<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission file number 0-22317
-------
MELITA INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
GEORGIA 58-1378534
(State or other Jurisdiction of Incorporation (I.R.S. Employer Identification
or Organization) Number)
</TABLE>
5051 PEACHTREE CORNERS CIRCLE
NORCROSS, GEORGIA 30092-2500
(770) 239-4330
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 requirements for the past 90 days. Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common stock, no par value,
outstanding as of November 10, 1997: 15,168,395 shares.
<PAGE> 2
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION
Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997 (Unaudited) 3
and December 31, 1996.
Unaudited Consolidated Statements of Operations for the three months ended 4
September 30, 1997 and 1996 and for the nine months ended September 30, 1997 and
1996.
Unaudited Consolidated Statements of Cash Flows for the nine months ended 5
September 30, 1997 and 1996
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and 7
Results of Operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
</TABLE>
- 2 -
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MELITA INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,807 $ 9,849
Marketable securities 23,735 --
Accounts receivable, net of allowance for doubtful 13,205 11,860
accounts of $6,651 at September 30, 1997 and $487 at December 31, 1996
Inventories 1,556 2,442
Deferred taxes 1,473 --
Prepaid expenses and other 883 170
-------- -------
Total current assets 46,659 24,321
Property and equipment, net of accumulated depreciation 4,537 2,724
Other assets 38 24
-------- -------
$ 51,234 $27,069
======== =======
Current liabilities:
Accounts payable $ 3,661 $ 2,429
Accrued liabilities 7,071 4,210
Deferred revenue 4,218 3,065
Customer deposits 1,481 3,849
Current maturities of notes payable to stockholder -- 2,625
Current maturities of capital lease obligations -- 19
-------- -------
Total current liabilities 16,431 16,197
Commitments and contingencies
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity
Preferred Stock:
Melita International Corporation, no par value; 20,000,000 shares authorized,
no shares issued and outstanding at December 31, 1996 and September 30, 1997 -- --
Common Stock:
Melita International Corporation, no par value; 100,000,000 shares
authorized, 8,000,000 shares issued and outstanding December 31, 1996 and
15,168,395 shares issued and outstanding September 30, 1997 69 2
Melita Europe Limited, L.1 par value; 50,000 shares authorized, 31,328 shares
issued and outstanding December 31, 1996 and no shares issued
and outstanding at September 30, 1997 -- 46
Inventions, Inc., $5 par value; 100 shares authorized, 100 shares issued
and outstanding December 31, 1996 and no shares issued and outstanding
at September 30, 1997 -- 1
Additional paid-in capital 36,046 20
Cumulative foreign currency translation adjustment 9 --
Net change in unrealized gains/(losses) or marketable securities (67) 35
Retained earnings (deficit) (1,254) 10,768
-------- -------
Total stockholders' equity (deficit) 34,803 10,872
-------- -------
$ 51,234 $27,069
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE> 4
MELITA INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues:
Product $ 11,728 $ 7,428 $ 32,707 $ 23,277
Service 5,200 4,161 14,420 11,269
-------- -------- -------- --------
Total revenues 16,928 11,589 47,127 34,496
Cost of revenues:
Product 3,812 2,660 11,213 8,099
Service 2,628 1,902 6,992 5,074
-------- -------- -------- --------
Total cost of revenues 6,440 4,562 18,205 13,173
-------- -------- -------- --------
Gross margin 10,488 7,027 28,922 21,323
Operating expenses:
Research and development 1,793 1,409 4,818 3,505
Selling, general and administrative 5,732 4,212 16,097 12,341
-------- -------- -------- --------
Total operating expenses 7,525 5,621 20,915 15,846
-------- -------- -------- --------
Income from operations 2,963 1,406 8,007 5,477
Other income (expense), net 396 20 336 63
-------- -------- -------- --------
Income before income taxes 3,359 1,426 8,343 5,540
Income tax provision (benefit):
Tax provision as 'C' Corporation 1,276 -- 1,685 --
Deferred tax adjustment -- -- (1,473) --
-------- -------- -------- --------
Net income after income tax $ 2,083 $ 1,426 $ 8,131 $ 5,540
======== ======== ======== ========
Income before income taxes 3,359 1,426 8,343 5,540
Pro forma income tax provision (Note 6) 1,276 517 3,170 2,054
-------- -------- -------- --------
Pro forma net income $ 2,083 $ 909 $ 5,173 $ 3,486
======== ======== ======== ========
Earnings per share $ 0.13 $ 0.12 $ 0.59 $ 0.45
======== ======== ======== ========
Weighted average common and common
equivalent shares 16,016 12,360 13,856 12,360
Pro forma earnings per share $ 0.13 $ 0.07 $ 0.37 $ 0.28
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
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MELITA INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,131 $ 5,540
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 964 757
Deferred taxes (1,473) --
Changes in assets and liabilities:
Accounts receivable (1,345) (2,039)
Inventories 886 (803)
Prepaid expenses and other assets (713) 96
Accounts payable 1,232 (282)
Accrued liabilities 2,860 945
Deferred revenue 1,154 2,002
Customer deposits (2,368) 2
Other, net (116) 19
-------- -------
Total adjustments 1,081 697
-------- -------
Net cash provided by operating activities 9,212 6,237
Cash flows from investing activities:
Purchases of property and equipment (2,777) (1,020)
Purchases of marketable securities (23,726) --
-------- -------
Net cash used in investing activities (26,503) (1,020)
Cash flows from financing activities:
Repayment of capital lease obligations (19) (36)
Net proceeds from issuance of common stock 36,046 --
Repayment of note payable to stockholder (15,525) (187)
Distributions to stockholders (7,253) (3,242)
-------- -------
Net cash provided by (used in) financing activities 13,249 (3,465)
-------- -------
Net change in cash and cash equivalents (4,042) 1,752
Cash and cash equivalents, beginning of period 9,849 5,959
-------- -------
Cash and cash equivalents, end of period 5,807 7,711
Marketable securities 23,735 --
-------- -------
Cash, cash equivalents and marketable securities $ 29,542 $ 7,711
======== =======
Cash paid for interest during the period $ 360 $ 208
======== =======
Income taxes paid $ 1,819 $ --
======== =======
</TABLE>
5
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MELITA INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
1. Basis of Presentation
The unaudited consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial statements. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of the Company's management, these
consolidated financial statements contain all adjustments (which comprise only
normal and recurring accruals) necessary to present fairly the financial
position as of September 30, 1997, the results of operations and changes in cash
flows for the nine months ended September 30, 1997 and 1996. The interim results
for the three months and nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the full year. These
statements should be read in conjunction with the Company's combined financial
statements for the year ended December 31, 1996, as filed in its Prospectus
dated June 4, 1997.
2. Principles of Consolidation
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.
3. Completion of Initial Public Offering and Combination
On June 4, 1997, the Company completed its initial public offering ("IPO") of
common stock. The Company sold 4,025 shares of common stock, including the
underwriters' over-allotment of 525 shares, for $40,250 less issuance costs of
$4,148. Concurrently with the IPO, the Company issued 3,143 shares in connection
with the combination of Melita International, Melita Europe Limited and
Inventions, Inc.
4. Inventories
Inventories are stated at the lower of first-in, first-out (FIFO) cost or market
and consist of the following at:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Raw Materials $ 827 $1,059
Work in process 278 337
Finished goods 451 1,046
------ ------
Total inventories $1,556 $2,442
======= ======
</TABLE>
5. Earnings Per Share
Earnings per share are computed using the weighted-average number of common
stock and dilutive common stock equivalents ("CSE") shares from stock options
and warrants (using the treasury stock method) outstanding during each period.
Also included are (1) common stock and CSE's issued at a price below the initial
public offering price during the 12 month period prior to June 4, 1997, and (2)
CSE's in an amount necessary to pay the stockholder distributions.
6. Income Taxes
In connection with the IPO the Company converted from an "S" corporation to a
"C" corporation and, accordingly, is subject to federal and state income taxes.
Upon the conversion, the Company recognized a one-time benefit by recording the
asset related to the future reduction of income tax payments due to timing
differences between the recognition of income for financial statements and
6
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income tax regulations. Pro forma income tax provisions reflect the Company's
anticipated effective annual tax rate of 38.0% for 1997 and 37.2% in 1996.
7. Accounting Pronouncements
During the first quarter of 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). This standard is effective for fiscal years ending after
December 15, 1997 and early adoption is not permitted. The Company will adopt
this statement for its year ended December 31, 1997.
Pro forma calculations of basic and diluted earnings per share, in conformance
with SFA's No. 128, are as follows:
<TABLE>
<CAPTION>
For the three months For the nine months
ended ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic EPS $.14 $.12 $.61 $.45
Basic pro forma EPS .14 .07 .39 .28
Diluted EPS .13 .12 .59 .45
Diluted pro forma EPS .13 .07 .37 .28
</TABLE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months and Nine Months Ended September 30, 1997 and 1996
Total revenues of $16.9 million in the third quarter of 1997 increased 46.1% as
compared to the same period in 1996. Total revenues increased to $47.1 million
in the first nine months of 1997 as compared to $34.5 million in the
corresponding period of 1996, representing growth of 36.6%.
Product revenue increased $4.3 million or 57.9% to $11.7 million for the third
quarter of 1997 as compared to the third quarter of 1996. Product revenue
increased $9.4 million or 40.8% to $32.7 million for the nine months of 1997 as
compared to the same period in 1996. Service revenue increased $1.0 million or
25.0% to $5.2 million in the third quarter as compared to the same quarter in
1996. Service revenue increased $3.2 million or 28.0% to $14.4 million for the
nine months ended 1997 as compared to the first nine months of 1996. The growth
in product revenues was due to continued increasing demand for the Company's
products, increased marketing and sales efforts, and the further penetration
into the telemarketing arena. Service revenues increased during the quarter and
nine month period due to the continued expansion of the Company's installed
customer base and the increased volume of installations during the period.
Cost of product revenue, as a percentage of product revenue, decreased 3.3
percentage points for the third quarter of 1997 as compared to 1996. For the
first nine months of 1997 the cost of product revenue as a percentage of product
revenue decreased .6 percentage points as compared to 1996. Product cost as a
percentage of product revenue decreased during the third quarter principally due
to the continuing engineering product cost reduction efforts, changes in the
product mix, and an increase in the volume of shipments as compared to fixed
costs. Cost of service revenue increased 3.5 percentage points for the nine
months ended September 30, 1997 due to an increase in support service personnel
and increases in compensation.
Research and development cost was $1.8 million in the third quarter of fiscal
1997, a $384,000 increase over the third quarter of 1996. For the first nine
months of 1997, research and development cost increased to $4.8 million, an
increase of $1.3 million over the comparable 1996 period. The overall cost
increase during the third quarter resulted primarily from the addition of
developers to support the Company's new product development efforts and the
subcontracting of certain feature development efforts during 1997. The decrease
in research and development as a percentage of sales is due to sales growth
outpacing the increased spending in research and development.
Selling, general and administrative expenses were $5.7 million for the third
quarter of 1997 as compared to $4.2 million in the comparable 1996 period.
Selling, general and administrative expenses for the first nine months of fiscal
1997 were $16.1 million, an
7
<PAGE> 8
increase of $3.8 million (30.4%) over the comparable 1996 period. This increase
was the result of an increase in sales commissions corresponding to the increase
in revenues, the additional staff required to support the larger sales levels in
1997, and an increase in advertising and trade show activities. Selling, general
and administrative expenses decreased as a percentage of revenue to 33.9% from
36.3% for the third quarter of fiscal 1997, and decreased as a percentage of
revenue to 34.2% from 35.8% for the first nine months of fiscal 1997.
Income from operations was $3.0 million in the third quarter of 1997,
representing a 110.8% increase over income from operations of $1.4 million in
the third quarter of 1996. Income from operations was $8.0 million in the first
nine months of 1997, representing a 46.2% increase over income from operations
of $5.5 million in the corresponding period in 1996. These increases were the
result of the foregoing factors.
Other income (expense), net was a net income of $396,000 in the third quarter of
1997 compared to net income of $20,000 in the third quarter of 1996. Other
income (expense), net was a net income of $336,000 for the first nine months of
1997 compared to net income of $63,000 in the first nine months of 1996. The
increase in other income reflects the earnings from the higher average cash and
short term investment balances in 1997 as compared to 1996.
Income tax provisions have been recorded for the period subsequent to the IPO.
The Company prior to the IPO was not subject to federal or state income taxes.
As a result of its election to be treated as an "S" Corporation for income tax
purposes prior to the IPO, pro forma net income amounts include additional
provisions for income taxes determined by applying the Company's anticipated
statutory tax rate to income before income taxes, adjusted for permanent tax
differences. The Company's "S" Corporation status was terminated in conjunction
with the completion of its initial public offering in June 1997. Upon the
termination of its "S" Corporation election, the Company recorded certain
deferred tax assets in the amount of $1.5 million.
Pro forma net income increased to $2.1 million in the third quarter of 1997 from
$909,000 in the third quarter of 1996. Pro forma net income rose to $5.2 million
in the first nine months of 1997 compared to $3.5 million in the first nine
months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
In June 1997, the Company completed its IPO, in which the Company received net
proceeds of approximately $36.1 million after deducting underwriting discounts
and offering expenses. The Company applied a portion of the net proceeds to (1)
repay outstanding stockholder notes of $15.2 million, (2) payment of $245,000 in
accrued interest on the stockholder notes, and (3) pay undistributed "S"
Corporation earnings of $ 2.4 million. Prior to the IPO date, the Company made
payments of $375,000 to repay stockholder notes, and $3.6 million in
distributions to stockholders. The balance of the net proceeds of the offering
(approximately $18.3 million) will be utilized for general corporate purposes.
Such purposes may also include possible acquisitions of, or investments in,
businesses and technologies that are complementary to those of the Company. The
Company has no specific agreements, commitments or understandings with respect
to any such acquisitions or investments.
As of September 30, 1997, the Company had $29.5 million in cash, cash
equivalents, and marketable securities, compared to $9.8 million as of December
31, 1996. The Company's working capital was $30.2 million for the period ending
September 30, 1997 as compared to $8.1 million for period ending December 31,
1996. Operating activities provided $9.2 million during the first nine months of
fiscal 1997. Cash used in investing activities totaled $26.5 million during the
first nine months of fiscal 1997. Such investing activities consisted of
purchases of property and equipment and an increase in short term interest
bearing investments. Cash provided by financing activities totaled $13.2 million
during the first nine months of fiscal 1997, due to the issuance of common stock
in the IPO offset by repayment of the Company's outstanding indebtedness noted
above. The Company anticipates that existing cash and cash equivalents will be
adequate to meet its cash requirements for the next twelve months.
FORWARD LOOKING STATEMENTS
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including but not limited to statements related to plans for future business
development activities, anticipated costs of revenues, product mix and service
revenues, research and development and selling, general and administrative
activities, and liquidity and capital needs and resources. Such forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Investors are cautioned that any
forward looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those contemplated by such forward looking statements.
8
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3 Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 11 Statement re Computation of per share earnings.
Exhibit 27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K. No Report on Form 8-K was filed during the quarter
ended September 30, 1997.
9
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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 hereunto duly authorized.
MELITA INTERNATIONAL CORPORATION
Date: November 14, 1997 By: /s/ Aleksander Szlam
-------------------------------
Aleksander Szlam
Chairman and Chief Executive
Officer
Date: November 14, 1997 By: /s/ Mark B. Adams
-------------------------------
Mark B. Adams
Vice President, Finance
and Chief Financial Officer
10
<PAGE> 1
EXHIBIT 11
MELITA INTERNATIONAL CORPORATION
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY (1)
Weighted average common stock outstanding 8,000 8,000 8,000 8,000
Effect of the combination (2) 3,143 3,143 3,143 3,143
Effect of issuance of shares in IPO 4,025 - 1,709 -
Dilutive effect of common stock equivalents 735 139 510 139
Cheap stock adjustment (3) 113 133 100 133
Effect of shareholder distribution (4) -- 945 394 945
- -- -- -- -- --
Weighted average common and common equivalent shares 16,016 12,360 13,856 12,360
====== ====== ====== ======
Net income after income tax 2,083 1,426 8,131 5,540
Earnings per share .13 .12 .59 .45
====== ====== ====== ======
Pro forma net income 2,083 909 5,173 3,486
Pro forma earnings per share .13 .07 .37 .28
====== ====== ====== ======
</TABLE>
(1) Fully diluted earnings per share would change only the dilutive effect of
common stock equivalents noted above. If the dilutive effect of common stock
equivalents was computed on a fully dilutive basis, the weighted average common
and common equivalent shares would be 16,081, 12,478, 13,971, and 12,468, for
the three months ended September 30, 1997 and 1996, and the nine months ended
September 30, 1997 and 1996, respectively.
(2) Reflects pro forma issuance of 3,143 shares of Common Stock in connection
with the combination of Melita International Corporation, Melita Europe Limited
and Inventions, Inc.
(3) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common stock and common stock equivalents issued at prices below the assumed
initial public offering price per share ("cheap stock") during the twelve months
immediately preceding the initial filing date of the Company's Registration
Statement for its public offering have been included as outstanding for all
periods presented.
(4) Pursuant to Staff Accounting Bulletin 1B.3, pro forma earnings per share
gives effect to the issuance by the Company of the numbers of shares that, of
the assumed public offering price, would yield proceeds in the amount necessary
to pay the shareholder distribution that is not covered by the earnings during
the period.
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MELITA INTERNATIONAL FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 5,807
<SECURITIES> 23,735
<RECEIVABLES> 19,856
<ALLOWANCES> (6,651)
<INVENTORY> 1,556
<CURRENT-ASSETS> 46,659
<PP&E> 4,537
<DEPRECIATION> 0
<TOTAL-ASSETS> 51,234
<CURRENT-LIABILITIES> 16,431
<BONDS> 0
0
0
<COMMON> 69
<OTHER-SE> 34,734
<TOTAL-LIABILITY-AND-EQUITY> 51,234
<SALES> 47,127
<TOTAL-REVENUES> 47,127
<CGS> 18,205
<TOTAL-COSTS> 18,205
<OTHER-EXPENSES> 20,915
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (336)
<INCOME-PRETAX> 8,343
<INCOME-TAX> 212
<INCOME-CONTINUING> 8,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,131
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
</TABLE>
