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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
________________
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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)
<TABLE>
<CAPTION>
<S> <C>
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)
</TABLE>
(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 April 30, 1996, there were 6,824,051 shares of Common Stock, no par
value, outstanding.
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SOFTWARE ARTISTRY, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION ----
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets --
As of March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations --
For the three monthssix months ended March 31June, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows --
For the three months ended March 31June, 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 II OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 14
ITEM 6. Exhibits and Reports on Form 8-K 14
Signatures 14
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOFTWARE ARTISTRY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
March 31 December 31,
1997 1996
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $20,019 $15,606
Marketable securities 2,117 2,216
Trade account receivables, net of allowance for doubtful
accounts of $390 in 1997 and $480 in 1996 10,220 13,785
Other receivables 53 366
Prepaid expenses 1,019 870
Deferred income taxes 262 262
------- -------
Total current assets 33,690 33,105
Property and equipment, net 6,103 5,676
Capitalized software development costs, net 1,405 1,245
Other assets 56 51
------- -------
Total assets $41,254 $40,077
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 3,024 $ 2,556
Accrued compensation and related expenses 1,663 1,898
Income taxes payable 93 874
Deferred revenue 8,748 7,560
------- -------
Total current liabilities 13,528 12,888
Deferred income taxes 737 737
------- -------
Total liabilities 14,265 13,625
------- -------
Stockholders' equity:
Common stock, no par value; 10,000,000 shares
authorized, 7,066,551 and 6,985,708 shares
outstanding at March 31, 1997 and
December 31,1996, respectively 24,282 24,091
Treasury stock; 242,500 shares (2,028) (2,028)
Accumulated translation adjustments (41) (83)
Retained earnings 4,776 4,472
------- -------
Total stockholders' equity 26,989 26,452
------- -------
Total liabilities and stockholders' equity $41,254 $40,077
------- -------
------- -------
See accompanying notes.
3
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SOFTWARE ARTISTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended March 31,
-----------------------------
1997 1996
-------------- ------------
Revenues:
Initial license fees $5,284 $3,590
Renewal license fees and services 3,396 2,482
-------------- ------------
Total revenues 8,680 6,072
-------------- ------------
Operating expenses:
Costs of license fees 405 385
Costs of renewal license fees and services 1,541 1,189
Sales and marketing 4,349 3,132
Product development 1,358 1,017
General and administrative 727 748
-------- -------
Total operating expenses 8,380 6,471
-------- -------
Operating income (loss) 300 (399)
Interest income, net 160 175
-------- -------
Income (loss) before income taxes 460 (224)
Provision for (benefit of) income taxes 156 (76)
-------- -------
Net income (loss) $ 304 $ (148)
-------- -------
-------- -------
Net income (loss) per share $ 0.04 $(0.02)
-------- -------
-------- -------
Shares used in computing net income (loss) per share 7,510 7,567
-------- -------
-------- -------
See accompanying notes.
4
<PAGE>
SOFTWARE ARTISTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Operating activities:
Net income (loss) $ 304 $ (148)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 429 282
Amortization of software development costs 151 63
Change in allowance for doubtful accounts (90) 55
Changes in assets and liabilities:
Trade accounts receivable 3,655 3,039
Prepaid expenses 164 (69)
Accounts payable and accrued liabilities 468 (234)
Accrued compensation and related expenses (235) (1,040)
Income taxes payable (781) (336)
Deferred revenue 1,188 806
--------- ---------
Net cash provided by operating activities 5,253 2,418
--------- ---------
Investing activities:
Purchase of marketable securities, net 99 (3,323)
Purchase of property and equipment (856) (1,011)
Capitalization of software development cos (311) (204)
Decrease (increase) in other assets (5) 3
--------- ---------
Net cash used in investing activities (1,073) (4,535)
--------- ---------
Financing activities:
Proceeds from issuance of common stock, net of issuance costs 25 --
Proceeds from exercise of stock options 166 108
Purchase of treasury stock -- (582)
Principal payments on equipment obligations -- (8)
--------- ---------
Net cash provided (used) by financing activities 191 (482)
Accumulated translation adjustments 42 --
--------- ---------
Change in cash and cash equivalents 4,413 (2,599)
Cash and cash equivalents, beginning of period 15,606 15,816
--------- ---------
Cash and cash equivalents, end of period $20,019 $13,217
--------- ---------
--------- ---------
Supplemental disclosures:
Cash paid for:
Interest expense $ -- $ 3
Income taxes 179 260
</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
customer have been increasing. 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 resolve customer problems.
The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Software Artistry Europe, Inc.
and Software Artistry International, Inc. 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
March 31, 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.
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.
6
<PAGE>
Capitalized software development costs consists of the following amounts
(in thousands):
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
Capitalized costs $2,149 $1,838
Less accumulated amortization 744 593
------ ------
$1,405 $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 dillutive
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.
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.
During the first three months of 1997, the Company executed a strategic
partnership with Coopers & Lybrand, L.L.P. The alliance delineates that the
companies will cooperatively design, develop and market applications and
professional services for both the CUSTOMER RELATIONSHIP MANAGEMENT and
ENTERPRISE SUPPORT MANAGEMENT market segments. At the end of the first
quarter of 1997, the Company released SA-EXPERTISE-TM for CUSTOMER
RELATIONSHIP MANAGEMENT (CRM).
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 monthssix months ended March 31 , 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------ Percentage increase
1997 1996 1997 over 1996
------ ------- --------------------
<S> <C> <C> <C>
Revenues:
Initial license fees 61% 59% 47%
Renewal license fees and services 39 41 37
--- ---
Total revenues 100 100 43
--- ---
Operating expenses:
Costs of license fees 5 6 5
Costs of renewal license fees and services 18 20 30
Sales and marketing 50 52 39
Product development 15 17 34
General and administrative 8 12 (3)
--- ---
Total operating expenses 96 107 30
--- ---
Operating income (loss) 4 (7) *
Interest income, net 2 3 (9)
--- ---
Income (loss) before income taxes 6 (4) *
Provision for (benefit of) income taxes 2 (2) *
--- ---
Net income (loss) 4% (2)% *
--- ---
--- ---
</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 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.
Total revenues increased by 43% to $8.7 million for the quarter ended
March 31, 1997, from $6.1 million for the quarter ended March 31, 1996. A
contributing factor to the earnings growth rate was a 37% increase in average
contract revenue for the first quarter of 1997 compared to the first quarter
of 1996.
International revenues accounted for approximately 22% and 29% of the
Company's total revenues for the first quarter of 1997 and 1996, respectively.
INITIAL LICENSE FEES
Initial license fee revenues increased by 47% to $5.3 million for the
quarter ended March 31, 1997, from $3.6 million for the quarter ended March
31, 1996. The increase in initial license fees was primarily due to a growing
acceptance throughout the industry of the Company's move to integrated
applications suites verses single product sales.
North American initial license fees increased by $1.1million (42%) to
$3.7 million in the first quarter of 1997 compared to $2.6 million in the
first quarter of 1996.
Initial license fees from outside North America increased by $600,000
(60%) to $1.6 million, or 30% of total initial license fees revenue for the
first quarter of 1997, from $1.0 million in the first quarter of 1996. The
increase in non-North American initial license fees is primarily the result
of increased sales and marketing activities in Europe.
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. 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 by 25% to $2.0
million in the three months ended March 31, 1997 from $1.6 million
for the comparable period in 1996. The increase is due to an expanded user
base as a result of and increased number of product installations and license
expansions.
Services revenues increased by 55% to $1.4 million in the first
quarter of 1996 from $903,000 in the first quarter of 1996. This increase is
attributable to the increase in revenues from the initial licensing of the
SA-EXPERTISETM products and the Company's commitment to being the 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
by 5% to $405,000 in the first quarter of 1997 from $385,000 in the first
quarter of 1996. Costs of license fees represented 5% of total
revenues for the first three months of 1997, compared to 6% for the first
three months of 1996, respectively. The Company expects these costs to
remain a similar percentage of total revenues for the remainder of 1997.
9
<PAGE>
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 18% and
20% of total revenues and 45% and 48% of renewal license fees and services
revenue in the first quarters of 1997 and 1996, respectively.
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 50% and 52% of
total revenues in the first quarters of 1997 and 1996, respectively.
PRODUCT DEVELOPMENT
The following table sets forth information regarding product development
costs (dollar amounts in thousands):
Three months ended March 31,
----------------------------
1997 1996
----------- -----------
Total product development costs $1,669 $1,221
Costs capitalized 311 204
------ -------
Product development expense $1,358 $1,017
------ -------
------ -------
Amortization of capitalized software
development costs (included in costs
of license fees) $ 151 $ 63
Percentage of costs capitalized 19% 17%
Percentage of costs capitalized,
net of amortization 10% 12%
Product development expenses were 15% and 17% of total revenues in the
first quarter of 1997 and 1996, respectively. The increase in dollar amounts
was due primarily to the growth of the development. 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 The Company plans to continue increasing its level of investment in
product development during 1997. The 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 represented 8% and 12%
of total revenue for the same first quarters of 1997 and 1996, respectively.
The dollar decrease resulted primarily from an adjustment in bad debt expense
resulting from the successful accounts receivable collection efforts during
the first quarter of 1997. The Company anticipates that the dollar amount of
general and administrative expenses will increase during the remainder of
1997 compared to 1996.
INTEREST INCOME, NET
Interest income, net was $160,000 and $175,000 in the first
quarters of 1997 and 1996, respectively. The decrease in net interest income
is a result of a slight decline in the average interest rate earned on
investments.
In January 1996, the Company announced a stock repurchase plan of up to
500,000 shares of its common stock. In January 1997, the Company announced
the discontinuation of its stock repurchase program, having repurchased
242,500 shares of its common stock.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $5.3 million and $2.4 million of cash from
operations for the three monthssix months ended March 31, 1997 and 1996,
respectively. For 1997 and 1996, this amount is due primarily to a decrease
in account receivables and non-cash expenses.
Account receivables decreased to $10.2 million from $13.8 million and
deferred revenues increased to $8.8 million from $7.6 million at March 31,
1997 from December 31, 1996, respectively. The decrease in accounts
receivable is primarily attributable to the successful collection efforts
during the first quarter of 1997, and the lower amount of initial license fee
revenues in the first quarter of 1997 compared to the fourth quarter of 1996.
The Company used $1.1 million and $4.5 million for investment activities
in the first quarters of 1997 and 1996, respectively. In the first quarters
of 1997 and 1996, the Company expended $856,000 and $1.0 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 potential expansion of Company
facilities. As of March 31, 1997, 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. In January 1997, the Company announced that it had terminated the
purchase of the Company's common stock.
As of March 31, 1997, the Company had $20.0 million of cash and cash
equivalents, $2.1 million of short-term investments, and working capital of
$20.2 million. In addition, at March 31, 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.
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.
11
<PAGE>
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 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 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.
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.
12
<PAGE>
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1997 Annual Meeting of Shareholders of Software Artistry, Inc. was
held on April 25, 1997, at the Ritz Charles, 12156 N. Meridian Street, Carmel,
Indiana at 2:00 p.m.
PROPOSAL 1 Election of Directors
Each of Jerry Baker, Lawrence W. Olson, Joseph A. Piscopo,
and W. Scott Webber were elected to the Board of Directors
to serve as directors until the 1997 Annual Meeting of
Shareholders by the following tally:
<TABLE>
<CAPTION>
Jerry Lawrence Joseph A. W. Scott
Baker W. Olson Piscopo Webber
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Votes in Favor 6,002,801 6,002,801 6,003,001 5,064,676
Votes Withhold 27,465 27,665 27,465 965,790
</TABLE>
PROPOSAL 2 Approval of the Amendment to the Amended and Restated
Incentive Stock Option Plan.
Votes in Favor 4,713,094
---------
Votes Against 1,305,005
---------
Abstentions 12,367
---------
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: May 1, 1997
SOFTWARE ARTISTRY, INC.
/s/ W. Scott Webber /s/ Thomas E. Vanneman
--------------------------------- -------------------------------
W. Scott Webber Thomas E. Vanneman
President, Chief Executive Officer Vice President, Finance and
and Director Administration,
(Principal Executive Officer) Chief Financial 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)
Three Months Ended March 31,
----------------------------
1997 1996
------------- -------------
Primary:
Average shares outstanding 6,785,375 6,773,901
---------- ----------
Net effect of dilutive stock options 724,141 792,643
---------- ----------
Total 7,509,516 7,566,544
---------- ----------
---------- ----------
Net income (loss) $ 304 $ (148)
Per share amount $ 0.04 $ (0.02)
---------- ----------
---------- ----------
Fully diluted:
Average shares outstanding 6,785,375 6,773,901
---------- ----------
Net effect of dilutive stock options 780,791 792,664
---------- ----------
Total 7,566,166 7,566,565
---------- ----------
---------- ----------
Net income (loss) $ 304 $ (148)
Per share amount $ 0.04 $ (0.02)
---------- ----------
---------- ----------
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 MARCH 31, 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> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 20,019
<SECURITIES> 2,117
<RECEIVABLES> 10,610
<ALLOWANCES> 390
<INVENTORY> 0
<CURRENT-ASSETS> 33,690
<PP&E> 9,095
<DEPRECIATION> 2,992
<TOTAL-ASSETS> 41,254
<CURRENT-LIABILITIES> 13,528
<BONDS> 0
0
0
<COMMON> 24,282
<OTHER-SE> 2,707
<TOTAL-LIABILITY-AND-EQUITY> 41,254
<SALES> 5,284
<TOTAL-REVENUES> 8,680
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 460
<INCOME-TAX> 156
<INCOME-CONTINUING> 304
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 304
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
