SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934 (NO FEE REQUIRED)
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 Dr., Suite 550, Norcross, Georgia 30092
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770)
446-8880
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.00033-1/3 par value
(Title of Class)
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 by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by
non-affiliates of the Registrant (assuming for these purposes, but
without conceding, that all executive officers and directors and
greater than five percent shareholders are "affiliates" of the
Registrant) as of March 31, 1997 (based on the closing sale price of
the Common Stock as quoted on the NASDAQ National Market System on
such date) was $47,976,744.
As of March 31, 1997, there were 4,647,632 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1997 Annual
Meeting of Shareholders to be held on June 24, 1997, are incorporated
by reference into Part III.
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PART I
ITEM 1 - BUSINESS
General
The Company designs, develops, markets and supports a suite of
business intelligence software products for data access, analysis, ad
hoc query and reporting designed to facilitate decision support. The
Company has licensed approximately 500,000 copies of its software
products. The Company has five standard software products that can be
licensed separately or in combination. Its principal products,
IQ/Objects and Intelligent Query ("IQ") are end user query and
reporting tools that allow users to access data stored in relational
databases, data warehouses and many legacy and non-relational database
file systems. The Company's principal customers include (i) large
corporate customers, (ii) federal, state and local governments and
(iii) vertical market application software developers who integrate
the Company's software into their products for license to end users.
The Company was incorporated in Georgia on August 16, 1984. The
Company's executive offices are located at 3295 River Exchange Drive,
Suite 550, Norcross, Georgia 30092. The Company's direct sales force
operates out of offices in Norcross, Georgia; Iselin, New Jersey; San
Jose, California; Burlington, Massachusetts; Chicago, Illinois; Wayne,
Pennsylvania; Dallas, Texas; Troy, Michigan and Winchester, England.
The Company has software development teams located in Norcross,
Georgia; Ann Arbor, Michigan and London, England.
The term "Company" refers to IQ Software Corporation and its
subsidiaries, unless the context otherwise requires. The Company's
Common Stock is reported on NASDAQ National Markets (Trading Symbol
"IQSW").
Products
Enterprise Class Products
IQ/Objects
IQ/Objects is a suite of object-based ad hoc query and reporting
tools. IQ/Objects provides the broadest class of users with a range of
decision support capabilities including report viewing, ad hoc query,
sophisticated analysis and reporting. IQ/Objects utilizes object
oriented technology to allow users to develop reusable query and
report components (objects). These objects can communicate and
interact with each other and can be assembled to create sophisticated
queries and reports. IQ/Objects allows users to develop multiple
queries which can be generated and executed in a single request.
Each query in the report output may access a different data
source. The results generated by one query object can be passed to
another query object which can use and act on the information passed
to it. IQ/Objects also allows objects to be active or inactive
depending on conditions. IQ/Objects is available for Windows 3.1,
Windows NT and Windows 95 operating systems.
IQ/Vision
IQ/Vision is a multi-dimensional analysis tool designed for
business analysts and mid-level to senior managers and executives.
IQ/Vision offers an extremely "high touch" interface. It provides for
highly interactive and intuitive top down analysis and synthesis of
summarized data. IQ/Vision has an open architecture supporting both
Relational On-Line Analytical Processing (ROLAP) and Multidimensional
On-Line Analytical Processing (MOLAP) databases. IQ/Vision's intuitive
interface provides sophisticated analysis capabilities including slice
and dice, drill up, drill down, dimension nesting, ranking, exception
highlighting, dimension rotation, charting and axis flip. In addition,
IQ/Vision supports the concept of live briefing books which allows
the user to save any of the views of information, record them and
provide them to play them back (VCR style) with a single button click.
IQ/Vision is available for Windows 3.1 operating systems.
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IQ/Smartserver
IQ/Smartserver, when combined with the Company's IQ/Vision and
IQ/Objects software, allows users to implement the Company's products
in three-tier architecture. This architecture allows for a "division
of labor" among clients and servers. With IQ/Smartserver, processing
can be partitioned on the database server, the application server, the
client or a combination of server and client. Routine query and ad hoc
reporting functions such as searching, sorting, data manipulation and
output processing, can be partially or completely executed on the
server. Batch processing functions such as scheduling and production
reporting, allow repetitive queries and reports to be created on the
desktop and executed completely on the server. The semantic
layer also can be stored and maintained on the server. IQ/Smartserver
for IQ/Objects was released in February 1996 and is available for
UNIX or Windows NT servers.
IQ/Vision Server
IQ/Vision Server includes all of the capabilities of IQ/Smartserver
plus a dynamic multidimensional database. Because it is integrated
with IQ/Smartserver, IQ/Vision Server provides an easy way to automate
the process of creating OLAP (On-Line Analytical Processing) cubes.
IQ/Vision Server is capable of handling fairly large volumes of data
efficiently. In addition to the inherent scalable advantages of a
server-based multidimensional engine, IQ/Vision Server's architecture
is highly efficient. IQ/Vision Server compresses and loads only base
data into memory instead of performing calculation in batch, in
advance. As particular data slices are requested, IQ/Vision Server
performs only the calculation required based on the specific
information requested. Because the data is in memory, summarizations
and calculations can be performed "on the fly" and returned instantly
to the user. IQ/Vision Server for the Windows NT platform was released
in September 1996.
IQ/Liveweb
IQ/Liveweb is an internet database reporting solution. By taking
advantage of the existing Internet backbone, IQ/Liveweb gives all
levels of users, through standard Internet browsers, the ability to
access database reports which have been published to a web server. In
addition, users can request ad hoc "on demand" reports for
up-to-the-second information. Related reports, like a summary and
underlying detail, can be hyperlinked together. IQ/Liveweb combines
certain capabilities of IQ/Objects and IQ/Smartserver with a number
of web enhancements. It can be installed on either UNIX or Windows NT
servers and is easy to implement. IQ/Liveweb was introduced in
September 1996 through a major marketing effort designed to seed the
market with thousands of copies. A major new release of IQ/Liveweb is
planned for May 1997, as well as several minor releases throughout the
balance of calendar 1997.
Legacy Products
INTELLIGENT QUERY
Intelligent Query ("IQ") is the Company's first product. It was
first used commercially in 1985. IQ is a query and reporting tool
which enables non-technical users to selectively retrieve data from a
variety of application databases, analyze and manipulate the data and
generate a variety of custom reports. IQ has a powerful command
language which offers sophisticated users and professional programmers
the ability to execute functions in addition to those in the menu
system, such as "if-then," "if-then-else," scaling control and
specifying legends for graphs. The Company has ported IQ to more than
35 hardware platforms, many operating systems and 60 DBMS and ISAM
file systems. IQ is available in Windows, Motif and character
versions.
Product Research and Development
The Company's products have been developed internally and
acquired or licensed. Thirty-two full-time employees were engaged in
product research and development as of January 31, 1997. This staff is
responsible for modifying, porting and enhancing all the Company's
products and for developing new products.
In June 1994 the Company acquired Skribe, Inc., the developer of
Skribe. Following the acquisition, the Company undertook a development
effort to substantially improve and enhance Skribe's original product.
In September 1995
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the Company released this improved and enhanced product as
IQ/Objects. Version 6.0 of IQ/Objects, released in April 1997,
provides significant improvement in the product's ad hoc query
capabilities and adds functionality which improves the product's
manageability in large-scale deployments.
In August 1995 the Company entered into a non-exclusive license
agreement with TM1 Corporation (TM1). Under the terms of the agreement
the Company can sublicense TM1's dynamic multidimensional database
(MDDB) and various other software modules. The Company pays a royalty
for each copy of TM1's software licensed. The Company has certain
rights to the TM1 software source code but currently has not exercised
any rights thereunder.
In September 1995 the Company acquired Soft Systems, Ltd. and its
principal product, Vision. Distribution of the product was limited.
Following the acquisition, the Company undertook a development effort
to substantially improve and enhance the software. In November 1996
the Company released this improved and enhanced product as IQ/Vision
Version 4.0.
In fiscal 1997, the Company incurred development expenses of $
2,074,000. In addition, the Company capitalized approximately $805,000
of development costs in fiscal 1997 in accordance with generally
accepted accounting principles.
Sales and Marketing
The Company markets its products principally in the United States
and the United Kingdom through its sales organization and in certain
other territories through distributors. The Company identifies
prospective customers through a combination of direct mail, seminars,
telemarketing, media advertising, trade show participation and various
vendor marketing partnership efforts. Once prospects are identified,
the Company conducts sales activities through a field sales force or
over the telephone. If requested by the prospective customer, the
Company generally provides a "date activated version" or an evaluation
copy of the software and support services for a limited evaluation
period. Eighty-three full-time employees were engaged in sales and
marketing as of January 31, 1997.
In the last 18 months the Company has changed its sales
operations from principally telephone sales to principally direct
field sales. This is primarily due to the increase in the average size
of a transaction and the complexity of the products and their
applications. The sales and marketing staff as a result also includes
pre-sales technical support personnel.
The Company's products are marketed to users in a wide variety of
industries. End user list prices for the Company's products range from
$250-$50,000 per copy, depending on the hardware platform and software
application. The Company offers discounts to large volume customers.
The Company's sales organization is organized to focus on three
principal marketing channels: software company resellers ("OEMs"), end
users and international distributors. None of the Company's customers
accounted for more than ten percent of revenues in fiscal 1995, 1996
or 1997. The Company typically grants a 30-60 day money back guarantee
to certain customers. Historically, returns of product have been
insignificant.
The Company typically realizes a larger percentage of its revenues in
the second half of each fiscal year. For financial information on
operations in geographic areas, see note 10 to the consolidated
financial statements, page 28, which is incorporated herein by
reference.
Direct
The Company sells directly to large companies and to federal,
state and local governmental agencies. The Company has a direct field
sales force focused on selling to these organizations. The Company's
direct field sales force operates out of offices in Norcross, Georgia;
Iselin, New Jersey; Chicago, Illinois; San Jose, California; Boston,
Massachusetts; Philadelphia, Pennsylvania; and Winchester, England.
Smaller accounts are generally handled by a telesales force based in
Norcross, Georgia. The Company's direct sales organization consists of
field sales, telesales, and pre-sales technical support personnel.
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The Company's pricing methodology for direct sales is generally a
client/server model wherein a licensee fee is charged for each
server copy (independent of the number of users) plus a license fee
for each client (user) copy. The total license fee varies depending
upon the customers' specific implementation.
International
International sales are principally conducted out of the U.S.
headquarters and through the Company's subsidiary in the United
Kingdom which was established in 1990. The United Kingdom subsidiary
is responsible for selling directly to OEM customers and end users and
for establishing distributor relationships. In territories outside
those served by the international office, the Company's U.S. based
sales personnel develop OEM, end user and distributor relationships.
The Company has appointed approximately 50 distributors in more than
20 territories, including Australia, Hong Kong, Malaysia, Singapore,
and the United Kingdom. The Company's software is designed to
facilitate the translation of screens, menus, and documentation and
help files into local languages. Various products are currently
available in English, French, German, Danish, Dutch, Spanish and
Chinese versions. IQ/Objects is currently available in English,
French, and German. A German version of IQ/Vision is currently under
development.
Software Company Resellers ("OEMs")
The software company resellers market was the initial channel the
Company developed for the distribution of its products. The Company
has licensed its products to more than 900 OEM customers worldwide,
consisting primarily of vertical application software companies which
license products across a wide range of industries, including hospital
information systems, 4GL, manufacturing, government contracting
systems, human resources, financial systems, timekeeping, general
accounting, telephone call accounting and real estate management.
The Company believes that OEMs enjoy several benefits from
incorporating its products into their existing software applications.
First, OEMs can functionally enhance their products without expending
the significant resources and many hours of programming time necessary
to develop software with capabilities similar to the Company's
products. Second, because many customers of vertical applications
consider a query and reporting tool to be a basic requirement for a
complete package, OEMs can make their products more competitive by
including the Company's software. Finally, the Company's software
affords OEMs an opportunity for add-on business by providing new
products to sell to their existing customers.
The terms of the Company's OEM distribution agreement typically
permit the OEM to copy and distribute the Company's software only for
use with the OEM's software application. The OEM assumes the marketing
and sales responsibility and the cost for delivering and installing
the Company's product to the ultimate end user thus allowing the
Company to leverage its marketing resources. The Company provides
maintenance and support services to the OEM and the OEM directly
supports its customers.
The Company employs a pricing model which consists of a
non-refundable prepaid license fee and a per-copy license fee. The
greater the amount of the prepaid license fee selected by the OEM, the
larger the discount for the per-copy license fee. The non-refundable
license fee is credited against per-copy license fees incurred by the
OEM until fully applied; thereafter license fees are typically paid
monthly at the per-copy rate. The Company may also offer certain
volume discounts. Historically, this pricing model has allowed the
Company to do business with a wide variety of OEMs with terms that are
designed for each OEM customer and allow for the specific pricing
requirement of the customer. The pricing model takes into account
the sales prices of customer's products and the industry in which the
OEM operates. The Company believes that the financial impact of the
volume discount policy to OEMs is not material inasmuch as certain
customers elect lower prepaid license fees and higher per unit
royalties while others elect larger prepaid fees in return for a lower
royalty rate. The Company believes that the cumulative effect of the
various discounts is offsetting.
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Customer Support and Services
The Company offers software maintenance and support, training and
consulting services to its customers. Generally, the Company's
software products include a 30-60 day warranty for end users and a
90-day free support period for OEMs. Thereafter, maintenance and
support services are available for an additional charge. A majority of
the customers renew their maintenance and support contracts.
Maintenance and support services include telephone support and
maintenance updates. The Company provides support to end users
who have licensed products directly from the Company and to OEMs. The
Company conducts training sessions for both end users and OEMs through
in-house, regional and on-site classes. The Company also provides
consulting services for the purpose of assisting customers in the
implementation, configuration and use of the Company's software.
Forty-four full-time employees were engaged in customer support,
training and consulting services as of January 31, 1997.
Employees
As of January 31, 1997, the Company employed 183 persons,
including 83 in sales and marketing, 44 in customer support and
services, 32 in product research and development and 24 in management,
administration and finance. Of the total employees, 137 are employed
in the United States and 46 internationally. None of the Company's
employees is represented by a labor union. The Company has never
experienced a work stoppage and believes that its employee relations
are good.
RISK FACTORS
This Form 10-K includes forward-looking statements with the
meaning of Section 27 A of the Securities Act of 1933, as amended, and
Section 21 E of the Securities Exchange Act of 1934, as amended, which
involve known and unknown risks and uncertainties or other factors
that may cause actual results, performance or achievements of the
Company to be materially different from any future results,
performance or achievements expressed or implied by such forward look
statements. Factors that might cause such differences include, but are
not limited to, those discussed below. In addition to statements which
explicitly describe such risks and uncertainties, readers are urged to
consider statements labeled with the terms "believes," "belief,"
"expects," "intends," "plans" or "anticipates" to be forward-looking
statements.
Annual and Quarterly Fluctuations
The operating results for future periods are subject to numerous
uncertainties including, among other matters, competitive pressures,
risk of technological change, the risks inherent in managing a growing
organization in worldwide markets and general economic conditions.
There can be no assurance that the Company will be able to operate
profitably in the future.
The Company operates without any backlog of product orders and a
majority of the revenues realized in a quarter results from orders
received in that quarter. In the future, the Company's annual and
quarterly results may be affected by factors such as customer order
deferrals in anticipation of the introduction of new products by the
Company, the possible delay in the shipment of new products,
announcements by third parties of competitive products or
technologies, and delay in the closing of significant product
licensing transactions as well as the Company's inability to attract,
train and retain qualified personnel.
The Company typically realizes a larger percentage of its revenue
in the second half of each fiscal year. In addition, a
disproportionate share of each quarter's revenues is typically
realized in the last month of each quarter. This is due in part to the
Company's sales commissions plan, which compensates sales personnel
for achieving or exceeding quarterly and annual quotas. Additionally,
a high percentage of the Company's expenses are relatively fixed,
including costs of personnel, and are not subject to rapid reduction.
Therefore, delays in closing significant product licensing
transactions at or near the end of a quarter may cause net income
in any given quarter to fall significantly below anticipated levels.
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Dependence on Principal Technology and Product Line
The Company's revenues are derived principally from the licensing
of its family of software products and related maintenance and support
services. The Company's dependence on a principal technology and a
limited product line make it more vulnerable to technological,
marketing and other competitive factors than other software companies
with more diversified technologies or product lines. Competitive
pressures, changes in technology or other factors that could cause the
Company to lose market acceptance or result in significant price
erosion would have a material adverse effect on the Company's
performance.
Technological Change and New Product Introduction and Acceptance
The computer software industry, including the decision support
software market, is characterized by rapid technological change and
frequent introductions of product enhancements and new products.
Accordingly, the Company's future success will depend in large part on
its ability to timely enhance its existing products and to timely
develop or acquire new products which achieve significant market
acceptance. The Company's growth requires it to invest continually in
research and development. Since the introduction of the Company's
first product in 1985, the Company has continuously enhanced its
products and expanded the environments in which its products
operate through a series of new versions and has introduced new
products. New products released since 1994 include IQ/SmartServer,
IQ/Objects, IQ/Vision and IQ/LiveWeb. The license fees from the
Company's legacy products, are declining as the Company has placed
significantly greater emphasis on the development and licensing of its
newer enterprise class software products. IQ/Vision and IQ/LiveWeb
were released in 1996 and have not yet achieved widespread market
acceptance. There can be no assurance that the Company can achieve
market acceptance of its most recently-introduced products or continue
to sustain the market acceptance of its other new products by adding
enhancements and porting the products to additional environments.
Additional products and new versions of existing products are in
various stages of development. There can be no assurance that the
Company will be able to continue to achieve the technological advances
which may be necessary to remain competitive or that its recently
released or future enhancements to existing products or new products
will gain market acceptance. Failure to remain competitive or to
timely develop new products which gain market acceptance will have a
material adverse affect on the Company's performance.
Competition
The market for decision support software products, such as those
marketed by the Company, is highly competitive. The Company's
competitors vary in size and in the scope and breadth of the products
and services they offer. The Company believes that functionality,
performance, ease of use, environments supported, price and customer
services are the primary competitive factors. Some of the Company's
existing competitors, as well as a number of potential competitors,
have larger technical staffs, more established and larger marketing
and sales organizations and greater financial resources than the
Company. The Company faces direct competition from a number of larger
companies which market decision support software. The Company's
principal competitors are Cognos Incorporated, Business Objects. S.A.
and Crystal, a subsidiary of Seagate Technology, Inc. In addition, a
number of other companies offer products which are competitive to a
lesser degree. The Company faces indirect competition from developers
of RDBMS, 4GL and OLAP products which offer ancillary development
tools capable of producing reports with their software. Also, OEM
software developers who integrate the Company's software with their
products may develop their own decisive support tools as a replacement
to the Company's products. To the extent that OEMs or other software
developers improve their decision support products, demand for the
Company's products may decline. There can be no assurance that the
Company will be able to compete successfully in the future or that
competition in the future will not have a material adverse effect on
the Company's business, financial condition and results of operations.
Personnel Requirements of Rapid Growth Company
The Company's success depends to a significant extent upon its
ability to continue to attract and retain highly talented personnel to
meet current and future needs of the Company. Competition for such
personnel is intense, as certain of these personnel have significant
prior industry experience and are in great demand. In the last 18
months the
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Company has changed the emphasis of its sales operations to direct
field sales from telephone sales. As a result, a large percentage of
the sales force has less than one year of sales experience with the
Company. As the products of the Company are complex, the time period
to train a new sales employee is estimated to be between 3 to 6
months. In addition, as a result of the acquisitions and introduction
of new products, there has been significant turnover in technical and
support personnel. As the Company grows it will require additional
experienced personnel. There can be no assurances that the Company
will be able to timely employ and train adequate numbers of personnel
to meet its present and future requirements. If the Company is unable
to retain its key sales, marketing, technical services and development
personnel and to timely attract and train adequate numbers of
experienced personnel to meet its present and future requirements, the
Company's performance could be materially and adversely affected.
Long Sales Cycles
The Company's sales process is often subject to delays associated
with the lengthy approval process that typically accompanies a
customer's significant capital expenditures. During this process, the
Company expends substantial time, effort and funds demonstrating the
product, preparing a contract proposal and negotiating the contract.
Any failures by the Company to process a signed agreement after
expending significant time, effort and funds could have a material
adverse affect on the Company's business, financial condition and
results of operations.
Dependence on Key Personnel
The Company's performance depends to a significant extent upon
its executive officers and other key personnel. None of the Company's
executive officers are subject to an employment agreement and/or
noncompetition agreement, except for two of its sales personnel and
two of its technical personnel. The loss of the services of any of its
executive officers or other key personnel could have a material
adverse effect on the Company's business and operating results. There
can be no assurance that the Company will be successful in attracting
and retaining such personnel. The Company does not have and has no
current plans to obtain key-man life insurance for any of its
personnel except on its chairman and chief executive officer, for
which it holds a policy in the amount of $500,000.
Difficulties in Managing Growth
The Company's business has grown rapidly in revenues, number of
personnel, and geographic scope of its operations. Continued growth
may place a significant strain on the Company's management and
operations. Certain of the Company's key personnel have recently
joined the Company, and none of the Company's officers has had
experience in managing large, public software companies. The Company's
future growth will depend in part on the ability of its officers and
other key employees to continue to implement and expand operational,
customer support and financial control systems, timely introduce
products improvements and new products and to expand, train and
manage its employee base. The Company's inability to manage growth
effectively could have a material adverse affect on the Company's
results of operations.
Risks Associated With International Operations and Foreign
Currencies
A significant portion of the Company's revenues (approximately
27% in fiscal 1996, and 33% in 1997) is derived from international
sales and is therefore subject to the risks attendant thereto. The
Company's international business is subject to longer payment cycles,
experiences greater difficulties in accounts receivable collections
and is subject to delays in shipments, increases in duties and taxes,
price controls, adverse changes in foreign regulation and the burdens
of complying with a wide variety of foreign laws. Currently, the
Company's international sales are principally to customers in
Europe, Canada, South America and Australia. The Company's UK
subsidiary transact business in foreign currencies. If the U.S. dollar
strengthens in relation to the international currencies, the Company's
revenues from international sales and the gains and losses on the
settlement of receivables of the Company from its international
subsidiary may be adversely affected. The Company does not provide for
U.S. federal income taxes on undistributed earnings of foreign
subsidiaries as such earnings are considered permanently reinvested.
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Limited Intellectual Property Protection; Risk of Infringement
The Company regards its software programs as intellectual
property and relies principally on copyright and trade secret law to
protect its intellectual property. Each employee of the Company is
required to enter into an agreement providing for the non-disclosure
of intellectual property and the assignment to the Company of all
intellectual property developed during the term of employment. There
can be no assurances that the steps taken by the Company to protect
its intellectual property will be adequate to prevent misappropriation
or unlawful copying of its technology or software programs. Copyright
and trade secret laws do not limit the rights of others to
independently develop similar technology and software programs. In
addition, the laws of some foreign countries do not protect the
Company's intellectual property rights in its software to the same
extent as do the laws of the United States. Although the Company
believes that its software products do not infringe any existing
intellectual rights of others, there can be no assurance that third
parties will not assert infringement claims in the future.
Product Related Claims
Although the Company has not experienced any product claims or
losses, the Company's products provide access to and enable analysis
of data, including financial and sales records. Any failure of the
Company's products to provide accurate, complete and timely
information could result in product liability or breach of contract
litigation against the Company by its customers or others. The
Company's license agreements disclaim and limit some or all of such
liabilities; however, there can be no assurance that such provisions
will be upheld in any legal proceeding. In addition the Company
maintains insurance to protect against claims associated with the use
of its products; however, there can be no assurance that such
insurance coverage will adequately cover any claim asserted against
the Company or that the specific claim will be covered by the policy.
A successful claim brought against the Company in excess of its
insurance coverage or for which it had no coverage could have a
material adverse effect on the Company's results of operations,
financial condition or business. Even unsuccessful claims could
result in the expenditure of funds in litigation, as well as diversion
of management time and resources.
Possible Volatility of Stock Price
Future announcements concerning the Company or its competitors,
quarterly or annual variations in results of operations, announcements
of technological innovations, the introduction of new products or
changes in pricing policies by the Company or its competitors,
intellectual property rights or other litigation, changes in earnings
estimates by analysts, the Company's failure to meet analysts'
estimates or other factors could cause the market price of the
Common Stock to fluctuate substantially. In addition, stock
prices for many technology companies fluctuate widely for reasons
which may be unrelated to results of operations. These fluctuations,
as well as general economic, market and political conditions such as
recessions or military conflicts, may materially and adversely affect
the market price of the Common Stock.
Absence of Dividends
The Company does not anticipate paying cash dividends on its
Common Stock in the foreseeable future.
Anti-Takeover Provisions
The Company's Articles and Bylaws contain certain provisions that
could have the effect of delaying, deferring or preventing a change in
control of the Company. The Board of Directors is authorized to issue
one or more series of preferred stock with respect to which the board,
without shareholder approval, may determine voting, conversion or
other rights which could adversely affect the rights of holders of
Common Stock. Only shareholders holding 25% of the outstanding Common
Stock have the power to call a special meeting. The affirmative vote
of at least two-thirds of the outstanding voting stock is necessary
for shareholders to approve a merger or sale of all or substantially
all of the assets and to amend certain provisions of the Articles of
Incorporation and the Bylaws of the Company. Directors of the
Company are divided into three classes and are elected to serve
staggered three-year terms. Under the Bylaws, directors serving
staggered terms can be removed from office only for cause and upon an
affirmative vote of at least
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two-thirds of the outstanding voting stock. One effect of the
foregoing provisions would be to make an acquisition of the Company
significantly more difficult to achieve if not approved by the Board
of Directors, even though a majority of the shareholders may favor
such action. Potential acquirers may be deterred due to the
anti-takeover provisions implemented by the Company under Georgia law.
The Company has no present intention to adopt any other charter, bylaw
or other provision which could have an anti-takeover effect.
ITEM 2 - PROPERTIES
The Company's headquarters and principal administrative, sales
and marketing operations are located in approximately 24,700 square
feet of leased office space in Norcross, Georgia, a suburb of Atlanta.
The lease for those facilities expires February 28, 1999, subject to a
five-year renewal option. The 1997 fiscal year annual rent was
approximately $433,000 including the Company's pro rata share of
certain operating expenses and taxes.
The Company also has approximately 2,900 square feet of leased
space in Ann Arbor, Michigan where it conducts product development
activities. The Company also leases smaller offices in Iselin, New
Jersey; San Jose, California; Burlington, Massachusetts; Chicago,
Illinois; Wayne, Pennsylvania; Dallas, Texas; Troy, Michigan and
England. Aggregate rental expense for these nine offices was
approximately $522,000 for the fiscal year 1997.
ITEM 3 - LEGAL PROCEEDINGS
There are no significant pending legal proceedings against the
Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS
Not applicable.
ITEM 4(A)
Executive Officers of the Registrant
The following are the executive officers of the Company:
Charles R. Chitty, 44, has served as Chairman, President and
Chief Executive Officer since 1988 and from its formation in 1984
until 1986. Mr. Chitty also has been a director since 1984 and served
as its Chief Financial Officer from 1984 to 1991. Mr. Chitty was
elected Chairman in December 1995.
David A. Cormack, 37, has served as Senior Vice President Sales
since December of 1995. From April 1993 to September 1995, Mr. Cormack
served as Managing Director of Soft Systems, Ltd. ( a United Kingdom
corporation), which was acquired by the Company in September 1995,
which specialized in executive information systems software. From
April 1992 to April 1993, Mr. Cormack served as UK Operations Director
for Planning Sciences. Prior to April 1992 Mr. Cormack held various
sales and marketing positions with Pilot Executive Software,
Information Builders, and Comshare. Mr. Cormack holds a degree in
accounting from Aberdeen College of Commerce in Scotland.
Michael J. Durnwald, 37, joined the Company in 1986 as director
of support services and has held his present position as Vice
President Product Planning since 1989. Mr. Durnwald earned a B.S.
degree in Information and Computer Sciences from Georgia Institute of
Technology and an M.B.A. from Georgia State University.
All executive officers serve at the pleasure of the Board of
Directors.
There is no family relationship between any of the executive
officers of the Company.
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
STOCK LISTING INFORMATION
IQ Software Corporation common stock is quoted on the NASDAQ
National Market System under the symbol IQSW.
MARKET PRICE INFORMATION
The table below presents the high and low closing prices for IQ
Software Corporation common stock as reported by NASDAQ for the years
ended January 31, 1997 and 1996.
<TABLE>
1997 1996
FISCAL YEAR ENDED JANUARY 31, HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First Quarter 13 1/2 10 1/4 14 1/2 9 3/4
Second Quarter 25 12 1/4 15 1/4 10 3/4
Third Quarter 20 3/4 14 1/2 16 1/2 11 1/2
Fourth Quarter 28 1/4 14 3/8 17 3/4 9 3/4
</TABLE>
The last sale price on January 31, 1997 was $15 3/4. As of
January 31, 1997, there were approximately 59 shareholders of record.
Shares of approximately 2,300 beneficial owners of the Company's
common stock are held by brokers, dealers and their nominees. The
Company has not declared or paid any cash dividends on its capital
stock. The Company currently intends to retain all earnings for use in
its business.
TRANSFER AGENT AND REGISTRAR
Chase Mellon
450 West 33rd Street
New York, New York 10001
ANNUAL MEETING
The 1997 Annual Meeting of Shareholders will be held on June 24,
1997. A formal notice of the meeting with a proxy statement and proxy,
is scheduled to be mailed during the week of May 23, 1997.
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
FISCAL YEAR ENDED JANUARY 31,
STATEMENT OF OPERATIONS DATA: 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Revenues $15,211 $19,119 $20,097 $21,855 $24,678
Operating income (loss) 3,780 3,289 2,501* (3,630)* 2,340
Income (loss) from continuing operations 2,456 2,537 1,737* (2,897)* 2,165
Net income (loss) 2,482 2,556 1,737* (2,897)* 2,165
Income (loss) per share from
continuing operations $ 0.69 $ 0.60 $ 0.41 $ (0.67) $ 0.45
Net income (loss) per share $ 0.70 $ 0.60 $ 0.41 $(0.67) $ 0.45
Weighted average number of
common and common equivalent
shares outstanding 3,556 4,236 4,257 4,304 4,792
</TABLE>
* Includes the effects of acquired research and development
expenses of $1,002,000 and $3,586,674 recorded in connection with the
acquisitions of Skribe Software, Inc. and Soft Systems, Ltd. in fiscal
1995 and 1996, respectively.
<TABLE>
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Working capital $12,413 $14,554 $15,267 $13,655 $17,279
Total assets 17,155 19,840 22,316 22,124 25,295
Total debt 321 147 45 -- --
Total shareholders' equity 13,890 16,692 18,751 18,020 21,828
</TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations. The following table sets forth, for the
periods indicated, certain items from the Company's consolidated
statements of operations expressed as a percentage of total revenues
and the percentage increase (decrease) in the dollar amount of such
items as compared to the prior year for the three years ended January
31, 1995, 1996 and 1997.
<TABLE>
Fiscal 1996 Fiscal 1997
Year ended January 31, over over
Revenues: 1995 1996 1997 FISCAL 1995 FISCAL 1996
<S> <C> <C> <C> <C> <C>
License fees 76.2% 71.3% 69.6% 1.7% 10.3%
Service fees 23.8 28.7 30.4 31.2 19.5
Operating expenses:
Cost of license fees 3.1 4.3 5.3 51.4 40.2
Cost of service fees 9.0 11.3 12.8 35.6 28.4
Development 13.2 12.5 8.4 3.1 (23.9)
Selling 36.1 46.1 45.3 38.7 11.0
General and administrative 21.2 20.2 18.7 3.9 4.2
Restructuring charges -- 5.8 -- 100.0 (100.0)
Acquired research and development costs 5.0 16.4 -- 258.0 (100.0)
Total operating expenses 87.6 116.6 90.5 44.8 (12.3)
Operating income (loss) 12.4 (16.6) 9.5 (245.2) 164.5
Investment income, net 1.7 2.7 2.0 69.4 (17.0)
Income (loss) before income taxes 14.2 (13.9) 11.5 (206.4) 193.3
Income taxes 5.5 (0.6) 2.7 (112.4) 581.3
Net income (loss) 8.6% (13.3)% 8.8% (266.7)% 174.7%
</TABLE>
<PAGE>
Revenues. The Company's revenues are derived from license fees
for decision support software products and fees for a range of
services complementing such products including software maintenance
and support, training and consulting. Total revenues were $20,097,000,
$21,855,000 and $24,678,000 in fiscal 1995, 1996 and 1997,
respectively. Revenues increased by $1,758,000, or 9%, from fiscal
1995 to 1996, and by $2,823,000, or 13%, from fiscal 1996 to 1997.
License fees were $15,314,000, $15,582,000 and $17,184,000 in
fiscal 1995, 1996 and 1997, respectively. License fees increased by
$268,000, or 2%, from fiscal 1995 to 1996 and increased by $1,602,000,
or 10% from fiscal 1996 to 1997. License fees from United States
customers increased by 3% from $10,508,000 in fiscal 1995 to
$10,809,000 in fiscal 1996 and decreased by 2% to $10,576,000 in
fiscal 1997. The increase in license fees from United States customers
from fiscal 1995 to 1996 was due principally to increased revenues
from direct sales. The decrease in license fees from United States
customers from fiscal 1996 to 1997 was due principally to decreased
revenues from our software resellers, partially offset by increased
revenues from direct sales.
Service fees were $4,783,000, $6,273,000 and $7,494,000 in fiscal
1995, 1996 and 1997, respectively. Service fees increased by
$1,490,000, or 31%, from fiscal 1995 to 1996 and by $1,221,000, or
19%, from fiscal 1996 to 1997. Service fees increased principally as a
result of the increase in the installed customer base and increases in
training and consulting revenues. The Company expects service fees to
continue to increase in relation to the demand for the Company's
products and services.
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 $619,000,
$937,000 and $1,314,000 for fiscal 1995, 1996 and 1997, respectively.
Cost of license fees as a percentage of revenues was 3%, 4% and 5% for
fiscal 1995, 1996 and 1997, respectively. The increases in cost of
license fees are due primarily to increases in the amortization of
capitalized software development costs, royalties related to
licensed products and additional documentation costs associated with
the release of new versions of the Company's products. Amortization of
capitalized software development costs was $488,000, $765,000 and
$951,000 in fiscal 1995, 1996 and 1997, respectively. The Company
expects cost of license fees to continue to increase in dollars as the
Company's license fee revenues increase.
Cost of Service Fees. Cost of service fees includes the costs
associated with supplying customers with technical assistance and
training and consulting services. Cost of service fees was $1,817,000,
$2,464,000 and $3,163,000 for fiscal 1995, 1996 and 1997,
respectively. Cost of service fees as a percentage of revenues was 9%,
11% and 13% for fiscal 1995, 1996 and 1997, respectively. The
increases in cost of service fees are due principally to growth in the
Company's technical support, training and consulting staff. The
Company expects cost of service fees to continue to increase
as the Company's customer base expands.
Development Expenses. Development expenses include all costs
related to the research and development of new products and the
enhancement of the Company's existing products, less any amounts
capitalized. Development expenses were $2,644,000, $2,727,000 and
$2,074,000 in fiscal 1995, 1996 and 1997, respectively. Development
expenses as a percentage of revenues were 13%, 12%, and 8% for fiscal
1995, 1996 and 1997, respectively. The increase in development
expenses from fiscal 1995 to 1996 was primarily due to the addition of
development personnel and equipment to modify, maintain and enhance
the existing versions of the Company's software products and to
develop new software products. The decrease in development expenses
from fiscal 1996 to 1997 was primarily due to the restructuring of the
Company's Legacy product development operations in the third quarter
of fiscal 1996 to shift the development focus to the Enterprise Class
technology. The Company capitalized $859,000, $1,038,000 and $805,000
of development expenditures in fiscal 1995, 1996, and 1997,
respectively.
<PAGE>
Selling Expenses. Selling expenses consist primarily of sales and
marketing personnel costs and related occupancy costs as well as
advertising expenditures. Selling expenses were $7,264,000,
$10,074,000 and $11,185,000 in fiscal 1995, 1996 and 1997,
respectively. Selling expenses as a percentage of revenues were 36%,
46% and 45% in fiscal 1995, 1996 and 1997, respectively. The increases
in selling expenses were primarily due to increased commissions, the
addition of sales and marketing personnel, and increased marketing
activities related to the release of new products. The Company expects
selling expenses to continue to increase in dollars as the Company
expands its sales and marketing activities in fiscal 1998.
General and Administrative Expenses. General and administrative
expenses consist primarily of personnel and occupancy costs for
administrative, executive and accounting and finance personnel as
well as allowances for returns and credit losses. General and
administrative expenses were $4,249,000, $4,415,000 and $4,603,000 for
fiscal 1995, 1996 and 1997, respectively. General and administrative
expenses as a percentage of revenues were 21%, 20% and 19% in fiscal
1995, 1996 and 1997, respectively. The increase in general and
administrative expenses in dollars is due principally to the addition
of personnel to support the growth of the Company's operations and
increases in other administrative expenses. The decrease in general
and administrative expenses as a percentage of revenues was due
primarily to increased revenues without a proportionate increase in
general and administrative expenses.
Restructuring Charges. As a result of recent acquisitions, the
Company made the decision in the third quarter of fiscal 1996 to
allocate a substantially greater portion of its research and
development resources towards its Enterprise Class products. As a
result of the transition, the Company recorded restructuring charges
of $1,282,000. These charges consisted primarily of the write-down of
capitalized software development costs of approximately $687,000
related to the Company's Legacy products and the write-down of certain
fixed assets of approximately $232,000, as well as other costs
associated with the restructuring.
Acquired Research and Development Costs. On June 17, 1994 the
Company acquired the outstanding common stock of Skribe Software, Inc.
("Skribe"). The total cost to the Company was approximately $1,525,000
plus additional contingent consideration and direct acquisition costs
of approximately $75,000 and was paid in cash. The Company used the
purchase method of accounting for the acquisition. In this regard, the
Company recorded a one-time, nontax-deductible charge for acquired
research and development costs of $1,002,000 in the second quarter of
fiscal 1995. The technological feasibility of the acquired in-process
technology had not been established and had no alternative future use.
On September 29, 1995 the Company acquired the outstanding
capital stock of Soft Systems, Limited ("Soft Systems"), a United
Kingdom corporation. The total cost to the Company was approximately
$4,020,000 ($2,251,280 cash and 248,083 unregistered shares of the
Company's common stock) plus direct acquisition costs of approximately
$325,000. The Company used the purchase method of accounting for the
acquisition. In this regard, the Company recorded a one-time,
nontax-deductible charge for acquired research and development costs
of $3,587,000 in the third quarter of fiscal 1996. The technological
feasibility of the acquired in-process technology had not been
established and had no alternative future use.
Investment Income, Net. Investment income consists primarily of
interest and dividends earned on the Company's cash and cash
equivalents and marketable securities. The Company recorded net
investment income of $351,000, $595,000 and $494,000, in fiscal 1995,
1996 and 1997, respectively. The increase in net investment income
from fiscal 1995 to 1996 is principally due to the increase in cash
and cash equivalents, marketable securities available for investment
and the high interest-bearing note receivable from affiliate. The
decrease in net investment income from fiscal 1996 to 1997 was
due principally to a decrease in cash and cash equivalents and
marketable securities available for investment due to the acquisition
of Soft Systems in September 1995.
Income Taxes. Income tax expense (benefit) on pretax income
(loss) for fiscal 1995, 1996 and 1997 was $1,115,000, $(139,000) and
$669,000, respectively. Research and development credits of
approximately $160,000, $60,000 and $5,000 were utilized in fiscal
1995, 1996 and 1997, respectively, to reduce federal income taxes. The
Company's effective tax rate on income from continuing operations was
40%, 5% and 24% in fiscal 1995, 1996 and 1997, respectively. The
Company's effective tax rate decreased to 5% in fiscal 1996 due
primarily to the nontax-deductible
<PAGE>
acquired research and development charges recorded in connection to
the acquisition of Soft Systems. The increase in income tax expense
and the effective tax rate from fiscal 1996 to 1997 is principally due
to an increase in operating income resulting from charges related to
the acquisition of Soft Systems in fiscal 1996, coupled with a
decrease in the amount of research and development credits utilized to
reduce federal income taxes.
Income (Loss) Per Share. Net income (loss) per share was $0.41,
$(0.67) and $0.45 in fiscal 1995, 1996 and 1997, respectively. Net
income (loss) per share decreased 267% to $(0.67) in fiscal 1996
primarily due to the one-time nontax-deductible charge of $3,587,000
or $0.83 per share for acquired research and development costs and the
restructuring charges of $1,282,000 or $0.19 per share, net of tax,
related to the Company's Legacy product development operations
recorded in the third quarter fiscal 1996. Net income (loss) per share
increased 167% to $0.45 in fiscal 1997 primarily due to an increase in
operating income resulting from increased revenues as well as charges
related to the acquisition of Soft Systems and the restructuring of
the Company's Legacy product development operations in fiscal 1996.
Quarterly Results. The following table sets forth certain
unaudited consolidated quarterly financial information for fiscal 1996
and 1997. This information has been prepared by the Company on
substantially the same basis as the audited consolidated financial
statements and includes all normal recurring adjustments necessary for
a fair presentation of the results for such periods. This information
should be read in conjunction with the Company's consolidated
financial statements and the notes thereto.
<TABLE>
Fiscal 1996 Fiscal 1997
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
(in thousands, except per share)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $5,294 $5,259 $ 5,295 $6,007 $5,907 $6,207 $6,646 $5,918
Operating expenses:
Cost of license fees 204 199 255 279 283 292 367 372
Cost of service fees 533 567 659 705 752 788 812 811
Development 776 813 625 513 498 507 561 508
Selling 2,246 2,465 2,486 2,877 2,597 2,556 2,631 3,401
General & administrative 1,003 1,083 1,136 1,193 1,069 1,221 1,243 1,070
Restructuring charges -- -- 1,282 -- -- -- -- --
Acquired research &
development costs -- -- 3,587 -- -- -- -- --
------ ------ ------- ------ ------ ------ ------ ------
Total operating expenses 4,762 5,127 10,030 5,567 5,199 5,364 5,614 6,162
------ ------ ------- ------ ------ ------ ------ ------
Operating income (loss) 532 132 (4,735) 440 708 843 1,032 (244)
Investment income, net 125 169 168 133 108 119 132 135
------ ------ ------- ------ ------ ------ ------ ------
Income (loss) before income taxes 657 301 (4,567) 573 816 962 1,164 (109)
Income taxes 187 35 (431) 70 224 295 307 (158)
------ ------ ------- ------ ------ ------ ------ -------
Net income (loss) $ 470 $ 266 $(4,136) $ 503 $ 592 $ 667 $ 857 $ 49
====== ====== ======= ====== ====== ====== ====== ======
Net income (loss) per share $ 0.11 $ 0.06 $ (0.96) $ 0.11 $ 0.13 $ 0.14 $ 0.17 $ 0.01
Weighted average number of
common and common
equivalent shares outstanding 4,344 4,364 4,312 4,628 4,648 4,826 4,822 4,879
</TABLE>
<PAGE>
Liquidity and Capital Resources. Cash provided by operating
activities was $4,375,000, $2,750,000 and $1,630,000 for fiscal 1995,
1996 and 1997, respectively. The decrease in fiscal 1996 from 1995 was
due principally to decreased income from operations before acquisition
related charges. The decrease in fiscal 1997 from 1996 was due
principally to significant changes in operating assets and liabilities
balances. Accounts receivable increased more rapidly than net income
in fiscal 1997 due to the overall increase in large deals in which the
Company granted extended payment terms. To date the Company has not
experienced any significant credit losses related to the granting of
extended payment terms on large deals. The Company has financed
capital expenditures and acquisitions with funds from operating
activities.
As of January 31, 1997, the Company had working capital of
$17,279,000, including $4,258,000 in cash and cash equivalents and
$4,945,000 in marketable securities. Aggregate operating lease
obligations as of January 31, 1997, were $1,935,000, of which $848,000
is payable during fiscal 1998.
The Company believes that the current cash and 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.
Inflation. Management believes inflation has not had a material
effect on the Company's operations or on its financial condition.
Foreign Currency Transactions. Approximately 23% of revenues
generated outside of the United States are negotiated, invoiced and
paid in U.S. dollars. All other international revenues are the result
of agreements entered into by the foreign subsidiary of the Company
and provide for payment in a foreign currency. Gains and losses on
foreign currency transactions have not been significant. For the
foreign subsidiary, the balance sheet accounts are translated at the
year-end exchange rate and income statement items are translated at
the average monthly exchange rates for the year. Resulting translation
adjustments are recorded in a separate component of Shareholders'
Equity, "Foreign currency translation adjustments." The adjustments
were ($214,000) and ($98,000) as of January 31, 1996 and 1997,
respectively.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and schedules are set forth in Item 14.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding directors is
incorporated by reference to the Company's Proxy Statement for the
1997 Annual Meeting of Shareholders to be held on June 24, 1997.
Information required by this item is included in the section entitled
"Executive Officers of the Registrant", Item 4(A) in Part I of this
Form 10-K. Information regarding compliance with the reporting
requirements of Section 16(a) of the Securities Exchange Act of 1934
by the Company's directors and executive officers and persons who own
more than ten percent of the Company's common stock is set forth
in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders to be held on June 24, 1997, if applicable.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is incorporated by
reference to the Company's Proxy Statement for the 1997 Annual Meeting
of Shareholders to be held on June 24, 1997.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders to be held on June 24, 1997.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by
reference to the Company's Proxy Statement for the 1997 Annual Meeting
of Shareholders to be held on June 24, 1997.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements and Report of
Independent Auditors
<PAGE>
IQ Software Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
January 31, January 31,
ASSETS 1996 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,632,580 $ 4,258,458
Marketable securities (Note 3) 2,601,055 4,944,596
Accounts receivable:
Billed 5,281,963 5,452,025
Non-billed 1,013,349 3,276,880
----------- -----------
6,295,312 8,728,905
Allowance for doubtful accounts (457,184) (654,227)
----------- -----------
5,838,128 8,074,678
Prepaid expenses and other current assets 1,266,595 1,314,316
Note receivable from affiliate (Note 4) 1,800,000 1,800,000
----------- -----------
Total current assets 17,138,358 20,392,048
Property and equipment:
Furniture and fixtures 1,183,692 1,192,163
Equipment 4,259,707 4,733,355
----------- -----------
5,443,399 5,925,518
Allowance for depreciation (3,416,027) (4,296,835)
----------- -----------
2,027,372 1,628,683
Capitalized software development costs, net of
accumulated amortization of $936,000 and
$457,000 at January 31, 1996 and 1997, respectively 1,226,123 1,312,776
Purchased software, net of accumulated amortization of
$211,000 and $458,000 at January 31, 1996 and
1997, respectively 774,286 542,345
Goodwill, net of accumulated amortization of $56,000 and
$134,000 at January 31, 1996 and 1997, respectively 794,477 1,242,886
Other assets 163,245 176,118
----------- -----------
$22,123,861 $25,294,856
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,091,638 $ 548,153
Accrued expenses 816,378 821,039
Unearned revenue 1,375,449 1,357,090
Income taxes payable (Note 7) -- 75,136
Current portion of deferred income taxes (Note 7) 200,000 312,000
----------- -----------
Total current liabilities 3,483,465 3,113,418
Deferred income taxes, less current portion (Note 7) 620,000 353,000
Shareholders' equity (Note 9):
Preferred stock, $0.01 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - none -- --
Common stock, $0.00033 par value
Authorized shares - 30,000,000
Issued and outstanding shares - 4,494,941 at January 31,
1996 and 4,647,632 at January 31, 1997 1,484 1,534
Additional paid-in capital 11,404,931 12,912,089
Retained earnings 6,827,235 8,991,959
Net unrealized gain on marketable securities
available for sale (Note 3) 947 20,622
Foreign currency translation adjustments (214,201) (97,766)
Total shareholders' equity 18,020,396 21,828,438
----------- -----------
Total liabilities and shareholders' equity $22,123,861 $25,294,856
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
IQ Software Corporation and Subsidiaries
Consolidated Statements of Operations
For the years ended January 31,
1995 1996 1997
<S> <C> <C> <C>
Revenues:
License fees $15,314,340 $ 15,582,053 $17,184,245
Service fees 4,782,640 6,273,012 7,493,851
----------- ------------ -----------
20,096,980 21,855,065 24,678,096
Operating expenses:
Cost of license fees 618,817 936,758 1,313,749
Cost of service fees 1,817,235 2,463,736 3,162,992
Development 2,644,454 2,727,014 2,073,948
Selling 7,264,256 10,074,045 11,184,895
General and administrative 4,249,094 4,415,481 4,602,829
Restructuring charges (Note 6) -- 1,281,812 --
Acquired research and development costs (Note 5) 1,002,000 3,586,674 --
Total operating expenses 17,595,856 25,485,520 22,338,413
----------- ----------- -----------
Operating income (loss) 2,501,124 (3,630,455) 2,339,683
Investment income, net 351,055 594,804 494,041
----------- ----------- -----------
Income (loss) before income taxes 2,852,179 (3,035,651) 2,833,724
Income taxes (Note 7):
Current 1,165,000 112,000 835,000
Deferred (50,000) (251,000) (166,000)
----------- ----------- -----------
1,115,000 (139,000) 669,000
Net income (loss) $ 1,737,179 $(2,896,651) $ 2,164,724
=========== =========== ===========
Net income (loss) per common share: $ 0.41 $ (0.67) $ 0.45
=========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding 4,257,000 4,304,000 4,792,000
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
IQ Software Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
Unrealized Foreign
Common Additional (Loss) Gain Currency Total
Stock Paid-in Retained on Marketable Translation Shareholders'
Shares Amount Capital Earnings Securities Adjustments Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 31, 1994 4,098,033 $1,353 $8,896,269 $7,986,707 $ -- $(192,559) $16,691,770
Issuance of common stock 79,125 26 201,844 -- -- 201,870
Tax benefit from exercise of
nonqualified stock options
and disqualifying dispo-
sitions of incentive stock
options -- -- 119,007 -- -- -- 119,007
Net income -- -- -- 1,737,179 -- -- 1,737,179
Foreign currency
translation adjustments -- -- -- -- -- 74,127 74,127
Unrealized loss on market-
able securities available
for sale -- -- -- -- (72,455) -- (72,455)
- ----------------------------------------------------------------------------------------------------------------------
Balances at January 31, 1995 4,177,158 1,379 9,217,120 9,723,886 (72,455) (118,432) 18,751,498
Issuance of common stock
related to stock options 69,700 23 340,355 -- -- -- 340,378
Issuance of common stock
related to acquisition of
Soft Systems, Ltd. 248,083 82 1,768,918 -- -- -- 1,769,000
Tax benefit from exercise of
nonqualified stock options
and disqualifying dispo-
sitions of incentive stock
options -- -- 78,538 -- -- -- 78,538
Net loss -- -- -- (2,896,651) -- -- (2,896,651)
Foreign currency
translation adjustments -- -- -- -- -- (95,769) (95,769)
Unrealized gain on market-
able securities available
for sale -- -- -- -- 73,402 -- 73,402
- ----------------------------------------------------------------------------------------------------------------------
Balances at January 31, 1996 4,494,941 1,484 11,404,931 6,827,235 947 (214,201) 18,020,396
Issuance of common stock
related to stock options 152,691 50 1,153,582 -- -- -- 1,153,632
Tax benefit from exercise of
nonqualified stock options
and disqualifying dispo-
sitions of incentive stock
options -- -- 353,576 -- -- -- 353,576
Net income -- -- -- 2,164,724 -- -- 2,164,724
Foreign currency
translation adjustments -- -- -- -- -- 116,435 116,435
Unrealized gain on market-
able securities available
for sale -- -- -- -- 19,675 -- 19,675
- ----------------------------------------------------------------------------------------------------------------------
Balances at January 31, 1997 4,647,632 $1,534 $12,912,089 $8,991,959 $20,622 $ (97,766) $21,828,438
======================================================================================================================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
IQ Software Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended January 31,
1995 1996 1997
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 1,737,179 $ (2,896,651) $ 2,164,724
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,276,684 2,544,574 1,985,162
Acquired research and development costs (Note 5) 1,002,000 3,586,674 --
Deferred income taxes (91,885) (250,496) (155,000)
Gain on disposal of equipment -- -- (17,650)
Changes in operating assets and liabilities:
Accounts receivable 73,201 (21,857) (2,127,205)
Prepaid expenses and other current assets 50,196 (474,136) (35,013)
Accounts payable (31,281) 332,455 (414,444)
Accrued expenses (32,614) (144,085) (184,286)
Unearned revenue 71,683 309,608 (40,740)
Income taxes payable 320,756 (235,931) 454,405
--------- --------- ---------
Net cash provided by operating activities 4,374,519 2,750,155 1,629,953
Investing activities:
Purchases of property and equipment (977,824) (1,137,734) (521,626)
Additions to capitalized software development costs (858,783) (1,038,240) (805,209)
Advances under Note receivable from
affiliate (Note 4) -- (1,800,000) --
Payments in connection with acquisition of Soft
Systems, Ltd., less cash acquired (Note 5) -- (2,146,830) (35,000)
Payments in connection with acquisition of Skribe
Software, Inc., less cash acquired (Note 5) (1,480,998) (76,873) (528,085)
Purchases (sales) of marketable securities (3,465,846) 1,368,238 (2,323,866)
Other investing activities (10,706) (46,337) (11,321)
----------- ----------- -----------
Net cash used in investing activities (6,794,157) (4,933,701) (4,225,107)
Financing activities:
Payments on long-term debt (101,853) (168,824) --
Proceeds from issuance of common stock 201,870 340,378 1,153,632
------------ ------------ ----------
Net cash provided by financing activities 100,017 171,554 1,153,632
Effect of exchange rate changes on cash 73,092 (54,826) 67,400
------------ ------------ ----------
Net decrease in cash and cash equivalents (2,246,529) (2,066,818) (1,374,122)
Cash and cash equivalents at beginning of period 9,945,927 7,699,398 5,632,580
--------- --------- ---------
Cash and cash equivalents at end of period $ 7,699,398 $ 5,632,580 $ 4,258,458
=========== ============ ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 13,903 $ 1,611 $ 5,632
=========== ============ ==========
Cash paid for income taxes $ 845,383 $ 292,250 $ 380,913
=========== ============ ==========
</TABLE>
See accompanying notes.
<PAGE>
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
IQ Software Corporation (the "Company"), a Georgia corporation,
designs, develops, markets and supports a family of data access,
analysis and custom report writing software products. Principal
customers are (i) vertical market application software developers who
integrate the Company's software into their products for license to
end users,(ii) large corporate customers, and (iii) federal, state and
local governments. As of January 31, 1996 and 1997, the Company had a
wholly-owned subsidiary located in the United Kingdom.
Principles of Consolidation
The consolidated financial statements of the Company include the
accounts of all of its subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Revenue Recognition
The Company's revenue recognition practices are in accordance
with the AICPA Statement of Position 91-1 on Software Revenue
Recognition. Revenue from software licenses is recognized in
accordance with the provisions of each respective software license
agreement (the "Agreements"). These Agreements between the Company and
various software companies are generally for an initial period of
12-60 months and automatically renew for 12-month periods thereafter.
License fees, which are non-refundable, are recognized as revenue
when the software is delivered, collectibility is probable and a
license agreement has been accepted. Direct sales of software are
recorded as revenue when shipped. Amounts prepaid for maintenance and
support services are recorded as unearned revenue and recognized
ratably over the service period. The Company performs periodic credit
evaluations of its customers' financial condition and generally does
not require collateral. Although due dates of receivables vary based
on contract terms, credit losses have been within management's
estimates in determining the level of allowance for doubtful
accounts. The provision for doubtful accounts is included in the
general and administrative expenses and was $1,216,000, $862,000 and
$849,000 for fiscal years 1995, 1996 and 1997, respectively.
Cost of License Fees
The cost of license fees consists of the amortization of capitalized
computer software development costs, purchased software, royalties
paid on licensed products and, to a lesser extent, the costs of
magnetic media, packaging and documentation.
Cost of Service Fees
The cost of service fees includes the costs associated with
supplying customers with technical assistance and training and
consulting services.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Marketable Securities
The Company accounts for marketable securities in accordance the
provisions of Statement of Financial Accounting Standards No.115("SFAS
No.115"). SFAS No. 115 addresses the accounting and reporting for
investments in fixed maturity securities and for equity securities
with readily determinable fair values. Management determines the
<PAGE>
appropriate classification of debt securities at the time of purchase
and reevaluates such designation as of each balance sheet date.
Currently, all debt securities with original maturity dates of greater
than 90 days are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with unrealized gains and
losses, net of tax, reported as a separate component of shareholders'
equity. Interest and dividends on securities classified as
available-for-sale are included in investment income. All
available-for-sale securities are classified as current since they are
available for use in the Company's current operations.
Capitalized Software Development Costs and Purchased Software and
Goodwill
Costs related to internally developed software which are incurred
after the establishment of technological feasibility are capitalized;
costs incurred prior to that point are considered research and
development expenditures and are expensed as incurred. Purchased
software and goodwill consist of costs capitalized in connection with
the Company's acquisitions of Skribe Software, Inc. and Soft Systems,
Limited (see Note 5). Such capitalized costs are generally amortized
over 3 to 10 years, the estimated lives of the assets. The Company
believes that the carrying value and the amortization period of
these costs remain appropriate based upon historical and
anticipated sales levels. Amortization expense was approximately
$488,000, $797,000 and $1,065,000 for the years ended January 31,
1995, 1996 and 1997, respectively.
Property and Equipment
Property and equipment is stated at cost. Depreciation expense is
computed using the straight-line method over the estimated useful
lives of the assets.
Advertising Costs
The Company expenses advertising costs as incurred in accordance
with Statement of Position 93-7. Advertising expenses were $479,000,
$963,000 and $ 1,304,000 for fiscal 1995, 1996 and 1997, respectively.
Foreign Currency Translation
For the foreign subsidiary, the balance sheet accounts are
translated at the year-end exchange rate and income statement items
are translated at the average monthly exchange rates for the year.
Resulting translation adjustments are made directly to a separate
component of shareholders' equity. Exchange gains and losses are not
material.
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed using the weighted
average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consists of
dilutive stock options.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to
employees and non-employee directors with an exercise price equal to
the fair value of the shares at the date of grant. The Company has
elected to account for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and
accordingly, recognizes no compensation expense for the stock option
grants. In 1995, the Financial Accounting Standards Board
("FASB") issued Statement No. 123, "Accounting for Stock-based
Compensation." Pro forma information regarding net income and
earnings per share is required by Statement No. 123 (see Note 9).
Impact of Recently Issued Accounting Standards
In March 1995, the FASB issued Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying amount. Statement No.
121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company adopted Statement No. 121 in
the first quarter of fiscal 1997. The effect of adoption was not
material.
In February 1997, the FASB issued a new accounting pronouncement,
Statement No. 128, "Earnings per Share," which will change the current
method of computing earnings per share. The new standard requires
presentation of "basic earnings per share" and "diluted earnings per
share" amounts, as defined. Statement No. 128 will be effective
<PAGE>
for the Company's quarter and year ending January 31, 1998, and, upon
adoption, all prior-period earnings per share data presented shall be
restated to conform with the provisions of the new pronouncement.
Application earlier than the Company's quarter ending January 31, 1998
is not permitted. The Company has not evaluated the impact
on earnings per share of Statement No. 128.
Reclassifications
Certain prior year amounts have been reclassified to conform with
current year presentaion in the accompanying financial statements.
2. FINANCIAL INSTRUMENTS
Concentrations of credit risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
and cash equivalents, short term investments, trade accounts and note
receivable (see Note 4). The Company maintains cash and cash
equivalents and short-term investments with various financial
institutions. The Company performs periodic evaluations of the
relative credit standing of those financial institutions that are
considered in the Company's investment strategy. Concent rations of
credit risk with respect to trade accounts receivable are limited
due to the large number of entities comprising the Company's customer
base.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents - The carrying amount reported in the
consolidated balance sheet for cash and cash equivalents approximates
its fair value.
Investment securities - The fair values for marketable securities
are based on quoted market price (see note 3).
Accounts receivable and accounts payable - The carrying amounts
reported in the consolidated balance sheet for accounts receivable and
accounts payable approximate their fair value.
Note receivable from affiliate - The carrying amount reported in
the consolidated balance sheet for the note receivable approximates
its fair value.
3. MARKETABLE SECURITIES
The following is a summary of available-for-sale securities at
January 31, 1996 and 1997:
<TABLE>
Gross Estimated
Unrealized Fair
January 31, 1996 Cost Gain (Loss) Value
<S> <C> <C> <C>
Municipal securities $2,368,000 $ 28,000 $2,396,000
Equity securities 232,000 (27,000) 205,000
---------- -------- ----------
$2,600,000 $ 1,000 $2,601,000
========== ======== ==========
Gross Estimated
Unrealized Fair
January 31, 1997 Cost Gain Value
Municipal securities $4,662,000 $33,000 $4,695,000
Equity securities 250,000 -- 250,000
---------- ------- ----------
$4,912,000 $33,000 $4,945,000
=========== ======== ==========
</TABLE>
The adjustment to unrealized holding gains on available-for-sale
securities included as a separate component of shareholders' equity
totaled $1,000 and $21,000, net of deferred taxes, as of January 31,
1996 and 1997, respectively.
<PAGE>
As of January 31, 1996 and 1997, the Company had no marketable
securities classified as held-to-maturity. The amortized cost and
estimated fair market value of debt and equity securities at January
31, 1997 by contractual maturity, are shown below.
Estimated
Fair
Cost Value
Due in 1 year or less $1,461,000 $1,464,000
Due after one year through 3 years 3,201,000 3,231,000
---------- ----------
Total debt securities 4,662,000 4,695,000
Equity securities 250,000 250,000
---------- ----------
$4,912,000 $4,945,000
========== ==========
4. 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. Interest on the Note was payable monthly at a rate of
prime plus 1/2 percent adjusted quarterly and was renewable at the end
of one year. The interest rate on the date of the agreement was 9
1/2%. The Company renewed the original agreement with Daystar Digital,
Inc. for an additional term ending April 18, 1997. Under the terms of
the renewal, the Note bears interest payable monthly at a rate of
prime plus 1-1/2 percent, adjusted quarterly. The Company may agree
to extend repayment past April 18, 1997. 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.
5. ACQUISITIONS
On September 29, 1995, the Company acquired all of the
outstanding capital stock of Soft Systems, Ltd. ("Soft Systems"), a
United Kingdom corporation, for approximately $4,020,000 (consisting
of $2,251,000 of cash and 248,083 unregistered shares of the Company's
common stock) plus direct acquisition costs of approximately $325,000.
The acquisition was accounted for under the purchase method and
accordingly, the operating results of Soft Systems 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 $3,587,000
which was expensed as a one-time, nontax-deductible charge at the
acquisition date.
The following unaudited pro forma results of operations for the
years ended January 31, 1995 and 1996 assume the acquisition occurred
as of the beginning of the respective periods after giving effect to
certain adjustments, including the elimination of license fees between
the Company and Soft Systems, amortization of intangibles and
purchased software costs, decreased investment income and related
income tax effects. The pro forma results have been prepared for
comparative purposes only and do not purport to indicate the results
of operations which would actually have occurred had the combination
been in effect on the dates indicated, or which may occur in the
future.
(in thousands except per share data, unaudited)
Year ended Year ended
January 31, 1995 January 31, 1996
Net revenues $21,030 $22,419
Net income 1,564 116
Net income per share $ 0.35 $ 0.03
The one-time charge of $3,587,000 for purchased research and
development costs related to the acquisition is not reflected in these
pro forma operating results.
<PAGE>
On June 17, 1994, the Company acquired all of the outstanding
common shares of Skribe Software, Inc. ("Skribe") for approximately
$1,525,000 plus additional contingent consideration due quarterly
through fiscal 1998 and direct acquisition costs of approximately
$75,000. The contingent consideration is based upon revenues generated
by products related to the purchased technology and is accounted for
as additional goodwill. The Company accounted for the acquisition
under the purchase method and, accordingly, the operating results of
Skribe have been included in its operating results since the date of
the acquisition. The purchase price was allocated among the
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 $1,002,000 which was expensed as a one-time,
nontax-deductible charge in the accompanying consolidated statements
of operations. Skribe is a developer of report writing products in the
Windows operating environment.
Exclusive of the effect of the acquired research and development
expense of $1,002,000 or approximately $0.25 per share in 1995, pro
forma statement of operations information, including pro forma
revenues and pro forma net income for the Company and Skribe for the
year ended January 31, 1995 does not vary significantly from the
accompanying consolidated statements of operations for those same
periods.
6. RESTRUCTURING CHARGES
During the third quarter of fiscal 1996, 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 pretax
restructuring charges totaling $1,282,000 during the quarter ended
October 31, 1995. The restructuring charges consisted primarily of the
write-down of certain capitalized software development costs of
approximately $687,000, write-down of certain fixed assets of
approximately $232,000 and other costs associated with the
restructuring of its product development operations.
7. INCOME TAXES
Current income tax expense consists of the following:
Years ended January 31,
1995 1996 1997
Federal $ 912,000 $ 197,000 $477,000
State 150,000 64,000 84,000
Foreign 103,000 (149,000) 274,000
--------- --------- --------
$1,165,000 $ 112,000 $835,000
========== ========= ========
Research and development credits of approximately $160,000,
$60,000 and $5,000 were utilized in 1995, 1996 and 1997, respectively,
to reduce federal income taxes.
Deferred income tax benefit results from temporary differences in
the recognition of revenue and expense for tax and financial
reporting purposes. The sources of these temporary differences are as
follows:
<TABLE>
Years ended January 31,
1995 1996 1997
<S> <C> <C> <C>
Adjustment for cash method for tax reporting $(240,000) $(240,000) $ --
Capitalized software development costs 166,000 (108,000) 32,000
Purchased software development costs (30,000) (32,000) (84,000)
Prepaid expenses 33,000 131,000 (55,000)
Allowance for doubtful accounts, net 91,000 31,000 (94,000)
Other (70,000) (33,000) 35,000
--------- -------- --------
Total $ (50,000) $(251,000) $(166,000)
========= ======== =========
</TABLE>
<PAGE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax
liabilities and assets as of January 31, 1996 and 1997, are as
follows:
<TABLE>
January 31,
<S> <C> <C>
1996 1997
Deferred tax liabilities:
Capitalized software development costs $ 449,000 $480,000
Prepaid expenses 320,000 265,000
Purchased software development costs 283,000 198,000
Other -- 12,000
-------- --------
Total deferred tax liabilities 1,052,000 955,000
Deferred tax assets:
Allowance for doubtful accounts, net 107,000 202,000
Accumulated depreciation 71,000 70,000
Other, net 54,000 18,000
--------- --------
Total deferred tax assets 232,000 290,000
--------- --------
Net deferred tax liabilities $ 820,000 $665,000
========= ========
</TABLE>
Reconciliations of the statutory U.S. federal income tax rate of
34% to the effective tax rates are as follows:
<TABLE>
Years ended January 31,
1995 1996 1997
<S> <C> <C> <C>
Statutory tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 2.6 2.6 2.6
Research and development tax credits (5.6) 2.0 (0.2)
Foreign sales corporation credits (2.6) 5.2 (7.6)
Acquired research and development costs 12.8 (40.2) --
Tax-free investment income (4.6) 3.5 (4.0)
Other 3.0 (2.5) (1.2)
---- ----- ----
Effective tax rate on income (loss) before taxes 39.6% 4.6% 23.6%
==== ===== ====
</TABLE>
The Company does not provide for U.S. income taxes on
undistributed earnings considered permanently invested in its foreign
subsidiary. The amount of undistributed earnings which would be
subject to U.S. federal income tax if repatriated as of January 31,
1996 and 1997 was approximately $203,000 and $481,000, respectively.
8. LEASES
The Company leases office space and equipment. Future minimum
lease payments under noncancelable operating leases with initial or
remaining terms of one year or more consisted of the following at
January 31, 1997:
1998 $ 848,000
1999 676,000
2000 252,000
2001 61,000
2002 30,000
Thereafter 68,000
---------
Total minimum lease payments $1,935,000
==========
Rental expense amounted to approximately $598,000, $813,000 and $
955,000, for all operating leases for the years ended January 31,
1995, 1996 and 1997, respectively.
<PAGE>
9. STOCK OPTION PLANS
The Company has elected to follow APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in
accounting for its employee stock options because, as discussed below,
the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires
use of option valuation models that were not developed for use in
valuing employee stock options. Under APB Opinion No. 25, because the
exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Under the Company's 1987 stock option plan (the "1987 Plan") the
Company may grant options to directors and key personnel for the
purchase of 400,000 shares of the Company's common stock at prices not
less than the fair market value of the shares on the date of the
grant. Options granted prior to fiscal 1992 may be exercised not
earlier than twelve months nor later than five years from the date of
the grant and vest 25% each year; options granted after fis-cal 1991
have a term of seven years. Option prices have been based on fair
market value of the shares at the date of grant. Since prior to the
Company's public offering in October 1992 there was no quoted
market price available at the time of grant, the best estimate of the
fair market value of the common stock was determined by the Board of
Directors, based upon the most recent sales of stock. On June 29,
1993, the shareholders approved an additional stock option plan (the
"1993 Plan") under which the Company may grant options to officers and
key personnel for the purchase of 600,000 shares of the Company's
common stock at a price not less than the fair market value of the
shares on the date of the grant. Under the 1993 Plan, options may be
exercised not earlier than twelve months nor later than ten years from
the date of grant. Options granted may be exercised no later than
seven years from the date of grant. The vesting of options has varied;
however, no options shall vest earlier than twelve months from the
date of grant.
On June 28, 1994 the shareholders approved the 1994 Non-Employee
Directors Stock Option Plan (the "1994 Plan") under which the Company
may grant options to non-employee directors of the Company for the
purchase of 30,000 shares of the Company's common stock at a price
equal to the simple average of the high and low selling price of the
shares on the date of the grant. Under the 1994 Plan, options may be
exercised not earlier than six months after granting but not later
than seven years from the date of grant; however, the options vest
immediately upon grant. Annually each non-employee director
receives an option to purchase 1,000 shares.
Pro forma information regarding net income and earnings per share
is required by FASB Statement No. 123 and has been determined as if
the Company had accounted for its employee stock options under the
fair value method of that statement. The fair value for these options
was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for
fiscal 1996 and 1997, respectively: risk-free interest rate of 6%; a
dividend yield of 0%; volatility factors of the expected market price
of the Company's common stock of .65 and .66; and a weighted average
expected life of the option of 4.5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
<PAGE>
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting
period. The Company's pro forma information follows:
Fiscal 1996 Fiscal 1997
Pro forma net income (loss) $(2,983,000) $1,619,000
Pro forma earnings (loss) per share $ (0.69) $ 0.34
Because FASB Statement No. 123 is applicable only to options granted
subsequent to January 31, 1995, its pro forma effect will not be
fully reflected until future years.
A summary of stock option activity under the above described plan
is as follows:
<TABLE>
Weighted
Shares Price Range Average Price
<S> <C> <C> <C>
Balance at January 31, 1995 413,375 $ 0.67 to $10.75 $ 7.35
Granted 136,500 $10.50 to $13.38 $12.29
Exercised (69,700) $ 0.67 to $10.75 $ 4.56
Canceled (88,375) $ 7.50 to $13.38 $10.41
-------
Balance at January 31, 1996 391,800 $ 0.67 to $23.33 $ 8.88
Granted 373,000 $11.25 to $23.75 $16.25
Exercised (152,691) $ 1.50 to $13.38 $ 7.60
Canceled (128,500) $ 7.50 to $18.25 $12.36
--------
Balance at January 31, 1997 483,609 $ 1.60 to $23.75 $14.02
========
</TABLE>
The weighted average fair value of options granted was $6.94 and
$10.87 for fiscal 1996 and 1997, respectively.
The following table summarizes information concerning outstanding
and exercisable options at January 31, 1997:
<TABLE>
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
<C> <C> <C> <C> <C> <C>
$1.60 12,500 1.50 $ 1.60 12,500 $ 1.60
$ 6.50 - $8.88 73,359 4.36 $ 6.99 28,401 $ 7.03
$10.50 - $13.38 230,750 5.87 $11.68 32,125 $11.78
$18.25 - $23.75 167,000 6.78 $21.30 4,000 $23.75
------- ---- ------ ------ ------
483,609 5.82 $14.02 77,026 $ 8.99
======= ==== ====== ====== ======
</TABLE>
At January 31, 1997, the Company had 1,803,484 shares of common
stock reserved for future issuance under the 1987 Plan, the 1993 Plan
and the 1994 Plan.
<PAGE>
10. GEOGRAPHIC INFORMATION
Summarized data for the Company's operations in different
geographic areas are as follows:
<TABLE>
Years ended January 31,
1995 1996 1997
<S> <C> <C> <C>
Sales to unaffiliated customers
(including exports):
United States $15,845,221 $ 16,911,619 $18,171,185
Europe 4,251,759 4,943,446 6,506,911
----------- ----------- -----------
Total sales to unaffiliated customers $20,096,980 $ 21,855,065 $24,678,096
=========== =========== ===========
Sales to affiliates:
United States $1,247,719 $1,471,709 $ 1,178,768
Europe -- -- --
Eliminations (1,247,719) (1,471,709) (1,178,768)
---------- ---------- -----------
Total sales to affiliates $ -- $ -- $ --
========== ========== ===========
Operating income (loss):
United States $ 2,554,108 $(4,407,205)* $ 1,458,937
Europe (52,984) 776,750 880,746
----------- ----------- -----------
Total operating income (loss) 2,501,124 (3,630,455) 2,339,683
Investment income, net 351,055 594,804 494,041
----------- ----------- -----------
Income (loss) before income taxes $ 2,852,179 $(3,035,651) $ 2,833,724
=========== =========== ===========
Identifiable assets:
United States $13,294,045 $15,536,024 $20,416,522
Europe 1,443,975 1,219,407 707,862
Eliminations (121,173) (264,150) (87,986)
----------- ----------- -----------
Total identifiable assets 14,616,847 16,491,281 21,036,398
Corporate assets 7,699,398 5,632,580 4,258,458
---------- ----------- -----------
Total assets $22,316,245 $22,123,861 $25,294,856
=========== =========== ===========
</TABLE>
*Includes one-time charge of $3,587,000 related to the acquisition of
Soft Systems, Ltd.
In computing operating income (loss), none of the following items have
been added or deducted: general corporate expenses and related
allocations, interest income or expense, or income taxes. All
transfers between geographic areas are made at reasonable rates for
the purpose of recovering certain research and development, marketing
and general and administrative expenses which are incurred on the
behalf of other locations. Export sales from the United States
operations were $2,010,000, $1,940,000 and $2,847,000 for fiscal 1995,
1996 and 1997, respectively.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
IQ Software Corporation
We have audited the accompanying consolidated balance sheets of
IQ Software Corporation and subsidiaries as of January 31, 1997 and
1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in
the period ended January 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of IQ Software Corporation and subsidiaries at
January 31, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended January 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Atlanta, Georgia
February 28, 1997
<PAGE>
(a) 2. Financial Statement Schedules
The following financial statement schedules
are filed as a part of this report:
II. Valuation and Qualifying Accounts
All other schedules are omitted because they
are not required or the required information is shown in the financial
statements or notes thereto.
(a) 3. Exhibits
The following exhibits are filed herewith or
are incorporated by reference to exhibits previously filed with the
Commission. Items marked with an asterisk relate to management
contracts or compensatory plans or arrangements.
<TABLE>
Exhibit
Number Description Filed herewith or incorporated by reference hereto
<S> <C> <C>
3.1 Amended and Restated Exhibit 3(a) to the Company's Registration
Articles of Incorporation Statement on Form S-1, No. 33-47268
3.2 Amended and Restated Exhibit 3(b) to the Company's Registration
By-laws Statement on Form S-1, No. 33-47268
*10.1 Stock Option Plan, Exhibit 10(a) to the Company's Registration
as amended Statement on Form S-1, No. 33-47268
*10.2 Form of Incentive Exhibit 10(f) to the Company's Registration
Stock Option Agreement Statement on Form S-1, No. 33-47268
10.3 Form of Non-Disclosure Exhibit 10(g) to the Company's Registration
Agreement Statement on Form S-1, No. 33-47268
*10.4 1993 Stock Option Plan Exhibit 10.4 to the Company's Annual Report on
Form 10K for the year ended January 31, 1995
*10.5 1993 Incentive Stock Exhibit 10.5 to the Company's Annual Report on
Option Agreement Form 10K for the year ended January 31, 1995
*10.6 Non-Employee Directors Exhibit 10.6 to the Company's Annual Report on
Stock Option Plan Form 10K for the year ended January 31, 1995
*10.7 Form of Non-Qualified Exhibit 10.7 to the Company's Annual Report on
Stock Option Plan Form 10K for the year ended January 31, 1995
11.4 Statement of Computation Filed herewith
of Per Share Earnings
23.4 Consent of Independent Filed herewith
Auditors
24.4 Powers of Attorney Filed herewith
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
fiscal quarter ended January 31, 1996.
(c) Exhibits
See Item 14(a)(3) above.
(d) Financial Statement Schedules
See Item 14(a)(2) above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ CHARLES R. CHITTY
_______________________________________
Charles R. Chitty
Chairman, President and Chief Executive Officer
Dated: April 28, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signature
/s/ CHARLES R. CHITTY J. LELAND STRANGE*
Charles R. Chitty J. Leland Strange
Chairman, President and Chief Director
Executive Officer Date: April 28, 1997
(Principal Executive Officer)
Date: April 28, 1997
/s/ J. KENT ELMER UGO F. IPPOLITO *
J. Kent Elmer Ugo F. Ippolito
Controller (Principal Accounting Officer) Director
Date: April 28, 1997 Date: April 28, 1997
* By Power of Attorney
J. WILLIAM GOODHEW, III * /s/ J. KENT ELMER
J. William Goodhew, III J. Kent Elmer
Director Attorney in fact
Date: April 28, 1997 Date: April 28, 1997
RICHARD L. JACKSON *
Richard L. Jackson
Director
Date: April 28, 1997
<PAGE>
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT
SCHEDULES AND EXHIBITS
PAGE
Financial Statement Schedules:
II. Valuation and Qualifying Accounts 34
Exhibits:
11.4 Statement of Computation of Per Share
Earnings 35
23.4 Consent of Independent Auditors 36
24.4 Powers of Attorney 37-40
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
<TABLE>
Col. A Col. B Col. C Col. D Col. E
Additions
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions* Period
<S> <C> <C> <C>
Year Ended January 31, 1995
Deducted from asset
accounts:
Allowance for
doubtful accounts $709,000 $1,216,000 $1,493,000 $432,000
- ------------------------------------------------------------------------------------------------------------------
Year Ended January 31, 1996
Deducted from asset
accounts:
Allowance for
doubtful accounts $432,000 $ 862,000 $ 837,000 $457,000
- ------------------------------------------------------------------------------------------------------------------
Year Ended January 31, 1997
Deducted from asset
accounts:
Allowance for
doubtful accounts $457,000 $ 849,000 $ 652,000 $654,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(*) Uncollectible accounts written off, net of recoveries.
<PAGE>
<TABLE>
EXHIBIT 11.4
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
1995 1996 1997
<S> <C> <C> <C>
Net income (loss) $1,737,000 $(2,897,000) $2,165,000
========== =========== ==========
PRIMARY
Weighted average common stock
outstanding 4,142,000 4,304,000 4,588,000
Net effect of dilutive stock options
based on the treasury stock method 115,000 -- 204,000
--------- ---------- ---------
Total 4,257,000 4,304,000 4,792,000
========= ========== =========
Net income (loss) per common share $ 0.41 $ (0.67) $ 0.45
========== =========== ==========
FULLY DILUTED
Weighted average common stock
outstanding 4,142,000 4,304,000 4,588,000
Net effect of dilutive stock options
based on the treasury stock method 176,000 -- 204,000
---------- ----------- ----------
Total 4,319,000 4,304,000 4,792,000
Net income (loss) per common share $ 0.40 $ (0.67) $ 0.45
========== =========== ==========
</TABLE>
Exhibit 23.4
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-55502) pertaining to the IQ Software
Corporation Stock Option Plan, the Registration Statement (Form
S-8 No. 33-86630) pertaining to the IQ Software Corporation 1993
Employee Stock Option Plan, and the Registration Statement (Form S-8
No. 33-86622) pertaining to the IQ Software Corporation Non-Employee
Directors Stock Option Plan of our report dated February 28, 1997,
with respect to the consolidated financial statements and schedule of
IQ Software Corporation included in the Annual Report (Form 10-K) for
the year ended January 31, 1997.
ERNST & YOUNG LLP
Atlanta,Georgia
April 25, 1997
Exhibit 24.4
IQ SOFTWARE CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of IQ SOFTWARE
CORPORATION, a Georgia corporation, does hereby make, constitute
and appoint Charles R. Chitty, J. Kent Elmer and Ugo F. Ippolito,
and each of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the
undersigned and in the undersigned's name, place and stead, to
sign and affix the undersigned's name as such director and/or
officer of said Corporation to the annual report for the
Corporation's fiscal year ending January 31, 1997, on
Form 10-K, and all amendments thereto, to be filed by said
Corporation with the Securities and Exchange Commission,
Washington, D.C. pursuant to the periodic reporting requirements
of the Securities Exchange Act of 1934, as amended, and the
regulations promulgated thereunder, and to file the same, with
all exhibits thereto and other supporting documents, with said
Commission, granting unto said attorneys-in-fact, and each of them,
full power and authority to do and perform any and all acts necessary
or incidental to the performance and execution of the powers herein
expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the
undersigned's hand this 25th day of April, 1997.
/s/ J. WILLIAM GOODHEW, III
Name: J. William Goodhew, III
Exhibit 24.4
IQ SOFTWARE CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of IQ SOFTWARE
CORPORATION, a Georgia corporation, does hereby make, constitute
and appoint Charles R. Chitty, J. Kent Elmer and Ugo F. Ippolito,
and each of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the
undersigned and in the undersigned's name, place and stead, to
sign and affix the undersigned's name as such director and/or
officer of said Corporation to the annual report for the
Corporation's fiscal year ending January 31, 1997, on Form 10-K,
and all amendments thereto, to be filed by said Corporation with
the Securities and Exchange Commission, Washington, D.C. pursuant
to the periodic reporting requirements of the Securities Exchange
Act of 1934, as amended, and the regulations promulgated
thereunder, and to file the same, with all exhibits thereto and
other supporting documents, with said Commission, granting unto
said attorneys-in-fact, and each of them, full power and
authority to do and perform any and all acts necessary or
incidental to the performance and execution of the powers herein
expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the
undersigned's hand this 25th day of April, 1997.
/s/ RICHARD L. JACKSON
Name: Richard L. Jackson
Exhibit 24.4
IQ SOFTWARE CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of IQ SOFTWARE
CORPORATION, a Georgia corporation, does hereby make, constitute
and appoint Charles R. Chitty, J. Kent Elmer and Ugo F. Ippolito,
and each of them, the undersigned's true and lawful attorneys-in-fact,
with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the
undersigned's name as such director and/or officer of said Corporation
to the annual report for the Corporation's fiscal year ending January
31, 1997, on Form 10-K, and all amendments thereto, to be filed by
said Corporation with the Securities and Exchange Commission,
Washington, D.C. pursuant to the periodic reporting requirements
of the Securities Exchange Act of 1934, as amended, and the
regulations promulgated thereunder, and to file the same, with all
exhibits thereto and other supporting documents, with said Commission,
granting unto said attorneys-in-fact, and each of them, full power and
authority to do and perform any and all acts necessary or
incidental to the performance and execution of the powers herein
expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the
undersigned's hand this 25th day of April, 1997.
/s/ J. LELAND STRANGE
Name: J. Leland Strange
Exhibit 24.4
IQ SOFTWARE CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of IQ SOFTWARE
CORPORATION, a Georgia corporation, does hereby make, constitute
and appoint Charles R. Chitty, J. Kent Elmer and Ugo F. Ippolito,
and each of them, the undersigned's true and lawful attorneys-in-fact,
with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the
undersigned's name as such director and/or officer of said
Corporation to the annual report for the Corporation's fiscal
year ending January 31, 1997, on Form 10-K, and all amendments
thereto, to be filed by said Corporation with the Securities and
Exchange Commission, Washington, D.C. pursuant to the
periodic reporting requirements of the Securities Exchange Act of
1934, as amended, and the regulations promulgated thereunder, and
to file the same, with all exhibits thereto and other supporting
documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to
do and perform any and all acts necessary or incidental to the
performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the
undersigned's hand this 25th day of April, 1997.
/s/ UGO F. IPPOLITO
Name: Ugo F. Ippolito
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 4,258,458
<SECURITIES> 4,944,596
<RECEIVABLES> 8,728,905
<ALLOWANCES> (654,227)
<INVENTORY> 0
<CURRENT-ASSETS> 20,392,048
<PP&E> 5,925,518
<DEPRECIATION> (4,296,835)
<TOTAL-ASSETS> 25,294,856
<CURRENT-LIABILITIES> 3,113,418
<BONDS> 0
0
0
<COMMON> 1,534
<OTHER-SE> 21,826,904
<TOTAL-LIABILITY-AND-EQUITY> 21,828,438
<SALES> 17,184,245
<TOTAL-REVENUES> 24,678,096
<CGS> 4,476,741
<TOTAL-COSTS> 17,861,672
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,632
<INCOME-PRETAX> 2,833,724
<INCOME-TAX> 669,000
<INCOME-CONTINUING> 2,164,724
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,164,724
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
</TABLE>
