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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 March 31, 1998
[ ] 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
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MELITA INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
GEORGIA 58-1378534
(State or other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
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 X No ___
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 May 1, 1998: 15,169,645 shares.
1
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<TABLE>
<CAPTION>
Page
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<S> <C>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997. 3
Unaudited Consolidated Statements of Operations for the three months ended 4
March 31, 1998 and 1997.
Unaudited Consolidated Statements of Cash Flows for the three months ended 5
March 31, 1998 and 1997
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
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MELITA INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,917 $ 6,845
Marketable securities 23,030 23,969
Accounts receivable, net of
allowance for doubtful
accounts of $1,145 at March 31,
1998 and $876 at December 31, 1997 20,080 15,796
Inventories 2,619 2,461
Deferred taxes 2,035 2,035
Prepaid expenses and other 381 251
------- -------
Total current assets 54,062 51,357
Property and equipment, net of accumulated
depreciation 5,720 4,939
Other assets 152 99
------- -------
$59,934 $56,395
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,295 $ 5,326
Accrued liabilities 8,973 7,763
Deferred revenue 5,072 4,029
Customer deposits 730 1,988
------- -------
Total current liabilities 20,070 19,106
Stockholders' Equity
Common Stock, no par value,
100,000,000 shares authorized
15,169,645 issued and outstanding
at March 31, 1998 and 15,168,395
issued and outstanding at
December 31, 1997 69 69
Additional paid-in capital 36,054 36,046
Accumulated other comprehensive income 50 30
Retained earnings 3,691 1,144
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Total stockholders' equity 39,864 37,289
------- -------
Total liabilities and stockholders' equity $59,934 $56,395
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
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MELITA INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Net revenues:
Product $ 14,820 $ 10,265
Service 5,552 4,404
-------- --------
Total revenues 20,372 14,669
Cost of revenues:
Product 4,760 3,836
Service 2,787 1,931
-------- --------
Total cost of revenues 7,547 5,767
-------- --------
Gross margin 12,825 8,902
Operating expenses:
Research and development 2,295 1,381
Selling, general and
administrative 6,822 5,134
-------- --------
Total operating expenses 9,117 6,515
-------- --------
Income from operations 3,708 2,387
Other income (expense), net 273 (51)
-------- --------
Income before income taxes 3,981 2,336
Income tax provision (benefit): 1,433 16
-------- --------
Net income after income tax $ 2,548 $ 2,320
======== ========
Income before income taxes 3,981 2,336
Pro forma income tax provision 1,433 911
(Note 6) -------- --------
Pro forma net income $ 2,548 $ 1,425
======== ========
Earnings per share
Basic $ 0.17 $ 0.19
======== ========
Diluted $ 0.16 $ 0.18
======== ========
Weighted average common and common
equivalent shares
Basic 15,168 12,453
Diluted 15,992 12,647
Pro forma earnings per share
Basic $ 0.11
========
Diluted $ 0.11
========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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MELITA INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Pro forma net income $ 2,548 $ 1,425
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Pro forma income taxes -- 895
Depreciation and amortization 386 392
Changes in assets and liabilities:
Accounts receivable, net (4,284) 673
Inventories (158) 524
Prepaid expenses and other assets (130) (303)
Accounts payable (31) 570
Accrued liabilities 1,210 (180)
Deferred revenue 1,043 785
Customer deposits (1,258) (638)
Other, net (47) (19)
-------- --------
Total adjustments (3,269) 2,699
-------- --------
Net cash (used in)provided by
operating activities (721) 4,124
Cash flows from investing activities:
Purchases of property and equipment (1,166) (486)
Purchases of marketable securities 953 --
-------- --------
Net cash used in investing activities (213) (486)
Cash flows from financing activities:
Repayment of capital lease obligations -- (4)
Net proceeds from issuance of common stock 6 --
Repayment of note payable to stockholder -- (188)
Distributions to stockholders -- (1,608)
-------- --------
Net cash provided by (used in) financing activities 6 (1,800)
Net change in cash and cash equivalents (928) 1,838
Cash and cash equivalents, beginning of period 6,845 9,849
-------- --------
Cash and cash equivalents, end of period 5,917 11,687
Marketable securities 23,030 --
-------- --------
Cash, cash equivalents and marketable securities $ 28,947 $ 11,687
======== ========
Supplemental Disclosures of Cash Flow Information:
Income Taxes paid $ 203 $ 16
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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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 March 31, 1998, the results of operations and changes in cash
flows for the three months ended March 31, 1998 and 1997. The interim results
for the three months ended March 31, 1998 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 fiscal year
ended December 31, 1997, as filed in its annual report on form 10-K.
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>
March 31, 1998 December 31, 1997
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<S> <C> <C>
Raw Materials $2,075 $1,251
Work in process 184 457
Finished goods 360 753
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Total inventories $2,619 $2,461
====== ======
</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
(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.
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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
income tax regulations. Pro forma income tax provisions reflect the Company's
anticipated effective annual tax rate of 38.0% for 1997.
7. Earnings Per Share
During the first quarter of 1997, the Financial Accounting Standards Board
("FASB") 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. The prior years' earnings per share have been
retroactively restated in accordance with this statement.
<TABLE>
<CAPTION>
For the three months ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Net income after income tax $ 2,548 $ 2,320
======= =======
Pro forma net income $ 1,425
=======
Weighted average shares outstanding
Basic weighted average shares outstanding 15,168 12,453
Weighted average common equivalent shares 824 194
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Diluted weighted average shares outstanding 15,992 12,647
======= =======
Earnings Per Share
Basic earnings per share $ 0.17 $ 0.19
Diluted earnings per share $ 0.16 $ 0.18
Pro forma basic earnings per share $ 0.11
Pro forma diluted earnings per share $ 0.11
</TABLE>
8. Revenue Recognition
In October, 1997 the American Institute of Certified Public Accountants issued
SOP 97-2, Software Revenue Recognition. The Company believes that its revenue
recognition practices are consistent with those required by SOP 97-2.
9. Other Comprehensive Income
In June, 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for the disclosure of all components of
comprehensive income. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company adopted SFAS No. 130 in 1998.
The changes in the components of other comprehensive income are reported as
follows (in thousands):
<TABLE>
<CAPTION>
For the three months ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Pro forma net income as reported $2,548 $1,425
Other comprehensive income:
Foreign currency translation $ 21 $ 15
Unrealized gains on securities, net 29 15
------ ------
Comprehensive income $2,598 $1,455
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</TABLE>
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10. Recently Issued Accounting Standards
In June, 1997 the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". SFAS No. 131 requires certain financial and
supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997 and is not required in interim financial
statements in the initial year of application.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended March 31, 1998 and 1997
Total revenues of $20.4 million in the first quarter of 1998 increased 38.9% as
compared to the same period in 1997. Product revenue increased $4.5 million or
44.4% to $14.8 million for the first quarter of 1998 as compared to the first
quarter of 1997. Service revenue increased $1.2 million or 26.1% to $5.6 million
in the first quarter as compared to the same quarter in 1997. 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 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 5.3
percentage points for the first quarter of 1998 as compared to 1997. Product
cost as a percentage of product revenue decreased during the first quarter
principally due to the continuing engineering product cost reduction efforts and
an increase in the volume of shipments as compared to fixed costs. Cost of
service revenue increased 6.4 percentage points for the three months ended March
31, 1998 due to an increase in support service personnel and increases in
compensation.
Research and development cost was $2.3 million in the first quarter of fiscal
1998, a $914,000 increase over the first quarter of 1997. The overall cost
increase during the first 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 1998.
Selling, general and administrative expenses were $6.8 million for the first
quarter of 1998 as compared to $5.1 million in the comparable 1997 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 1998, and an increase in advertising and trade show activities.
Selling, general and administrative expenses decreased as a percentage of
revenue to 33.5% from 35.0% for the first quarter of fiscal 1998.
Income from operations was $3.7 million in the first quarter of 1998,
representing a 55.3% increase over income from operations of $2.4 million in the
first quarter of 1997. These increases were the result of the foregoing factors.
Other income (expense), net was a net income of $273,000 in the first quarter of
1998 compared to net expense of $51,000 in the first quarter of 1997. The
increase in other income reflects the earnings from the higher average cash and
short term investment balances in 1998 as compared to 1997.
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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. The Company's pro forma
income tax rate was 36.0% in the first quarter of 1998 compared to 38.6% in the
first quarter of 1997, primarily due to the impact on operations of a foreign
sales corporation.
Pro forma net income increased to $2.5 million in the first quarter of 1998 from
$1.4 million in the first quarter of 1997, as a result of the operational, other
income and tax factors described above.
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 March 31, 1998, the Company had $28.9 million in cash, cash equivalents
and marketable securities, compared to $30.8 million as of December 31, 1997.
The Company's working capital was $34.0 million for the period ending March 31,
1998 as compared to $32.3 million for period ending December 31, 1997. Operating
activities used $715,000 during the first three months of fiscal 1998. Cash used
in investing activities totaled $213,000 million during the first three months
of fiscal 1998. Such investing activities consisted of purchases of property and
equipment and a decrease in short term interest bearing investments. 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.
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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 March 31, 1998.
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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: May 14, 1998 By: /s/ Aleksander Szlam
--------------------
Aleksander Szlam
Chairman and Chief Executive Officer
Date: May 14, 1998 By: /s/ Mark B. Adams
-----------------
Mark B. Adams
Vice President, Finance and
Chief Financial Officer
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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
Ended March 31
1998 1997
---- ----
<S> <C> <C>
DILUTED
Weighted average common stock outstanding 8,000 8,000
Effect of the combination (1) 3,143 3,143
Effect of issuance of shares in IPO 4,025 --
Dilutive effect of common stock equivalents 824 194
Cheap stock adjustment (2) -- 116
Effect of shareholder distribution (3) -- 1,194
-- -----
Weighted average common and common equivalent shares 15,992 12,647
====== ======
Net income after income tax 2,548 2,320
Earnings per share .16 .18
====== ======
Pro forma net income 2,548 1,425
Pro forma earnings per share .16 .11
====== ======
</TABLE>
(1) 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.
(2) 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.
(3) 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.
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,917
<SECURITIES> 23,030
<RECEIVABLES> 21,225
<ALLOWANCES> 1,145
<INVENTORY> 2,619
<CURRENT-ASSETS> 54,062
<PP&E> 5,720
<DEPRECIATION> 0
<TOTAL-ASSETS> 59,934
<CURRENT-LIABILITIES> 20,070
<BONDS> 0
0
0
<COMMON> 69
<OTHER-SE> 39,795
<TOTAL-LIABILITY-AND-EQUITY> 59,934
<SALES> 20,372
<TOTAL-REVENUES> 20,372
<CGS> 7,547
<TOTAL-COSTS> 7,547
<OTHER-EXPENSES> 9,117
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,981
<INCOME-TAX> 1,433
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,548
<EPS-PRIMARY> .17
<EPS-DILUTED> .16
</TABLE>
