SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - Amendment No. 1
For the fiscal year ended January 31, 1998
[ ] 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. [ ]
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, 1998 (based on the closing sale
price of the Common Stock as quoted on the NASDAQ National Market System on such
date) was $44,789,797.
As of March 31, 1998, there were 4,666,466 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders to be held on June 9, 1998, 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
principal software products that can be licensed separately or in combination.
Its principal products, IQ/Objects, IQ/Smartserver, IQ/Vision, IQ/Vision Server
and IQ/Liveweb are end user business intelligence 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; Rutherford, New Jersey; Irvine, California; Dallas, Texas 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.
Available in four versions, 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 , Windows NT and Windows '95 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 cubes. IQ/Vision Server is capable of handling fairly large
volumes of data efficiently. In addition to the inherent scaleable 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 calculation 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 intranet 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.
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 junction 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.
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Product Research and Development
The Company's products have been developed internally and acquired or licensed.
Twenty-six full-time employees were engaged in product research and development
as of January 31, 1998. 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
the Company released this improved and enhanced product as IQ/Objects. Version
6.1 of IQ/Objects, released in February 1998, will provide significant
improvement in the product's ad hoc query capabilities and will also add
functionality which will improve the product's manageability in large scale
deployments.
In August 1995 the Company entered into a 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 February 1998 the Company released this improved
and enhanced product as IQ/Vision Version 4.2.
In fiscal 1998, the Company incurred development expenses of $2,306,000. In
addition, the Company capitalized approximately $739,000 of development costs in
fiscal 1998 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. Sixty-six
full-time employees were engaged in sales and marketing as of January 31, 1998.
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. 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"), direct
sales and international distributors. None of the Company's customers accounted
for more than ten percent of revenues in fiscal 1996, 1997 or 1998. 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 11 to the consolidated financial statements, page 32, which is
included herein.
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 sales force operates out
of offices in Norcross, Georgia; Rutherford, New Jersey; Irvine, California and
Winchester, England. Smaller
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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.
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 distributors in more than 20 territories, including
Australia, France, Greece, Hong Kong, Korea, 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 and Korean. 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
application software. 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 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,
maintenance updates and discounts on releases of new versions. The Company
provides support to end users who have licensed IQ 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. Fifty-two
full-time employees were engaged in customer support, training and consulting
services as of January 31, 1998.
Employees
As of January 31, 1998, the Company employed 163 persons, including 66 in sales
and marketing, 52 in customer support and services, 26 in product research and
development and 19 in management, administration and finance. Of the total
employees, 115 are employed in the United States and 48 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
27A of the Securities Act of 1933, as amended, and Section 21 E of the
Securities and 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-looking 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 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 parities of competitive products or technologies and delays 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 the quarter. This
is due in part to the Company's sales commission 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 susceptible 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 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 or other factors that might cause IQ 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 enhance its existing
products and to 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 Liveweb, IQ/Vision and IQ/Vision Server. 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. There can be no assurance that the
Company can achieve market acceptance of its most recently released products or
continue to sustain the market acceptance of its other new products by adding
enhancements and porting 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 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 Actuate, Cognos,
Inc., Business Objects, S.A. and Crystal Reports, 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 products with their programs may
develop and market their own decision support tool as 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 by 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
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.
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
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train adequate numbers of personnel to meet its present and future requirements.
If the Company is unable to 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 Cycle
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 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 product 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 33% in fiscal
1997 and 32% in fiscal 1998) 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 collection 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, Australia and the Pacific Rim. The Company's UK subsidiary
transacts 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.
Limited Intellectual Property Protection; Risk of Infringement
The Company regards its software programs as intellectual property and relies
principally on copyright and trade secret laws 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
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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 Matters
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 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 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.
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ITEM 2 - PROPERTIES
The Company's headquarters and principal administrative, sales and marketing
operations are located in approximately 28,000 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 1998
fiscal year annual rent was approximately $442,000 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 Rutherford, New Jersey; Dallas, Texas; Reston,
Virginia and Winchester, England. Aggregate rental expense for these offices was
approximately $554,000 for the fiscal year 1998.
ITEM 3 - LEGAL PROCEEDINGS
A complaint was served on the Company and Charles R. Chitty, President and Chief
Executive Officer, and David A. Cormack, Senior Vice President on October 23,
1997. The action was filed in the United States District Court for the Northern
District of Georgia, Atlanta Division by Harvey Altman, individually, and on
behalf of purchasers of the Company's Common Stock between May 8, 1996 and
February 3, 1997 ("Class Period"). The market price of the Company's common
stock ranged from a low of $13 1/4 to a high of $28 1/4 during the Class Period.
The market price of the common stock on February 5, 1997, the first day of
trading after the Company's announcement of its fourth quarter preliminary
results was between $12 1/2 and $13 3/4. The Plaintiff seeks to recover
damages individually and on behalf of all other purchasers of the Company's
common stock during the Class Period. The action alleges violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, arising from
the alleged failure of the Company to disclose the risks and liabilities
assumed by the Company in connection with the transition of its sales force
from an inside telesales model to an outside field-based model. The Company
intends to defend this action vigorously and believes that the suit is
without merit.
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, 45, has served as 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, 38, 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, 38, 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.
<PAGE>
J. Kent Elmer, 29, joined the Company in 1992 as Director of SEC Reporting. Mr.
Elmer was promoted to Vice President Finance in January 1998 after serving as
Controller for several years. Prior to his employment with the Company, Mr.
Elmer was a senior accountant with Arthur Andersen & Co. Mr. Elmer holds a
B.S. degree in accounting from Bob Jones 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.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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 prices for IQ Software Corporation
common stock as reported by NASDAQ for the years ended January 31, 1998 and
1997.
1998 1997
Fiscal Year Ended January 31, High Low High Low
First Quarter 16 1/2 6 3/4 13 1/2 10 1/4
Second Quarter 10 3/4 7 1/4 25 12 1/4
Third Quarter 14 1/2 7 1/2 20 3/4 14 1/2
Fourth Quarter 9 1/8 6 28 1/4 14 3/8
The last sale price on January 30, 1998 was $8 3/8. As of January 31, 1998,
there were approximately 64 shareholders of record. Shares of approximately
3,000 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
ChaseMellon
450 West 33rd Street
New York, New York 10001
ANNUAL MEETING
The 1998 Annual Meeting of Shareholders will be held on June 9, 1998. A formal
notice of the meeting with a proxy statement and proxy, is scheduled to be
mailed during the week of May 4, 1998.
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
Fiscal year ended January 31,
STATEMENT OF OPERATIONS DATA: 1994 1995 1996 1997 1998
(in thousands, except per share)
<S> <C> <C> <C> <C> <C>
Revenues $19,119 $20,097 $21,855 $24,678 $24,705
Operating income (loss) 3,289 2,501* (3,630)* 2,340 1,922*
Income (loss) from continuing operations 2,537 1,737* (2,897)* 2,165 1,976*
Net income (loss) 2,556 1,737* (2,897)* 2,165 1,976*
Net income (loss) per share - Basic $ 0.63 $ 0.42 $ (0.67) $ 0.47 $ 0.42
Net income (loss) per share - Diluted $ 0.60 $ 0.40 $ (0.67) $ 0.45 $ 0.42
Weighted average number of
common and common equivalent
shares outstanding
Basic 4,076 4,142 4,304 4,588 4,655
Diluted 4,236 4,319 4,304 4,792 4,706
</TABLE>
* Includes the effects of acquired research and development expenses of
$1,002,000, $3,587,000 and $280,000 recorded in connection with the acquisition
of Skribe Software, Inc., Soft Systems, Ltd., and the Data Direct Explorer
product from Intersolv, Inc. in fiscal 1995, 1996 and 1998, respectively.
<TABLE>
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $14,554 $15,267 $13,655 $17,279 $19,669
Total assets 19,840 22,316 22,124 25,295 28,330
Total debt 147 45 -- -- --
Total shareholders' equity 16,692 18,751 18,020 21,828 24,057
</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, 1996, 1997 and 1998.
<TABLE>
Fiscal 1997 Fiscal 1998
Year ended January 31, over over
1996 1997 1998 Fiscal 1996 Fiscal 1997
<S> <C> <C> <C> <C> <C>
Revenues:
License fees 71.3% 69.6% 62.0% 10.3% (10.9)%
Service fees 28.7 30.4 38.0 19.5 25.4
Operating expenses:
Cost of license fees 4.3 5.3 5.6 40.2 5.0
Cost of service fees 11.3 12.8 13.8 28.4 7.5
Development 12.5 8.4 9.3 (23.9) 11.2
Selling 46.1 45.3 44.5 11.0 (1.7)
General and administrative 20.2 18.7 17.9 4.2 (3.8)
Restructuring charges 5.8 -- -- (100.0) --
Acquired research and development costs 16.4 -- 1.1 (100.0) 100.0
Total operating expenses 116.6 90.5 92.2 (12.3) 2.0
Operating income (loss) (16.6) 9.5 7.8 164.5 (17.8)
Investment income, net 2.7 2.0 2.3 (17.0) 13.3
Income (loss) from continuing operations
before income taxes (13.9) 11.5 10.0 193.3 (12.4)
Income taxes ( 0.6) 2.7 2.0 581.3 (24.4)
Net income (loss) (13.3)% 8.8% 8.0% 174.7% (8.7)%
</TABLE>
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 $21,855,000, $24,678,000 and $24,705,000 in fiscal 1996,
1997 and 1998, respectively. Revenues increased by $2,823,000, or 13%, from
fiscal 1996 to 1997, and by $27,000 from fiscal 1997 to 1998.
License fees were $15,582,000, $17,184,000 and $15,309,000 in fiscal 1996, 1997
and 1998, respectively. License fees increased by $1,602,000, or 10%, from
fiscal 1996 to 1997 and decreased by $1,875,000, or 11% from fiscal 1997 to
1998. License fees from United States customers decreased by 2% from $10,809,000
in fiscal 1996 to $10,576,000 in fiscal 1997 and increased to $10,601,000 in
fiscal 1998. The decrease in overall license fees from fiscal 1997 to 1998 was
due principally to decreased revenues from the Company's software resellers.
Service fees were $6,273,000, $7,494,000 and $9,396,000 in fiscal 1996, 1997 and
1998, respectively. Service fees increased by $1,221,000, or 19%, from fiscal
1996 to 1997 and by $1,902,000, or 25%, from fiscal 1997 to 1998. 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.
<PAGE>
Cost of License Fees. Cost of license fees includes the amortization of
capitalized software development costs and purchased software, royalties related
to licensed products and the costs of magnetic media, packaging and
documentation. Cost of license fees was $937,000, $1,314,000 and $1,379,000 for
fiscal 1996, 1997 and 1998, respectively. Cost of license fees as a
percentage of revenues was 4%, for fiscal year 1996, 5% for fiscal year 1997 and
6% for fiscal 1998. The increases in cost of license fees are due primarily to
increases in 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 costs was $765,000, $951,000 and $994,000
in fiscal 1996, 1997 and 1998, 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 $2,464,000, $3,163,000 and $3,400,000 for
fiscal 1996, 1997 and 1998, respectively. Cost of service fees as a percentage
of revenues was 11%, 13% and 14% for fiscal 1996, 1997 and 1998, 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 in dollars 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 amount capitalized. Development expenses were
$2,727,000, $2,074,000 and $2,306,000 in fiscal 1996, 1997 and 1998,
respectively. Development expenses as a percentage of revenues were 12%, 8%,
and 9% for fiscal 1996, 1997 and 1998, respectively. 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 $1,038,000, $805,000 and $739,000
of development expenditures in fiscal 1996, 1997, and 1998, respectively.
Selling Expenses. Selling expenses consist primarily of sales and marketing
personnel costs and related occupancy costs as well as advertising expenditures.
Selling expenses were $10,074,000, $11,185,000 and $10,992,000 in fiscal 1996,
1997 and 1998, respectively. Selling expenses as a percentage of revenues were
46%, 45% and 44% in fiscal 1996, 1997 and 1998, respectively. The increases in
selling expenses in fiscal 1997 were primarily due to the 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 increase in dollars as the Company expands its sales and marketing
activities in fiscal 1999.
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 $4,415,000, $4,603,000 and
$4,426,000 for fiscal 1996, 1997 and 1998, respectively. General and
administrative expenses as a percentage of revenues were 20%, 19% and 18% in
fiscal 1996, 1997 and 1998, respectively. The decreases in general and
administrative expenses as a percentage of revenues were due primarily to
increases in revenues without proportionate increases in general and
administrative expenses.
Restructuring Charges. As a result of 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.
<PAGE>
Acquired Research and Development Costs. On September 29, 1995 the Company
acquired the outstanding 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
in-process 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.
On September 29, 1997, the Company acquired the Data Direct Explorer technology
from Intersolv, Inc. The purchase price was $300,000 plus a maximum of an
additional $300,000 in contingent consideration based upon the attainment of
certain revenue levels derived from the sale of products which include the
acquired technology. The additional contingent consideration, if
any, will be recorded as goodwill when payable. The Company used the purchase
method of accounting for the acquisition. The purchase price was allocated to
certain intangible assets based upon their fair value. The Company intends to
effect significant enhancements to the existing technology in order to achieve
technological feasibility. Because management believes that in its current
state, the technology has no alternative future use, a portion of the purchase
price equal to $280,000 was allocated to acquired research and development costs
and was expensed as a one-time charge in fiscal 1998.
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 $595,000, $494,000
and $560,000, in fiscal 1996, 1997 and 1998, respectively. 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. The increase in net
investment income from fiscal 1997 to 1998 was due primarily to an increase in
cash and cash equivalents and marketable securities available for investment
provided by operations.
Income Taxes. Income tax expense (benefit) on pretax income (loss) for fiscal
1996, 1997 and 1998 was $(139,000), $669,000 and $506,000, respectively.
Research and development credits of approximately $60,000 and $5,000 were
utilized in fiscal 1996 and 1997, respectively, to reduce federal income taxes.
The Company's effective tax rate on income from continuing operations
was 5%, 24% and 20% in fiscal 1996, 1997 and 1998, respectively. The increase in
the Company's 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, Ltd. in fiscal 1996, coupled
with a decrease in the amount of research and development credits utilized to
reduce federal income taxes in fiscal 1997. The decrease in income tax expense
and the effective tax rate from fiscal 1997 to 1998 is due principally to the
geographic distribution of the Company's pretax income coupled with an increased
percentage of the Company's investment income being derived from tax-free
investment vehicles.
Income (Loss) Per Share. Basic income (loss) per common share was $(0.67),
$0.47, and $0.42 in fiscal 1996, 1997 and 1998, respectively. Diluted income
(loss) per common share was $(0.67), $0.45, and $0.42 in fiscal 1996, 1997 and
1998, respectively. Diluted income (loss) per common share increased to $0.45 in
fiscal 1997 primarily due to an increase in operating income resulting from
increased revenues in fiscal 1997 and charges related to the acquisition of Soft
Systems, Ltd. and the restructuring of the Company's Legacy product development
operations in fiscal 1996. Diluted income per common share decreased by 7% to
$0.42 in fiscal 1998 due principally to the one-time charge for acquired
research and development costs in the third quarter of 1998 related to the
acquisition of the Data Direct Explorer product from Intersolv, Inc. offset
by increases in income from operations.
<PAGE>
Quarterly Results. The following table sets forth certain unaudited consolidated
quarterly financial information for fiscal 1997 and 1998. 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 1997 Fiscal 1998
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
(in thousands, except per share)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 5,907 $ 6,207 $ 6,646 $ 5,918 $ 5,982 $6,103 $ 5,901 $ 6,719
Operating expenses:
Cost of license fees 283 292 367 372 268 396 320 395
Cost of service fees 752 788 812 811 782 817 879 921
Development 498 507 561 508 518 587 590 610
Selling 2,597 2,556 2,631 3,401 3,066 2,787 2,620 2,520
General & administrative 1,069 1,221 1,243 1,070 1,025 1,087 1,096 1,218
Acquired research &
development -- -- -- -- -- -- 280 --
------- ------- ------- ------- ------- ------ ------- -------
Total operating expenses 5,199 5,364 5,614 6,162 5,659 5,674 5,785 5,664
------- ------- ------- ------- ------- ------ ------- -------
Operating income (loss) 708 843 1,032 (244) 323 429 116 1,055
Investment income, net 108 119 132 135 125 167 136 131
------- ------- ------- ------- ------ ------ ------- -------
Income (loss) before income taxes 816 962 1,164 (109) 448 596 252 1,186
Income taxes 224 295 307 (158) 45 100 113 248
------- ------- ------- ------- ------ ------ ------- -------
Net income (loss) $ 592 $ 667 $ 857 $ 49 $ 403 $ 496 $ 139 $ 938
======= ======= ======= ======= ====== ====== ======= =======
Net income (loss) per share:
Basic $ 0.13 $ 0.15 $ 0.19 $ 0.01 $ 0.09 $ 0.11 $ 0.03 $ 0.20
Diluted $ 0.13 $ 0.14 $ 0.18 $ 0.01 $ 0.09 $ 0.11 $ 0.03 $ 0.20
Weighted average number of
common shares outstanding:
Basic 4,535 4,582 4,597 4,634 4,648 4,648 4,659 4,666
Diluted 4,658 4,826 4,822 4,870 4,700 4,677 4,758 4,687
</TABLE>
The Company typically realizes a larger percentage of its revenues in the second
half of each fiscal year. In addition, a significant portion of each quarter's
revenues is typically realized in the last month of the quarter. This factor is
due in part to the Company's sales commission plan, which compensates sales
personnel for achieving or exceeding quarterly and annual quotas. A high
percentage of the Company's expenses are relatively fixed, including costs of
personnel, and are not susceptible to rapid reduction. Therefore, delays in
closing significant product licensing transactions near the end of a
quarter may cause quarterly income to fall below anticipated levels.
Liquidity and Capital Resources. Cash provided by operating activities was
$2,750,000, $1,630,000 and $5,667,000 for fiscal 1996, 1997 and 1998,
respectively. 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 credit
terms. To date the Company has not experienced any significant credit losses
related to the granting of extended credit terms on large deals. The increase
in fiscal 1998 from 1997 was due primarily to net income from operations coupled
with a reduction in the outstanding accounts receivable balance. The Company
has financed capital expenditures and acquisitions with funds from operating
activities.
<PAGE>
As of January 31, 1998, the Company had working capital of $19,424,000,
including $5,595,000 in cash and cash equivalents and $9,177,000 in marketable
securities. Aggregate operating lease obligations as of January 31, 1998, were
$1,089,000, of which $678,000 is payable during fiscal 1999.
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 12% 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 subsidiaries of the Company and provide for payment in a foreign
currency. Gains and losses on foreign currency transactions have not been
significant. For foreign subsidiaries, the balance sheet accounts are translated
at the year-end exchange rates 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 approximately
($98,000) and ($38,000) as of January 31, 1997 and 1998, respectively.
Impact of Recently Issued Accounting Standards. In February 1997, The FASB
issued Statement No. 128, "Earnings per Share" (SFAS No. 128). SFAS No. 128
became effective for financial statements for periods ending after December 15,
1997. SFAS No. 128 requires dual presentation of basic and diluted earnings per
share for entities with complex capital structures. Basic earnings per share
includes no dilution and is computed by dividing net income (loss) available to
common shareholders by the weighted average number of shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity similar to fully
diluted earnings per share. The Company adopted SFAS No. 128 for the period
ended January 31, 1998 and amounts previously reported for all prior periods
have been restated to apply the provisions of SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 is effective for financial statements for fiscal years beginning
after December 15, 1997. This standard defines comprehensive income as the
changes in equity of an entity except those resulting from shareholder
transactions. All components of comprehensive income are required to be
reported in a new financial statement. Management believes the adoption of SFAS
No. 130 will not have a material effect on the Company's financial statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 is effective for financial
statements for periods beginning after December 31, 1997. SFAS No. 131
establishes standards for disclosures about operating segments, products and
services, geographic areas and major customers. Management believes that the
adoption of SFAS No. 131 will not have a material effect on the Company's
financial statements.
In October 1997, the AICPA issued Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"), which will supersede SOP 91-1 for periods beginning
after December 15, 1997. Management continues to assess the impact of this new
SOP, as there is currently little practical guidance provided for it
application, and believes that its adoption will not have a material effect on
the timing of the Company's revenue recognition or cause changes to its revenue
recognition policies.
Year 2000. The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. As a result,
those computer programs having time-sensitive software would recognize a date
using "00" as the year 1900 rather than the year 2000.
Based on a recent assessment of the Company's products and the software used
internally, the Company determined that its accounting software will need to be
updated or modified. This should be accomplished through updates from
<PAGE>
the software manufacturer. The Company does not expect any material costs
associated with this modification or any significant disruptions to its primary
operations. The Company anticipates no other Year 2000 problems which are
reasonably likely to have a material adverse effect on the Company's operations.
There can be no assurances, however, that such problems will not arise.
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.
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 1998 Annual Meeting of
Shareholders to be held on June 9, 1998. 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 1998 Annual Meeting of Shareholders to be held on June
9, 1998.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the 1998 Annual Meeting of Shareholders to be held
on June 9, 1998.
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 1998 Annual Meeting of Shareholders to be held
on June 9, 1998.
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 1998 Annual Meeting of Shareholders to be held
on June 9, 1998.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements and Report of Independent Auditors
(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.
<PAGE>
(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.
Exhibit Filed herewith or incorporated by
Number Description reference hereto
3.1 Amended and Restated Exhibit 3(a) to the Company's
Articles of Incorporation Registration Statement on Form S-1,
No. 33-47268
3.2 Amended and Restated Exhibit 3(b) to the Company's
By-laws Registration Statement on Form S-1,
No. 33-47268
*10.1 Stock Option Plan, Exhibit 10(a) to the Company's
as amended Registration Statement on Form S-1,
No. 33-47268
*10.2 Form of Incentive Exhibit 10(f) to the Company's
Stock Option Agreement Registration Statement on Form S-1,
No. 33-47268
10.3 Form of Non-Disclosure Exhibit 10(g) to the Company's
Agreement Registration 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
Option Agreement Annual Report on Form 10K for the
year ended January 31, 1995
*10.6 Non-Employee Directors Exhibit 10.6 to the Company's
Stock Option Plan Annual Report on Form 10K for the
year ended January 31, 1995
*10.7 Form of Non-Qualified Exhibit 10.7 to the Company's
Stock Option Plan Annual Report on Form 10K for the
year ended January 31, 1995
23.4 Consent of Independent Filed herewith
Auditors
24.4 Powers of Attorney Filed herewith
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fiscal quarter ended
January 31, 1998.
(c) Exhibits
See Item 14(a)(3) above.
(d) Financial Statement Schedules
See Item 14(a)(2) above.
<PAGE>
<TABLE>
IQ Software Corporation and Subsidiaries
Consolidated Balance Sheets
January 31, January 31,
1997 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,258,458 $ 5,595,113
Marketable securities (Note 3) 4,944,596 9,176,780
Accounts receivable:
Billed 5,452,025 6,079,074
Non-billed 3,276,880 2,526,542
------------ ------------
8,728,905 8,605,616
Allowance for doubtful accounts (654,227) (829,312)
------------ ------------
8,074,678 7,776,304
Prepaid expenses and other current assets 1,314,316 909,988
Note receivable from affiliate (Note 4) 1,800,000 --
------------ ------------
Total current assets 20,392,048 23,458,185
Property and equipment:
Furniture and fixtures 1,192,163 1,095,854
Equipment 4,733,355 5,106,613
------------ ------------
5,925,518 6,202,467
Accumulated depreciation (4,296,835) (4,925,784)
------------ ------------
1,628,683 1,276,683
Capitalized software development costs, net of
accumulated amortization of $457,000 and
$1,142,000 at January 31, 1997 and 1998, respectively 1,312,776 1,729,281
Purchased software, net of accumulated amortization of
$458,000 and $262,000 at January 31, 1997 and 1998, respectively 542,345 237,650
Goodwill , net of accumulated amortization of $134,000 and
$320,000 at January 31, 1997 and 1998, respectively 1,242,886 1,445,566
Other assets 176,118 182,671
------------ ------------
Total assets $ 25,294,856 $ 28,330,036
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 548,153 $ 572,027
Accrued expenses 821,039 943,767
Unearned revenue 1,357,090 1,786,575
Income taxes payable (Note 7) 75,136 465,076
Current portion of deferred income taxes (Note 7) 312,000 22,000
------------ ------------
Total current liabilities 3,113,418 3,789,445
Deferred income taxes, less current portion (Note 7) 353,000 484,000
Shareholders' equity (Note 10):
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 - 4,647,632 at January 31,
1997 and 4,666,466 at January 31, 1998 1,534 1,540
Additional paid-in capital 12,912,089 13,071,891
Retained earnings 8,991,959 10,968,071
Net unrealized gain on marketable securities available
for sale (Note 3) 20,622 52,668
Foreign currency translation adjustments (97,766) (37,579)
------------ ------------
Total shareholders' equity 21,828,438 24,056,591
------------ ------------
Total liabilities and shareholders' equity $ 25,294,856 $ 28,330,036
============ ============
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
IQ Software Corporation and Subsidiaries
Consolidated Statements of Operations
For the years ended January 31,
1996 1997 1998
<S> <C> <C> <C>
Revenues:
License fees $ 15,582,053 $ 17,184,245 $ 15,309,034
Service fees 6,273,012 7,493,851 9,395,738
------------ ------------ ------------
21,855,065 24,678,096 24,704,772
Operating expenses:
Cost of license fees 936,758 1,313,749 1,378,955
Cost of service fees 2,463,736 3,162,992 3,399,574
Development 2,727,014 2,073,948 2,306,027
Selling 10,074,045 11,184,895 10,992,049
General and administrative 4,415,481 4,602,829 4,425,790
Restructuring charges (Note 6) 1,281,812 -- --
Acquired research and development costs (Note 5) 3,586,674 -- 280,000
------------ ------------ ------------
Total operating expenses 25,485,520 22,338,413 22,782,395
------------ ------------ ------------
Operating income (loss) (3,630,455) 2,339,683 1,922,377
Investment income, net 594,804 494,041 559,735
------------ ------------ ------------
Income (loss) before income taxes (3,035,651) 2,833,724 2,482,112
Income taxes (Note 7):
Current 112,000 835,000 695,000
Deferred (251,000) (166,000) (189,000)
------------ ------------ ------------
(139,000) 669,000 506,000
------------ ------------ ------------
Net income (loss) $ (2,896,651) $ 2,164,724 $ 1,976,112
============ ============ ============
Net income (loss) per common share:
Basic $ (0.67) $ 0.47 $ 0.42
============ ============ ============
Diluted $ (0.67) $ 0.45 $ 0.42
============ ============ ============
Weighted average number of common and common
equivalent shares outstanding:
Basic 4,304,000 4,588,000 4,655,000
Diluted 4,304,000 4,792,000 4,706,000
</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, 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
Issuance of
common stock
related to stock
options 18,834 6 122,415 -- -- -- 122,421
Tax benefit from
exercise of
nonqualified stock
options and
disqualifying dispo-
sitions of incentive
stock options -- -- 37,387 -- -- -- 37,387
Net income -- -- -- 1,976,112 -- -- 1,976,112
Foreign currency
translation adjustments -- -- -- -- -- 60,187 60,187
Unrealized gain on market-
able securities available
for sale -- -- -- -- 32,046 -- 32,046
- ----------------------------------------------------------------------------------------------------------------------------
Balances at
January 31, 1998 4,666,466 $1,540 $13,071,891 $10,968,071 $ 52,668 $ (37,579) $24,056,591
============================================================================================================================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
IQ Software Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended January 31,
1996 1997 1998
<S> <C> <C> <C>
Operating activities:
Net income (loss) $(2,896,651) $ 2,164,724 $ 1,976,112
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 2,544,574 1,985,162 1,903,258
Acquired research and development costs (Note 5) 3,586,674 -- 280,000
Deferred income taxes (250,496) (155,000) (159,000)
Gain on disposal of equipment -- (17,650) (1,117)
Changes in operating assets and liabilities:
Accounts receivable (21,857) (2,127,205) 281,138
Prepaid expenses and other current assets (474,136) (35,013) 307,290
Accounts payable 332,455 (414,444) 3,851
Accrued expenses (144,085) (184,286) 151,861
Unearned revenue 309,608 (40,740) 481,916
Income taxes payable (235,931) 454,405 441,775
----------- ----------- -----------
Net cash provided by operating activities 2,750,155 1,629,953 5,667,084
Investing activities:
Purchases of property and equipment (1,137,734) (521,626) (403,048)
Additions to capitalized software development costs (1,038,240) (805,209) (1,001,080)
(Advances) proceeds under Note receivable from
affiliate (Note 4) (1,800,000) -- 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) (76,873) (528,085) (355,571)
Payments in connection with acquisition of Data
Direct Explorer -- -- (300,000)
Purchases (sales) of marketable securities 1,312,313 (2,323,866) (4,212,043)
Other investing activities (46,337) (11,321) 11,823
----------- ----------- -----------
Net cash used in investing activities (4,933,701) (4,225,107) (4,459,919)
Financing activities:
Payments on long-term debt (168,824) -- --
Proceeds from issuance of common stock 340,378 1,153,632 122,421
----------- ----------- -----------
Net cash provided by financing activities 171,554 1,153,632 122,421
Effect of exchange rate changes on cash (54,826) 67,400 7,069
----------- ----------- -----------
Net increase/(decrease) in cash and cash equivalents (2,066,818) (1,374,122) 1,336,655
Cash and cash equivalents at beginning of period 7,699,398 5,632,580 4,258,458
----------- ----------- -----------
Cash and cash equivalents at end of period $ 5,632,580 $ 4,258,458 $ 5,595,113
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,611 $ 5,632 $ 814
=========== =========== ===========
Cash paid for income taxes $ 292,250 $ 380,913 $ 548,900
=========== =========== ===========
</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 (1) vertical
market application software developers who integrate the Company's software
into their products for license to end users, (2) large corporate
customers, and (3) federal, state and local governments. As of January 31,
1997 and 1998, 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 AICPA
Statement of Position 91-1, "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 $862,000, $849,000 and $824,000
for fiscal years 1996, 1997 and 1998, 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 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,
<PAGE>
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 reaching technological feasibility 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 $797,000, $1,065,000 and $1,113,000 for the years ended
January 31, 1996, 1997 and 1998, 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 AICPA
Statement of Position 93-7, "Reporting on Advertising Costs." Advertising
expenses were $963,000, $1,304,000 and $615,000 for fiscal 1996, 1997 and
1998, respectively.
Foreign Currency Translation
For foreign subsidiaries, the balance sheet accounts are translated at the
year-end exchange rates and income statement items are translated at the
average 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
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS No. 128"). SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effect of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements.
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 SFAS 123, "Accounting for Stock-based
Compensation." Pro forma information regarding net income and earnings per
share is required by SFAS 123 (See Note 10).
Impact of Recently Issued Accounting Standards
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 is effective for financial
statements for fiscal years beginning after December 15, 1997. This
standard defines comprehensive income as the changes in equity of an entity
except those resulting from shareholder transactions. All components of
comprehensive income are required to be reported in a new financial
statement. Management believes the adoption of SFAS No. 130 will not have
a material effect on the Company's financial statements.
In June 1997, the FASB also issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS
No. 131 is effective for financial statements for periods beginning after
December 31, 1997. SFAS No. 131 establishes standards for disclosures
about operating segments, products and services, geographic areas and major
customers. Management believes that the adoption of SFAS No. 131 will not
have a material effect on the Company's financial statements.
<PAGE>
In October 1997, the AICPA issued Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2"),which will supersede SOP 91-1 for periods
beginning after December 15, 1997. Management continues to assess the
impact of this new SOP, as there is currently little practical guidance
provided for its application, and believes that its adoption will not have
a material effect on the timing of the Company's revenue recognition or
cause changes to its revenue recognition policies.
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. Concentrations 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. (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,
1997 and 1998:
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
========== ======= ==========
Gross Estimated
Unrealized Fair
January 31, 1998 Cost Gain Value
Municipal securities $8,844,000 $75,000 $8,919,000
Equity securities 250,000 8,000 258,000
---------- ------- ----------
$9,094,000 $83,000 $9,177,000
========== ======= ==========
<PAGE>
The adjustment to unrealized holding gains on available-for-sale securities
included as a separate component of shareholders' equity totaled $21,000
and $53,000, net of deferred taxes, as of January 31, 1997 and 1998,
respectively.
As of January 31, 1997 and 1998, 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, 1998 by
contractual maturity, are shown below.
Estimated
Fair
Cost Value
Due in 1 year or less $ 2,873,000 $ 2,898,000
Due after 1 year through 3 years 3,856,000 3,886,000
Due after 3 years 2,115,000 2,135,000
----------- -----------
Total debt securities 8,844,000 8,919,000
Equity securities 250,000 258,000
----------- -----------
$ 9,094,000 $ 9,177,000
=========== ===========
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 original
agreement, the Note was payable one year from the date of the agreement,
with interest payable monthly at a rate of prime plus 1/2 percent adjusted
quarterly. The interest rate on the date of the agreement was 9 1/2%.
The Note was renewable at the end of one year and was renewed for an
additional term ending April 18, 1997. Under the terms of the 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 240,163 shares of the Company's common stock
held by Intelligent Systems Corporation. On July 31, 1997, the Note was
paid in full.
5. ACQUISITION
On September 29, 1997, the Company acquired the Data Direct Explorer
technology from Intersolv, Inc. The purchase price was $300,000 plus a
maximum of an additional $300,000 in contingent consideration based upon
the attainment of certain revenue levels derived from the sale of products
which include the acquired technology. The additional contingent
consideration, if any, will be recorded as goodwill when payable. The
Company used the purchase method of accounting for the acquisition. The
purchase price was allocated to certain intangible assets based upon their
fair value. The Company intends to effect significant enhancements to the
existing technology in order to achieve technological feasibility. Because
management believes that in its current state, the technology has no
alternative future use, a portion of the purchase price equal to
$280,000 was allocated to acquired research and development costs and was
expensed as a one-time charge in fiscal 1998.
<PAGE>
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 a 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,
1996 1997 1998
Federal $ 197,000 $ 477,000 $ 525,000
State 64,000 84,000 71,000
Foreign (149,000) 274,000 99,000
--------- --------- ---------
$ 112,000 $ 835,000 $ 695,000
========= ========= =========
Research and development credits of approximately $60,000 and $5,000 were
utilized in 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:
Years ended January 31,
1996 1997 1998
Adjustment for cash method
for tax reporting $(240,000) $ -- $ --
Capitalized software
development costs (108,000) 32,000 42,000
Purchased software
development costs (32,000) (84,000) (111,000)
Prepaid expenses 131,000 (55,000) (58,000)
Allowance for doubtful
accounts, net 31,000 (94,000) (37,000)
Other (33,000) 35,000 (25,000)
--------- ---------- ---------
Total $(251,000) $(166,000) $(189,000)
========= ========= =========
<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, 1997 and 1998, are as follows:
January 31,
1997 1998
Deferred tax liabilities:
Capitalized software development costs $480,000 $549,000
Prepaid expenses 265,000 255,000
Purchased software development costs 198,000 87,000
Other 12,000 58,000
-------- --------
Total deferred tax liabilities 955,000 949,000
Deferred tax assets:
Allowance for doubtful accounts, net 202,000 238,000
In-process research and development costs -- 100,000
Accumulated depreciation 70,000 79,000
Other, net 18,000 26,000
-------- --------
Total deferred tax assets 290,000 443,000
-------- --------
Net deferred tax liabilities $665,000 $506,000
======== ========
Reconciliation's of the statutory U.S. federal income tax rate of 34% to
the effective tax rates are as follows:
<TABLE>
Years ended January 31,
1996 1997 1998
<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 2.0 (0.2) --
Foreign taxes paid 5.2 (7.6) (7.4)
Acquired research and development costs (40.2) -- --
Tax-free investment income 3.5 (4.0) (6.6)
Other (2.5) (1.2) (2.2)
----- ---- ----
Effective tax rate on income before taxes 4.6% 23.6% 20.4%
===== ==== ====
</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, 1997 and 1998 was approximately
$743,000 and $995,000, 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, 1998:
1999 $ 678,000
2000 252,000
2001 61,000
2002 30,000
2003 30,000
Thereafter 38,000
-----------
Total minimum lease payments $ 1,089,000
===========
Rental expense amounted to approximately $813,000, $955,000 and $996,000,
for all operating leases for the years ended January 31, 1996, 1997 and
1998, respectively.
<PAGE>
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
1996 1997 1998
<S> <C> <C> <C>
Numerator:
Net income (loss) $(2,897,000) $2,165,000 $1,976,000
Denominator:
Denominator for basic earnings per share-
weighted average shares 4,304,000 4,588,000 4,655,000
Effect of dilutive securities:
Employee stock options -- 204,000 51,000
----------- ---------- ----------
Denominator for diluted earnings per
share - adjusted weighted average shares 4,304,000 4,792,000 4,706,000
Basic earnings (loss) per share $ (0.67) $ 0.47 $ 0.42
=========== ========== ==========
Diluted earnings (loss) per share $ (0.67) $ 0.45 $ 0.42
=========== ========== ==========
</TABLE>
10. 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
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 1988 stock option plan (the "1988 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 fiscal 1992 have a term of seven years. Option
prices have historically 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 1,100,000 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 SFAS 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, 1997 and 1998, respectively:
risk-free
<PAGE>
interest rate of 6%; a dividend yield of 0%; volatility factors of the
expected market price of the Company's common stock of .66 and .60; 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.
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 Fiscal 1998
Pro forma net income (loss) $(2,983,000) $1,619,000 $1,362,000
Pro forma earnings per share
Basic $ (0.69) $ 0.35 $ 0.29
Diluted $ (0.69) $ 0.34 $ 0.29
Because SFAS 123 is applicable only to options granted subsequent to
January 31, 1995, its pro forma effect will not be fully
reflected until fiscal 2003.
The weighted average fair value of options granted during 1996, 1997 and
1998 with option prices equal to the market price on the date of grant was
$6.94, $10.87 and $5.41, respectively.
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
Granted 630,000 $ 6.81 to $11.44 $ 9.70
Exercised (18,834) $6.50 $ 6.50
Canceled (490,000) $ 8.25 to $23.38 $14.63
--------
Balance at January 31, 1998 604,775 $ 1.60 to $23.75 $ 9.43
========
</TABLE>
<PAGE>
The following table summarizes information concerning currently outstanding
and exercisable options:
<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
<S> <C> <C> <C> <C> <C>
$1.60 12,500 .50 $ 1.60 12,500 $ 1.60
$ 6.50 - $ 9.06 243,275 6.15 $ 6.91 51,525 $ 7.17
$10.50 - $13.38 345,000 5.67 $11.37 60,750 $12.13
$18.25 - $23.75 4,000 5.75 $23.75 4,000 $23.75
------- ---- ------ ------- ------
604,775 5.82 $ 9.43 128,775 $ 9.48
======= ==== ====== ======= ======
</TABLE>
Exercisable options of 124,883, 77,026 and 128,775 at a weighted average
exercise price of $6.56, $8.99 and $9.48 were outstanding at January 31,
1996, 1997 and 1998 respectively.
At January 31, 1998, the Company had 1,062,775 shares of common stock
reserved for future issuance under the 1988 Plan, the 1993 Plan and the
1994 Plan.
11. GEOGRAPHIC INFORMATION
Summarized data for the Company's operations in different geographic areas
are as follows:
<TABLE>
Year ended January 31,
1996 1997 1998
<S> <C> <C> <C>
Sales to unaffiliated customers
(including exports):
United States $ 6,911,619 $ 18,171,185 $ 17,784,168
Europe 4,943,446 6,506,911 6,920,604
------------ ------------ -------------
Total sales to unaffiliated customers $ 1,855,065 $ 24,678,096 $ 24,704,772
============ ============ =============
Sales to affiliates:
United States $ 1,471,709 $ 1,178,768 $ 1,610,975
Europe -- -- --
Eliminations (1,471,709) (1,178,768) (1,610,975)
------------ ------------ -------------
Total sales to affiliates $ -- $ -- $ --
============ ============ =============
Operating income (loss):
United States $ (4,407,205)* $ 1,458,937 $ 1,670,182
Europe 776,750 880,746 252,195
------------ ------------ -------------
Total operating income (loss) (3,630,455) 2,339,683 1,922,377
Investment income, net 594,804 494,041 559,735
------------ ------------ -------------
Income (loss) before income taxes $ (3,035,651) $ 2,833,724 $ 2,482,112
============ ============ =============
Identifiable assets:
United States $ 15,536,024 $ 20,416,522 $ 21,728,242
Europe 1,219,407 707,862 1,063,517
Eliminations (264,150) (87,986) (56,836)
------------ ------------ -------------
Total identifiable assets 16,491,281 21,036,398 22,734,923
Corporate assets 5,632,580 4,258,458 5,595,113
------------ ------------ -------------
Total assets $ 22,123,861 $ 25,294,856 $ 28,330,036
============ ============ =============
</TABLE>
* Includes one-time charge of $3,587,000 related to the acquisition of
Soft Systems, Ltd.
<PAGE>
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 $1,940,000, $2,847,000
and $1,108,000 for fiscal 1996, 1997 and 1998, respectively.
12. CONTINGENCIES
A complaint was served on the Company and Charles R. Chitty, President and
Chief Executive Officer, and David A. Cormack, Senior Vice President on
October 23, 1997. The action was filed in the United States District Court
for the Northern District of Georgia, Atlanta Division by Harvey Altman,
individually, and on behalf of purchasers of the Company's Common
Stock between May 8, 1996 and February 3, 1997 ("Class Period"). The market
price of the Company's common stock ranged from a low of $13 1/4 to a high
of $28 1/4 during the Class Period. The market price of the common stock
on February 5, 1997, the first day of trading after the Company's
announcement of its fourth quarter preliminary results was between
$12 1/2 and $13 3/4.The action alleges violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, arising from the alleged
failure of the Company to disclose the risks and liabilities assumed by the
Company in connection with the transition of its sales force from an inside
telesales model to an outside field-based model. The Plaintiff seeks to recover
damages individually and on behalf of all other purchasers of the Company's
common stock during the Class Period. The Company intends to defend this
action vigorously and believes that the suit is without merit.
13. EMPLOYEE BENEFIT PLANS
Effective February 1, 1992, the Company adopted the IQ Software Corporation
401(k) Plan (the "Plan"), a defined contribution benefit plan which
qualifies under Section 401(k) of the Internal Revenue Code. All employees
of the Company are eligible to participate in the Plan. Participants may
contribute up to 15% of their base salary to the Plan. Effective August 1,
1996 the Company made contributions to the Plan based on employee
contributions. The Company's contributions to the Plan were $13,066 and
$32,237 in fiscal 1997 and 1998, 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 1998, and the
related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended January 31,
1998. 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 1998, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended January 31,
1998, 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 20, 1998
<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, 1998
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: May 5, 1998
(Principal Executive Officer)
Date: May 5, 1998
/s/ J. KENT ELMER UGO F. IPPOLITO *
J. Kent Elmer Ugo F. Ippolito
Vice President Finance Director
(Principal Accounting Officer) Date: May 5, 1998
Date: May 5, 1998
J. WILLIAM GOODHEW, III * SAID MOHAMMADIOUN
J. William Goodhew, III Said Mohammadioun
Director Director
Date: May 5, 1998 Date: May 5, 1998
* By Power of Attorney
RICHARD L. JACKSON * /s/ J. KENT ELMER
Richard L. Jackson J. Kent Elmer
Director Attorney in fact
Date: May 5, 1998 Date: May 5, 1998
<PAGE>
IQ SOFTWARE CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT
SCHEDULES AND EXHIBITS
Page
Financial Statement Schedules:
*II. Valuation and Qualifying Accounts 37
Exhibits:
*23.4 Consent of Independent Auditors 38
*24.4 Powers of Attorney 38-41
*Previously filed
<PAGE>
