<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____.
SEGUE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4188982
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1320 Centre Street, Newton Centre, Massachusetts 02159
(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 796-1000
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 a 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 [_] NO [X] *
The number of shares of Registrant's Common Stock outstanding as of May 3,
1996 was 6,499,502.
* The registrant became subject to such filing requirements on March 28, 1996.
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SEGUE SOFTWARE, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets 3
March 31, 1996 and December 31, 1995
Statements of Operations 4
Three months ended March 31, 1996 and 1995
Statements of Cash Flows 5
Three months ended March 31, 1996 and 1995
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Exhibits Index 14
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SEGUE SOFTWARE, INC.
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8 $ 442
Accounts receivable, net of 3,159 2,595
allowances of $170 and $150
Other current assets 275 96
------- -------
Total current assets 3,442 3,133
Property and equipment, net 1,394 1,154
Intangible assets, net of accumulated 43 64
amortization of $287 and $266
Other assets 428 145
------- -------
Total assets $ 5,307 $ 4,496
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 577 $ 461
Accrued compensation and benefits 524 604
Accrued expenses 410 185
Deferred revenue 1,330 1,068
Accrued royalties 219 219
Convertible debt to stockholders 623 654
------- -------
Total current liabilities 3,683 3,191
Stockholders' equity:
Series A Preferred Stock, $0.01 par value; noncumulative;
4,000,000 shares authorized; 2,416,458 and 2,291,458
shares issued and outstanding 24 23
Common Stock, $0.01 par value; 30,000,000
shares authorized; 1,594,244 and 1,586,090 16 16
issued and outstanding
Additional paid-in capital 5,896 5,027
Unearned compensation (553) -
Accumulated deficit (3,759) (3,761)
------- -------
Total stockholders' equity 1,624 1,305
------- -------
Total liabilities and stockholders' equity $ 5,307 $ 4,496
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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SEGUE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1996 1995
------ ------
<S> <C> <C>
Revenue:
Software $2,598 $1,561
Services 991 502
Royalties - 43
------ ------
Total revenue 3,589 2,106
Cost of revenue:
Cost of software 76 59
Cost of services 336 235
Cost of royalties - 10
------ ------
Total cost of revenue 412 304
Gross margin 3,177 1,802
Operating expenses:
Sales and marketing 1,826 1,082
Research and development 824 490
General and administrative 518 380
------ ------
Total operating expenses 3,168 1,952
------ ------
Income (loss) from operations 9 (150)
Other expense, net (7) (5)
------ ------
Net income(loss) $ 2 $ (155)
====== ======
Net income (loss) per common and common
equivalent share $ - $(0.04)/(1)/
====== ======
Weighted average common shares and common
equivalent shares outstanding 5,123 4,063 /(1)/
</TABLE>
/(1)/Presented on a pro forma basis giving effect to the conversion of
all outstanding shares of preferred stock.
The accompanying notes are an integral part of the financial statements.
4
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SEGUE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2 $ (155)
Adjustments to reconcile net income(loss)
to net cash provided by operating activities:
Depreciation and amortization 124 78
Loss on disposal of property and equipment - 21
Noncash compensation charges 22 -
Changes in operating assets and liabilities:
Accounts receivable (564) 237
Other current assets (179) (196)
Other assets (8) 14
Accounts payable (101) (152)
Accrued expenses, compensation, and benefits 146 (190)
Accrued royalties - 14
Deferred revenue 262 106
------- -------
Net cash used by operating activities (296) (223)
------- -------
Cash flows from investing activities - Additions to
------- -------
property and equipment (344) (151)
------- -------
Cash flows from financing activities:
Expenditures for initial public stock offering (58) -
Proceeds from exercise of stock options 264 2
------- -------
Net cash provided (used) by financing activities 206 2
------- -------
Net decrease in cash and cash equivalents (434) (372)
Cash and cash equivalents, beginning of period 442 711
------- -------
Cash and cash equivalents, end of period $ 8 $ 339
======= =======
Supplemental disclosure of noncash financing
transactions:
Conversion of convertible debt to stockholders
into common stock $ 31 $ -
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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SEGUE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
1. The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes, however, that disclosures are adequate to
make the information presented not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements for
the year ended December 31, 1995 and the notes thereto included in the Company's
Registration Statement filed on Form S-1 (Registration No. 333-1488).
This financial information reflects, in the opinion of management, all
adjustments of a normal recurring nature necessary to present fairly the results
for the interim periods. Results of interim periods may not be indicative of
results for the full year.
2. Net income (loss) per share is computed based upon the weighted average
number of common and common equivalent shares outstanding during each period.
Common equivalent shares are included in the per share calculations where the
effect of their inclusion would be dilutive. The convertible debt outstanding
is not considered a common stock equivalent. In accordance with the Securities
and Exchange Commission Staff Accounting Bulletin No. 83 ("SAB No. 83"), all
common and common equivalent shares (including stock options) issued during the
twelve month period prior to the initial filing date in February 1996 of the
Registration Statement relating to the Company's initial public offering have
been included in the calculation as if they were outstanding for all periods
presented. As a result, the common equivalent shares for stock options were
determined using the treasury stock method.
For the three months ended March 31, 1995, on a historical basis, net
loss per common and common equivalent shares was $(.09) and the weighted average
common and common equivalent shares outstanding were 1,772,000.
Net income (loss) per common share on a pro forma basis is computed in
the same manner as net income (loss) per common share on a historical basis
except all outstanding shares of the Series A Preferred Stock are included in
the computation as if they had been converted into an equivalent number of
shares of common stock even if anti-dilutive.
Fully diluted net income (loss) per common share is the same as primary net
income (loss) per common share.
6
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3. In April 1996, an initial public offering of 3,162,500 of the Company's
Common Stock ($.01 par value) at an initial public offering price of $18.00 per
share was consummated. Concurrent with the closing of the offering in April
1996, all outstanding shares of Series A Preferred Stock were converted into
Common Stock. The total shares sold in the offering consisted of 2,000,000
shares sold by the Company, 750,000 shares sold by selling shareholders and an
additional 412,500 shares sold by the Company to cover the underwriters' over-
allotment option. Proceeds to the Company from this offering, net of
underwriters' discount, were approximately $40.4 million.
4. In February 1996, the Board of Directors of the Company voted for the
following, which were approved by the shareholders on February 16, 1996: (i) the
reincorporation of the Company from a California corporation to a Delaware
corporation; (ii) an amendment of the Company's Certificate of Incorporation to
increase the number of authorized shares of Common Stock and Preferred Stock to
30,000,000 and 9,000,000 shares, respectively; (iii) the designation of
4,000,000 shares of such 9,000,000 shares of Preferred Stock as Series A
Preferred Stock; (iv) the changing of the per share par value of the Common
Stock and Preferred Stock from no par value to $.01 par value; (v) the amendment
and restatement of the Company's 1989 Incentive and Non-Qualified Stock Option
Plan (the "Option Plan"), pursuant to which, among other things, the number of
shares of Common Stock reserved for issuance pursuant to options granted
pursuant to the Option Plan was increased to 2,450,000 shares, the name of the
Option Plan was changed to the 1996 Amended and Restated Incentive and Non-
Qualified Stock Option Plan, and stock option grants to non-employee directors
were authorized; and (vi) the Employee Stock Purchase Plan, which permits
eligible employees to purchase Common Stock of the Company up to a maximum of
100,000 shares of Common Stock. The accompanying balance sheets reflect these
changes in capital structure for all periods presented.
7
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table sets forth certain unaudited quarterly results of
operations expressed as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
Percentage of Revenue for
Three Months Ended March 31,
-----------------------------
1996 1995
------ ------
<S> <C> <C>
Revenue:
Software 72.4% 74.1%
Services 27.6 23.8
Royalties 0.0 2.1
------ ------
Total revenue 100.0 100.0
Cost of revenue:
Cost of software 2.1 2.8
Cost of services 9.3 11.1
Cost of royalties 0.0 .5
------ ------
Total cost of revenue 11.4 14.4
Gross margin 88.6 85.6
Operating expenses:
Sales and marketing 50.9 51.4
Research and development 23.0 23.3
General and administrative 14.4 18.0
------ ------
Total operating expenses 88.3 92.7
Income (loss) from operations .3 (7.1)
Other expense, net (.2) (.3)
------ ------
Net income (loss) .1% (7.4)%
====== ======
</TABLE>
Revenue
Revenue from Software. Software revenue increased 66% to $2.6 million
during the first quarter of 1996 from $1.6 million in the first quarter of 1995,
primarily due to the continuing growth in unit shipments of QA Partner(R). The
increase in unit shipments came largely through the direct domestic channel and
was driven in part by a significant increase in the number of sales personnel.
Revenue from the domestic indirect channels and from the International
8
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distributors accounted for 6% and 11% of the revenue in the quarter,
respectively. In the comparable quarter in 1995, those channels accounted for
0% and 8% of total revenue, respectively.
Revenue from Services. Service revenue increased 97% to $991,000
during the first quarter of 1996 from $502,000 in the first quarter of 1995
driven by the increase in maintenance revenue and training and consulting
revenue related to the increase in software licenses sold. Training and
consulting revenue increased 78% while maintenance revenue increased 111%.
Revenue from Royalties. Royalty revenue amounted to $ 43,000 in the
quarter ended March 31, 1995. There were no royalty revenues in the current
quarter. Royalty revenue is related to porting contracts completed in 1991 for
Lotus Development Corporation. The Company receives royalty revenue on the sale
of UNIX versions of Lotus 1-2-3. The Company does not expect significant
revenues, if any, from this contract in the future.
Cost of Revenue
Cost of Software. Cost of software increased 29% to $76,000 during
the first quarter of 1996 from $59,000 in the first quarter of 1995. As a
percent of software license revenue, costs in the current quarter declined
slightly to 2.9% of revenue from 3.8% of revenue a year earlier.
Cost of Services. Cost of services increased 43% to $336,000 during
the first quarter of 1996 from $235,000 in the first quarter of 1995. As a
percent of service revenue, costs in the current quarter declined from 46.8% to
33.9%. This decrease is largely due to the faster rate of maintenance revenue
growth over the growth rate of the customer support hotline costs and a slightly
improved margin on training and consulting business. In the latter case, as a
result of a shortage of staff in the first quarter of 1996, the training staff
conducted more classes per person than is typical and therefore the Company
expects to hire more staff in the near future.
Cost of Royalties. There were no royalty revenues or costs related
thereto in the first quarter of 1996. Cost of royalties totaled $10,000 in the
first quarter of 1995 and represents the portion of royalties that are due to
third parties.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 69% to
$1.8 million during the first quarter of 1996 from $1.1 million in the first
quarter of 1995. This increase is largely due to increases in promotional
marketing programs, increases in sales commissions as a result of higher revenue
levels and increases in the number of sales and marketing personnel to support
the growth of the business. The number of employees in sales and marketing
totaled 51 as of March 31, 1996. This is an increase of 15 employees over the
period ended March 31, 1995.
9
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Research and Development. Research and development expenses increased
68% to $824,000 during the first quarter of 1996 from $490,000 in the first
quarter of 1995. This increase is largely due to the growth of the research and
development staff in order to continue to enhance the Company's products and
develop new products. The staff grew from 19 employees at March 31, 1995 to 28
employees as of March 31, 1996. To date, all of the Company's costs for
research and development have been charged to operations as incurred, since the
amount of software development costs qualifying for capitalization has been
immaterial.
General and Administrative. General and administrative expenses
increased 36% to $518,000 during the first quarter of 1996 from $380,000 in the
first quarter of 1995. This increase is largely attributable to the increase in
the general and administrative staff and consulting assistance related to the
implementation of the Company's new order entry and financial systems.
Other Expense, Net
Other expense, net is comprised primarily of interest expense related to
the Company's convertible debt, partially offset by interest income from cash
and cash equivalents. The Company has generally invested in money market
accounts. With the interest earned from investing the proceeds from the initial
public offering which the Company received on April 2, 1996, the Company expects
to see an increase in other income over prior periods. The Company has invested
the proceeds from the initial public offering in U.S.Government and Government
Agency securities, in A1 rated commercial paper and in money market accounts
until such time as the proceeds are needed to fund operations.
Provision for Income Taxes
The Company has no provision for income taxes for the first quarter of
1996 and 1995 due to the fact that it either incurred net losses or utilized
operating loss carryforwards.
Liquidity and Capital Resources
Cash and cash equivalents decreased from $442,000 at December 31, 1995
to $8,000 at March 31, 1996, primarily to fund the purchase of capital equipment
in the period.
The Company used $296,000 and $223,000 to fund operations in the first
quarter of 1996 and 1995, respectively. The increase in cash needed to fund
operations in the first quarter of 1996 was primarily due to the growth in
accounts receivable.
The Company utilized $344,000 and $151,000 for investing activities in
the first quarter of 1996 and 1995, respectively. The investing activities in
both periods consisted of capital
10
<PAGE>
expenditures to provide computers, software and furniture for new employees and
to build the information systems infrastructure to support the Company's growth.
During the first quarter of 1996, the Company received approximately
$260,000 in proceeds from the exercise of stock options.
As of March 31, 1996, the Company had available a $1,000,000 demand line of
credit with a bank. Interest is charged at the bank's prime rate plus 1%. The
line of credit is collateralized by all of the Company's assets and expired
April 30, 1996. The Company is currently negotiating with the bank to obtain a
new line of credit. As of March 31, 1996 and December 31, 1995, the Company had
no balance outstanding against this line of credit. The Company is subject to
certain covenants under the agreement, including covenants to maintain certain
quarterly financial ratios and profitability and a restriction on the Company's
ability to pay cash dividends. As of March 31, 1996 and December 31, 1995, the
Company was in violation of certain ratios and profitability covenants. The
Company obtained a waiver of the covenant violations for the period ended
December 31, 1995, but did not request a waiver for the period ended March 31,
1996.
The Company completed an initial public offering in April 1996 and
received proceeds totaling $40,385,250. The Company estimates that it has
incurred approximately $400,000 in initial public offering expenses that remain
to be paid out of these proceeds.
Assuming that there is no significant change in the Company's
business, the Company believes that cash flow from operations together with
existing cash balances and proceeds from the initial public offering will be
sufficient to meet its working capital requirements for at least the next
twelve months.
Important Factors Related to Forward-Looking Statements and Associated Risks
This Form 10Q contains forward-looking statements within the meaning of the
"safe-harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include statements regarding the
sufficiency of the Company's liquidity and capital. Such statements are based on
management's current expectations and are subject to a number of uncertainties
and risks that could cause actual results to differ materially from those
described in the forward-looking statements. Such uncertainties and risks
include, but are not limited to, potential fluctuations in the Company's
quarterly results, the Company's dependence on revenues from licenses from its
principal product, QA Partner, dependence on key personnel, developments in the
emerging automated software testing product market, technological change,
competition, and the Company's ability to manage its recent growth, expand its
international sales, develop indirect sales channels, avoid channel conflicts,
introduce new products and avoid product defects and product liability, and
protect its intellectual property and proprietary rights. For more explanation
of these and other risk factors, please see the Company's final prospectus dated
March 28, 1996.
11
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PART II. OTHER INFORMATION
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibits:
11.1 Computation of primary and fully-diluted net income (loss) per
common share for the three months ended March 31, 1996 and 1995.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 1996
SEGUE SOFTWARE, INC.
/s/ ELISABETH ELTERMAN
----------------------
President and Chief Executive Officer
/s/ J. JEFFREY BINGENHEIMER
---------------------------
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
13
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INDEX TO EXHIBITS
Exhibit
No. Description
- - ----------------
11.1 Computation of primary and fully-diluted net income (loss) per common
share for the three months ended March 31, 1996 and March 31, 1995.
27.1 Financial Data Schedule
<PAGE>
EXHIBIT 11.1
SEGUE SOFTWARE, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Primary Fully diluted
income (loss) income (loss)
per common share per common share
---------------- ----------------
<S> <C> <C>
For the three months ended March 31, 1996:
Net income $ 1,910 $ 1,910
========== ==========
Weighted average common stock outstanding
during the period 5,001,000 5,146,000
Weighted average cheap stock outstanding
during the period /(1)/ 122,000 122,000
---------- ----------
Weighted average common and common
equivalent shares outstanding 5,123,000 5,268,000
========== ==========
Net income (loss) per common and common
equivalent shares $ - $ -
========== ==========
For the three months ended March 31, 1995:
Net loss $ (154,787) $ (154,787)
========== ==========
Weighted average common stock outstanding
during the period 1,529,000 1,529,000
Weighted average cheap stock outstanding
during the period/(1)/ 243,000 243,000
---------- ----------
Weighted average common and common
equivalent shares outstanding 1,772,000 1,772,000
========== ==========
Net income (loss) per common and common
equivalent shares-historical $ (.09) $ (.09)
========== ==========
</TABLE>
/(1)/ In accordance with the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, issuances of Common Stock and Common Stock equivalents within
one year prior to the initial filing date of the registration statement, at
share prices less than the assumed initial public offering price (cheap stock),
are considered to have been made in anticipation of the public offering which
completed April 2, 1996. Accordingly, these equity issuances are treated as if
issued and outstanding, using the treasury stock method, for all periods
presented.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ITEM 1
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 8 442
<SECURITIES> 0 0
<RECEIVABLES> 3,329 2,745
<ALLOWANCES> 170 150
<INVENTORY> 56 40
<CURRENT-ASSETS> 3,442 3,133
<PP&E> 2,019 1,474
<DEPRECIATION> 625 320
<TOTAL-ASSETS> 5,307 4,496
<CURRENT-LIABILITIES> 3,683 3,191
<BONDS> 0 0
0 0
24 23
<COMMON> 16 16
<OTHER-SE> 1,584 1,266
<TOTAL-LIABILITY-AND-EQUITY> 5,307 4,496
<SALES> 3,589 2,106
<TOTAL-REVENUES> 3,654 2,106
<CGS> 412 304
<TOTAL-COSTS> 3,157 1,934
<OTHER-EXPENSES> (8) (10)
<LOSS-PROVISION> 11 18
<INTEREST-EXPENSE> 15 15
<INCOME-PRETAX> 2 (155)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 2 (155)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2 (155)
<EPS-PRIMARY> 0.0 (.04)
<EPS-DILUTED> 0.0 (.04)
</TABLE>
