SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter Ended October 31, 1996
Commission file number 0-20085
IQ SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
GEORGIA 58-1614492
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3295 River Exchange Drive, Suite 550
Norcross, Georgia
30092
(Address of principal executive office)
(Zip Code)
(770) 446-8880
(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 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.
NUMBER OF SHARES
CLASS OUTSTANDING AT DECEMBER 14, 1996
Common 4,625,507
FORM 10-Q
Page 1 of 12
<PAGE>
IQ SOFTWARE CORPORATION
FORM 10-Q
QUARTER ENDED OCTOBER 31, 1996
TABLE OF CONTENTS
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
October 31, 1996 (unaudited) and January 3
Condensed Consolidated Statements of Income (Loss)
(unaudited) - Three months and nine months ended
October 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
(unaudited) - Nine months ended October 31, 1996
and 1995 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 6. Exhibits and Reports on Form 8-K 11
Signatures 11
FORM 10-Q
Page 2 of 12
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, 1996 January 31, 1996
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................... $ 4,323,355 $ 5,632,580
Marketable securities.......................................... 5,164,046 2,601,055
Accounts receivable, net of allowance for doubtful accounts of
$698,000 at October 31, 1996 and $457,000 at January 31, 1996 7,979,084 5,838,128
Note receivable from affiliate (Note 2)........................ 1,800,000 1,800,000
Prepaid expenses and other current assets...................... 1,373,314 1,266,595
Total current assets............................................... 20,639,799 17,138,358
Property and equipment:
Furniture and fixtures......................................... 1,192,908 1,183,692
Equipment...................................................... 4,544,807 4,259,707
5,737,715 5,443,399
Allowance for depreciation......................................... (4,095,138) (3,416,027)
1,642,577 2,027,372
Capitalized software development costs, net of accumulated amortization of
$1,516,000 at October 31, 1996 and $936,000 at January 31, 1996 1,215,326 1,226,123
Purchased software, net of accumulated amortization of $381,000 at
October 31, 1996 and $211,000 at January 31, 1996.............. 619,689 774,286
Goodwill, net of accumulated amortization of $163,000 at October 31, 1996
and $56,000 at January 31, 1996................................ 1,094,218 794,477
Other assets....................................................... 165,922 163,245
Total assets................................................... $25,377,531 $22,123,861
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................... $ 528,391 $ 1,091,638
Accrued expenses............................................... 817,410 816,378
Unearned revenue............................................... 1,510,049 1,375,449
Income taxes payable........................................... 538,509 --
Current portion of deferred income taxes....................... 209,000 200,000
Total current liabilities.......................................... 3,603,359 3,483,465
Deferred income taxes, less current portion........................ 522,000 620,000
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 5,000,000 - Issued and outstanding shares - none -- --
Common stock, $.00033 par value:
Authorized shares - 30,000,000
Issued and outstanding shares - 4,624,007 at October 31, 1996
and 4,494,941 at January 31, 1996.............................. 1,527 1,484
Additional paid-in capital......................................... 12,347,207 11,404,931
Retained earnings.................................................. 8,943,417 6,827,235
Net unrealized gain on marketable securities available for sale.... 4,150 947
Foreign currency translation adjustments........................... (44,129) (214,201)
Total shareholders' equity..................................... 21,252,172 18,020,396
Total liabilities and shareholders' equity..................... $25,377,531 $22,123,861
<?TABLE>
See Notes to Condensed Consolidated Financial Statements
FORM 10-Q
Page 3 of 12
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
</TABLE>
<TABLE>
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(unaudited)
Three Months Ended Nine Months Ended
October 31, October 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
License fees........................... $4,722,876 $ 3,669,297 $13,141,528 $11,196,221
Service fees........................... 1,923,383 1,626,016 5,618,839 4,651,905
6,646,259 5,295,313 18,760,367 15,848,126
Operating expenses:
Cost of license fees................... 368,071 254,859 931,451 657,828
Cost of service fees................... 811,017 659,058 2,362,103 1,751,613
Development............................ 560,824 624,297 1,565,775 2,214,271
Selling................................ 2,630,792 2,486,356 7,784,647 7,192,699
General and administrative............. 1,243,863 1,136,712 3,533,814 3,233,338
Restructuring charges (Note 4)......... -- 1,281,811 -- 1,281,811
Acquired research and development costs (Note 3) -- 3,586,674 -- 3,586,674
Total operating expenses............. 5,614,567 10,029,767 16,177,790 19,918,234
Operating income (loss).................... 1,031,692 (4,734,454) 2,582,577 (4,070,108)
Investment income, net..................... 131,906 167,924 359,289 461,417
Income (loss) before income taxes.......... 1,163,598 (4,566,530) 2,941,866 (3,608,691)
Income tax................................. 307,000 (431,000) 826,000 (210,000)
Net income (loss).......................... $ 856,598 $(4,135,530) $ 2,115,866 $(3,398,691)
Net income (loss) per common share......... $ 0.18 $ (0.96) $ 0.44 $ (0.80)
Weighted average number of common and
common equivalent shares outstanding..... 4,822,000 4,312,000 4,771,000 4,241,000
</TABLE>
See Notes to Condensed Consolidated Financial Statements
FORM 10-Q
Page 4 of 12
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
<TABLE>
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
October 31,
1996 1995
<S> <C> <C>
Operating activities:
Net income (loss)........................................................ $ 2,115,866 $(3,398,691)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization........................................ 1,534,892 1,301,384
Deferred income taxes................................................ (92,000) (261,000)
Acquired research and development (Note 3)........................... -- 3,586,674
Write-down of capitalized software development costs
and property and equipment......................................... -- 918,551
Gain on disposal of equipment........................................ (9,333) --
Changes in operating assets and liabilities:
Accounts receivable................................................ (2,021,261) 802,892
Prepaid expenses and other current assets.......................... (88,623) (141,524)
Accounts payable................................................... (436,814) 66,956
Accrued expenses................................................... (192,296) (108,822)
Unearned revenue................................................... 130,721 120,192
Income taxes payable............................................... 484,346 (242,086)
Net cash provided by operating activities................................ 1,425,498 2,644,526
Investing activities:
Purchases of property and equipment...................................... (325,346) (1,127,535)
Additions of capitalized software development costs...................... (569,773) (805,043)
Advance under note receivable (Note 2)................................... -- (1,800,000)
(Purchases) sales of marketable securities, net.......................... (2,557,393) 1,988,112
Payments in connection with acquisition of Skribe Software, Inc.......... (346,175) --
Payments in connection with acquisition of Soft Systems, Ltd............. (35,000) (2,146,830)
Other investing activities............................................... (2,178) (46,227)
Net cash used in investing activities.................................... (3,835,865) (3,937,523)
Financing activities:
Payments on long-term debt............................................... -- (45,216)
Payments on long-term debt assumed in connection with acquisition........ -- (126,760)
Proceeds from issuance of common stock................................... 1,020,856 269,784
Net cash provided by financing activities................................ 1,020,856 97,808
Effect of exchange rate changes on cash.................................. 80,286 10,533
Net decrease in cash and cash equivalents................................ (1,309,225) (1,184,656)
Cash and cash equivalents at beginning of period......................... 5,632,580 7,699,398
Cash and cash equivalents at end of period............................... $ 4,323,355 $ 6,514,742
Supplemental disclosure of cash flow information:
Cash paid during the period for interest................................. $ 5,516 $ 1,611
Cash paid during the period for income taxes............................. $ 355,000 $ 291,000
</TABLE>
See Notes to Condensed Consolidated Financial Statements
FORM 10-Q
Page 5 of 12
<PAGE>
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation of the results of operations have been included.
2. NOTE RECEIVABLE FROM AFFILIATE
On April 18, 1995, the Company loaned $1.8 million to Daystar
Digital, Inc. pursuant to a note receivable (the "Note"). Under the
terms of the agreement, the Note was payable one year from the date of
the agreement. The Note bore interest payable monthly at a rate of
prime plus 1/2 percent adjusted quarterly. The interest rate on the
date of the agreement was 9 1/2%. The Note is guaranteed by
Intelligent Systems Corporation and is secured by 240,163 shares of
the Company's common stock held by Intelligent Systems Corporation.
On April 18, 1996, the Company renewed the original agreement
with Daystar Digital, Inc. for an additional nine months. Under the
terms of the renewal, the Note bears interest payable monthly at a
rate of prime plus 1 1/2 percent, adjusted quarterly.
3. ACQUISITION
On September 29, 1995 the Company acquired all of the
outstanding common shares of Soft Systems, Ltd. ("Soft Systems"), a
United Kingdom corporation, for approximately $4,020,000 (consisting
of $2,251,280 of cash and 248,083 unregistered shares of the Company's
common stock) plus direct acquisition costs approximating $325,000.
The acquisition was accounted for under the purchase method and,
accordingly, the operating results of Soft Systems, Ltd. have been
included in the Company's operating results since the date of the
acquisition. The purchase price was allocated among identifiable
tangible assets and liabilities based on their respective fair values.
In addition, the purchase price was allocated to certain intangible
assets, including existing software products which had reached
technological feasibility and acquired research and development costs
of $3,586,674 which was expensed as a one-time, nontax-deductible
charge in the quarter ended October 31, 1995.
FORM 10-Q
Page 6 of 12
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4. RESTRUCTURING CHARGES
During the third quarter ended October 31, 1995, the Company
began to allocate a larger portion of its development resources to
recently acquired products resulting in a restructuring of its product
development operations. As a result, the Company recorded one-time,
pretax restructuring charges totaling $1,281,811 during the quarter
ended October 31, 1995. The restructuring charges consist primarily of
the write-down of certain capitalized software development costs and
other costs associated with the restructuring of its product
development operations.
5. THE FRANCE SUBSIDIARY
In August 1996, the Company made a decision to discontinue the
operations of its France subsidiary. In connection with the
discontinuation of its France subsidiary, the Company recorded an
one-time charge of approximately $101,000 which is included in general
and administrative expenses in the accompanying condensed consolidated
statements of income (loss). This charge was related to the write down
of certain assets to their estimated net realizable value and
estimated wrap-up costs. In addition, the Company recorded an income
tax benefit of $115,000 in the quarter ended October 31, 1996
associated with the write off of certain receivables from its France
subsidiary.
6. RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform
with current year presentation in the accompanying consolidated
financial statements.
FORM 10-Q
Page 7 of 12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased $3,381,000 to
$17,036,000 as of October 31, 1996 from $13,655,000 as of January 31,
1996. This increase was due primarily to increases in working capital
provided from operations partially offset by additions to capitalized
software development cost of $570,000 and property and equipment
additions of $325,000.
The Company believes that the current cash, cash equivalents
and cash flow from operations will be sufficient to provide the
liquidity and capital resources to meet its lease obligations and to
finance operating needs, research and development activities and
planned growth for at least the next twelve months.
RESULTS OF OPERATIONS
Revenues
Revenues were $18,760,000 for the nine months ended October 31,
1996 and $15,848,000 for the nine months ended October 31, 1995, an
increase of $2,912,000 or 18%. Revenues were $6,646,000 for the
quarter ended October 31, 1996 and $5,295,000 for the quarter ended
October 31, 1995, an increase of $1,351,000 or 26%.
License fees were $13,142,000 for the nine months ended October
31, 1996 compared to $11,196,000 for the nine months ended October 31,
1995, an increase of $1,946,000 or 17%. License fees were $4,723,000
for the quarter ended October 31, 1996 and $3,669,000 for the quarter
ended October 31, 1995, an increase of $1,054,000 or 29%.
Service fees were $5,619,000 for the nine months ended October
31, 1996 compared to $4,652,000 for the nine months ended October
31,1995, an increase of $967,000 or 21%. Service fees were $1,923,000
for the quarter ended October 31, 1996 compared to $1,626,000 for the
quarter ended October 31, 1995, an increase of $297,000 or 18%.
Service fees increased principally as a result of the increase in the
installed base of the Company's software products and increases in
training and consulting revenues.
Cost of License Fees
Cost of license fees includes the amortization of capitalized
software development costs, royalties related to licensed products and
the costs of magnetic media, packaging and documentation. Cost of
license fees was $931,000 or 5% of revenues and $658,000 or 4% of
revenues for the nine months ended October 31, 1996 and 1995
respectively. Cost of license fees was $368,000 or 6% of revenues for
quarter ended October 31, 1996. For the comparable quarter of the
prior year, cost of license fees was $255,000 or 5% of revenues. The
increase in cost of license fees in dollars and as a percentage of
revenues for the nine months and quarter ended October 31, 1996
is due primarily to increases in amortization and royalties related to
licensed products. Amortization of capitalized software development
costs was $735,000 and $567,000 and $267,000 and $230,000 for the nine
months and the quarters ended October 31, 1996 and 1995, respectively.
FORM 10-Q
Page 8 of 12
<PAGE>
Cost of Service Fees
Cost of service fees consists of the costs associated with
supplying customers with technical assistance and training and
consulting services. Cost of service fees was $2,362,000 or 13% of
revenues and $1,752,000 or 11% of revenues for the nine months ended
October 31, 1996 and 1995 respectively. Cost of service fees was
$811,000 or 12% of revenues for the quarter ended October 31, 1996.
Cost of service fees was $659,000 or 12% of revenues for the quarter
ended October 31, 1995. The increase in cost of service fees in
dollars is due principally to increases in the Company's support,
training and consulting staffs and related expenses. The Company
expects costs of service fees to continue to increase in dollars as
the Company's customer base expands.
Development Expenses
Development expenses were $1,566,000 or 8% of revenues for the
nine months ended October 31, 1996 compared to $2,214,000 or 14% of
revenues for the nine months ended October 31, 1995. Development
expenses were $561,000 or 8% of revenues for the quarter ended October
31, 1996 and $624,000 or 12% of revenues for the quarter ended October
31, 1995. Development expenses for the nine months and quarter ended
October 31, 1996 decreased due to the restructuring of the Company's
product development operations in the third quarter ended October 31,
1995. The Company capitalized $570,000 and $808,000 and $146,000 and
$398,000 of development expenditures for the nine months and the
quarters ended October 31, 1996 and 1995, respectively.
Selling Expenses
Selling expenses were $7,785,000 for the nine months ended
October 31, 1996 as compared to $7,193,000 for the nine months ended
October 31, 1995, an increase of 8%. Selling expenses were $2,631,000
for the quarter ended October 31, 1996 and $2,486,000 for the quarter
ended October 31, 1995, an increase of 6%. Selling expenses as a
percentage of revenues were 41% for the nine months ended October 31,
1996 and 45% for the nine months ended October 31, 1995, and 40% for
the quarter ended October 31, 1996 and 47% for the quarter ended
October 31, 1995. The increase in selling expenses in dollars is due
principally to the addition of sales and marketing personnel and
increased marketing expenses. The decrease in selling expenses as a
percentage of revenues is due to an increase in revenues without a
proportionate increase in selling expenses.
General and Administrative Expenses
General and administrative expenses were $3,534,000 for the
nine months ended October 31, 1996 and $3,233,000 for the nine months
ended October 31, 1995, an increase of 9%. General and administrative
expenses were $1,244,000 for the quarter ended October 31, 1996 and
$1,137,000 for the quarter ended October 31, 1995, an increase of 9%.
General and administrative expenses were 19% of revenues for the nine
months ended October 31, 1996 and 20% of revenues for the nine months
ended October 31, 1995. These expenses were 19% of revenues for the
quarter ended October 31, 1996 and 21% for the quarter ended October
31, 1995. The decrease in general and administrative expenses as a
percentage of revenue for the nine months and the quarter ended
October 31, 1996 reflects increased revenues without a proportionate
increase in general and administrative expenses.
FORM 10-Q
Page 9 of 12
<PAGE>
Income Taxes
The Company's effective tax rate on pretax income was 28% and
6% for the nine months ended October 31, 1996 and 1995, respectively,
and 26% and 9% for the quarters ended October 31, 1996 and 1995,
respectively. Income tax expense (benefit) was $826,000 and ($210,000)
for the nine months ended October 31, 1996 and 1995, respectively.
Income tax expense (benefit) was $307,000 and ($431,000) for the
quarters ended October 31, 1996 and 1995, respectively. The increase
in income tax expense and the Company's effective tax rate for the
nine months and the quarter ended October 31, 1996 was due principally
to an increase in operating income resulting from charges related
to the acquisition of Soft Systems, Ltd. and the restructuring of the
Company's product development operations in the quarter ended October
31, 1995, coupled with a decrease in the amount of research and
development credits utilized to reduce federal income taxes. Research
and development credits of approximately $40,000 and $117,500 were
utilized in the nine months ended October 31, 1996 and 1995
respectively to reduce federal income taxes.
The Company does not provide for U.S. federal income taxes on
undistributed earnings of foreign subsidiaries as such earnings are
considered to be permanently reinvested. The amount of undistributed
earnings which would be subject to U.S. federal income tax if
repatriated as of July 31, 1996 was approximately $602,000. The tax
liability on these earnings, if repatriated, would not be material.
Income Per Share
Net income (loss) per share increased to $0.44 from ($0.80)
for the nine months ended October 31, 1996 and 1995, respectively. Net
income (loss) per share increased to $0.18 from ($0.96) for the
quarters ended October 31, 1996 and 1995, respectively. This increase
was due primarily to increased income from operations.
FORM 10-Q
Page 10 of 12
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of Primary and Fully Diluted Per Share
Earnings
(b) Reports on Form 8-K
None
S I G N A T U R E S
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.
IQ SOFTWARE CORPORATION
(Registrant)
Date: December 14, 1996
By: /s/ Charles R. Chitty
Charles R. Chitty
Chairman, President and
Chief Executive Officer
(Principal Executive
Officer)
By: /s/ J. Kent Elmer
J. Kent Elmer
Controller
(Principal Accounting
Officer)
FORM 10-Q
Page 11 of 12
<PAGE>
EXHIBIT 11
<TABLE>
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
COMPUTATION OF PRIMARY AND FULLY DILUTED PER SHARE EARNINGS
Three Months Ended Nine Months Ended
October 31, October 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
PRIMARY
Weighted average Common Stock outstanding 4,597,000 4,312,000 4,572,000 4,241,000
Net effect of dilutive stock options
based on the treasury stock method... 225,000 -- 199,000 --
Total................................ 4,822,000 4,312,000 4,771,000 4,241,000
Net income (loss)...................... $ 857,000 $(4,136,000) $2,116,000 $(3,399,000)
Net income (loss) per share............ $ 0.18 $ (0.96) $ 0.27 $ (0.80)
FULLY DILUTED
Weighted average Common Stock outstanding 4,597,000 4,312,000 4,572,000 4,241,000
Net effect of dilutive stock options
based on the treasury stock method... 248,000 -- 247,000 --
Total................................ 4,845,000 4,312,000 4,819,000 4,241,000
Net income (loss)...................... $ 857,000 $(4,136,000) $2,116,000 $(3,399,000)
Net income (loss) per share............ $ 0.18 $ (0.96) $ 0.27 $ (0.80)
</TABLE>
FORM 10-Q
Page 12 of 12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 4,323,355
<SECURITIES> 5,164,046
<RECEIVABLES> 8,677,084
<ALLOWANCES> (698,000)
<INVENTORY> 0
<CURRENT-ASSETS> 20,639,799
<PP&E> 5,737,715
<DEPRECIATION> (4,095,138)
<TOTAL-ASSETS> 25,377,531
<CURRENT-LIABILITIES> 3,603,359
<BONDS> 0
0
0
<COMMON> 1,527
<OTHER-SE> 21,250,645
<TOTAL-LIABILITY-AND-EQUITY> 25,377,531
<SALES> 13,141,528
<TOTAL-REVENUES> 18,760,367
<CGS> 2,409,441
<TOTAL-COSTS> 16,177,790
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,941,866
<INCOME-TAX> 826,000
<INCOME-CONTINUING> 2,115,866
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,115,866
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
</TABLE>
