<PAGE> 1
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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 December 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 December
31, 1998 was 12,521,281.
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<PAGE> 2
INFINIUM SOFTWARE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheet at September 30, 1998 and
December 31, 1998......................................................... 3
Condensed Consolidated Statement of Operations for the three
months ended December 31, 1997 and 1998................................... 4
Condensed Consolidated Statement of Cash Flows for the three months
ended December 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 ........................................... 17
SIGNATURES.................................................................................... 18
EXHIBIT INDEX................................................................................. 19
EXHIBITS...................................................................................... 20
</TABLE>
2
<PAGE> 3
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, DECEMBER 31,
1998 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 12,708 $ 10,370
Marketable securities at fair market value ................................. 33,585 31,404
Accounts receivable, less allowance for doubtful accounts of $1,650 and
$1,623 at September 30, 1998 and December 31, 1998,
respectively ............................................................. 27,383 24,449
Deferred income taxes ...................................................... 2,482 2,482
Prepaid expenses and other current assets .................................. 6,103 6,273
--------- ---------
Total current assets ............................................... 82,261 74,978
--------- ---------
Property and equipment, net .................................................. 7,442 8,392
Capitalized software development costs, net .................................. 9,643 10,497
Goodwill and other intangible assets, net .................................... 2,245 2,104
Deferred income taxes ........................................................ 1,731 1,731
Other assets ................................................................. 3,093 3,087
--------- ---------
Total assets ....................................................... $ 106,415 $ 100,789
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 8,136 $ 7,566
Accrued expenses ........................................................... 14,672 12,113
Income taxes payable ....................................................... 3,068 1,672
Deferred revenue ........................................................... 35,991 33,399
--------- ---------
Total current liabilities .......................................... 61,867 54,750
--------- ---------
Deferred revenue ............................................................. 1,586 1,879
--------- ---------
Total liabilities .................................................. 63,453 56,629
--------- ---------
Common stock, $.01 par value; authorized 40,000 shares, issued
12,607 shares at September 30, 1998 and December 31, 1998................. 126 126
Additional paid-in capital ................................................. 36,644 36,779
Retained earnings .......................................................... 7,804 8,826
Cumulative translation adjustment .......................................... (319) (336)
--------- ---------
44,255 45,395
Less: treasury stock at cost, 89 and 85 shares at September 30,
1998 and December 31, 1998, respectively ................................. (1,293) (1,235)
--------- ---------
Total stockholders' equity ......................................... 42,962 44,160
--------- ---------
Total liabilities and stockholders' equity ......................... $ 106,415 $ 100,789
========= =========
</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
DECEMBER 31
-------------------
1997 1998
---- ----
<S> <C> <C>
Revenue:
Software license fees ............................... $ 7,718 $ 8,538
Service revenue ..................................... 16,516 21,545
------- -------
Total revenue ............................... 24,234 30,083
------- -------
Operating costs and expenses:
Cost of software license fees ....................... 1,549 1,927
Cost of services .................................... 6,916 9,450
Research and development ............................ 4,026 5,261
Sales and marketing ................................. 8,255 9,929
General and administrative .......................... 2,336 2,385
------- -------
Total operating costs and expenses .......... 23,082 28,952
------- -------
Income from operations ................................ 1,152 1,131
Other income, net ..................................... 397 431
------- -------
Income before provision for income taxes .............. 1,549 1,562
Provision for income taxes ............................ 496 500
------- -------
Net income ............................................ $ 1,053 $ 1,062
======= =======
Basic earnings per share .............................. $ 0.09 $ 0.08
======= =======
Diluted earnings per share ............................ $ 0.08 $ 0.08
======= =======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
<PAGE> 5
INFINIUM SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
DECEMBER 31
---------------------
1997 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................... $ 1,053 $ 1,062
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................................. 1,672 1,879
Allowance for doubtful accounts ........................................... 380 69
Deferred income taxes ..................................................... 21 --
Changes in operating assets and liabilities:
Accounts receivable ................................................... (332) 2,840
Prepaid expenses and other current assets ............................. (95) (183)
Other assets .......................................................... (238) 8
Accounts payable ...................................................... (609) (565)
Accrued expenses ...................................................... (2,104) (2,548)
Income taxes payable .................................................. (217) (1,236)
Deferred revenue ...................................................... 1,429 (2,252)
-------- --------
Net cash provided by (used in) operating activities ................. 960 (926)
-------- --------
Cash flows from investing activities:
Purchase of marketable securities ............................................ (4,300) (9,265)
Sale of marketable securities ................................................ 3,937 11,446
Purchase of property and equipment ........................................... (704) (1,850)
Capitalized software ......................................................... (1,036) (1,723)
-------- --------
Net cash used in investing activities ................................ (2,103) (1,392)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock
purchase plan .............................................................. 692 18
-------- --------
Net cash provided by financing activities ............................ 692 18
-------- --------
Effect of foreign exchange rate changes on cash ................................ (36) (38)
-------- --------
Net decrease in cash and cash equivalents ...................................... (487) (2,338)
-------- --------
Cash and cash equivalents, beginning of period ................................. 9,779 12,708
-------- --------
Cash and cash equivalents, end of period ....................................... $ 9,292 $ 10,370
======== ========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
<PAGE> 6
INFINIUM SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION
The information at December 31, 1997 and 1998 and for the three 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,
1998. 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 month period ended
December 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 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. The Company repurchased 191 shares at
a cost of $2,944 during fiscal year 1998. No shares were repurchased during the
quarter ended December 31, 1998. The Company reissued 102 shares during the year
ended September 31, 1998 and an additional 4 shares were reissued during the
quarter ended December 31, 1998.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No.131, Disclosures about
Segments of an Enterprise and Related Information. This statement is effective
for fiscal years beginning after December 15, 1997 (October 1, 1998 for the
Company). The Company will implement this statement as required. The future
adoption of 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 Company's results
of operations or its financial position.
4. COMPREHENSIVE INCOME
In the first quarter of fiscal 1999, the Company adopted SFAS No.130
Reporting Comprehensive Income. This statement requires disclosure of
comprehensive income and its components in interim and annual reports.
Comprehensive income includes all changes in stockholders' equity during a
period except those resulting from investments by stockholders and distributions
to stockholders. Accordingly, the components of comprehensive income include net
income, cumulative translation adjustments and unrealized gains and losses on
available-for-sale securities. For the three months ended December 31, 1997 and
1998, foreign currency translation adjustments resulted in losses of $36 and
$17, respectively.
6
<PAGE> 7
INFINIUM SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
4. COMPREHENSIVE INCOME, CONTINUED
There were no unrealized gains or losses on available-for-sale securities
for the three months ended December 31, 1997 and 1998.
5. NET INCOME PER COMMON 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.
The computation of basic and diluted earnings per share for the three
months ended December 31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
DEC. 31, 1997 DEC. 31, 1998
------------- -------------
PER PER
INCOME SHARES SHARE INCOME SHARES SHARE
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income available to
common stockholders $ 1,053 12,210 $ 0.09 $1,062 12,518 $ 0.08
======= ====== ====== ======
EFFECT OF DILUTIVE SECURITIES:
Stock options 1,545 334
------ ------
DILUTED EARNINGS PER SHARE:
Income available to
common stockholders $ 1,053 13,755 $ 0.08 $1,062 12,852 $ 0.08
======= ====== ====== ====== ====== ======
</TABLE>
7
<PAGE> 8
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, 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.
RESULTS OF OPERATIONS
Founded in 1981, Infinium Software develops, markets and supports
enterprise-level business software applications for, and provides consulting and
other services to, 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 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 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 NT servers.
The Company continues to invest in these products.
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 is comprised of 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.
8
<PAGE> 9
The following table sets forth for the periods indicated the Company's
condensed consolidated statement of operations data expressed as a percentage of
total revenue and the percentage of dollar increase period over period for the
three months ended December 31, 1997 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED DEC. 31,
---------------------------
% OF TOTAL % OF $
REVENUE INCREASE
------------- ---------
1997 1998 97 to 98
---- ---- ---------
<S> <C> <C> <C>
Revenue:
Software license fees ...................... 32% 28% 11%
Service revenue ............................ 68 72 30
--- ---
Total revenue ........................... 100 100 24
--- ---
Operating costs and expenses:
Cost of software license fees .............. 6 6 24
Cost of services ........................... 29 31 37
Research and development ................... 17 17 31
Sales and marketing ........................ 34 33 20
General and administrative ................. 10 8 2
--- ---
Total operating costs and expenses....... 96 95 25
--- ---
Income from operations ....................... 4 5 (2)
--- ---
Other income, net ............................ 2 1 9
--- ---
Income before provision
for income taxes ........................... 6 6 1
Provision for income
taxes ...................................... 2 2 1
--- ---
Net income ................................... 4% 4% 1%
=== ===
</TABLE>
QUARTER ENDED DECEMBER 31, 1998 COMPARED TO QUARTER ENDED DECEMBER 31, 1997
REVENUE. Total revenue increased 24%, from $24.2 million for the quarter
ended December 31, 1997 to $30.1 million for the quarter ended December 31,
1998. The increase was due to a greater overall market acceptance of the
Company's products and the addition of revenue from Windows NT products. In
addition, with each license agreement entered into, consulting services and
maintenance are typically also contracted resulting in an increase in service
revenue as the contracted services are delivered. Revenue from consulting
services continued to grow, driven by a widespread shortage of skilled technical
personnel and additional service offerings from Infinium.
Revenue in North America (United States and Canada) increased 24%, from
$22.3 million for the quarter ended December 31, 1997 to $27.7 million for the
quarter ended December 31, 1998. This is representative of 92% of total revenue
for the first quarter of fiscal year 1999 and is unchanged compared to the first
quarter of fiscal year 1998. EMEA (Europe, Middle East and Africa) revenue
increased 18% from $1.7 million for the quarter ended December 31, 1997 to $2.0
million for the quarter ended December 31, 1998 while its percentage of total
revenue remained unchanged at 7%. Other international regions, including
Asia-Pacific and Latin America, contributed 1% of total revenue for both the
first quarter of fiscal year 1998 and 1999. Revenue derived from the IBM AS/400
platform represented 88% of total revenue while revenue derived from the Windows
NT platform represented 12% for the first quarter ended December 31, 1998
compared to 97% and 3%, respectively, for the first quarter ended December 31,
1997.
Software license fee revenue increased 11%, from $7.7 million for the
quarter ended December 31, 1997 to $8.5 million for the quarter ended December
31, 1998. The growth was due primarily to the sale of NT applications in
addition to AS/400 applications. For the first quarter of fiscal year 1999,
software license fee revenue derived from Windows NT products was $1.9 million
or 22% of total software license fees compared to $0.5 million or 6% of software
license fees from the first quarter of fiscal year 1998. All other software
license fee revenue was derived from IBM AS/400 transactions.
9
<PAGE> 10
Service revenue increased 30%, from $16.5 million for the quarter ended
December 31, 1997 to $21.5 million for the quarter ended December 31, 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 increased service
offerings.
The table below summarizes the composition and growth in the Company's
service revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
--------------------------------
(in thousands) % INCREASE
1997 1998 97 TO 98
---- ---- --------
<S> <C> <C> <C>
Maintenance fee revenue $ 8,936 $10,361 16%
Consulting services revenue 7,580 11,184 48
------- -------
Total service revenue $16,516 $21,545 30%
======= =======
</TABLE>
COST OF SOFTWARE LICENSE FEES. Cost of software license fees consists
primarily of royalties on the sale of third party products, amortization expense
related to capitalized software and the cost of product media, manuals and
shipping. Cost of software license fees increased 24%, from $1.5 million for the
quarter ended December 31, 1997 to $1.9 million for the quarter ended December
31, 1998. Cost of software license fees as a percentage of software license fee
revenue increased from 20% for the quarter ended December 31, 1997 to 23% for
the quarter ended December 31, 1998. The increase in the dollar amount and as a
percentage is attributed to an increase in software license fees as well as to
royalties on third party product software sales as well as to an increase in
amortization of capitalized software.
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 37%, from $6.9 million
for the quarter ended December 31, 1997 to $9.5 million for the quarter ended
December 31, 1998. Cost of services as a percentage of service revenue increased
from 42% for the quarter ended December 31, 1997 to 44% for the quarter ended
December 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
the use of third party contractors.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of engineering personnel, related facilities and computer and
communications overhead, and third party contractor costs reduced by capitalized
software development costs and, when applicable, research funding. Research and
development expenses increased 31% from $4.0 million for the quarter ended
December 31, 1997 to $5.3 million for the quarter ended December 31, 1998.
Research and development expense as a percentage of total revenue was 17% for
both the first quarter of fiscal year 1998 and fiscal year 1999. The increase in
research and development expenses was due primarily to increased NT platform
development initiatives during the period. In addition to AS/400 platform
development efforts, the Company continues to invest in the further development
of its human resource and financial management product line designed exclusively
for the Microsoft NT server market. The Company capitalized $1.0 million of
software development costs for the quarter ended December 31, 1997 compared to
$1.7 million of software development costs for the quarter ended December 31,
1998. There were no research funding offsets during the quarters ending December
31, 1997 and 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 20% from $8.3 million for the quarter ended December 31, 1997 to $9.9
million for the quarter ended December 31, 1998. The increase was attributable
to increased staffing in both the direct sales force and marketing organization
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 first quarter of fiscal year 1998 and fiscal year 1999, respectively.
10
<PAGE> 11
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries of executive and administrative personnel and related
facilities and computers and communication overhead, as well as provisions for
doubtful accounts, insurance, investor relations and outside professional fees.
General and administrative expenses increased 2% from $2.3 million for the
quarter ended December 31, 1997 to $2.4 million for the quarter ended December
31, 1998. General and administrative expense as a percentage of total revenue
was 10% and 8% for the first quarter of fiscal year 1998 and fiscal year 1999,
respectively. The increase in dollar amount was primarily due to an increase in
staffing offset by a decrease in the provision for doubtful accounts.
PROVISION FOR INCOME TAXES. The provision for federal, state and foreign
income taxes remained constant at $0.5 million on an effective income tax rate
of 32% for both the quarter ended December 31, 1997 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash, cash equivalents and
marketable securities of $41.8 million resulting from a net use of cash, cash
equivalents and marketable securities of $4.5 million during the first three
months of fiscal year 1999. Operating activities consumed $0.9 million while
$1.7 million was used to fund capitalized software and $1.9 million was used for
purchases of computers and equipment.
Days sales outstanding ("DSO") remained unchanged at 73 days at December
31, 1998 compared to September 30, 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 decreased $2.3 million, from $37.6 million at September
30, 1998 to $35.3 million at December 31, 1998. The decrease in deferred revenue
primarily resulted from a decrease in the deferred consulting services component
due to increased services delivery during the quarter ended December 31, 1998
coupled with the seasonal decline in new customer bookings typically experienced
during the first fiscal quarter of a year. The deferred software license fee and
maintenance revenue components of deferred revenue remained relatively
consistent at December 31, 1998 compared to September 30, 1998.
The Company is currently contemplating expanding its offering of
complementary products and technology via third party software relationships
and/or acquisition. In connection with the acquisition of Cort in June 1998,
deferred consideration of $1.9 million is scheduled for payment within fiscal
1999. 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.
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
11
<PAGE> 12
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.
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
matter 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. Because the Company is in the business of selling
computer system products, the Company's risk of being subjected to lawsuits
relating to Year 2000 issues with its products is likely to be greater than that
of companies in other industries. The outcomes of any Year 2000 claims and the
impact of such claims on the Company cannot be determined at this time; such
outcomes will depend on the facts and circumstances of each situation and an
evolving state of law as these types of claims are addressed by the legal
systems worldwide.
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 information systems.
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 it 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).
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.
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
implementation precludes system replacement as a timely solution to the Year
2000 issue. Additionally, as the Year 2000 approaches, potential customers may
consider outsourcing their system
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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 relationships. 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 established fixed conversion rates between their sovereign currencies and
the euro and adopted 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 has modified the financial, human resource, and material
management application software products it has developed and marketed to end
users so that the systems, as modified, 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 have been made generally available
to its customers. Despite the foregoing, there can be no assurance that such
software products will not contain undetected errors or 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 resource 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
13
<PAGE> 14
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. Accordingly, the Company believes that period to period comparisons of
results of operations are not necessarily meaningful and should not be relied
upon as indicative of future performance.
The Securities and Exchange Commission (SEC) has recently raised issues
regarding the methodologies used in the allocation of purchase price to
in-process research and development (R&D) acquired and has required some
companies to adjust or restate prior period earnings to reduce allocations to
in-process R&D, thereby increasing intangible assets and future amortization
expense. While the Company believes its in-process R&D allocation is
appropriate, if the SEC were to require that the allocation be changed, this
would result in higher amortization expense, which would adversely impact future
operating results in addition to a restatement of historical operating results.
During fiscal year 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 as well as $375 of
acquisition costs. The amount allocated to in-process research and development
was determined by an independent appraiser and represented technology which had
not reached technological feasibility and had no alternative future use.
Accordingly, this amount of $7,796 was charged to operations at the acquisition
date.
The Company's business has experienced and is expected to continue to
experience significant seasonality. In recent years, the Company has experienced
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
14
<PAGE> 15
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 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.
A portion of the Company's revenue comes from customers using Microsoft NT
servers. In addition, the Company is continuing to develop additional 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 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 Company's continued growth and success depend to a significant extent
on the continued services of its senior management and other key employees and
the hiring of new qualified employees. Competition for highly-skilled business,
product development, technical and other personnel is increasingly intense due
to lower overall unemployment rates and the boom in information technology
spending. Accordingly, the Company expects to experience increased compensation
costs that may not be offset through either improved productivity or higher
prices. There can be no assurances that the Company will be successful in
continuously recruiting new personnel and in retaining existing personnel. The
Company does not have long-term employment or non-competition agreements with
its employees. The loss of key employees or the Company's inability to attract
additional qualified employees or retain other employees could have a material
adverse effect on the continued growth of the Company.
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.
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
15
<PAGE> 16
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.
16
<PAGE> 17
PART II - OTHER INFORMATION
Items 1 - 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
None
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Infinium Software, Inc. has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: February 12, 1999
INFINIUM SOFTWARE, INC.
by:
/s/ DANIEL J. KOSSMANN
----------------------------------
Daniel J. Kossmann
Chief Financial Officer
18
<PAGE> 19
INFINIUM SOFTWARE, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
27 Financial Data Schedule 19
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 10,370
<SECURITIES> 31,404
<RECEIVABLES> 26,072
<ALLOWANCES> 1,623
<INVENTORY> 0
<CURRENT-ASSETS> 74,978
<PP&E> 20,424
<DEPRECIATION> 12,032
<TOTAL-ASSETS> 100,789
<CURRENT-LIABILITIES> 54,750
<BONDS> 0
0
0
<COMMON> 126
<OTHER-SE> 44,034
<TOTAL-LIABILITY-AND-EQUITY> 100,789
<SALES> 8,538
<TOTAL-REVENUES> 30,083
<CGS> 1,927
<TOTAL-COSTS> 11,377
<OTHER-EXPENSES> 17,506
<LOSS-PROVISION> 69
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,562
<INCOME-TAX> 500
<INCOME-CONTINUING> 1,062
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,062
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
