<PAGE>
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, 1997
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 August 11, there were 6,872,344 shares of Common Stock, no par value,
outstanding.
<PAGE>
SOFTWARE ARTISTRY, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
ITEM 1.Financial Statements
Condensed Consolidated Balance Sheets --
As of June 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations --
For the three months and six months ended
June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows --
For the six months ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART IIOTHER INFORMATION
ITEM 6.Exhibits and Reports on Form 8-K 14
Signatures 14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOFTWARE ARTISTRY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,271 $ 15,606
Marketable securities 127 2,216
Trade account receivables, net of allowance for doubtful
accounts of $467 in 1997 and $480 in 1996 10,827 12,036
Accrued accounts receivable 2,535 1,749
Other receivables 66 366
Prepaid expenses 1,054 870
Deferred income taxes 262 262
-------- --------
Total Current Assets 35,142 33,105
Property and equipment, net 5,856 5,676
Capitalized software development costs, net 1,530 1,245
Other assets 58 51
-------- --------
Total Assets $ 42,586 $ 40,077
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 2,072 $ 2,556
Accrued compensation and related expenses 1,664 1,898
Income taxes payable 61 874
Deferred revenue 10,194 7,560
-------- --------
Total Current Liabilities $ 13,991 $ 12,888
Deferred income taxes 737 737
-------- --------
Total Liabilities 14,728 13,625
------- -------
Stockholders' equity:
Common stock, no par value; 10,000,000 shares authorized,
7,079,189 and 6,985,708 shares outstanding at June 30,
1997 and December 31, 1996, respectively 24,342 24,091
Treasury stock; 242,500 shares (2,028) (2,028)
Accumulated translation adjustments 54 (83)
Retained earnings 5,490 4,472
-------- --------
Total Stockholders' Equity 27,858 26,452
-------- --------
Total Liabilities and Stockholders' Equity $ 42,586 $ 40,077
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
SOFTWARE ARTISTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Initial license fees $ 6,535 $ 4,861 $11,819 $ 8,451
Renewal license fees and services 4,189 2,665 7,585 5,147
------- ------- ------- -------
Total Revenues 10,724 7,526 19,404 13,598
------- ------- ------- -------
Operating expenses:
Costs of license fees 628 423 1,032 808
Costs of renewal license fees and services 2,012 1,483 3,554 2,672
Sales and marketing 4,824 3,548 9,173 6,680
Product development 1,305 1,151 2,663 2,168
General and administrative 1,101 772 1,828 1,520
Severance charge -- 207 -- 207
------- ------- ------- -------
Total Operating Expenses 9,870 7,584 18,250 14,055
------- ------- ------- -------
Operating income (loss) 854 (58) 1,154 (457)
Interest income, net 228 188 388 363
------- ------- ------- -------
Income (loss) before income taxes 1,082 130 1,542 (94)
Provision for (benefit of) income taxes 368 44 524 (32)
------- ------- ------- -------
Net income (loss) $ 714 $ 86 $ 1,018 $ (62)
======= ======= ======= =======
Net income (loss) per share $ 0.09 $ 0.01 $ 0.13 $ (0.01)
======= ======= ======= =======
Shares used in computing net income (loss) per share 7,731 7,465 7,638 7,536
======= ======= ======= =======
</TABLE>
See accompanying notes.
4
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SOFTWARE ARTISTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1997 1996
------- --------
<S> <C> <C>
Operating activities:
Net income (loss) $ 1,018 $ (62)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 903 667
Amortization of software development costs 352 166
Change in allowance for doubtful accounts (13) (59)
Changes in assets and liabilities:
Trade accounts receivable 436 3,082
Prepaid expenses 116 (41)
Accounts payable and accrued liabilities (484) 199
Accrued compensation and related expenses (234) (824)
Income taxes payable (813) (383)
Deferred revenue 2,634 374
------- -------
Net Cash Provided By Operating Activities 3,914 3,119
------- -------
Investing activities:
Purchase of marketable securities, net 2,090 (4,120)
Purchase of property and equipment (1,083) (1,846)
Capitalization of software development costs (637) (396)
Decrease (increase) in other assets (7) 2
------- -------
Net Cash Provided (Used) By Investing Activities 363 (6,360)
------- -------
Financing activities:
Proceeds from exercise of stock options 251 238
Purchase of treasury stock -- (1,253)
Principal payments on equipment obligations -- (13)
------- -------
Net Cash Provided (Used) By Financing Activities 251 (1,028)
Accumulated translation adjustments 137 --
------- -------
Change in cash and cash equivalents 4,665 (4,269)
Cash and cash equivalents, beginning of period 15,606 15,816
------- -------
Cash and cash equivalents, end of period $20,271 $11,547
======= =======
Supplemental disclosures:
Cash paid for:
Interest expense $ -- $ 4
Income taxes 186 351
</TABLE>
See accompanying notes.
5
<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, although sales to non-North American customers
continue to increase as a percentage of revenues. 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 the
licensing and support of the Company's EXPERTISE-TM- suite of products for
Enterprise Support Management solutions, a complete problem management system
designed to proactively manage and improve the organization's processes for
help desk, network management, asset and change management, and end-user
empowerment; and the EXPERTISE-TM- suite of products for Customer Relationship
Management solutions, a complete problem management system designed to
address customer support and satisfaction.
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 1996 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, 1997
or December 31, 1996.
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.
6
<PAGE>
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.
Capitalized software development costs consists of the following amounts
(in thousands):
June 30, December 31,
1997 1996
-------- ------------
(Unaudited)
Capitalized costs $ 2,475 $ 1,838
Less accumulated amortization 945 593
-------- --------
$ 1,530 $ 1,245
======== ========
4. NET INCOME PER SHARE
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. Common equivalent shares are included in the per share calculation
using the modified treasury stock method. In February 1997, the Financial
Accounting Standards Board issued Statement No. 128, EARNINGS PER SHARE,
which is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The Company has not yet determined what
the impact of Statement No. 128 will be on the calculation of earnings per
share.
Fully diluted net income per share is computed in the same manner as
primary net income per share.
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. SUBSEQUENT EVENTS
On August 12, 1997, the Company acquired substantially all the assets of
Sirius Systems, Inc., an Atlanta-based sales management software developer.
The transaction is structured as an asset purchase and consists of an
initial cash payment of $5,125,000 and a $2,000,000 earn out, which was
funded through the Company's marketable securities and cash equivalents. The
Company expects to recognize a one-time charge in the third quarter of a
substantial portion of the initial cash payment related to in-process
research and development and other integration expenses. Additionally, the
Company expects a mildly dilutive impact on operating results in the third
and fourth quarters of 1997.
Sirius Systems, Inc., of Norcross, Georgia, was founded in late 1991 and
markets G2 client/server software. G2 helps sales managers and salespeople
gain control of sales processes, communicate effectively, forecast
accurately, and win more sales. The Sirius G2 product is fully operational
in nearly 60 national and international organizations.
7
<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
1996 Annual Report to Shareholders and Form 10-K for the year ended December
31, 1996, that could cause actual results to differ materially from
historical results or those anticipated. In this report, the words
"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.
In 1995, the Company began marketing the SA-EXPERTISE-TM- name as an
umbrella for its evolving product suite for Enterprise Support Management
(ESM). The EXPERTISE suite for Enterprise Support Management provides
organizations with an integrated solution for internal support for employees
and end users. In 1996, the Company began using the SA-EXPERTISE-TM- suite
designation for its Customer Relationship Management (CRM) products for
external customer support. At the end of the first quarter of 1997, the
Company released SA-EXPERTISE-TM- for CUSTOMER RELATIONSHIP MANAGEMENT (CRM).
During the second quarter of 1997, the Company increased its commitment
to and investment in its channel marketing organization, which develops
strategic alliances with technology partners and service partners as well as
value-added retailers and outsourcing channels. In the three months ended
June 30, 1997, the Company signed value-added reseller agreements with
MicroAge The Corporate Center; Science Applications International Corporation
(SAIC); and Siemens Nixdorf Informationssysteme AG (SNI ITS).
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 months and six months ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
Period to Period Change
Three Months Ended Six Months Ended ------------------------------
June 30, June 30, Three Months Six Months
------------------ ---------------- 1997 Compared 1997 Compared
1997 1996 1997 1996 to 1996 to 1996
------- ------ ------ ------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Initial license fees 61% 65% 61% 62% 34% 40%
Renewal license fees and services 39 35 39 38 57 47
--- --- --- ---
Total Revenues 100 100 100 100 43 43
--- --- --- ---
Operating expenses:
Costs of license fees 6 6 6 6 48 28
Costs of renewal license fees and services 19 20 18 20 36 33
Sales and marketing 45 47 47 49 36 37
Product development 12 15 14 16 13 23
General and administrative 10 10 9 11 43 20
Severance charge -- 3 -- 1 * *
--- --- --- ---
Total Operating Expenses 92 101 94 103 30 30
--- --- --- ---
Income (loss) from operations 8 (1) 6 (3) * *
Interest income, net 2 3 2 3 21 7
--- --- --- ---
Income before income taxes 10 2 8 -- * *
Provision for income taxes 3 1 3 -- * *
--- --- --- ---
Net income 7% 1% 5% 0% * *
=== === === ===
</TABLE>
_____________________
* Not a meaningful percentage
8
<PAGE>
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) 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 educational services. 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.
Total revenues increased 43% to $10.7 million for the quarter ended
June 30, 1997, from $7.5 million for the quarter ended June 30, 1996. For the
six month period ended June 30, 1997, total revenues increased by 43% to $19.4
from $13.6 million for the comparable period 1996 period.
International revenues accounted for approximately 31% and 16% of the
Company's total revenues for the three months ended June 30, 1997 and 1996,
respectively. International revenues accounted for approximately 27% and 17%
of the Companies total revenues for the six months ended June 30, 1997 and
1996, respectively.
INITIAL LICENSE FEES
Initial license fee revenues increased 34% to $6.5 million for the
quarter ended June 30, 1997, from $4.9 million for the quarter ended June 30,
1996. For the six month period ended June 30, 1997, initial license fee
revenues increased 40% to $11.8 million from $8.5 million for the comparable
1996 period. The increase in initial license fees was primarily due to
increased world-wide acceptance throughout the industry of the Company's
move to integrated applications suites verses single product sales.
North American initial license fees decreased $400,000 (-8%) to $3.5
million in the second quarter of 1997 compared to $3.9 million in the second
quarter of 1996. For the six month period ended June 30, 1997, North
American initial license fees increased $600,000 (9%) to $7.1 million
compared to $6.5 million for the comparable 1996 period. The results in the
second quarter reflect an increase in the percentage of new salespersons in
the domestic sales force due to involuntary and voluntary attrition.
Initial license fees from outside North America increased $2.0 million
(192%) to $3.0 million, or 46% of total initial license fees revenue for the
second quarter of 1997, from $1.0 million or 21% for the quarter ended June
30, 1996. For the six month period ended June 30, 1997, initial license fees
from outside North America increased by $2.7 million (135%) to $4.7 million,
or 40% of total license fees revenue, compared to $2.0 million or 24% for the
comparable 1996 period. The increase in initial license fees outside North
America is primarily the result of increased acceptance of the Company's
move to integrated applications suites verses single product sales both in
Europe and the Asia-Pacific regions.
As both the European and Asia-Pacific operations continue to mature, the
Company believes that initial license fees from outside North America will
continue to increase as a percentage of total revenues.
The initial license fees for products are based on the number of seats a
licensee contracts to use.
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 35% to $2.2 million
in the three months ended June 30, 1997 from $1.6 million for the comparable
period in 1996. For the six month period ended June 30, 1997, renewal license
fee revenues increased 30% to $4.2 million from $3.2 for the comparable 1996
period. The increase is due to an expanded user base as a result of an
increased number of product installations and license expansions.
9
<PAGE>
Services revenues increased 92% to $2.0 million in the second quarter of
1997 from $1.0 million in the second quarter of 1996. For the six month
period ended June 30, 1997, service revenues increased 77% to $3.3 million
from $1.9 million for the comparable 1996 period. This increase is
attributable to the increase in revenues from the initial licensing of the
SA-EXPERTISE-TM- products and the Company's commitment to being a total
solutions provider of products, services and training 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
48% to $628,000 in the second quarter of 1997 from $423,000 in the second
quarter of 1996. For the six month period ended June 30, 1997, costs of
license fees increased 28% to $1.0 million from $808,000 for the cmoparable
1996 period. Costs of license fees represented 6% of total revenues for the
three months ended June 30, 1997, and 1996. For the six month period ended
June 30, 1997, costs of license fees represented 5% of total revenues
compared to 6% for the comparable 1996 period. The Company expects these
costs to remain a similar percentage of total revenues for the remainder of
1997.
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
19% and 20% of total revenues and 48% and 56% of renewal license fees and
services revenue in the second quarters of 1997 and 1996, respectively.
Costs of renewal license fees and services constituted 18% and 20% of total
revenues and 47% and 52% of renewal license fees and services revenue in the
first six months of 1997 and 1996, respectively. The increase was due
primarily to the growth in the Company's installed customer base.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries, commissions,
incentives and travel expenses of sales and marketing personnel, as well as
promotional expenses. Sales and marketing expenses were 45% and 47% of
total revenues in the second quarters of 1997 and 1996, respectively. For
the six month periods ended June 30, 1997 and 1996, sales and marketing
expenses were 47% and 49% of total revenues, respectively. The increase was
primarily due to the development and staffing of the channel marketing
department.
PRODUCT DEVELOPMENT
The following table sets forth information regarding product development
costs (dollar amounts in thousands):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
------- ------- -------- ---------
<S> <C> <C> <C> <C>
Total product development costs $ 1,632 $ 1,343 $ 3,300 $ 2,564
Costs capitalized 327 192 637 396
------- ------- -------- --------
Product development expense $ 1,305 $ 1,151 $ 2,663 $ 2,168
======= ======= ======== ========
Amortization of capitalized software
development costs (included in costs
of license fees) $ 202 $ 103 $ 352 $ 166
Percentage of costs capitalized 20% 13% 19% 15%
Percentage of costs capitalized,
net of amortization 8% 5% 9% 8%
</TABLE>
Product development expenses were 12% and 15% of total revenues in the
second quarters of 1997 and 1996, respectively. For the six month periods
ended June 30, 1997 and 1996, product development expenses were 14% and 16%
of total revenues, respectively. The increase in dollar amounts was due
primarily to the growth of the development department. The decrease in
percentage of revenue is due primarily to the increase in costs capitalized
resulting from a higher concentration of resources dedicated to unreleased
products.
10
<PAGE>
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 represented 10% of total
revenue for the second quarters of 1997 and 1996. For the six month periods
ended June 30, 1997 and 1996, general and administrative expenses were 9% and
11% of total revenues, respectively.
SEVERANCE CHARGE
Severance charge amounts for the second quarter of 1996 include the
compensation and benefits expense resulting from certain management
separations.
INTEREST INCOME, NET
Interest income, net, was $228,000 and $188,000 for the three months
ended June 30, 1997 and 1996, respectively. For the six month period ended
June 30, 1997, interest income increased to $388,000 from $363,000 for the
six month period ended June 30, 1996. The increase in net interest income is
a result of continued re-investment of the interest earned on the Company's
marketable securities and cash equivalents.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $3.9 million and $3.1 million of cash from
operations for the six months ended June 30, 1997 and 1996, respectively.
The 1997 increase is due primarily to net income and an increase in deferred
revenues, as well as a decrease in accounts receivable.
Account receivables decreased to $13.4 million from $13.8 million
deferred revenues increased to $10.2 million from $7.6 million at June 30,
1997 from December 31, 1996, respectively. The decrease in accounts
receivable is primarily attributable to successful collection efforts during
the first six months of 1997, and the lower amount of initial license fee
revenues in the second quarter of 1997 compared to the fourth quarter of
1996.
The Company received $363,000 for investment activities in the first two
quarters of 1997, and used $6.4 million for investment activities for the
same period in 1996. In the first six months of 1997 and 1996, the Company
expended $1.1million and $1.8 million, 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
expansion of Company facilities. As of June 30, 1997, the Company had no
material commitments for capital expenditures.
As of June 30, 1997, the Company had $20.3 million of cash and cash
equivalents, $127,000 of short-term investments, and working capital of $21.2
million. In addition, at June 30, 1997 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.
In October 1996 the Company signed a lease for a new corporate office
facility in the same vicinity as its current corporate office. The expected
occupancy date is January 1998. The new facility is considered necessary to
meet the expected growth in company staff. The lease commitment is
substantially greater than the current lease, but is relatively comparable in
cost per square foot. In connection with this relocation, there may be
capital costs incurred by the company for leasehold improvements and other
equipment. In connection with the Company's decision to remain in Indiana,
state and city tax credits are available which could aggregate more than $10
million over a ten year period beginning in 1998.
11
<PAGE>
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 cause a significant impact on the Company's
future results of operations. This section should be read in conjunction
with the Company's 1996 Annual Report to Shareholders and Form 10-K for the
year ended December 31, 1996.
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 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 significant 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 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 the Company does business, or relating to the Company
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 the
SA-EXPERTISE-TM- suite of products and related services and expects this
concentration to continue for the foreseeable future. As a result, any
factor adversely affecting the demand for, or pricing of the SA-EXPERTISE-TM-
suite of products and services would have a material adverse effect on the
Company's business and results of operations. At the end of the first quarter
the company released SA-EXPERTISE-TM- for CUSTOMER RELATIONSHIP MANAGEMENT
(CRM), a suite of applications to address external customer support and
satisfaction. The Company's future financial performance will depend
significantly on the successful development and customer acceptance of new
and enhanced versions of the SA-EXPERTISE-TM- suite 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 and
development staff. 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.
12
<PAGE>
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 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.
13
<PAGE>
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 11, 1997
SOFTWARE ARTISTRY, INC.
/s/ W. Scott Webber Thomas E. Vanneman
- ------------------------------------ --------------------------
W. Scott Webber Thomas E. Vanneman
President, Chief Executive Officer Vice President, Finance and
and Director Administration, Chief Financial
(Principal Executive Officer) Officer, Secretary and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
14
<PAGE>
SOFTWARE ARTISTRY, INC.
EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary:
Average shares outstanding 6,831,566 6,751,925 6,808,598 6,762,913
Net effect of dilutive stock options 899,004 712,613 829,388 772,920
---------- ---------- ---------- ----------
Total 7,730,570 7,464,538 7,637,986 7,535,833
========== ========== ========== ==========
Net income (loss) $ 714 $ 86 $ 1,018 $ (62)
Per share amount $ 0.09 $ 0.01 $ 0.13 $ (0.01)
========== ========== ========== ==========
Fully diluted:
Average shares outstanding 6,831,566 6,751,925 6,808,598 6,762,913
Net effect of dilutive stock options 1,104,653 712,613 1,123,660 772,920
---------- ---------- ---------- ----------
Total 7,936,219 7,464,538 7,932,258 7,535,833
========== ========== ========== ==========
Net income (loss) $ 714 $ 86 $ 1,018 $ (62)
Per share amount 0.09 0.01 0.13 (0.01)
========== ========== ========== ==========
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ITEM 1 OF
FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 20,271
<SECURITIES> 127
<RECEIVABLES> 13,829
<ALLOWANCES> 467
<INVENTORY> 0
<CURRENT-ASSETS> 35,142
<PP&E> 9,321
<DEPRECIATION> 3,465
<TOTAL-ASSETS> 42,586
<CURRENT-LIABILITIES> 13,991
<BONDS> 0
0
0
<COMMON> 24,342
<OTHER-SE> 3,516
<TOTAL-LIABILITY-AND-EQUITY> 42,586
<SALES> 6,535
<TOTAL-REVENUES> 10,724
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,082
<INCOME-TAX> 368
<INCOME-CONTINUING> 714
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 714
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
