<PAGE>1
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 July 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 SEPTEMBER 13, 1996
Common 4,596,007
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IQ SOFTWARE CORPORATION
Form 10-Q
Quarter Ended July 31, 1996
Table of Contents
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - July 31,
1996 (unaudited) and January 31, 1996 3
Condensed Consolidated Statements of Income
(unaudited) - Three months and six months
ended July 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash
Flows (unaudited) - Six months ended July 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 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 10
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<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, 1996 January 31, 1996
(unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,856,102 $ 5,632,580
Marketable securities 4,572,864 2,601,055
Accounts receivable, net of allowance for doubtful accounts of
$642,000 at July 31, 1996 and $457,000 at January 31, 1996 7,239,843 5,838,128
Note receivable from affiliate (Note 2) 1,800,000 1,800,000
Prepaid expenses and other current assets 1,224,959 1,266,595
Total current assets 18,693,768 17,138,358
Property and equipment:
Furniture and fixtures 1,179,652 1,183,692
Equipment 4,441,730 4,259,707
5,621,382 5,443,399
Accumulated depreciation (3,874,351) (3,416,027)
1,747,031 2,027,372
Capitalized software development costs, net of accumulated amortization
of $1,303,000 at July 31, 1996 and $936,000 at January 31, 1996 1,282,985 1,226,123
Purchased software, net of accumulated amortization of $296,000 at
July 31, 1996 and $211,000 at January 31, 1996 673,267 774,286
Goodwill, net of accumulated amortization of $131,000 at July 31, 1996
and $56,000 at January 31, 1996 992,980 794,477
Other assets 169,476 163,245
Total assets $23,559,507 $22,123,861
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 708,262 $ 1,091,638
Accrued expenses 766,872 816,378
Unearned revenue 1,306,793 1,375,449
Income taxes payable 152,592 0
Current portion of deferred income taxes 207,000 200,000
Total current liabilities 3,141,519 3,483,465
Deferred income taxes, less current portion 552,000 620,000
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 5,000,000 - Issued and outstanding shares-none 0 0
Common stock, $.00033 par value:
Authorized shares - 30,000,000
Issued and outstanding shares - 4,584,632 at July 31, 1996
and 4,494,941 at January 31, 1996 1,513 1,484
Additional paid-in capital 11,939,924 11,404,931
Retained earnings 8,086,820 6,827,235
Net unrealized gain on marketable securities available for sale 1,169 947
Foreign currency translation adjustments (163,438) (214,201)
Total shareholders' equity 19,865,988 18,020,396
Total liabilities and shareholders' equity $23,559,507 $22,123,861
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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<TABLE>
Item 1. Financial Statements (continued)
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
July 31, July 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
License fees $4,310,195 $3,732,175 $8,418,652 $7,526,924
Maintenance and support services 1,897,228 1,527,318 3,695,457 3,025,889
6,207,423 5,259,493 12,114,109 10,552,813
Operating expenses:
Cost of license fees 291,893 199,205 563,303 402,969
Cost of maintenance and support services 788,175 566,623 1,551,162 1,092,555
Development 507,016 813,473 1,004,951 1,589,974
Selling 2,556,703 2,465,272 5,153,855 4,706,343
General and administrative 1,220,618 1,083,100 2,289,952 2,096,626
Total operating expenses 5,364,405 5,127,673 10,563,223 9,888,467
Operating income 843,018 131,820 1,550,886 664,346
Investment income, net 119,437 168,900 227,383 293,493
Income before income taxes 962,455 300,720 1,778,269 957,839
Income tax 295,000 35,000 519,000 221,000
Net income $ 667,455 $ 265,720 $1,259,269 $ 736,839
Net income per common share $ 0.14 $ 0.06 $ 0.27 $ 0.17
Weighted average number of common and
common equivalent shares outstanding 4,826,000 4,364,000 4,751,000 4,355,000
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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Item 1. Financial Statements (continued)
<TABLE>
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
July 31,
1996 1995
<S> <C> <C>
Operating activities:
Net income $ 1,259,269 $ 736,839
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,021,822 816,173
Deferred income taxes (61,000) 6,000
Gain on disposal of equipment (9,269) 0
Changes in operating assets and liabilities:
Accounts receivable (1,346,716) 915,325
Prepaid expenses and other current assets 47,543 (296,277)
Accounts payable (240,804) 273,156
Accrued expenses (233,859) (243,562)
Unearned revenue (79,298) 30,182
Income taxes payable 97,229 79,085
Net cash provided by operating activities 454,917 2,316,921
Investing activities:
Purchases of property and equipment (212,366) (759,490)
Additions of capitalized software development costs (424,100) (422,423)
Advance under note receivable (Note 2) 0 (1,800,000)
(Purchase) sale of marketable securities, net (1,971,587) 1,477,506
Payments in connection with acquisition of Skribe Software, Inc. (214,730) 0
Payments in connection with acquisition of Soft Systems, Ltd. (35,000) 0
Other investing activities (6,475) (23,863)
Net cash used in investing activities (2,864,258) (1,528,270)
Financing activities:
Payments on long-term debt 0 (45,216)
Proceeds from issuance of common stock 613,560 77,961
Net cash provided by financing activities 613,560 32,745
Effect of exchange rate changes on cash 19,303 (2,696)
Net (decrease) increase in cash and cash equivalents (1,776,478) 818,700
Cash and cash equivalents at beginning of period 5,632,580 7,699,398
Cash and cash equivalents at end of period $ 3,856,102 $ 8,518,098
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 4,764 $ 1,270
Cash paid during the period for income taxes $ 353,662 $ 193,000
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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IQ SOFTWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
July 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. Reclassifications
Certain prior-year amounts have been reclassified to conform with
current year presentation in the accompanying consolidated financial
statements.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
The Company's working capital increased $1,897,000 to $15,552,000 as
of July 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 costs of $424,000 and property and equipment additions of
$212,000
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 $12,114,000 for the six months ended July 31, 1996 and
$10,553,000 for the six months ended July 31, 1995, an increase of
$1,561,000 or 15%. Revenues were $6,207,000 for the quarter ended
July 31, 1996 and $5,259,000 for the quarter ended July 31, 1995, an
increase of $948,000 or 18%.
License fees were $8,419,000 for the six months ended July 31, 1996
compared to $7,527,000 for the six months ended July 31, 1995, an
increase of $892,000 or 12%. License fees were $4,310,000 for the
quarter ended July 31, 1996 and $3,732,000 for the quarter ended July
31, 1995, an increase of $578,000 or 15%. License fees increased
principally as a result of increases in the sale of the Company's
graphical software products.
Maintenance and support services revenues were $3,695,000 for the six
months ended July 31, 1996 compared to $3,026,000 for the six months
ended July 31, 1995, an increase of $669,000 or 22%. Maintenance and
support services were $1,897,000 for the quarter ended July 31, 1996
compared to $1,527,000 for the quarter ended July 31, 1995, an
increase of $370,000 or 24%. Maintenance and support services
revenues increased principally as a result of the increase in the
installed based 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 $563,000 or 5% of revenues and $403,000 or 4% of revenues for
the six months ended July 31, 1996 and 1995 respectively. Cost of
license fees was $292,000 or 5% of revenues for quarter ended July 31,
1996. For the comparable quarter of the prior year, cost of license
fees was $199,000 or 4% of revenues. The increase in cost of license
fees in dollars and as a percentage of revenues for the six months and
the quarter ended July 31, 1996 is due primarily to increases in
amortization and royalties related to licensed products. Amortization
of capitalized software development costs was $452,000 and $337,000
and $239,000 and $166,000 for the six months and the quarters ended
July 31, 1996 and 1995, respectively.
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Cost of Maintenance and Support Services
Cost of maintenance and support services consists of the costs
associated with supplying customers with technical assistance and
training and consulting services. Cost of maintenance and support
services was $1,551,000 or 13% of revenues and $1,093,000 or 10% of
revenues for the six months ended July 31, 1996 and 1995,
respectively. Cost of maintenance and support services was $788,000
or 13% of revenues for the quarter ended July 31, 1996. Cost of
maintenance and support services was $567,000 or 11% of revenues for
the quarter ended July 31, 1995. The increase in cost of maintenance
and support services is due principally to increases in the Company's
support, training and consulting staff. The Company expects costs
of maintenance and support services to continue to increase in as the
Company's customer base expands.
Development Expenses
Development expenses were $1,005,000 or 8% of revenues for the six
months ended July 31, 1996 compared to $1,590,000 or 15% of revenues
for the six months ended July 31, 1995, a decrease of 37%.
Development expenses were $507,000 or 8% of revenues for the quarter
ended July 31, 1996 and $813,000 or 15% of revenues for the quarter
ended July 31, 1995. Development expenses for the six months and
quarter ended July 31, 1996 decreased due to the restructuring of the
Company's product development operations in the third quarter of
fiscal 1996. The Company capitalized $424,000 and $400,000 and
$181,000 and $261,000 of development expenditures for the six months
and the quarters ended July 31, 1996 and 1995, respectively.
Selling Expenses
Selling expenses were $5,154,000 for the six months ended July 31,
1996 as compared to $4,706,000 for the six months ended July 31, 1995,
an increase of 10%. Selling expenses were $2,557,000 for the quarter
ended July 31, 1996 and $2,465,000 for the quarter ended July 31,
1995, an increase of 4%. Selling expenses as a percentage of revenues
were 43% for the six months ended July 31, 1996 and 45% for the six
months ended July 31, 1995, and 41% for the quarter ended July 31,
1996 and 47% for the quarter ended July 31, 1995. The increase in
selling expenses in dollars is due principally to the addition of
sales and marketing personnel and increased marketing and commission
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 $2,290,000 for the six months
ended July 31, 1996 and $2,097,000 for the six months ended July 31,
1995, an increase of 9%. General and administrative expenses were
$1,221,000 for the quarter ended July 31, 1996 and $1,083,000 for the
quarter ended July 31, 1995, an increase of 13 %. General and
administrative expenses were 19 % of revenues for the six months ended
July 31, 1996 and 20% of revenues for the six months ended July 31,
1995. These expenses were 20% of revenues for the quarter ended July
31, 1996 and 21% for the quarter ended July 31, 1995. The decrease in
general and administrative expenses as a percentage of revenue for the
six months and the quarter ended July 31, 1996 reflects increased
revenues without a proportionate increase in general and
administrative expenses.
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Income Taxes
The Company's effective tax rate on pretax income was 29% and 23% for
the six months ended July 31, 1996 and 1995, respectively, and 31% and
12% for the quarters ended July 31, 1996 and 1995, respectively.
Income tax expense was $519,000 and $221,000 for the six months ended
July 31, 1996 and 1995, respectively. Income tax expense was $295,000
and $35,000 for the quarters ended July 31, 1996 and 1995,
respectively. The increase in income tax expense for the six months
and the quarter ended July 31, 1996 was due principally to an increase
in operating income, coupled with a decrease in the amount of research
and development credits available to reduce federal income taxes.
Research and development credits of approximately $90,000 were
utilized in the six months ended July 31, 1995 to reduce federal
income taxes. No research and development credits were available to
reduce federal income taxes in the six months ended July 31, 1996.
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 $480,000. The tax
liability on these earnings, if repatriated, would not be material.
Income Per Share
Net income per share increased to $0.27 from $0.17, or 59%, for the
six months ended July 31, 1996 and 1995, respectively. Net income per
share increased to $0.14 from $0.06, or 133%, for the quarters ended
July 31, 1996 and 1995, respectively. This increase was due primarily
to increased income from operations.
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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: September 13, 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)
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<TABLE>
EXHIBIT 11
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
COMPUTATION OF PRIMARY AND FULLY DILUTED PER SHARE EARNINGS
Three Months Ended Six Months Ended
July 31, July 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
PRIMARY
Weighted average Common Stock outstanding 4,582,000 4,208,000 4,559,000 4,204,000
Net effect of dilutive stock options
based on the treasury stock method 244,000 156,000 192,000 151,000
Total 4,826,000 4,364,000 4,751,000 4,355,000
Net income $ 667,000 $ 266,000 $ ,259,000 $ 737,000
Net income per share $ 0.14 $ 0.06 $ 0.27 $ 0.17
FULLY DILUTED
Weighted average Common Stock outstanding 4,582,000 4,208,000 4,559,000 4,204,000
Net effect of dilutive stock options
based on the treasury stock method 244,000 179,000 192,000 182,000
Total 4,826,000 4,387,000 4,751,000 4,386,000
Net income $ 667,000 $ 266,000 $1,259,000 $ 737,000
Net income per share $ 0.14 $ 0.06 $ 0.27 $ 0.17
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> JUL-31-1996
<CASH> 3,856,102
<SECURITIES> 4,572,864
<RECEIVABLES> 7,881,843
<ALLOWANCES> 642,000
<INVENTORY> 0
<CURRENT-ASSETS> 18,693,768
<PP&E> 5,621,382
<DEPRECIATION> 3,874,351
<TOTAL-ASSETS> 23,559,507
<CURRENT-LIABILITIES> 3,141,519
<BONDS> 0
0
0
<COMMON> 1,513
<OTHER-SE> 19,864,475
<TOTAL-LIABILITY-AND-EQUITY> 23,559,507
<SALES> 8,418,652
<TOTAL-REVENUES> 12,114,109
<CGS> 563,303
<TOTAL-COSTS> 10,563,223
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,778,269
<INCOME-TAX> 519,000
<INCOME-CONTINUING> 1,259,269
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,259,269
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
