11,901 $(0.31) $1,385 13,871 $0.10
======= ====== ====== ====== ====== =====
<CAPTION>
SIX MONTHS ENDED
---------------------------------------------------------------
MARCH 31, 1997 MARCH 31, 1998
---------------------------- --------------------------
INCOME PER INCOME PER
(LOSS) SHARES SHARE (LOSS) SHARES SHARE
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income (loss) available to
common stockholders $(2,800) 11,508 $(0.24) $2,438 12,287 $0.20
======= ====== ====== =====
Income available to common
EFFECT OF DILUTIVE SECURITIES
Stock options n/a 1,526
------ ------
DILUTED EARNINGS PER SHARE
Income (loss) available to
common stockholders $(2,800) 11,508 $(0.24) $2,438 13,813 $0.18
======= ====== ====== ====== ====== =====
4. OTHER INCOME, NET
Other income, net consists of the following:
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1997 1998 1997 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income................. $490 $480 $1,038 $ 983
Foreign exchange loss........... (21) (32) (43) (138)
---- ---- ------ -----
$469 $448 $ 995 $ 845
==== ==== ====== =====
</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
All statements contained herein that are not historical facts, including
but not limited to, statements regarding anticipated future revenue and expense
levels and capital requirements, the Company's future product development and
marketing plans, the Company's ability to generate cash from operations, and the
Company's ability to attract and retain employees, are based on current
expectations. These statements are forward looking in nature and involve a
number of risks and uncertainties, as more fully described under "Factors
Affecting Future Performance." Actual results may differ materially from those
described in the forward-looking statements.
RESULTS OF OPERATIONS
Founded in 1981, Infinium Software develops, markets and supports
enterprise-level business software applications for mid-sized organizations
(typically companies with revenues of $50 million to $1 billion). The Company
has two primary product lines. One product line, designed for AS/400 computers,
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,
released during fiscal year 1997, is designed for use by customers using
Microsoft Windows NT servers. It is designed to automate the financial
management operations of mid-sized organizations. Additional NT applications are
under development and expected to be available during fiscal year 1998.
In January 1997, the Company acquired all of 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 of these software products for the
Microsoft NT server platform. The Company released Infinium Financials for
Microsoft Windows NT servers for general availability in September 1997.
The Company has currently under development a Microsoft NT server-based
Human Resources Management product. Infinium Human Resources for Microsoft
Windows NT servers is in customer test and is expected for general availability
in the third fiscal quarter. Also, the Company has entered into a strategic
alliance with Cambridge Technologies Partners to develop a new suite of
materials management applications for the Company which will complement existing
financial and human resource management applications for the Microsoft Windows
NT environment. These products form the basis for the Company's expansion into
the market for business applications designed for Windows NT servers.
The Company's revenue is derived from two sources: software license fees and
service revenue. Software license fees includes revenue from noncancelable
software license agreements entered into between the Company and its customers
with respect to both the Company's products and third party products distributed
by the Company. Software license fee revenue is recognized upon shipment of the
software and when all significant contractual obligations have been satisfied.
The Company's service revenue is comprised of software maintenance fees and fees
for consulting services. Maintenance fees are billed separately and are
recognized ratably over the period of the maintenance agreement, which is
typically one year. Consulting service revenue, which is not essential to the
functionality of the software products, is recognized as the services are
performed. Prior to the introduction of the Microsoft NT Server-based
applications, all software applications were developed, marketed and operated
predominately on the IBM AS/400 hardware platform. Accordingly, substantially
all revenue recognized and associated costs during that period were attributed
with AS/400 platform transactions.
8
<PAGE> 9
The following table sets forth for the periods indicated the Company's
condensed consolidated statement of income data expressed as a percentage of
total revenue and the percentage of dollar increase period over period for the
three and six months ended March 31, 1997 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
---------------------------- --------------------------
% OF TOTAL % OF $ % OF TOTAL % OF $
REVENUE INCREASE REVENUE INCREASE
---------------- -------- -------------- --------
1997 1998 97 TO 98 1997 1998 97 TO 98
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Software license fees ................. 29% 34% 57% 29% 33% 51%
Service revenue ....................... 71 66 22 71 67 25
--- --- --- ---
Total revenue ...................... 100 100 32 100 100 32
--- --- --- ---
Operating costs and expenses:
Cost of software license fees ......... 5 6 47 5 6 49
Cost of services ...................... 28 30 44 27 29 45
Research and development .............. 20 17 11 20 17 11
Sales and marketing ................... 34 33 25 34 33 28
General and administrative ............ 9 8 15 9 9 26
Write-off of in-process research
and development acquired ............ 35 -- -- 18 -- --
--- --- --- ---
Total operating costs and
expenses ........................ 131 94 -6 114 95 10
--- --- --- ---
Income (loss) from operations ........... (31) 6 -- (14) 5 --
--- --- --- ---
Other income, net ....................... 2 2 -4 3 2 -15
--- --- --- ---
Income (loss) before provision
(benefit) for income taxes ............ (29) 8 -- (11) 7 --
Provision (benefit) for income taxes .... (10) 2 -- (4) 2 --
--- --- --- ---
Net income (loss) ...................... (19)% 6% -- (7)% 5% --
=== === === ===
</TABLE>
Included in operating costs and expenses above is a one-time charge of $6.8
million for the three and six months ended March 31, 1997 as a result of the
write-off of in-process research and development acquired in connection with the
acquisition of Time (Open Systems) Ltd. On a pro forma basis, exclusive of this
one-time charge, operating costs and expenses would have been reported as $19.2
million and $36.5 million for the three and six months ended March 31, 1997,
respectively, resulting in a 28% and 30% increase for the current fiscal years
results over the same periods a year previous, respectively. Income from
operations, on a pro forma basis, would have been reported as $0.6 million and
$1.5 million for the three and six months ended March 31, 1997, respectively,
resulting in a 149% and 77% increase for the current fiscal years results over
the same periods a year previous, respectively. Net income, on a pro forma
basis, would have been reported as $0.7 million and $1.7 million for the three
and six months ended March 31, 1997, respectively, resulting in an increase of
92% and 48% for the current fiscal years results over the same periods a year
previous, respectively. Also on a pro forma basis, diluted earnings per share
would have been reported as $0.06 and $0.14 for the three and six months ended
March 31, 1997, respectively, resulting in a 67% and 29% increase for the
current fiscal years results over the same periods a year previous,
respectively.
In addition to traditional AS/400 expenditures, included in fiscal 1998
operating costs and expenses above are those expenditures incurred by the
Company with respect to the development efforts of the Microsoft NT server
products, as well as expenditures attributed to the hiring and training of
personnel to market and service this new product offering.
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
REVENUE. Total revenue increased 32%, from $19.8 million for the quarter ended
March 31, 1997 to $26.1 million for the quarter ended March 31, 1998. The
increase was due to a greater market acceptance of the company's products
resulting in increased software license fees. The Company further attributes
this growth to the increased demand of businesses requiring application software
solutions for the year 2000 issues which the Company offers. In addition, with
each license agreement entered into, generally
9
<PAGE> 10
consulting services and maintenance are contracted resulting in an increase in
service revenue as the contracted services are delivered.
Revenue in North America (United States and Canada) increased 33%, from
$17.8 million for the quarter ended March 31, 1997 to $23.7 million for the
quarter ended March 31, 1998. This is representative of 89% of total revenue for
both the second quarter of fiscal year 1997 and fiscal year 1998. EMEA (Europe,
Middle East and Africa) revenue grew 35%, from $1.7 million for the quarter
ended March 31, 1997 to $2.3 million for the quarter ended March 31, 1998 due to
greater market penetration. Other international regions, including Asia-Pacific
and Latin America, contributed 2% of total revenue for the second quarter of
fiscal year 1997 compared to 1% for the second quarter of fiscal year 1998.
Revenue derived from the IBM AS/400 platform represented 96% of total revenue
while revenue derived from the Windows NT platform represented 4% for the second
quarter ended March 31, 1998.
Software license fee revenue increased 57%, from $5.7 million for the
quarter ended March 31, 1997 to $8.9 million for the quarter ended March 31,
1998. The growth was due primarily to continued acceptance of the Company's
products enhanced by increased demand of businesses requiring application
software solutions that will be functionally operative with the year 2000. For
the second quarter of fiscal year 1998, software license fee revenue derived
from Windows NT products was $0.5 million. All other software license fee
revenue was derived from IBM AS/400 hardware platform transactions.
Service revenue increased 22%, from $14.2 million for the quarter ended
March 31, 1997 to $17.2 million for the quarter ended March 31, 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. Also contributing to the increase in consulting services revenue was an
increase in larger consulting service engagements as well as increased service
offerings.
The table below summarizes the composition and growth in the Company's
service revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
(in thousands) % INCREASE
1997 1998 97 TO 98
------- ------- ----------
<S> <C> <C> <C>
Maintenance fee revenue $ 8,378 $ 9,329 11%
Consulting services revenue 5,773 7,911 37
------- -------
Total service revenue $14,151 $17,240 22%
======= =======
</TABLE>
COST OF SOFTWARE LICENSE FEES. Cost of software license fees consists
primarily of royalties on the sales of third party products, amortization
expense related to capitalized software development costs and the cost of
product media, manuals and shipping. Cost of software license fees increased
47%, from $1.0 million for the quarter ended March 31, 1997 to $1.5 million for
the quarter ended March 31, 1998. Cost of software license fees as a percentage
of software license fee revenue decreased from 18% for the quarter ended March
31, 1997 to 17% for the quarter ended March 31, 1998. The increase in the dollar
amount is attributed to an increase in royalties of third party product software
sales offset in part by a decrease in amortization of capitalized software
development costs.
COST OF SERVICES. Cost of services consists of costs to provide product and
technical support, consulting services and training services to licensees of
Infinium Software products. Cost of services increased 44%, from $5.5 million
for the quarter ended March 31, 1997 to $7.9 million for the quarter ended March
31, 1998. Cost of services as a percentage of service revenue increased from 39%
for the quarter ended March 31, 1997 to 46% for the quarter ended March 31,
1998. The increase in the cost of services as a percentage of service revenue is
attributed to the relative increase in the amount of consulting services versus
maintenance at a lower gross margin. The increase in dollar amount of such costs
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 third party
contractors.
10
<PAGE> 11
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of engineering personnel and third party contractor costs reduced by
capitalized software development costs and, when applicable, research funding.
Research and development expenses increased 11% from $4.0 million for the
quarter ended March 31, 1997 to $4.5 million for the quarter ended March 31,
1998. The increase in research and development expenses was due primarily to NT
platform development initiatives during the period. In addition to traditional
AS/400 platform development efforts, the Company continues to invest in the
development of its human resource management product line designed exclusively
for the Microsoft NT server market. The Company also continues to invest in the
enhancement of its Microsoft NT server financial management applications. The
Company capitalized $0.8 million of software development costs and offset
research and development costs $0.1million due to research funding for the
quarter ended March 31, 1997 compared to $0.9 million of capitalized software
development costs and $30,000 of research funding for the quarter ended March
31, 1998.
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 25% from $6.8 million for the quarter ended March 31, 1997 to $8.6
million for the quarter ended March 31, 1998. The increase was attributable to
increased staffing in the direct sales force and additional marketing activities
in connection with the launch of the NT products, as well as an increase in
commission expense associated with higher revenue. Sales and marketing expense
as a percentage of total revenue was 34% and 33% for the second quarter of
fiscal year 1997 and fiscal year 1998, respectively.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries of executive, administrative, financial and legal
personnel, as well as provisions for doubtful accounts, insurance, investor
relations and outside professional fees. General and administrative expenses
increased 15% from $1.8 million for the quarter ended March 31, 1997 to $2.1
million for the quarter ended March 31, 1998. General and administrative expense
as a percentage of total revenue were 9% and 8% for the second quarter of fiscal
year 1997 and fiscal year 1998, respectively. The increase in dollar amount was
primarily due to incremental costs associated with the Time acquisition.
WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT ACQUIRED. As a result of
the acquisition of Time (Open System) Ltd. in January 1997, the Company recorded
a one-time charge to operations of $6.8 million for the write-off of in-process
research and development acquired in the second quarter of fiscal year 1997.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision (benefit) for federal,
state and foreign income taxes was ($2.0) million on an effective income tax
rate of 35% for the quarter ended March 31, 1997 compared to $0.7 million on an
effective income tax rate of 32% for the quarter ended March 31, 1998. The
decrease in the effective income tax rate for the second quarter of fiscal year
1997 to the second quarter of fiscal year 1998 is primarily due to the
implementation of worldwide income tax reduction strategies.
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997
REVENUE. Total revenue increased 32%, from $38.1 million for the six months
ended March 31, 1997 to $50.4 million for the six months ended March 31, 1998.
Software license fee revenue increased 51%, from $11.0 million for the six
months ended March 31, 1997 to $16.6 million for the six months ended March 31,
1998. The software license fee growth reflects a continued market acceptance of
the products and increased demand of businesses requiring application software
solutions for the year 2000 issues. Service revenue increased 25%, from $27.1
million for the six months ended March 31, 1997 to $33.8 million for the six
months ended March 31, 1998. The increase was primarily attributable to an
increase in the installed base of customers resulting in an increase in both
maintenance revenue and consulting service revenue.
11
<PAGE> 12
The following table sets forth a comparative breakout of the components of
service revenue.
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
--------------------------------
(IN THOUSANDS) % OF $
INCREASE
1997 1998 97 TO 98
------ ------- --------
<S> <C> <C> <C>
Maintenance fee revenue $16,532 $18,265 10%
Consulting services revenue 10,565 15,491 47
------- -------
Total service revenue $27,097 $33,756 25%
======= =======
</TABLE>
COST OF SOFTWARE LICENSE FEES. Cost of software license fees increased 49%,
from $2.0 million for the six months ended March 31, 1997 to $3.0 million for
the six months ended March 31, 1998. Cost of software license fees as a
percentage of software license fee revenue decreased from 19% for the six months
ended March 31, 1997 to 18% for the six months ended March 31, 1998.
COST OF SERVICES. Cost of services increased 45%, from $10.2 million for
the six months ended March 31, 1997 to $14.8 million for the six months ended
March 31, 1998. Cost of services as a percentage of service revenue increased
from 38% for the six months ended March 31, 1997 to 44% for the six months ended
March 31, 1998. The increase in both the dollar and as a percentage of service
revenue resulted primarily from an increase in the use of third party
consultants for delivery of consulting services into the customer base in
response to continued growth and to the continued demand for consulting
services.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 11%,
from $7.7 million for the six months ended March 31, 1997 to $8.5 million for
the six months ended March 31, 1998. The increase in research and development
expense was due primarily to increased NT platform development initiatives
during the current fiscal year. Capitalized software development costs and
research funding totaled $1.9 million for each of the six months ended March 31,
1997 and 1998.
SALES AND MARKETING. Sales and marketing expenses increased 28%, from $13.1
million for the six months ended March 31, 1997 to $16.8 million for the six
months ended March 31, 1998. The increase was attributable to increased staffing
in the direct sales force and additional marketing activities in connection with
the launch of the NT products, as well as an increase in commission expense
associated with higher revenue. Sales and marketing expense as a percentage of
total revenue were 34% and 33% for the first six months of fiscal year 1997 and
fiscal year 1998, respectively.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
26%, from $3.6 million for the six months ended March 31, 1997 to $4.5 million
for the six months ended March 31, 1998. The increase in dollar amount and as a
percent of revenue related primarily to incremental costs associated with the
Time acquisition. General and administrative expenses as a percentage of total
revenue were 9% for each of the six months ended March 31, 1997 and 1998.
WRITE-OFF OF RESEARCH AND DEVELOPMENT ACQUIRED. As a result of the
acquisition of Time (Open System) Ltd. in January 1997, the Company recorded a
one-time charge to operations of $6.8 million for the write-off of in-process
research and development acquired in the second quarter of fiscal year 1997.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision (benefit) for federal,
state and foreign income taxes was ($1.5) million and $1.1 million for the six
months ended March 31, 1997 and March 31, 1998, respectively. The effective tax
rates were 35% for the six months ended March 31, 1997 and 32.0% for the six
months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had cash, cash equivalents and marketable
securities of $52.8 million. During the first six months of fiscal year 1998,
the Company generated $4.4 million of cash, cash equivalents and marketable
securities of which $7.9 million was provided by operating and financing
activities while $1.9 million was used to fund software development and $1.5
million to purchase
12
<PAGE> 13
computers and equipment. The Company also used $0.4 million to repurchase common
shares under a stock repurchase program.
Days sales outstanding ("DSO") remained constant at 64 days at September 30,
1997 and March 31, 1998. The Company calculates DSO by dividing the ending
accounts receivable balance, net of allowance for doubtful accounts, by the
annualized revenue for the 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.
Deferred revenue increased $1.4 million, from $32.0 million at September 30,
1997 to $33.4 million at March 31, 1998. The increase in deferred revenue was
primarily due to an increase in deferred maintenance revenue as a result of
continued growth in the customer base. Deferred software license fees and
consulting services remained relatively consistent at March 31, 1998 compared to
September 30, 1997.
On February 9, 1998, the Company announced that it would be initiating a
stock repurchase program of up to $6.0 million of common stock effective
immediately. The Company expects to use the repurchased stock 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.
The Company is currently contemplating expanding its offering of
complementary products and technology via third party software relationships
and/or acquisition. In March 1998, the Company announced a strategic partnership
with Cambridge Technologies Partners to develop a new suite of materials
management applications for the Company which will complement existing financial
and human resources management applications for the Microsoft Windows NT
environment. Consummation of such agreements may result in the use of cash, cash
equivalents and marketable securities for prepaid royalties, development
funding, and acquisition. In addition, 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.
The Company believes that cash, cash equivalents and marketable securities
on hand and cash flows from operations will be sufficient to fund its operations
at least through fiscal 1998. While operating activities may provide cash in
certain periods, to the extent the Company experiences growth in the future, the
Company anticipates that its operating and investing activities may use cash,
and consequently, such growth may require the Company to obtain additional
sources of financing.
FACTORS AFFECTING FUTURE PERFORMANCE
The Company's quarterly revenue and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. Such fluctuations may result in volatility in the price
of the Company's common stock. Quarterly revenue and operating results may
fluctuate as a result of a variety of factors, including the Company's lengthy
sales cycle, the proportion of revenue attributable to license fees versus
service revenue, changes in the level of operating expenses, demand for the
Company's products, the introduction of new products and product enhancements by
the Company or its competitors, changes in customer budgets, competitive
conditions in the industry and general economic conditions. Further, the
purchase of the Company's products often involves a significant commitment of
capital by its customers with the attendant delays frequently associated with
large capital expenditures and authorization procedures within an organization.
For these and other reasons, the sales cycles for the Company's products are
typically lengthy and subject to a number of significant risks over which the
Company has little or no control. The Company historically has operated with
little software license backlog because its software products are generally
shipped as orders are received. The Company has often recognized a substantial
portion of its revenue in the last month of the quarter and often in the last
week of that month. As a result, license fees in any quarter are substantially
dependent on orders booked and shipped in the last month or last week of that
quarter. Accordingly, a small variation in the timing of recognition of revenue
for specific transactions is likely to adversely and disproportionately affect
the
13
<PAGE> 14
Company's operating results for a quarter because the Company establishes its
expenditure levels on the basis of its expected future revenue and only a small
portion of the Company's expenses vary with its revenue. Accordingly, the
Company believes that period to period comparisons of results of operations are
not necessarily meaningful and should not be relied upon as indicative of future
performance. Although the Company has been profitable 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
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.
As the Company's primary current source of revenue comes from customers
using IBM mid-range 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.
Although the Company has recently introduced and 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, there can
be no assurance that the Company will be successful in marketing and developing
these new products. 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. There can
be no assurance that the Company will be successful in developing additional
products for NT and marketing these products or will 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
14
<PAGE> 15
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.
Revenue from customers outside North America represented 8.7%, 10.6% and
11.4% of the Company's total revenue in fiscal 1995, 1996 and 1997,
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.
15
<PAGE> 16
PART II - OTHER INFORMATION
Items 1 - 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
On March 5, 1998, the Company filed a Current Report on Form
8-K, Item 5, reporting the Company's adoption of a stock
repurchase program of up to $6,000,000 of its common stock,
in open market transactions, subject to market conditions
and other factors, on the Nasdaq National Market or in
negotiated transactions.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Infinium Software, Inc. has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: May 14, 1998
INFINIUM SOFTWARE, INC.
by:
/s/ DANIEL J. KOSSMANN
------------------------------------
Daniel J. Kossmann
Chief Financial Officer
17
<PAGE> 18
INFINIUM SOFTWARE, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
27 Financial Data Schedule 18
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 52,750
<SECURITIES> 0
<RECEIVABLES> 20,100
<ALLOWANCES> 1,456
<INVENTORY> 0
<CURRENT-ASSETS> 78,349
<PP&E> 19,045
<DEPRECIATION> 12,220
<TOTAL-ASSETS> 96,746
<CURRENT-LIABILITIES> 50,749
<BONDS> 0
0
0
<COMMON> 125
<OTHER-SE> 45,872
<TOTAL-LIABILITY-AND-EQUITY> 96,746
<SALES> 16,596
<TOTAL-REVENUES> 50,352
<CGS> 3,036
<TOTAL-COSTS> 17,831
<OTHER-EXPENSES> 29,781
<LOSS-PROVISION> 458
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,585
<INCOME-TAX> 1,147
<INCOME-CONTINUING> 2,438
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,438
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.18
</TABLE>
