NOTES ON THE BENCHMARK CHARTS.

Data for this survey is compiled from annual reports, 10-Ks, and other financial data supplied by public companies that meet the basic eligibility requirements for our annual Soft-letter 100 rankings of personal computer software companies.

Although we poll both public and private companies in most other Soft- letter surveys, this particular report is based exclusively on data from public firms, because public companies tend to have the most rigorous and consistent accounting methods. However, it's worth noting that even among public companies, there's a frustrating lack of consistency in how major income and balance sheet items--such as G&A, capitalized R&D, and tech support--are classified. Since company reports rarely provide drill-down information that might explain these differences, we're left with data that's not always as precise as we (or our readers) would like. Until the software industry standardizes its accounting practices, benchmarking will always be an inexact process.

H COGS Ratio: Included in COGS are software manufacturing costs and royalty payments (which may be a significant expense line for consumer publishers). COGS usually includes the cost of delivering ancillary services and support, such as consulting and training. COGS spending has remained relatively stable over the past three years, at about 20% of sales.

H Sales & Marketing Ratio: For most software companies, sales and marketing represents the biggest single expense category by far, often consuming over 40% of revenues. Companies with annual sales below $25 million have the highest S&M burden (currently, 49.6% of sales), a level that's substantially higher than the 42.3% that large companies spend.

H General & Administrative Ratio: G&A typically represents such "common" expenses as CEO and CFO salaries, human resources staff, facilities, insurance, MIS costs, and other overhead (though some companies allocate a portion of shared costs to individual cost centers). There are obvious economies of scale in G&A spending: Big companies spend about 10% of revenues on G&A, compared to about 28% for their smaller counterparts.

H Research & Development Ratio: The cost of product development has risen dramatically in recent years, to over 20% of sales for most companies (consumer publishers are a notable exception). In fact, the R&D ratio probably understates the industry's true investment in development: Significant product-related costs are often capitalized or show up as royalty expenses in COGS.

H Operating Income Ratio: Operating income excludes such items as interest income and taxes, so it fairly represents the performance of a company's basic business activities. During 2000, median operating income for large companies declined to 2.8% of sales, compared to losses of -13.9% for mid-sized companies and -3.8% for small companies. Overall, more companies lost money on operations last year than turned a profit; the industry median for operating profit was -2.8%.

H Cash-to-Revenues Ratio: Operating losses continue to affect corporate liquidity: During 2000, the overall industry ratio of cash and cash equivalents to sales dropped from 59.9% to 53.2%.

H Accounts Receivable Ratio: From 1999 to 2000, receivables levels rose slightly, from 17.8% of sales to 18.3% (equal to about 67 days of sales). But the performance of individual companies often changed significantly on a year-to-year basis (for example, Adobe's receivables ratio rose from 7% to 11%, while Novell's dropped from 22% to 17%).

H Inventory Ratio: Inventory is not a material balance sheet item for many software companies, and even for the companies that report inventory data, the total investment is currently about 1.2% of sales.

H Accounts Payable Ratio: Smaller software companies rely more on outsourcers for services like manufacturing and tech support, so their balance sheets tend to accumulate higher levels of trade payables. The current industry payables level is 11.3% of sales for small companies (up from 6.9% last year) and 7.4% for mid-sized companies; the payables ratio for large companies is 5.5%.

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