<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 June 30, 1996.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended to
Commission File number 0-27196
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SQA, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 04-3079083
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(State of Incorporation) (IRS Employer Identification No.)
1 Burlington Woods Dr. Burlington MA 01803
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(Address of Principal Executive Offices) (Zip Code)
(617) 229-3500
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Telephone Number, Including Area Code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
During the preceding 12 months (or for such shorter period that registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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As of August 2, 1996 there were 8,026,239 shares of Common Stock,
-------------------- -------------
$.01 par value, outstanding.
<PAGE>
SQA, Inc.
Index to Form 10-Q
<TABLE>
<CAPTION>
Page No.
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Part I - Financial Statements
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Item 1. Financial Statements
<S>
Condensed Consolidated Balance Sheets
At June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations
for the Three Months and Six Months Ended June 30,
1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
<CAPTION>
Part II - Other Information
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<S> <C>
Item 4. Submission of Matters to a Vote of Security-Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 16
</TABLE>
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<PAGE>
SQA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, Dec. 31,
1996 1995
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 40,564 $ 36,444
Accounts receivable, net 4,168 2,635
Prepaid expenses and other current
assets 1,247 476
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Total current assets 45,979 39,555
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Property and equipment, net 2,151 865
Other assets 260 45
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Total assets $ 48,390 $ 40,465
======== ========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable $ 1,251 $ 819
Accrued expenses 1,828 1,646
Deferred revenue 3,113 2,279
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Total current liabilities 6,192 4,744
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Stockholders' equity: -- --
Preferred Stock
Authorized 5,000,000 shares, none
issued and outstanding
Common Stock 80 77
Authorized 18,000,000 shares. Issued
and outstanding 8,008,239 at June 30,
1996 and 7,660,699 at December 31, 1995
Additional paid-in capital 46,059 41,554
Accumulated deficit (3,941) (5,910)
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Total stockholders' equity 42,198 35,721
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Total liabilities and stockholders' equity $ 48,390 $ 40,465
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</TABLE>
See Notes to Condensed Consolidated Financials Statements.
-3-
<PAGE>
SQA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
License fees $ 3,501 $ 2,039 $ 6,530 $ 3,646
Services 1,908 898 3,420 1,599
------ ------ ------ ------
Total revenue 5,409 2,937 9,950 5,245
------ ------ ------ ------
Cost of revenue:
License fees 194 134 310 222
Services 563 326 1,071 663
------ ------ ------ ------
Total cost of revenue 757 460 1,381 885
------ ------ ------ ------
Gross profit 4,652 2,477 8,569 4,360
------ ------ ------ ------
Operating expenses:
Sales and marketing 2,375 1,406 4,425 2,741
Research and development 953 572 1,737 1,177
General and administrative 605 489 1,098 966
------ ------ ------ ------
Total operating expenses 3,933 2,467 7,260 4,884
------ ------ ------ ------
Income (loss) from operations 719 10 1,309 (524)
Other income, net 437 67 851 85
------ ------ ------ ------
Income (loss) before provision for
income taxes 1,156 77 2,160 (439)
Provision for income taxes 116 -- 191 --
Net income (loss) $ 1,040 $ 77 $ 1,969 $ (439)
======= ======= ======= =======
Proforma (Note 3)
Net income (loss) per share $0.12 $0.01 $0.23 $(0.08)
Shares used in computing net
income (loss) per share 8,850 5,900 8,668 5,841
===== ===== ===== =====
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-4-
<PAGE>
SQA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,969 ($ 439)
Adjustments to reconcile net income (loss) to
net cash flows provided by (used in)
operating activities -
Depreciation and amortization 171 58
Deferred income taxes (115) - -
Changes in assets and liabilities -
Accounts receivable (1,533) (1,290)
Prepaid expenses and other current assets (771) (34)
Accounts payable 432 (299)
Accrued expenses 186 592
Deferred revenue 834 683
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Net cash provided by (used in)
operating activities 1,173 (729)
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Cash flows from investing activities:
Purchases of property and equipment (1,457) (230)
Increase in other assets - -
(100)
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Net cash (used in) investing activities (1,557) (230)
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Cash flows from financing activities:
Proceeds from sale of stock, net of issuance
costs 4,372 4,468
Proceeds from exercise of stock options 136 - -
Proceeds from sale/leaseback - - 18
Payments on capital lease obligations (4) (5)
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Net cash provided by investing
activities 4,504 4,481
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Net increase in cash and cash equivalents 4,120 3,522
Cash and cash equivalents, beginning of period 36,444 2,805
------ ------
Cash and cash equivalents, end of period $40,564 $6,327
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</TABLE>
See Notes to Condensed Consolidated Financial Statements
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<PAGE>
SQA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
SQA, Inc. (the "Company") develops and markets integrated software products
for the automated testing and quality management of Windows-based client/server
applications. The Company also provides a comprehensive range of customer
support services, including training, support and on-site consulting. The
Company sells its products to companies (end users), that develop customized
software applications using standardized development software provided by
others, and to distributors, which remarket the Company's products to end users.
The Company's revenue is derived from license fees for use of its software
products by end users and from services provided to end users.
The Company was incorporated as Software Quality Automation, Inc. under the
laws of the State of Delaware in March 1990. The name of the Company was changed
to SQA, Inc. in April 1995.
(a) Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of SQA, Inc. and its wholly owned subsidiary. All significant
intercompany balances and transactions have been eliminated. The financial
statements included herein are subject to year-end audit adjustments by the
Company's independent public accountants.
Management has made estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could differ
from those estimates.
(b) Interim Financial Statements
The condensed consolidated balance sheet at June 30, 1996 and condensed
consolidated statements of operations for the three month and six month periods
ended June 30, 1996 and 1995 are unaudited and, in the opinion of management,
include all adjustments (consisting only of normal and recurring adjustments)
necessary for a fair presentation of results for these interim periods. Certain
information and footnote disclosures normally included in the Company's annual
consolidated financial statements have been condensed or omitted. The results of
operations for the interim period ended June 30, 1996 are not necessarily
indicative of the results to be expected for the entire year. The condensed
consolidated balance sheet at December 31, 1995 contained herein has been
derived from the audited consolidated financial statements at that date but does
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. It is suggested that
these interim condensed consolidated financial statements be read in conjunction
with the audited consolidated financial statements for the year ended December
31, 1995, which are contained in the Company's 1995 Annual Report to
Stockholders.
2. Initial Public Offering
In December 1995, the Company completed its initial public offering and
issued 2,000,000 shares of its common stock to the public at a price of $16 per
share. The Company received approximately $29 million of cash, net of
underwriting discounts, commissions and other offering costs. Simultaneously,
all outstanding preferred shares were automatically converted into an equal
number of shares of common stock.
In January 1996, an additional 300,000 shares were sold at $16 per share
pursuant to an underwriters over-allotment provision.
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<PAGE>
SQA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. Net Income Per Share
Net income per share for the three months and six months ended June 30,
1996 is computed based upon the weighted average number of common and common
equivalent shares outstanding during the period when dilutive. Fully diluted
earnings per share have not been presented, as the amounts would not differ
significantly from primary earnings per share.
Net income (loss) per share for the three months and six months ended June
30, 1995 is computed based upon the pro forma weighted average number of common
shares outstanding during the period, assuming conversion of all classes of
convertible preferred stock into common stock. Common equivalent shares are not
included in the per share calculation where the effect of their inclusion would
be antidilutive, except that, in accordance with the Securities and Exchange
Commission requirements, common and common equivalent shares issued during the
twelve-month period prior to the filing of an initial public offering have been
included in the calculation as if they were outstanding for the entire period,
using the treasury stock method and the initial public offering price.
4. Lease Agreement
In February 1996, the Company entered into a four year sublease agreement
for approximately 43,000 square feet of office space to be used as the Company's
corporate headquarters.
As of June 30, 1996, the future minimum rental payments under the lease are
as follows:
<TABLE>
<CAPTION>
Year Ended Amount
(in thousands)
<S> <C>
1996 $477
1997 763
1998 763
1999 763
2000 254
$3,020
======
</TABLE>
5. Investments in Debt Securities
The Company's investment portfolio consists of U.S. government debt
securities with original maturities at date of purchase of 90 days or less.
These short-term investments are classified as held-to-maturity and are included
in cash and cash equivalents. Such short-term investments are carried at
amortized cost, which approximates fair value, due to the short period of time
to maturity. Unrealized holding gains at June 30, 1996 amounted to $245,000.
Unrealized holding losses at December 31, 1995 amounted to $8,000. Gross
realized gains and losses on sales of marketable securities for the three month
and six month periods ended June 30, 1996 and 1995 were not material to the
results of operations.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Three Months Ended June 30, 1996 and 1995
Revenue
Total revenue which consists of license fees revenue and services
revenue increased approximately 84% to $5.4 million in the three months ended
June 30, 1996 from $2.9 million in the three months ended June 30, 1995.
License fees revenue consists of revenue from the granting of perpetual licenses
to use the Company's products. Services revenue consists of revenue from
product support, training, and consulting. International revenue accounted for
approximately 24% and 22% of total revenue for the three months ended June 30,
1996 and 1995, respectively. The Company expects that international revenue
will continue to increase as a percentage of total revenue as the Company
increases its international sales and marketing capabilities.
Revenue from License Fees
License fees revenue increased approximately 72% to $3.5 million in
the three months ended June 30, 1996 compared to $2.0 million in the three
months ended June 30, 1995. The principal reason for the increase in license
fees revenue was increased unit shipments. The Company believes that the
increased unit shipments is due to an increase in the total market for automated
testing of Windows client/server applications; the introduction of product
upgrades and new products, including SQA Loadtest which was originally released
in July 1995; increased market acceptance of the Company's products, primarily
SQA Robot; and expanded sales and marketing activities by the Company, including
an increase in the number of resellers of the Company's products. Also
contributing to the increased license fees revenue was a September 1995 increase
in the list price of the Company's products. There can be no assurance that in
the future the Company will be able to increase prices for its products or avoid
pressures to lower prices.
In addition, the increase in license fees revenue for the quarter
ended June 30, 1996 was primarily due to the introduction of SQA Suite 5.0. SQA
Suite 5.0 operates in both the 16-bit and 32-bit Microsoft Windows environment.
SQA Suite 5.0 contributed significant revenue in the quarter ended June 30,
1996. The Company anticipates that SQA Suite 5.0 will be its principal source
of license fees revenue for the foreseeable future. There can be no assurance,
however, that this version of the product will continue to increase revenue in
future quarters.
Revenue from Services
Revenue from services increased approximately 112% to $1.9 million in
the three months ended June 30, 1996 from $898,000 in the three months ended
June 30, 1995. The increase in revenue from services is principally the result
of increased volume from support and training services, primarily due to the
expansion of the total installed customer base, and renewals of annual service
contracts by the Company's existing customers. To date, a substantial majority
of the Company's customers have purchased annual service contracts and/or
training at the time of ordering software products. The Company expects that
services revenue will increase over time with the growth of the installed
customer base.
Cost of License Fees
Cost of license fees increased approximately 45% to $194,000 in the
three months ended June 30, 1996 from $134,000 in the three months ended June
30, 1995 and decreased as a percentage of total revenue from 4.5% to 3.6%. Cost
of license fees includes software and documentation reproduction costs, product
packaging, media duplication, product media, packaging design and royalties to
third parties. The increase in the absolute dollar amount reflects the
increased volume of units sold. The decrease of cost of license fees as a
percentage of total
-8-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
revenue is primarily due to operating efficiencies associated with the greater
volume of units shipped. This percentage may fluctuate in the future depending
on product mix and distribution strategy.
Cost of Services
Cost of services increased approximately 73% to $563,000 in the three
months ended June 30, 1996 from $326,000 in the three months ended June 30, 1995
and decreased as a percentage of total revenue from 11% to 10%. The increase in
the absolute dollar amount reflects an increase in employment-related costs for
both customer support staff and consulting and training personnel, as well as an
increase in the cost of product upgrades and materials used in training
customers. The cost of services as a percentage of total revenue has decreased
due to operating efficiencies associated with higher revenue levels. The
Company expects to continue to hire additional customer support, consulting and
training staff and to invest in its services organization in 1996. While the
Company expects to make continued investments in its service organization to
expand service capabilities in order to support an increasing number of users in
the installed customer base operating on an increased number of platforms, the
Company expects that such expenditures as a percentage of services revenue will
remain approximately the same.
Sales and Marketing Expenses
Sales and marketing expenses, which consist principally of salaries,
commissions, and related costs for Company personnel, marketing seminars and
other promotional expenses, increased approximately 69% to $2.4 million in the
three months ended June 30, 1996 from $1.4 million in the three months ended
June 30, 1995 and decreased as a percentage of total revenue to 44% from 48%.
The increase in the absolute dollar amount of expenses was primarily due to the
increased amount of sales personnel, increased commissions due to the higher
revenue levels, increased number of marketing seminars and other promotional
type activities. Sales and marketing expenses as a percentage of total revenue
decreased due to greater productivity achieved by the sales and marketing
organizations. The Company intends to continue to invest in its sales and
marketing organization in the future. There can be no assurance that such
investments will result in increased revenues or continued improvement in the
effectiveness of the Company's sales organization.
Research and Development Expenses
Research and development expenses, which consist principally of the
employment-related costs for engineering and technical personnel associated with
developing new products or enhancing existing products, increased approximately
67% to $953,000 for the three months ended June 30, 1996 from $572,000 in the
three months ended June 30, 1995. The increase in absolute dollars was
primarily due to increases in the number of software engineers and technical
personnel and related costs for the development of new software products, as
well as the enhancement and support of existing products. The Company's
research and development efforts focused primarily on the introduction of SQA
Suite 5.0 for the Windows 32-bit operating systems. There can be no assurance,
however, that the Company will continue to be successful in developing product
enhancements, new products, or versions of existing products for Windows 32-bit
operating systems. Research and development expenses as a percentage of total
revenue decreased from 19.5% to 17.6%. The Company intends to increase its
investment in research and development for the continued development of new
software products, as well as the enhancement and support of existing products.
While the Company intends to increase the amount of product development
expenditures in the future, it expects that such expenses as a percentage of
total revenue will remain approximately the same. To date, the Company has not
capitalized any software development costs, since the amount of costs incurred
subsequent to the establishment of technological feasibility have been
immaterial.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
General and Administrative
General and administrative expense, which consist primarily of
employment-related costs for administrative personnel, professional and other
general corporate expenses, increased approximately 24% to $605,000 in the three
months ended June 30, 1996 from $489,000 in the three months ended June 30, 1995
and decreased as a percentage of total revenue from 16.6% to 11.0%. The
increase in absolute dollars was primarily due to an increase in additional
costs associated with the Company's public company status. General and
administrative expenses as a percentage of total revenue decreased due to
operating efficiencies associated with higher revenue levels. The Company
anticipates that general and administrative expenses will increase in absolute
dollars in the future as it continues to build the infrastructure to support the
Company's growth, as well as costs associated with being a public company.
While the Company intends to increase the amount of general and administrative
expenses in the future, it expects that such expenses as a percentage of total
revenue will remain approximately the same or decrease.
Other Income, Net
Other income, which consists primarily of interest income generated
from the Company's excess cash balances increased significantly to $437,000 in
the three months ended June 30, 1996 from $67,000 in the three months ended June
30, 1995. This increase is due to an increase in the Company's cash position as
a result of its initial public offering in December 1995, as well as an increase
in cash generated from operations.
Six Months Ended June 30, 1996 and 1995
Revenues
Total revenue which consists of license fees revenue and services
revenue increased approximately 90% to $9.9 million in the six months ended June
30, 1996 from $5.2 million in the six months ended June 30, 1995. License fees
revenue consists of revenue from the granting of perpetual licenses to use the
Company's products. Services revenue consists of revenue from product support,
training and consulting. International revenue accounted for 28% and 20% of
total revenue for the six months ended June 30, 1996 and 1995, respectively.
The Company expects that international revenue will increase as a percentage of
total revenue as the Company increases its international sales and marketing
capabilities.
Revenue from License Fees
License fees revenue increased approximately 79% to $6.5 million in
the six months ended June 30, 1996 compared to $3.6 million in the six months
ended June 30, 1995. The principal reason for the increase in license fees
revenue was increased unit shipments. The Company believes that the increased
unit shipments is due to an increase in the total market for automated testing
of Windows client/server applications; the introduction of product upgrades and
new products, including SQA Loadtest which was originally released in July 1995;
increased market acceptance of the Company's products, primarily SQA Robot; and
expanded sales and marketing activities by the Company, including an increase in
the number of resellers of the Company's products. Also contributing to the
increased license fees revenue was a September 1995 increase in the list price
of the Company's products. There can be no assurance that in the future the
Company will be able to increase prices for its products or avoid pressures to
lower prices.
In addition, the increase in license fees revenue for the six months
ended June 30, 1996 was due, in part, to the introduction of SQA Suite 5.0. SQA
Suite 5.0 operates in both the 16-bit and 32-bit Microsoft Windows environment.
SQA Suite 5.0 contributed significant revenue in the six months ended June 30,
1996. The Company anticipates that SQA Suite 5.0 will be its principal source
of license fees revenue for the foreseeable future. There can be no assurance
that this version of the product will continue to increase revenue in future
quarters.
-10-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Revenue from Services
Revenue from services increased approximately 113% to $3.4 million in
the six months ended June 30, 1996 from $1.6 million the six months ended June
30, 1995. The increase in revenue from services is principally the result of
increased volume from support and training services, primarily due to the
expansion of the total installed customer base, and renewals of annual service
contracts by the Company's existing customers. To date, a substantial majority
of the Company's customers have purchased annual service contracts and/or
training at the time of ordering software products. The Company expects that
services revenue will increase over time with the growth of the installed
customer base.
Cost of License Fees
Cost of license fees increased approximately 40% to $310,000 in the
six months ended June 30, 1996 from $222,000 in the six months ended June 30,
1995 and decreased as a percentage of total revenue from 4% to 3%. Cost of
license fees includes software and documentation reproduction costs, product
packaging, media duplication, product media, packaging design and royalties to
third parties. The increase in the absolute dollar amount reflects the
increased volume of units sold. The decrease of cost of license fees as a
percentage of total revenue is primarily due to operating efficiencies
associated with the greater volume of units shipped. This percentage may
fluctuate in the future depending on product mix and distribution strategy.
Cost of Services
Cost of services increased approximately 61% to $1.1 million in the
six months ended June 30, 1996 from $663,000 in the six months ended June 30,
1995 and decreased as a percentage of total revenue from 13 % to 11%. The
increase in the absolute dollar amount reflects an increase in employment-
related costs for both customer support, consulting, and training personnel, as
well as an increase in the cost of product upgrades and materials used in the
training of customers. The cost of services as a percentage of total revenue
has decreased due to operating efficiencies associated with higher revenue
levels. The Company expects to continue to hire additional customer support,
consulting, and training staff and to invest in its services organization in
1996. While the Company expects to make continued investments in its service
organization to expand service capabilities in order to support an increasing
number of users in the installed customer base operating on an increased number
of platforms, the Company expects that such expenditure as a percentage of
services revenue will remain approximately the same.
Sales and Marketing Expenses
Sales and marketing expenses, which consist principally of salaries,
commissions, and related costs for Company personnel, marketing seminars and
other promotional expenses, increased approximately 61% to $4.4 million in the
six months ended June 30, 1996 from $2.7 million in the six months ended June
30, 1995 and decreased as a percentage of total revenue to 45% from 52%. The
increase in the absolute dollar amount of expenses was primarily due to the
increased amount of sales personnel, increased commissions due to the higher
revenue levels, increased marketing seminars and other promotional type
activities. Sales and marketing expenses as a percentage of total revenue
decreased due to greater productivity achieved by the sales and marketing
organizations. The Company intends to continue to invest in its sales and
marketing organizations in the future. There can be no assurance that such
investments will result in increased revenues or continued improvement in the
effectiveness of the Company's sales organization.
Research and Development Expenses
Research and development expenses, which consist principally of the
employment-related costs for engineering and technical personnel associated with
developing new products or enhancing existing products, increased approximately
48% to $1.7 million for the six months ended June 30, 1996 from $1.2 million in
the six
-11-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
months ended June 30, 1995. The increase in absolute dollars was primarily due
to increases in the number of software engineers and technical personnel and
related costs for the development of new software products, as well as the
enhancement and support of existing products. In the first half of 1996 the
Company's research and development efforts focused primarily on the development
of SQA Suite 5.0 for the Windows 32-bit operating systems, which was released
during the quarter ended June 30, 1996. There can be no assurance, however, that
the Company will continue to be successful in developing product enhancements,
new products, or versions of existing products for Windows 32-bit operating
systems. Research and development expenses as a percentage of total revenue
decreased from 22% to 18%. The Company intends to continue to invest in research
and development for the continued development of new software products, as well
as the enhancement and support of existing products. While the Company intends
to increase the amount of product development expenditures in the future, it
expects that such expenses as a percentage of total revenue will remain
approximately the same. To date, the Company has not capitalized any software
development costs, since the amount of costs incurred subsequent to the
establishment of technological feasibility have been immaterial.
General and Administrative
General and administrative expense, which consist primarily of
employment-related costs for administrative personnel, professional and other
general corporate expenses increased approximately 14% to $1.1 million in the
six months ended June 30, 1996 from $966,000 in the six months ended June 30,
1995 and decreased as a percentage of total revenue from 18% to 11%. The
increase in absolute dollars was primarily due to an increase in additional
costs associated with the Company's public company status, as well as additional
costs for finance and administrative personnel required to expand the Company's
sales and customer support organization. General and administrative expenses as
a percentage of total revenue decreased due to operating efficiencies associated
with higher revenue levels. The Company anticipates that general and
administrative expenses will increase in absolute dollars in the future as it
continues to build the infrastructure to support the Company's growth, as well
as costs associated with being a public company. While the Company intends to
increase the amount of general and administrative expenses in the future, it
expects that such expenses as a percentage of total revenue will remain
approximately the same or decrease.
Other Income, Net
Other income, which consists primarily of interest income generated
from the Company's excess cash balances increased significantly to $851,000 in
the six months ended June 30, 1996 from $85,000 in the six months ended June 30,
1995. The increase is due to an increase in the Company's cash position as a
result of its initial public offering in December 1995, as well as an increase
in cash generated from operations.
Provision for Income Taxes
The Company has a limited operating history and has incurred
significant cumulative losses to date. As a result of these factors, the
prediction of future results of operations is difficult. Under Statement of
Financial Accounting Standards (SFAS) 109, the Company is required to establish
a valuation allowance against its deferred tax asset to the extent that it
believes that it is "more likely than not" that the Company will not generate
future taxable income sufficient to realize the tax benefit of its deferred tax
asset in future years. Management will continue to monitor all available
evidence to determine to what extent a valuation allowance is needed in the
future. The Company expects that its effective income tax rate will be
approximately ten (10%) percent for fiscal 1996 and accordingly, for the six
months ended June 30, 1996 has provided $191,000 for income taxes.
Liquidity and Capital Resources
In December 1995, the Company completed an initial public offering of
2,000,000 shares of its common stock at a price of $16 per share. Total net
proceeds from its initial public offering was approximately $29 million.
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
In January 1996, an additional 300,000 shares were sold also at $16 per share,
pursuant to an underwriters over-allotment provision. Total net proceeds from
this particular sale of common stock was approximately $4.5 million.
Cash and cash equivalents totaled $40.6 million at June 30, 1996
compared to $36.4 million at December 31, 1995. Net cash provided by operations
was $1,173,000 for the six months ended June 30, 1996 as compared to a use of
cash of $729,000 for the six months ended June 30, 1995. Net cash provided by
operations for the six months ended June 30, 1996 consisted principally of
increases in net income, accounts payable, accrued expenses and deferred
revenue, offset in part by increases in accounts receivable, prepaid expenses
and other current assets. Net cash used in operations for the six month period
ended June 30, 1995 was principally the result of the net loss as well as
increases in accounts receivable, prepaid expenses and other current assets and
decreases in accounts payable, offset in part by increases in accrued expenses
and deferred revenue.
Net cash used in the Company's investing activities was $1,557,000 and
$230,000 for the six months ended June 30, 1996 and 1995, respectively. The net
cash used in investing activities consists primarily of the purchase of property
and equipment, principally computers and software. The Company anticipates that
additional purchases of equipment will be made as the Company's employee base
continues to grow.
In February of 1996, the Company entered into a sublease arrangement
for new corporate headquarters located in Burlington, Massachusetts, which the
Company occupied beginning July 1996. As a result of this relocation, the
Company has entered into firm commitments for additions to property and
equipment and leasehold improvements of approximately $1,200,000.
As of June 30, 1996 the Company had working capital of $39.8 million
compared with $34.8 million at December 31, 1995. The Company does not have a
bank line of credit. The Company believes that as of June 30, 1996, its current
cash balances together with its cash flows from operations will be sufficient to
meet its working capital and capital expenditure requirements through 1997.
Certain Factors Which May Affect Future Results
The Company does not provide forecasts of the financial performance of
the Company. From time to time, information provided by the Company or
statements made by its employees may contain "forward-looking" information which
include substantial risks and uncertainties affecting the Company's future
results of operations. The Company makes forward-looking statements under the
provisions of the "safe harbor" section of the Private Securities Litigation
Reform Act of 1995. The Company's actual results may in the future vary
significantly depending on a variety of factors which could cause actual results
to differ materially from those contained in forward-looking statements
contained herein. The Company's future results remain difficult to predict, and
depend on factors including, without limitation, limited history of
profitability, fluctuations in quarterly results, dependence on the
client/server environment, an emerging market for software testing tools,
dependence on Microsoft's Windows operating system, dependence on principal
products, dependence on third parties for compatibility with development tool
architecture, competition, rapid technological change, potential for new product
delays and defects, dependence on proprietary technology, management of change,
international operations and fluctuations in economic and market conditions.
Because of these and other factors, past financial performance should not be
considered an indicator of future performance.
-13-
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders
a.) The Company held its annual meeting of stockholders on April 30,
1996. The number of shares issued, outstanding and eligible to
vote as of the record date of March 11, 1996 was 7,966,547.
b.) Messrs. Ted R. Dintersmith and Jerald G. Fishman were elected as
directors at the April 30, 1996 annual stockholders meeting to
Class I of the Company's Board of Directors, to serve for a term
of three years and until successors are elected and qualified.
Messrs. Edward T. Anderson and Paul A. Maeder were designated to
serve a two-year term at a meeting of the Board of Directors
held on October 23, 1995. The term of Messrs. Anderson and Maeder
expires on the date of the 1997 Annual Meeting of Stockholders.
Messrs. Thomas I. Csathy and Ronald H. Nordin were designated to
serve a three-year term at a meeting of the Board of Directors
held on October 23, 1995. The term of Messrs. Csathy and Nordin
expires on the date of the 1998 Annual Meeting of Stockholders.
c.) The following matters were voted on at the annual meeting of
stockholders on April 30, 1996:
1. To elect two directors to Class I of the Company's Board of
Directors, to serve for a term of three years and until
successors are elected and qualified.
Number of Shares
----------------
Director For Against Withold Authority
-------- --- ------- -----------------
Ted R. Dintersmith 7,320,934 46,720 0
Jerald G. Fishman 7,320,934 46,720 0
2. To ratify the selection of the firm of Arthur Andersen, LLP,
independent public accountants, as auditors for the year ending
December 31, 1996.
Number of Shares
----------------
For 1,349,234
Against 18,420
Withhold Authority 0
d.) Not appliacble.
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits.
11.1 Statement Regarding Computation of Pro Forma Net Income
(Loss) Per Share.
27 Financial Data Schedule.
b.) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
June 30, 1996.
-14-
<PAGE>
INDEX TO EXHIBITS
Exhibit
No.
- - -----
11.1 Statement Regarding Computation of Pro Forma Net Income (Loss) Per Share.
27 Financial Data Schedule.
-15-
<PAGE>
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.
SQA, Inc.
Date: August 12, 1996
/s/ Thomas F. Bogan
--------------------------------------------
By: Thomas F. Bogan
Senior Vice President, Finance, Chief
Financial Officer, and Assistant Secretary
(Duly Authorized Officer and Principal
Financial Officer)
-16-
<PAGE>
SQA, Inc.
Exhibit 11.1
Shares Used in Computing Earnings Per Share
(in Thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
-----------------------------------------------
<S> <C> <C> <C> <C>
Weighted average Convertible Preferred Stock outstanding
during the period assuming conversion to Common Stock ---- 5,270 5,318
Weighted average Common Stock outstanding during the
period 7,990 297 7,926 190
Dilutive effect of Common Stock equivalents outstanding
during the period 860 ---- 742
Dilutive effect of Common Stock equivalents issued
subsequent to October 15, 1994 (1) ---- 333 ---- 333
------ --- ------ ---
8,850 5,900 8,668 5,841
===== ===== ===== =====
</TABLE>
(1) Options issued at prices below the initial public offering price of $16 per
share during the twelve month period immediately prior to the filing of the
initial public offering have been included as outstanding for the six month
and three month periods ended June 30, 1995. The dilutive effect of the
common and common share equivalents was computed in accordance with the
treasury stock method.
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> MAR-31-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 40,564 0
<SECURITIES> 0 0
<RECEIVABLES> 4,168 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 45,979 0
<PP&E> 2,151 0
<DEPRECIATION> 171 0
<TOTAL-ASSETS> 48,390 0
<CURRENT-LIABILITIES> 6,192 0
<BONDS> 0 0
0 0
0 0
<COMMON> 80 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 48,390 0
<SALES> 5,409 9,950
<TOTAL-REVENUES> 5,409 9,950
<CGS> 757 1,381
<TOTAL-COSTS> 3,935 7,260
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 1,156 2,160
<INCOME-TAX> 116 191
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,040 1,969
<EPS-PRIMARY> .12 .23
<EPS-DILUTED> .12 .23
</TABLE>
