SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
July 31, 1997
For Quarter Ended
0-20085
Commission file number
IQ SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
GEORGIA
(State or other jurisdiction of
incorporation or organization)
58-1614492
(I.R.S. Employer
Identification No.)
3295 River Exchange Drive, Suite 550
Norcross, Georgia
30092
Address of principal executive office)
(Zip Code)
(770) 446-8880
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X
Yes......... No..........
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
4,666,298
Number of Shares OUTSTANDING AT SEPTEMBER 14, 1997
Common
CLASS
FORM 10-Q
IQ SOFTWARE CORPORATION
Form 10-Q
Quarter Ended July 31, 1997
Table of Contents
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - July 31, 1997
(unaudited) and January 31, 1997 3
Condensed Consolidated Statements of Income (unaudited) -
Three months and six months ended July 31, 1997 and
1996 4
Condensed Consolidated Statements of Cash Flows (unaudited) -
Six months ended July 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
July 31, 1997 January 31, 1997
<S> <C>
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,478,933 $4,258,458
Marketable securities 5,449,325 4,944,596
Accounts receivable:
Billed 6,273,017 5,452,025
Non-billed 2,951,290 3,276,880
9,224,307 8,728,905
Allowance for doubtful accounts (688,521) (654,227)
8,535,786 8,074,678
Note receivable from affiliate (Note 2) - 1,800,000
Prepaid expenses and other current assets 1,452,994 1,314,316
Total current assets 21,917,038 20,392,048
Property and equipment:
Furniture and fixtures 1,188,565 1,192,163
Equipment 4,983,829 4,733,355
6,172,394 5,925,518
Allowance for depreciation (4,737,102) (4,296,835)
1,435,292 1,628,683
Capitalized software development costs, net
of accumulated amortization of $744,000 at
July 31, 1997 and $457,000 at January 31, 1997 1,474,976 1,312,776
Purchased software, net of accumulated amortization
of $612,000 at July 31, 1997 and $458,000 at
January 31, 1997 392,324 542,345
Goodwill, net of accumulated amortization of
$214,000 at July 31, 1997 and $134,000 at
January 31, 1997 1,381,389 1,242,886
Other assets 174,494 176,118
Total assets $26,775,513 $25,294,856
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 632,065 $ 548,153
Accrued expenses 846,046 821,039
Unearned revenue 1,549,066 1,357,090
Income taxes payable 306,814 75,136
Current portion of deferred income taxes 318,000 312,000
Total current liabilities 3,651,991 3,113,418
Deferred income taxes, less current portion 314,000 353,000
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 5,000,000 - Issued and
outstanding shares - none - -
Common stock, $.00033 par value:
Authorized shares - 30,000,000
Issued and outstanding shares - 4,647,632
at July 31, 1997 and at January 31, 1997 1,534 1,534
Additional paid-in capital 12,912,089 12,912,089
Retained earnings 9,891,005 8,991,959
Net unrealized gain on marketable securities
available for sale 31,549 20,622
Foreign currency translation adjustments (26,655) (97,766)
Total shareholders' equity 22,809,522 21,828,438
Total liabilities and shareholders' equity $26,775,513 $25,294,856
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<TABLE>
<CAPTION>
Item 1. Financial Statements (continued)
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
July 31, July 31,
<S> <C> <C> <C> <C>
1997 1996 1997 1996
Revenues:
License fees $3,770,242 $4,310,195 $7,572,948 $8,418,652
Service fees 2,333,126 1,897,228 4,511,831 3,695,457
6,103,368 6,207,423 12,084,779 12,114,109
Operating expenses:
Cost of license fees 396,446 291,893 664,657 563,303
Cost of service fees 816,640 788,175 1,599,015 1,551,162
Development 587,176 507,016 1,105,058 1,004,951
Selling 2,787,627 2,556,703 5,852,101 5,153,855
General and administrative 1,087,183 1,220,618 2,112,258 2,289,952
Total operating expenses 5,675,072 5,364,405 11,333,089 10,563,223
Operating income 428,296 843,018 751,690 1,550,886
Investment income, net 167,635 119,437 292,356 227,383
Income before income taxes 595,931 962,455 1,044,046 1,778,269
Income taxes 100,000 295,000 145,000 519,000
Net income $ 495,931 $ 667,455 $ 899,046 $ 1,259,269
Net income per common and common equivalent share $ 0.11 $ 0.14 $ 0.19 $ 0.27
Weighted average number of common and
common equivalent shares outstanding 4,677,000 4,826,000 4,689,000 4,751,000
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<TABLE>
<CAPTION>
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
July 31,
<S> <C> <C>
1997 1996
Operating activities:
Net income $ 899,046 $1,259,269
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,004,444 1,021,822
Deferred income taxes (22,000) (61,000)
Gain on disposal of equipment (1,636) (9,269)
Changes in operating assets and liabilities:
Accounts receivable (401,857) (1,346,716)
Prepaid expenses and other current assets (131,465) 47,543
Accounts payable 74,574 (240,804)
Accrued expenses 20,374 (233,859)
Unearned revenue 181,814 (79,298)
Income taxes payable 229,638 97,229
Net cash provided by operating activities 1,852,932 454,917
Investing activities:
Purchase of property and equipment, net (295,627) (212,366)
Additions of capitalized software development costs (453,552) (424,100)
Payment under note receivable (Note 2) 1,800,000 -
Purchase of marketable securities, net (505,707) (1,971,587)
Payments in connection with the acquisition of
Skribe Software, Inc. (199,544) (214,730)
Payments in connection with the acquisition
of Soft Systems, Ltd. - (35,000)
Other investing activities - (6,475)
Net cash provided by (used in) investing activities 345,570 (2,864,258)
Financing activities:
Proceeds from issuance of common stock. - 613,560
Net cash provided by financing activities - 613,560
Effect of exchange rate changes on cash 21,973 19,303
Net increase (decrease) in cash and cash equivalents 2,220,475 (1,776,478)
Cash and cash equivalents at beginning of period 4,258,458 5,632,580
Cash and cash equivalents at end of period $6,478,933 $3,856,102
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 530 $ 4,764
Cash paid during the period for income taxes $ 122,450 $ 353,662
See Notes to Condensed Consolidated Financial Statements
</TABLE>
[CAPTION]
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
July 31, 1997
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation of the results of operations have been included.
2. Note Receivable From Affiliate
On April 18, 1995, the Company loaned $1.8 million to Daystar
Digital, Inc. pursuant to a note receivable (the "Note"). Under the
terms of the agreement, the Note was payable one year from the date of
the agreement. The Note bore interest payable monthly at a rate of
prime plus 1/2 percent, adjusted quarterly, 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 June 30, 1997. Under the terms of
renewal, the Note bore interest payable monthly at a rate of prime
plus 1-1/2 percent, adjusted quarterly. The Note was guaranteed by
Intelligent Systems Corporation and was secured by 154,904 shares of
the Company's common stock and certificates of deposit totaling
$1,364,137 owned by Intelligent Systems Corporation.
On July 31, 1997, the Note was paid in full.
3. Earnings Per Share
In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings Per Share, which is required to be
adopted for the Company's fourth quarter ending January 31, 1998. At
that time the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods
presented. Under the new requirements, the Company will be required to
report "basic" earnings per share, which excludes the dilutive effect
of stock options, and "diluted" earnings per share. The following
table sets forth the pro forma results had earnings per share been
calculated under Statement No. 128 for the three and six months ended
July 31, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
<S> <C> <C> <C> <C>
1997 1996 1997 1996
Basic earnings per share $ 0.11 $ .15 $ 0.19 $ 0.28
Weighted average common
and common equivalent
shares outstanding 4,648,000 4,582,000 4,648,000 4,559,000
Diluted earnings per share $ 0.11 $ 0.14 $ 0.19 $ 0.27
Weighted average common
and common equivalent
shares outstanding 4,677,000 4,826,000 4,689,000 4,751,000
</TABLE>
[CAPTION]
4. Reclassifications
Certain prior-year amounts have been reclassified to conform
with current year presentation in the accompanying consolidated
financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
The Company's working capital increased $986,000 to
$18,265,000 as of July 31, 1997 from $17,279,000 as of January 31,
1997. This increase was due primarily to increases in working capital
provided from operations partially offset by additions to capitalized
software development cost of $454,000 and property and equipment
additions of $296,000.
The Company believes that the current cash, cash equivalents
and cash flow from operations will be sufficient to provide the
liquidity and capital resources to meet its lease obligations and to
finance operating needs, research and development activities and
planned growth for at least the next twelve months.
Results of Operations
Revenues
Revenues were $12,085,000 for the six months ended July 31,
1997 and $12,114,000 for the six months ended July 31, 1996, a
decrease of $29,000. Revenues were $6,103,000 for the quarter ended
July 31, 1997 and $6,207,000 for the quarter ended July 31, 1996, a
decrease of $104,000 or 2%.
License fees were $7,573,000 for the six months ended July 31,
1997 compared to $8,419,000 for the six months ended July 31, 1996, a
decrease of $846,000 or 10%. License fees were $3,770,000 for the
quarter ended July 31, 1997 and $4,310,000 for the quarter ended July
31, 1996, a decrease of $540,000 or 13%. License fees decreased
primarily as a result of the continued declining sales of the
Company's older generation products.
Service fees were $4,512,000 for the six months ended July 31,
1997 compared to $3,695,000 for the six months ended July 31, 1996, an
increase of $817,000 or 22%. Service fees were $2,333,000 for the
quarter ended July 31, 1997 compared to $1,897,000 for the quarter
ended July 31, 1996, an increase of $436,000 or 23%. Service fees
increased principally as a result of the increase in the installed
base of the Company's software products and increases in training and
consulting revenues.
Cost of License Fees
Cost of license fees includes the amortization of capitalized
software development costs, royalties related to licensed products and
the costs of magnetic media, packaging and documentation. Cost of
license fees was $665,000 or 6% of revenues and $563,000 or 5% of
revenues for the six months ended July 31, 1997 and 1996,
respectively. Cost of license fees was $396,000 or 6% of revenues for
quarter ended July 31, 1997. For the comparable quarter of the prior
year, cost of license fees was $292,000 or 5% of revenues. The
increase in cost of license fees in dollars and as a percentage of
revenues for the six months and quarter ended July 31,
1997 is due primarily to increases in royalties related to licensed
products. Royalties related to licensed products were $215,000 and
$83,000 and $144,000 and $50,000 for the six months and the quarters
ended July 31, 1997 and 1996, respectively.
Cost of Service Fees
Cost of service fees consists of the costs associated with
supplying customers with technical assistance and training and
consulting services. Cost of service fees was $1,599,000 or 13% of
revenues and $1,551,000 or 13% of revenues for the six months ended
July 31, 1997 and 1996, respectively. Cost of service fees was
$817,000 or 13% of revenues for the quarter ended July 31, 1997. Cost
of service fees was $788,000 or 13% of revenues for the quarter ended
July 31, 1996. The increase in cost of service fees in dollars is due
principally to increases in the Company's support, training and
consulting staffs. The Company expects costs of service fees to
continue to increase in dollars as the Company's customer base
expands.
Development Expenses
Development expenses were $1,105,000 or 9% of revenues for the
six months ended July 31, 1997 compared to $1,005,000 or 8% of
revenues for the six months ended July 31, 1996, an increase of 10%.
Development expenses were $587,000 or 10% of revenues for the quarter
ended July 31, 1997 and $507,000 or 8% of revenues for the quarter
ended July 31, 1996. The increase in development expenses for the six
months and quarter ended July 31, 1997 is due principally to the
addition of personnel needed for modifying and enhancing all the
Company's products and for developing new products.
Selling Expenses
Selling expenses were $5,852,000 for the six months ended July
31, 1997 as compared to $5,154,000 for the six months ended July 31,
1996, an increase of 14%. Selling expenses were $2,788,000 for the
quarter ended July 31, 1997 and $2,557,000 for the quarter ended July
31, 1996, an increase of 9%. Selling expenses as a percentage of
revenues were 48% for the six months ended July 31, 1997 and 43% for
the six months ended July 31, 1996, and 46% for the quarter ended July
31, 1997 and 41% for the quarter ended July 31, 1996. The increase in
selling expenses in dollars and as a percentage of revenues for the
six months and quarter ended July 31, 1997 is due principally to the
increase of sales and marketing compensation and increased
marketing expenses.
General and Administrative Expenses
General and administrative expenses were $2,112,000 for the
six months ended July 31, 1997 and $2,290,000 for the six months ended
July 31, 1996, a decrease of 8%. General and administrative expenses
were $1,087,000 for the quarter ended July 31, 1997 and $1,221,000 for
the quarter ended July 31, 1996, a decrease of 11%. General and
administrative expenses were 17% of revenues for the six months ended
July 31, 1997 and 19% of revenues for the six months ended July 31,
1996. These expenses were 18% of revenues for the quarter ended July
31, 1997 and 20% for the quarter ended July 31, 1996. The decrease in
general and administrative expenses as a percentage of revenue for the
six months and quarter ended July 31, 1997 is due primarily to a
reduction in the provision for doubtful accounts needed, coupled with
a decrease in administrative personnel.
Income Taxes
The Company's effective tax rate on pretax income was 14% and
29% for the six months ended July 31, 1997 and 1996, respectively, and
17% and 31% for the quarters ended July 31, 1997 and 1996,
respectively. Income tax expense was $145,000 and $519,000 for the six
months ended July 31, 1997 and 1996, respectively. Income tax expense
was $100,000 and $295,000 for the quarters ended July 31, 1997 and
1996, respectively. The decrease in income tax expense for the six
months and the quarter ended July 31, 1997 was due principally to a
decrease in operating income and a relative increase of tax free
interest income as a percentage of total pretax income. The decrease
in the effective tax rate for the six months and quarter ended July
31, 1997 was due principally to the relative effect tax credits had on
the lower operating income.
The Company does not provide for U.S. federal income taxes on
undistributed earnings of foreign subsidiaries as such earnings are
considered to be permanently reinvested. The amount of undistributed
earnings which would be subject to U.S. federal income tax if
repatriated as of July 31, 1997 was approximately $784,000. The tax
liability on these earnings, if repatriated, would not be material.
Income Per Share
Net income per share decreased to $0.19 from $0.27, or 30%,
for the six months ended July 31, 1997 and 1996, respectively. Net
income per share decreased to $0.11 from $0.14, or 21%, for the
quarters ended July 31, 1997 and 1996, respectively. This decrease was
due primarily to decreased income from operations.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 1997 Annual Meeting of Shareholders of the Company was
held on June 24, 1997. At the Annual Meeting of the Shareholders, an
Amendment to the 1993 Stock Option Plan ("Plan") increasing the number
of shares of Common Stock that may be issued under the Plan from
600,000 to 1,100,000 shares. The holders of 2,189,367 shares of Common
Stock voted in favor of the Amendment, the holders of 618,230 shares
of Common Stock voted against the Amendment and the holders of 475,924
shares abstained from voting. Broker nonvotes constituted 1,036,084
shares of Common Stock. The Amendment was approved.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11. Computation of Primary and Fully Diluted Per
Share Earnings
(b) Reports on Form 8-K
None
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
IQ SOFTWARE CORPORATION
..................................
(Registrant)
September 14, 1997
Date:..........................
/s/ Charles R. Chitty
By:..............................
Charles R. Chitty
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
/s/ J. Kent Elmer
By:..............................
J. Kent Elmer
Controller
(Principal Accounting Officer)
<TABLE>
<CAPTION>
EXHIBIT 11
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
COMPUTATION OF PRIMARY AND FULLY DILUTED PER SHARE EARNINGS
Three Months Ended Six Months Ended
July 31, July 31,
<S> <C> <C> <C> <C>
1997 1996 1997 1996
PRIMARY
Weighted average Common Stock outstanding 4,648,000 4,582,000 4,648,000 4,559,000
Net effect of dilutive stock options
based on the treasury stock method 25,000 244,000 39,000 192,000
Total 4,673,000 4,826,000 4,687,000 4,751,000
Net income $ 496,000 $ 667,000 $ 899,000 $1,259,000
Net income per share $ 0.11 $ 0.14 $ 0.19 $ 0.27
FULLY DILUTED
Weighted average Common Stock outstanding 4,648,000 4,582,000 4,648,000 4,559,000
Net effect of dilutive stock options-
based on the treasury stock method 29,000 244,000 41,000 192,000
Total 4,677,000 4,826,000 4,689,000 4,751,000
Net income $ 496,000 $ 667,000 $ 899,000 $1,259,000
Net income per share $ 0.11 $ 0.14 $ 0.19 $ 0.27
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 6,478,933
<SECURITIES> 5,449,325
<RECEIVABLES> 9,224,307
<ALLOWANCES> (688,521)
<INVENTORY> 0
<CURRENT-ASSETS> 21,917,038
<PP&E> 6,172,394
<DEPRECIATION> (4,737,102)
<TOTAL-ASSETS> 26,775,513
<CURRENT-LIABILITIES> 3,651,991
<BONDS> 0
0
0
<COMMON> 1,534
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 26,775,513
<SALES> 3,770,242
<TOTAL-REVENUES> 6,103,368
<CGS> 1,213,086
<TOTAL-COSTS> 4,461,986
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 530
<INCOME-PRETAX> 595,931
<INCOME-TAX> (100,000)
<INCOME-CONTINUING> 495,931
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 495,931
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
