UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-Q
________________
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
Commission file number: 0-25578
SOFTWARE ARTISTRY, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1731589
(State or other jurisdiction of organization) (I.R.S. Employer
Identification Number)
9449 Priority Way West Drive, Indianapolis, IN 46240
(Address of principal executive offices) (Zip Code)
(317) 843-1663
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days.
Yes X No
As of July 25, 1996, there were 6,763,691 shares of Common Stock, no par
value, outstanding.
15
SOFTWARE ARTISTRY, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets --
As of June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations --
For the three months and six months ended June 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows --
For the six months ended June 30, 1996 and 1995 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
ITEM 6. Exhibits and Reports on Form 8-K 14
Signatures 14
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SOFTWARE ARTISTRY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
June 30, December 31,
1996 1995
------------ -------------
(Unaudited)
<S> <C> <C>
Assets
- - - ----------------------------------------------
Current assets:
Cash and cash equivalents $ 11,547 $ 15,816
Marketable securities 6,383 2,263
Trade account receivables, net 9,419 12,442
Prepaid expenses and other current assets 713 672
Deferred income taxes 103 103
------------ -------------
Total current assets 28,165 31,296
Property and equipment, net 4,497 3,318
Capitalized software development costs, net 1,050 820
Other assets 58 60
------------ -------------
Total assets $ 33,770 $ 35,494
============ =============
Liabilities and Stockholders' Equity
- - - ----------------------------------------------
Current liabilities:
Notes payable and capitalized leases $ 9 $ 22
Accounts payable and accrued expenses 1,294 1,095
Accrued compensation and related expenses 703 1,527
Income taxes payable 494 877
Deferred revenue 6,247 5,873
------------ -------------
Total current liabilities 8,747 9,394
Deferred income taxes 462 462
------------ -------------
Total liabilities 9,209 9,856
------------ -------------
Stockholders' equity:
Common stock, no par value; 10,000,000 shares
authorized, 6,758,799 and 6,777,148 shares
outstanding at June 30, 1996 and
December 31,1995, respectively 22,088 23,103
Retained earnings 2,473 2,535
------------ -------------
Total stockholders' equity 24,561 25,638
------------ -------------
Total liabilities and stockholders' equity $ 33,770 $ 35,494
============ =============
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
SOFTWARE ARTISTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
------- ------ -------- ------
<S> <C> <C> <C> <C>
Revenues:
Initial license fees $4,861 $4,151 $ 8,451 $7,026
Renewal license fees and services 2,665 1,556 5,147 2,915
------- ------ -------- ------
Total revenues 7,526 5,707 13,598 9,941
Operating expenses:
Costs of license fees 423 343 808 595
Costs of renewal license fees and services 1,483 978 2,672 1,744
Sales and marketing 3,548 2,093 6,680 3,978
Product development 1,151 690 2,168 1,228
General and administrative 772 482 1,520 884
Severance charge 207 -- 207 --
------- ------ -------- ------
Total operating expenses 7,584 4,586 14,055 8,429
------- ------ -------- ------
Income (loss) from operations (58) 1,121 (457) 1,512
Interest income, net 188 206 363 267
------- ------ -------- ------
Income (loss) before income taxes 130 1,327 (94) 1,779
Provision for (benefit of) income taxes 44 465 (32) 623
------- ------ -------- ------
Net income (loss) $ 86 $ 862 $ (62) $1,156
======= ====== ======== ======
Primary:
Net income (loss) per share $ 0.01 $ 0.11 $ (0.01) $ 0.17
======= ====== ======== ======
Shares used in computing net income (loss) per share 7,465 7,826 7,536 6,693
======= ====== ======== ======
Fully diluted:
Net income (loss) per share $ 0.01 $ 0.11 $ (0.01) $ 0.16
======= ====== ======== ======
Shares used in computing net income (loss) per share 7,465 7,881 7,536 7,291
======= ====== ======== ======
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
SOFTWARE ARTISTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended June 30,
1996 1995
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss) $ (62) $ 1,156
Items not affecting cash provided by operations:
Depreciation and amortization of property and equipment 667 278
Amortization of software development costs 166 79
Change in allowance for doubtful accounts (59) 99
Disposition of equipment -- 11
Amortization of financing costs -- 1
Changes in assets and liabilities:
Trade accounts receivable 3,082 1,122
Prepaid expenses and other current assets (41) (336)
Accounts payable and accrued expenses 199 (607)
Accrued compensation and related expenses (824) (573)
Income taxes payable (383) 172
Deferred revenue 374 641
Net cash provided by operations 3,119 2,043
-------- --------
Investing activities:
Purchase of marketable securities, net (4,120) (7,758)
Purchase of property and equipment (1,846) (596)
Capitalization of software development costs (396) (274)
Decrease (increase) in other assets 2 (7)
Net cash used in investing activities (6,360) (8,635)
-------- --------
Financing activities:
Proceeds from issuance of common stock, net of issuance costs -- 19,741
Proceeds from exercise of stock options 238 113
Purchase of common stock (1,253) --
Redemption of Series D preferred stock -- (563)
Payment of accumulated dividends on preferred stock -- (519)
Payment of interest payable to stockholders -- (362)
Principal payments on equipment obligations (13) (23)
Net cash provided (used) by financing activities (1,028) 18,387
-------- --------
Change in cash and cash equivalents (4,269) 11,795
Cash and cash equivalents, beginning of period 15,816 398
-------- --------
Cash and cash equivalents, end of period $11,547 $12,193
======== ========
Supplemental disclosures:
Cash paid for:
Interest expense $ 4 $ 10
Income taxes 351 452
Noncash investing and financing activities:
Transfer of preferred stock to common stock -- 2,900
Dividends accrued on preferred stock -- 31
</TABLE>
See accompanying notes.
<PAGE>
SOFTWARE ARTISTRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Software Artistry, Inc. (the "Company") develops, internationally
markets, and supports a family of internal and external customer support
software applications. To date, a significant portion of revenues have been
generated from North American customers. The Company does not have a
concentration of credit risk in any one industry, geographic region, or
customer.
A significant portion of the Company's revenues are derived from licenses
of Expert Advisor, a complete problem management system designed to resolve
customer problems.
The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
1. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's 1995 Annual Report to
Shareholders. In management's opinion, this information has been prepared on
the same basis as the annual consolidated financial statements and includes
all adjustments (consisting only of normal and recurring adjustments)
necessary for a fair presentation of the information.
The operating results for the interim periods are not necessarily
indicative of the results of operations for the full year.
2. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents. Those instruments with
maturities between three and twelve months are considered to be short-term
marketable securities. Cash equivalents and marketable securities consist
primarily of U.S. government securities, municipal issues and interest-bearing
deposits with major banks.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
Company classifies all of its marketable debt securities as available-for-sale
securities. These securities are valued at their fair value. There was no
significant difference between cost and fair value at June 30, 1996 or
December 31, 1995.
3. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Software development costs are accounted for in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed." Costs
associated with the planning and designing phase of software development,
including coding and testing activities necessary to establish technological
feasibility, are classified as product development and expensed as incurred.
Once technological feasibility has been determined, additional costs incurred
in development, including coding, testing, and product quality assurance, are
capitalized.
Amortization is provided on a product-by-product basis over the estimated
economic life of the software, not to exceed three years, using the
straight-line method. This method results in greater amortization than the
ratio of current year gross product revenues to current and anticipated future
gross product method. Amortization commences when a product is available for
general release to customers. Unamortized capitalized costs determined to be
in excess of the net realizable value of a product are expensed at the date of
such determination.
<PAGE>
Capitalized software development costs consists of the following amounts (in
thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ -------------
(Unaudited)
<S> <C> <C>
Capitalized costs $ 1,400 $ 1,004
Less accumulated amortization 350 184
$ 1,050 $ 820
============ =============
</TABLE>
4. NET INCOME PER SHARE
Primary net income per share is computed based upon the weighted average
number of common and common equivalent shares outstanding and gives effect to
certain adjustments. Common equivalent shares include outstanding stock
options and, for periods prior to 1996, Series A redeemable convertible
preferred stock; such stock was redeemed in connection with the Company's
initial public offering in March 1995. Common equivalent shares are included
in the per share calculation using the modified treasury stock method.
Fully diluted net income per share is computed in the same manner as
primary net income per share, except that all outstanding shares of Series B
and C redeemable convertible preferred stock are assumed to have been
converted to common stock at the time of issuance.
5. USE OF MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the unaudited condensed
financial statements and accompanying notes. Actual results could differ from
those estimates.
6. SEVERANCE CHARGE
Severance charge amounts include the compensation and benefits expense
resulting from certain management separations.
7. RECLASSIFICATIONS
Certain amounts in the 1995 unaudited condensed consolidated financial
statements have been reclassified to conform to the 1996 presentation.
<PAGE>
SOFTWARE ARTISTRY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report includes a number of forward-looking statements which reflect
the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks
and uncertainties, including those discussed in the Company's 1995 Annual
Report to Shareholders and Form 10-K for the year ended December 31, 1995,
that could cause actual results to differ materially from historical results
or those anticipated. In this report, the words "anticipates," "believes,"
"plans," "expects," or similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to update this discussion
except as may be legally required in its reporting statements.
RESULTS OF OPERATIONS
The following table sets forth certain income and expense items as a
percentage of total revenues, and the percentage change in dollar amounts of
such items, for the three and six months ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
Period to Period Change
-----------------------
Three Months Six Months
Ended Ended Three Months Six Months
June 30, June 30, 1996 1996
------------- ------------ Compared Compared
1996 1995 1996 1995 to 1995 to 1995
----- ----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Initial license fees 65% 73% 62% 71% 17% 20%
Renewal license fees and services 35 27 38 29 71 77
Total revenues 100 100 100 100 32 37
----- ----- ----- -----
Operating expenses:
Costs of license fees 6 6 6 6 23 36
Costs of renewal license fees and services 20 17 20 18 52 53
Sales and marketing 47 37 49 40 70 68
Product development 15 12 16 12 67 77
General and administrative 10 8 11 9 60 72
Severance charge 3 -- 1 -- * *
Total operating expenses 101 80 103 85 65 67
----- ----- ----- -----
Income (loss) from operations (1) 20 (3) 15 * *
Interest income, net 3 3 3 3 (9) 36
----- ----- ----- -----
Income (loss) before income taxes 2 23 -- 18 (90) *
Provision for (benefit of) income taxes 1 8 -- 6 (91) *
----- ----- ----- -----
Net income (loss) 1% 15% 0% 12% (90) *
===== ===== ===== =====
* Not a meaningful percentage
</TABLE>
General
The Company has not recognized North American initial license fee growth
in 1996 compared to 1995 (as discussed in Initial License Fees below).
However, the Company has made a strategic decision to increase investing in
sales and marketing activities, product development activities, and general
and administrative expenses. As a result of the level North American initial
license fees and the strategic investing decision, sales and marketing,
product development, and general and administrative expenses were a greater
percentage of total revenues in 1996 compared to comparable periods in 1995.
The Company plans to continue at least its current dollar level of sales
and marketing activities and to continue to increase product development and
general and administrative expenses during 1996. Additionally, the Company
plans to continue increasing services activities as discussed under Costs of
Renewal License Fees and Services below. The Company anticipates that, for the
remainder of 1996, expenses in these areas may continue to be a higher
percentage of total revenues for 1996 compared to comparable periods in 1995.
Revenues
The Company's revenues are derived from initial license fees, renewal
license fees, and services. The Company recognizes initial license fees upon
shipment. The Company unbundles the initial product support revenue (typically
12 months effective April 1, 1996 and typically three months prior to April 1,
1996) and services revenue included in the license agreement and recognizes
these revenues in renewal license fees and services. The Company's license
agreements do not provide a right of return. Continued support of the
Company's software typically requires the payment of an annual license renewal
fee which is offered at 18% of the then current initial license fee. Renewal
license fees include customer technical support and product enhancements and
are recognized ratably over the term of the license period. The Company
provides a comprehensive range of services, including consulting and
education; services revenue is recognized at the time the service is provided.
Allowances are maintained for potential credit losses, which have not been
significant to date.
Initial License Fees
Initial license fee revenues increased by 17% to $4.9 million for the
quarter ended June 30, 1996, from $4.2 million for the quarter ended June 30,
1995. For the six month period ended June 30, 1996, initial license fees
revenues increased by 20% to $8.5 million from $7.0 million for the comparable
1995 period. The continued growth in initial license fee revenues is
primarily a result of the expansion of both the direct sales force and
marketing operations and increased marketing efforts.
North American initial license fees were $3.9 million and $3.8 million
for the three months ended June 30, 1996 and 1995, respectively. For the six
month periods ended June 30, 1996 and 1995, North American initial license
fees were $6.5 million. The results in the second quarter and first half of
1996 reflect the effects of increased domestic competitive pressures, the
learning curve experienced by newer members of the North American sales force,
and the impact of the change in warranty period (discussed below in last
paragraph of Initial License Fees).
Initial license fees from outside North America were $1.0 million, or 21%
of total initial license fee revenues, for the quarter ended June 30, 1996,
compared with $342,000, or 8% of total initial license fee revenues, in the
same period in 1995. For the six month period ended June 30, 1996, initial
license fees from outside North America were $2.0 million, or 24% compared
with $497,000, or 7% of total initial license fee revenues, in the same period
in 1995. The increase in non-North American initial license fees is primarily
the result of increased sales and marketing activities in Europe. During
1995, the Company added both a Vice President, European Operations and a Vice
President, Asia/Pacific Operations. The Company expects that international
revenue will continue to be a larger portion of total revenues during the
remainder of 1996 than in 1995.
Beginning on April 1, 1996, the Company extended its standard warranty
period, which includes initial product support, from three months to 12 months
on all new contracts. As a result of extending the standard warranty period, a
larger percentage of each contract is now unbundled, which may have negatively
impacted the amount of initial license fee revenues recognized in the quarter
ended June 30, 1996. However, the impact of this change in standard warranty
period cannot be conclusively determined due to various factors involved in
the contract negotiation process.
Renewal License Fees and Services
Renewal license fees include a portion of initial license fee amounts
representing support (unbundled from the initial license fee) and annual
license renewals. Renewal license fee revenues increased by 78% to $1.6
million in the three months ended June 30, 1996 from $920,000 for the
comparable period in 1995. For the six month period ended June 30, 1996,
renewal license fee revenues increased by 79% to $3.2 million from $1.8
million for the comparable 1995 period. These increases are due to an
expanded user base as a result of an increased number of product installations
and license expansions.
Services revenues increased by 62% to $1.0 million in the second quarter
of 1996 from $636,000 in the second quarter of 1995. For the six month period
ended June 30, 1996, service revenues increased by 73% to $1.9 million from
$1.1 million for the comparable 1995 period. These increases were
attributable to the increase in revenues from the initial licensing of the
Company's products and a continuing emphasis on providing complete services
solutions to existing customers.
Costs of License Fees
Costs of license fees consist primarily of third party royalty and
commission payments, product media, documentation, duplication, shipment, and
amortization of capitalized software costs. Costs of license fees increased by
23% in the second quarter of 1996 and 36% for the first half of 1996 from
comparable periods in 1995. Costs of license fees represented 6% of total
revenues each of the periods presented. Costs of license fees may increase as
a percentage of total revenue in the remainder of 1996 because of recently
negotiated royalty contracts for items designed to increase product
functionality and performance that are now included in various products.
Costs of Renewal License Fees and Services
Costs of renewal license fees and services consist primarily of the costs
of providing customer technical support, consulting, education, and account
management. Costs of renewal license fees and services constituted 20% and 17%
of total revenues and 56% and 63% of renewal license fees and services revenue
in the second quarters of 1996 and 1995, respectively. Costs of renewal
license fees and services constituted 20% and 18% of total revenues and 52%
and 60% of renewal license fees and services revenue in the first six months
of 1996 and 1995, respectively. The dollar increase was due primarily to the
growth in the Company's installed customer base and the growth of customer
technical support, consulting, training, and account management staff. These
costs increased as a percent of total revenue also in part due to the increase
in services revenues.
The Company plans to continue expanding its account management group
which is included in costs of services and anticipates that the costs of
renewal license fees and services i) will increase in dollars and ii) may
continue to increase as a percentage of renewal license fees and services
during the remainder of 1996 compared to 1995.
Sales and Marketing
Sales and marketing expenses were 47% and 37% of total revenues in the
second quarters of 1996 and 1995, respectively. For the six month periods
ended June 30, 1996 and 1995, sales and marketing expenses were 49% and 40% of
total revenues, respectively. The dollar increase in sales and marketing
expenses was due to both an increase in domestic and international sales staff
and a significant expansion of marketing expenses, including increased staff
and promotional activities. The Company anticipates that the dollar amount of
sales and marketing expenses will continue to be a higher percentage of
revenues in 1996 compared to 1995 as this additional staff becomes educated
on the Company's product suite.
Product Development
The following table sets forth information regarding product development
costs (dollar amounts in thousands):
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
1996 1995 1996 1995
------- ------ ------- -------
<S> <C> <C> <C> <C>
Total product development costs $1,343 $ 837 $2,564 $1,502
Costs capitalized 192 147 396 274
Product development expense $1,151 $ 690 $2,168 $1,228
======= ====== ======= =======
Amortization of capitalized software
development costs (included in costs
of license fees) $ 103 $ 34 $ 166 $ 79
Percentage of costs capitalized 13% 18% 15% 18%
Percentage of costs capitalized,
net of amortization 5% 13% 8% 13%
</TABLE>
Product development expenses were 15% and 12% of total revenues in the
second quarter of 1996 and 1995, respectively. For the six month periods
ended June 30, 1996 and 1995, product development expenses were 16% and 12% of
total revenues, respectively. The increase in dollar amounts was due
primarily to the growth of the product development staff. The Company plans to
continue increasing its level of investment in product development during
1996. This increase is contingent upon the Company identifying and hiring
qualified candidates.
The Company capitalized software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed." The amounts
capitalized are dependent on the specific activities that the development
staff is engaged in during each year. Capitalized software development costs
are amortized over the estimated life of the related products (up to three
years) and amounts amortized are included in the costs of license fees.
General and Administrative
General and administrative expenses include the costs of finance, human
resources, information systems, and administrative departments of the Company.
General and administrative expenses increased by 60% to $772,000 in the
second quarter of 1996 from $482,000 in the second quarter of 1995,
representing 10% and 8% of total revenue for both periods, respectively. For
the six month periods ended June 30, 1996 and 1995, general and administrative
expenses were 11% and 9% of total revenues, respectively. The dollar increase
resulted primarily from additional personnel and other costs incurred to
support the growth of the Company's operations.
Severance Charge
Severance charge amounts include the compensation and benefits expense
resulting from certain management separations.
Interest Income, Net
Interest income, net was $188,000 and $206,000 in the second quarters of
1996 and 1995, respectively. This decrease was primarily attributable to 1996
stock repurchases, which have totaled $1.3 million. For the six month period
ended June 30, 1996, interest income increased to $363,000 from $267,000 for
the comparable 1995 period. This increase was due to interest earned on the
proceeds of the Company's initial public offering in March 1995.
In January 1996, the Company announced a stock repurchase plan of up to
500,000 shares of its common stock. To the extent that the Company repurchases
common stock as authorized, 1996 interest rates change in relation to 1995
interest rates, and cash is generated or used by operations, interest income
will be affected.
LIQUIDITY AND CAPITAL RESOURCES
In March 1995, the Company completed the sale of equity securities
through the initial public offering of its common stock. As a result of this
offering, the Company recorded proceeds of $19.7 million, net of related
underwriting discount and offering expenses. The Company generated $3.1
million and $2.0 million of cash from operations for the six months ended June
30, 1996 and 1995, respectively. These amounts are due primarily to a
decrease in accounts receivable in both years and net income in 1995.
Accounts receivable decreased to $9.4 million from $12.4 million and
deferred revenues increased to $6.2 million from $5.9 million at June 30, 1996
from December 31, 1995, respectively. The decrease in accounts receivable is
primarily attributable to the lower amount of initial license fee revenues in
the second quarter of 1996 compared to the fourth quarter of 1995. The
Company calculates days sales outstanding as (i) the amount of accounts
receivable at quarter end (ii) divided by the sum of quarterly revenues and
the change in deferred revenues (iii) multiplied by 90. The Company believes
this calculation to be relevant because deferred revenues (in addition to
recognized revenues) are typically billable, and therefore contribute to the
increase in accounts receivable each period.
Days sales outstanding were 119 days as of June 30, 1996 and 82 days as
of June 30, 1995. The increase in such days is primarily attributable to the
greater concentration of licensing activity at the end of the second quarter
of 1996 compared to licensing activity in the second quarter of 1995. Also, a
greater percentage of 1996 contracts in 1996 periods are with customers
outside of North America (see Initial License Fees discussion) and the
payments from these customers take longer, on average, to collect. A number of
the Company's contracts are billable over an extended period of time,
generally four to six months. Given the expected continuing concentration of
licensing activity at the end of each period, increasing international revenue
and certain extended billing terms, the Company expects that accounts
receivable and days sales outstanding may continue to be substantial in the
foreseeable future.
The Company used $6.4 million and $8.6 million for investment activities
in the first two quarters of 1996 and 1995, respectively. This decrease is
due primarily to a lower amount of marketable securities purchased in the
first six months of 1996 compared to the same time period in 1995. In the
first six months of 1996 and 1995, the Company expended $1.8 million and
$596,000, respectively, for purchases of property and equipment. Due to
planned business expansion, additions to property and equipment are expected
to continue, including the purchase of equipment for new employees, upgrading
equipment for existing employees, and potential expansion of Company
facilities. As of June 30, 1996, the Company had no material commitments for
capital expenditures.
In January 1996 the Company announced that the Board of Directors
authorized the Company to purchase up to 500,000 of the Company's common
stock. During the three months ended June 30, 1996, the Company purchased
90,000 shares at a cost of $672,000 and for the first six months of 1996, the
Company purchased 140,000 shares at a cost of $1.3 million.
As of June 30, 1996, the Company had $11.5 million of cash and cash
equivalents, $6.4 million of short-term investments, and working capital of
$19.4 million. In addition, at June 30, 1996 the Company had a working
capital line of credit of $2.0 million. Management believes that existing
cash balances and marketable securities, cash flow from operations, and the
line of credit commitment will be sufficient to meet the Company's currently
anticipated working capital and capital expenditure requirements at least
through the next twelve months.
OTHER CONSIDERATIONS
In addition to the other information set forth in this report, there are
certain risks that should be considered with regard to the Company and its
Common Stock. The following section lists some, but not all, of these risks
and uncertainties which may potentially cause a significant impact on the
Company's future results of operations. This section should be read in
conjunction with the Company's 1995 Annual Report to Shareholders and Form
10-K for the year ended December 31, 1995.
The Company may experience significant fluctuations in operating results
depending upon many factors, including, among others, the timing of new
application announcements and releases by the Company and its competitors,
budgeting cycles of its customers, demand for the Company's products, the
size and timing of customer orders, changes in the proportion of revenues
attributable to license fees versus renewal fees and services, changes in the
level of operating expenses, and general economic conditions. As a result, the
Company believes that period-to-period comparisons are not necessarily
meaningful and should not be relied upon as an indication of future
performance.
Although the Company has experienced rapid growth in recent periods, such
growth rates may not be sustainable and may not be indicative of future
operating results. The Company's continued growth will depend in part upon its
ability to enhance existing applications and develop and introduce new
applications that are technologically advanced, respond to evolving customer
requirements, respond to competitive products or announcements, and achieve
market acceptance of its products.
The Company's quarterly operating results fluctuate from quarter to
quarter with the fourth quarter historically having the highest total revenues
and operating income. The Company believes that this pattern will repeat in
the future.
The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to quarterly variations in the Company's operating
results, announcements of new products or technological innovations by the
Company or its competitors, as well as other events or factors. Changes in
earnings estimates made by brokerage firms and industry analysts relating to
the market in which Software Artistry does business, or relating to Software
Artistry specifically, have in the past resulted and could in the future
result in an immediate and adverse effect on the market price of the Company's
Common Stock. In addition, the stock market has from time to time experienced
extreme price and volume fluctuations, which have particularly affected the
market prices of securities of many high-technology companies and which have
often been unrelated to the operating performance of these companies. The
broad market fluctuations may adversely affect the market price of the
Company's Common Stock.
The Company currently derives substantially all of its revenue from
SA-Expert Advisor and related products and services and expects this
concentration to continue for the foreseeable future. As a result, any factor
adversely affecting the demand for, or pricing of SA-Expert Advisor and
related products and services would have a material adverse effect on the
Company's business and results of operations. The Company's future financial
performance will depend significantly on the successful development and
customer acceptance of new and enhanced versions of SA-Expert Advisor and
other products.
The Company believes that its future success will depend upon its ability
to attract, motivate, and retain qualified personnel, including key members of
senior management and members of the Company's sales force. Competition for
such personnel is intense. The inability to hire and retain qualified
personnel could have a material adverse effect on the Company's business or
results of operations. In addition, the rapid growth in the Company's
customer base and expansion of its applications have placed, and are expected
to continue to place, a strain on the Company's management and other
resources. The Company's future performance will depend in part on its
ability to implement and improve its operational, financial, and management
information systems and to hire, train, and manage its employees.
In conjunction with the license of its applications, the Company markets
a proprietary application development environment, including its own fourth
generation language. In the event that the Company's proprietary application
development environment does not keep pace with the technological changes
required by its customers, there can be no assurance that the Company would be
able to modify its proprietary application development environment or rewrite
its applications, and the inability or delays in doing so could have a
material adverse effect on the Company's business or results of operations.
Because the Company provides its licensees with the source code to
certain Company licensed applications, licensees have the ability to customize
such applications. However, there can be no assurance that all licensees will
appropriately isolate their customizations. As a result, the Company, while
not contractually obligated, may incur additional costs for services in excess
of those that would ordinarily be required, and customer satisfaction could
diminish substantially, resulting in a material adverse effect on the
Company's business or results of operations.
The market for the Company's applications is characterized by rapid
technological advances, changes in customer requirements and frequent new
product introductions and enhancements. The Company's growth and future
financial performance will depend in part upon its ability to enhance existing
applications and to develop and introduce new applications that meet
technological advances, respond to evolving customer requirements, respond to
competitive products or announcements, and achieve market acceptance. There
can be no assurance that the Company will be successful in developing and
marketing new applications or enhancements to existing applications on a
timely basis, or that its enhancements and new applications will adequately
address the changing needs of the marketplace and achieve market acceptance.
Any such failure could have a material adverse effect on the Company's
business or results of operations. Furthermore, programs as complex as those
offered by the Company may contain a number of undetected errors or bugs when
they are first introduced or as new versions are released. There can be no
assurance that, despite testing by the Company and by third-party test sites,
errors will not be found in future applications or enhancements, with the
possible result of delay in or loss of market acceptance and a material
adverse effect on the Company's business or results of operations.
The competitive factors affecting the market for the Company's software
and services include: vendor and product reputation, availability of products
on "popular" computer and communications platforms, scalability, integration
with other enterprise applications, functionality and features, ease-of-use,
product quality, performance, price, quality of support, documentation, and
training. The relative importance of each of these factors depends upon the
market segment. The inability to compete effectively with respect to these
factors could have a material adverse effect on the Company's business or
results of operations.
The Company is not aware that its products, trademarks, or other
proprietary rights significantly infringe the property rights of third
parties. However, there can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to
current or future products or that any such assertion may not require the
Company to enter into royalty arrangements or result in costly litigation. As
the number of software products in the industry increases and the
functionality of these products further overlap, the Company believes that
software developers may become increasingly subject to infringement claims.
Any such claims, with or without merit, can be time consuming and expensive to
defend.
Despite the high credit ratings on the Company's marketable securities,
there is no assurance such agencies will not default on their obligations
which could result in losses of principal and accrued interest to the Company.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 -- Statement re: Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the current period.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 2, 1996
SOFTWARE ARTISTRY, INC.
W. Scott Webber
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Stephen R. Head
Vice President, Finance
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
15
<TABLE>
<CAPTION>
Software Artistry, Inc.
Exhibit 11 -- Statement Re: Computation of Earnings Per Share
(Dollars in thousands, except per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Primary:
Average shares outstanding 6,751,925 6,701,579 6,762,913 5,197,147
Add common shares issued upon conversion of
Series A Redeemable Preferred Stock -- -- -- 423,724
Net effect of dilutive stock options 712,613 1,124,503 772,920 1,071,886
---------- ---------- ----------- -----------
Total 7,464,538 7,826,082 7,535,833 6,692,757
========== ========== =========== ===========
Net income (loss) $ 86 $ 862 $ (62) $ 1,156
Deduct dividends on Series B, C, and D
Redeemable Preferred Stock -- -- -- (31)
---------- ---------- ----------- -----------
Adjusted net income (loss) $ 86 $ 862 $ (62) $ 1,125
========== ========== =========== ===========
Per share amount $ 0.01 $ 0.11 $ (0.01) $ 0.17
========== ========== =========== ===========
Fully diluted:
Average shares outstanding 6,751,925 6,701,579 6,762,913 5,197,147
Add common shares issued upon conversion of
Series A, B, and C Redeemable Preferred Stock -- -- -- 914,428
Net effect of dilutive stock options 712,613 1,179,544 772,920 1,179,544
---------- ---------- ----------- -----------
Total 7,464,538 7,881,123 7,535,833 7,291,119
========== ========== =========== ===========
Net income (loss) $ 86 $ 862 $ (62) $ 1,156
Deduct dividends on Series D
Redeemable Preferred Stock -- -- - (8)
---------- ---------- ----------- -----------
Adjusted net income (loss) $ 86 $ 862 $ (62) $ 1,148
========== ========== =========== ===========
Per share amount $ 0.01 $ 0.11 $ (0.01) $ 0.16
========== ========== =========== ===========
</TABLE>
<TABLE> <S> <C>
[ARTICLE] 5
EXHIBIT 27
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
condensed financial statements included in the Company's Form 10-Q and is
qualified in its entirety by reference to such condensed financial statements.
[MULTIPLIER] 1,000
<S> <C>
[PERIOD-TYPE] 3-mos
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-END] JUN-30-1996
[CASH] 11,547
[SECURITIES] 6,383
[RECEIVABLES] 9,754
[ALLOWANCES] 335
[INVENTORY] 0
[CURRENT-ASSETS] 28,165
[PP&E] 6,308
[DEPRECIATION] 1,811
[TOTAL-ASSETS] 33,770
[CURRENT-LIABILITIES] 8,747
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 22,088
[OTHER-SE] 0
[TOTAL-LIABILITY-AND-EQUITY] 33,770
[SALES] 4,861
[TOTAL-REVENUES] 7,526
[CGS] 1,906
[TOTAL-COSTS] 1,906
[OTHER-EXPENSES] 5,678
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 4
[INCOME-PRETAX] 130
[INCOME-TAX] 44
[INCOME-CONTINUING] 0
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 86
[EPS-PRIMARY] 0.01
[EPS-DILUTED] 0.01
</TABLE>
