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UNITED STATES
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, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____.
Commission file number: 0-27794
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 [X] NO [_]
The number of shares of Registrant's Common Stock outstanding as of May 4,
1998, was 8,003,335.
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SEGUE SOFTWARE, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets (unaudited)
March 31, 1998 and December 31, 1997 2
Consolidated Statements of Operations (unaudited)
Three Months ended March 31, 1998 and 1997 3
Consolidated Statements of Cash Flows (unaudited)
Three Months ended March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits Index
1
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SEGUE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 32,828 $ 22,975
Short-term investments 4,474 14,385
Accounts receivable, net of allowances of $400 and $345 6,210 4,308
Other current assets 1,124 615
-------- --------
Total current assets 44,636 42,283
Property and equipment, net 2,082 2,252
Other assets 1,859 1,502
-------- --------
Total assets $ 48,577 $ 46,037
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term subordinated notes payable $ 883 $ 883
Accounts payable 642 860
Accrued compensation and benefits 1,225 1,127
Accrued expenses 1,298 1,268
Deferred revenue 2,837 2,477
Accrued royalties 1,127 147
-------- --------
Total current liabilities 8,012 6,762
Subordinated notes payable 3,532 3,532
Stockholders' equity:
Series A Preferred Stock, par value $.01 per share; noncumulative;
4,000 shares authorized; no shares issued and outstanding - -
Common Stock, par value $.01 per share; 30,000 shares
authorized; 7,951 and 7,630 shares issued and outstanding 80 76
Additional paid-in capital 49,288 48,479
Unearned compensation (45) (105)
Cumulative translation adjustments 5 -
Accumulated deficit (12,295) (12,707)
-------- --------
Total stockholders' equity 37,033 35,743
-------- --------
Total liabilities and stockholders' equity $ 48,577 $ 46,037
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
2
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SEGUE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
1998 1997
------ ------
<S> <C> <C>
Revenue:
Software $5,679 $4,006
Services 1,782 1,395
------ ------
Total revenue 7,461 5,401
Cost of revenue:
Cost of software 422 199
Cost of services 754 544
------ ------
Total cost of revenue 1,176 743
Gross margin 6,285 4,658
Operating expenses:
Sales and marketing 3,883 2,577
Research and development 1,503 1,089
General and administrative 862 780
------ ------
Total operating expenses 6,248 4,446
------ ------
Income from operations 37 212
Other income, net 401 534
------ ------
Income before provision for income taxes 438 746
Provision for income taxes 26 48
------ ------
Net income $ 412 $ 698
====== ======
Net income per common share - basic $ .05 $ .10
Net income per common share - diluted $ .05 $ .09
Weighted average common shares
outstanding - basic 7,761 7,222
Weighted average common shares
outstanding - diluted 8,375 8,088
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
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SEGUE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 412 $ 698
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 453 206
Noncash compensation charges 13 36
Net changes in operating assets and liabilities:
Accounts receivable (1,902) (778)
Other current assets (16) (202)
Accounts payable (218) (59)
Accrued expenses, compensation and benefits 128 (296)
Deferred revenue 360 202
------- -------
Net cash used in operating activities (770) (193)
------- -------
Cash flows from investing activities:
Additions to property and equipment (136) (364)
Increase in other assets (29) -
Maturities (purchases) of short-term investments, net 9,911 (638)
------- -------
Net cash provided by (used in) investing activities 9,746 (1,002)
------- -------
Cash flows from financing activities:
Proceeds from stock options and stock purchase plan 877 299
------- -------
Net cash provided by financing activities 877 299
------- -------
Net increase (decrease) in cash and cash equivalents 9,853 (896)
Cash and cash equivalents, beginning of period 22,975 7,112
------- -------
Cash and cash equivalents, end of period $32,828 $ 6,216
======= =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
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SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED 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 that the disclosures are adequate to make the
information presented not misleading. However, it is suggested that these
financial statements be read in conjunction with the Company's audited financial
statements for the year ended December 31, 1997, included in its 1997 Annual
Report on Form 10-K.
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. The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1998 1997
------ ------
<S> <C> <C>
Net income $ 412 $ 698
Weighted average shares used in net
income per share - basic 7,761 7,222
Effect of dilutive securities:
Employee and director stock options 614 866
------ ------
Weighted average shares used in net
income per share - diluted 8,375 8,088
====== ======
Net income per common share - basic $ .05 $ .10
====== ======
Net income per common share - diluted $ .05 $ .09
====== ======
</TABLE>
3. In March 1998, the Company entered into an agreement with a vendor whereby
the vendor will license specific software to the Company for purposes of
marketing and distribution. Under the terms of the agreement, the Company is
required to pay a nonrefundable non-recurring engineering and initial license
fee ("NRE") of $480,000 during the second quarter of 1998 and $500,000 in
royalties by September 30, 1998. As of March 31, 1998, the Company recorded
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the minimum commitment of $980,000. The NRE fee will be amortized over two
years, beginning in the second quarter of 1998, and the royalty expense will be
recognized based upon sales of the related product.
4. In April 1998, the Company entered into a nine year lease commitment for
40,500 to 67,500 square feet, effective August 1, 1998 at an annual rental rate
of approximately $2.2 million. The lease expires in October 2007. The Company
has the right to terminate the lease on September 30, 2004 for a fee of
approximately $2.2 million.
6
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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 the
Three Months Ended March 31,
----------------------------
1998 1997
------ ------
<S> <C> <C>
Revenue:
Software 76.1% 74.2%
Services 23.9 25.8
----- -----
Total revenue 100.0 100.0
Cost of revenue:
Cost of software 5.7 3.7
Cost of services 10.1 10.1
----- -----
Total cost of revenue 15.8 13.8
Gross margin 84.2 86.2
Operating expenses:
Sales and marketing 52.0 47.7
Research and development 20.1 20.2
General and administrative 11.6 14.4
----- -----
Total operating expenses 83.7 82.3
Income from operations 0.5 3.9
Other income, net 5.4 9.9
----- -----
Income before provision for income taxes 5.9 13.8
Provision for income taxes 0.4 0.9
----- -----
Net income 5.5% 12.9%
===== =====
</TABLE>
REVENUE
Revenue from Software. Software revenue increased 42% to $5.7 million
during the first quarter of 1998 from $4.0 million in the first quarter of 1997.
The increases in software revenue are primarily the result of increased unit
shipments due to an increase in the demand for automated testing products; the
introduction by the Company of new and upgraded products; increased market
acceptance of the families of products including its Web application testing
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products and load testing products introduced in 1997; and expansion of the
Company's sales and marketing activities.
The increase in software revenue came largely through the direct domestic
channel. International revenue accounted for 14% and 10% of total software
revenue in the first quarter of 1998 and 1997, respectively.
In addition, the mix of software license revenue changed from the first
quarter of 1997 to the first quarter of 1998. SilkTest and SilkPerformer, which
target the e-commerce testing markets, were not available until May 1997 and
September 1997, respectively. These products represented 41% of total software
revenue in the first quarter of 1998. QA Performer and SilkPerformer, which
target the load testing markets, in total represented 17% and 1% of total
software revenue in the first quarter of 1998 and 1997, respectively.
Revenue from Services. Service revenue increased 28% to $1.8 million during
the first quarter of 1998 from $1.4 million in the first quarter of 1997 driven
by the increase in maintenance revenue and training and consulting revenue
related to the increase in software licenses sold. Due to growth of the
installed base of licenses sold, training and consulting revenue increased 10%
and maintenance revenue increased 38%.
COST OF REVENUE
Cost of Software. Cost of software increased 112% to $422,000 during the
first quarter of 1998 from $199,000 in the first quarter of 1997. The increase
over the comparable period in 1997 is due to the cost of upgrading the installed
base with new versions of SilkTest and QA Partner and due to the amortization of
intangible assets mainly related to the SQLBench acquisition and the
internationalization of QA Partner.
In March 1998, the Company licensed technology from a vendor to be bundled
with certain Segue products. The Company is required to pay an NRE fee of
$480,000 and royalties to the vendor based on the net sales of the bundled
products. The Company has guaranteed royalty payments of $500,000 for 1998.
The NRE fee will be amortized over two years, beginning in the second quarter of
1998. The amortization and the guaranteed royalty payments may cause the cost
of software to increase as a percentage of revenue.
Cost of Services. Cost of services increased 39% to $754,000 during the
first quarter of 1998 from $544,000 in the first quarter of 1997. As a percent
of services revenue, costs in the current quarter increased to 42% from 39% in
the corresponding prior year period. The increases in the current quarter over
the prior year are largely the result of the increase in the number of employees
in both the training and consulting and technical support groups, from 22
employees as of March 31, 1997 to 26 employees as of March 31, 1998. This
increase is also attributable to costs related to the delivery of training and
consulting services, such as travel and equipment rental.
8
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OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased 51% to $3.9
million during the first quarter of 1998 from $2.6 million in the first quarter
of 1997. Sales and marketing expenses were 52% and 48% of total revenue in the
first quarter of 1998 and 1997, respectively. These increases are largely due
to increases in the number of sales and marketing personnel, commissions as a
result of higher revenue levels, recruiting fees and travel costs. The number
of employees in sales and marketing totaled 70 as of March 31, 1998, an increase
of 18 employees over the same period last year.
Research and Development. Research and development expenses increased 38%
to $1.5 million during the first quarter of 1998 from $1.1 million in the first
quarter of 1997. Research and development expenses were 20% of total revenue in
the first quarter of 1998 and 1997. The absolute dollar increase is largely due
to the growth of the research and development staff in order to continue to
develop new products and to enhance existing products. The staff grew to 51
employees as of March 31, 1998, which includes 11 in Austria due to the December
1997 SQLBench acquisition, from 39 employees as of March 31, 1997.
General and Administrative. General and administrative expenses increased
11% to $862,000 during the first quarter of 1998 from $780,000 in the first
quarter of 1997. General and administrative expenses were 12% and 14% of total
revenue in the first quarter of 1998 and 1997, respectively. The absolute dollar
increase is largely attributable to increased employment of both executive and
administrative personnel.
OTHER INCOME, NET
Other income, net decreased 25% to $401,000 during the first quarter of
1998 from $534,000 in the first quarter of 1997. This decrease is largely due to
interest expense of $94,000 recognized in the first quarter of 1998 related to
subordinated notes payable.
PROVISION FOR INCOME TAXES
The Company recorded provisions for state income taxes of $26,000 and
$48,000 for the three months ended March 31, 1998 and 1997, respectively, but no
provisions for federal income taxes due to utilization of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 1998, the Company used $770,000 for operating
activities, resulting from the growth in accounts receivable offset by net
income and deferred revenue.
In the first quarter of 1998, the Company generated $9.7 million from
investing activities, mainly as a result of maturities of short-term
investments. The Company generated funds from financing activities of $877,000
related to the exercise of stock options and issuance of stock pursuant to the
employee stock purchase plan.
9
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In April 1998, the Company entered into a nine year lease commitment for
40,500 to 67,500 square feet, effective August 1, 1998, at an annual rental rate
of approximately $2.2 million. The lease expires in October 2007. The Company
has the right to terminate the lease on September 30, 2004 for a fee of
approximately $2.2 million.
Long-term cash requirements, other than normal operating expenses, are
anticipated for the development of new software products and enhancements of
existing products, the opening of additional international offices, and the
possible acquisition of software products or technologies complementary to the
Company's business.
Assuming there is no significant change in the Company's business, the
Company believes that the existing cash and short-term investments as well as
cash flows from operations 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 Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Various important factors, including but not limited to the following, may cause
the Company's future results to differ materially from those set forth in the
forward-looking statements: risks associated with the Company's limited
operating history; the dependence upon license revenues from the Company's
principal products; uncertainties regarding the development of the automated
software testing marketplace; the dependence upon the growth of a viable
commercial marketplace for the Internet's World Wide Web and Internet-related
products; changes in technology and industry standards; the Company's ability to
develop and introduce product enhancements and new products; risks related to
the management of the Company's growth; risks related to the Company's ability
to integrate acquisitions already completed as well as others that may occur;
risks related to the development of the Company's sales and marketing strategy;
risks related to Year 2000 compliance of the Company's internal systems; the
Company's ability to attract, train and retain qualified personnel; the
development of an international market and distribution channel for the
Company's products; the Company's ability to develop strategic partnerships; the
timing of the receipt of orders from major customers; increased competition,
including competition from the recent consolidation in the automated software
quality market; and general economic conditions. In addition, the Company has
significantly changed the executive management team and the sales management
team under the direction of a new Chief Executive Officer. In conjunction with
these management changes, the Company has refocused its sales and marketing
approach to focus on e-commerce applications. There can be no assurance that the
Company will be able to effectively manage such change. Furthermore, a
significant portion of the Company's revenue within a quarter is typically not
realized until late in that quarter. As a result, it may be difficult for the
Company to predict its total revenue for a quarter or to quickly adapt its
spending levels within a quarter to reflect changes in demand for its products.
The market price of the Company's common stock has been, and in the future will
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likely be, subject to significant fluctuations in response to variations in
quarterly operating results and other factors, such as announcements of
technological innovations or new products by the Company or its competitors, or
other events. For a more detailed discussion of those factors affecting future
operating results, see the discussion contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997, under the heading "Certain
Factors Affecting Future Operating Results".
11
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
On January 14, 1998, the Company filed a Report under Item 5 on Form
8-K. On March 16, 1998, the Company filed an amendment to the Report.
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 12, 1998
SEGUE SOFTWARE, INC.
/s/ STEPHEN B. BUTLER
----------------------------
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
- --- -----------
27.1 Financial Data Schedule
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 32,828
<SECURITIES> 4,474
<RECEIVABLES> 6,210
<ALLOWANCES> 400
<INVENTORY> 0
<CURRENT-ASSETS> 44,636
<PP&E> 2,082
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,577
<CURRENT-LIABILITIES> 8,012
<BONDS> 0
0
0
<COMMON> 80
<OTHER-SE> 36,953
<TOTAL-LIABILITY-AND-EQUITY> 48,577
<SALES> 7,461
<TOTAL-REVENUES> 7,461
<CGS> 422
<TOTAL-COSTS> 1,176
<OTHER-EXPENSES> 6,248
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 438
<INCOME-TAX> 26
<INCOME-CONTINUING> 412
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 412
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
