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 JUNE 30, 1998.
OR
[ ] 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 0-24277
SQL FINANCIALS INTERNATIONAL, INC.
-------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 58-1972600
- ------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3950 Johns Creek Court, Suite 100
Suwanee, Georgia 30024
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(Address of principal executive offices)
(Zip code)
(770) 291-3900
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former
fiscal year, if changed since last report.)
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 periods 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]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
COMMON STOCK, ($.0001 PAR VALUE)
--------------------------------
9,064,836 SHARES OUTSTANDING AS OF JULY 27, 1998
INDEX
- -----
SQL FINANCIALS INTERNATIONAL, INC.
PART I FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) June 30, 1998 and
December 31, 1997;
Condensed Consolidated Statements of Operations (unaudited) Three
months and six months ended June 30, 1998 and 1997;
Condensed Consolidated Statements of Cash Flows (unaudited) Six
months ended June 30, 1998 and 1997;
Notes to Condensed Consolidated Financial Statements (unaudited) -
June 30, 1998
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk -
Not Applicable
PART II OTHER INFORMATION
- ------- -----------------
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SQL FINANCIALS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
1998 1997
--------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 26,090 $ 7,213
Trade accounts receivable, less allowance for
doubtful accounts of $316 and $338 in 1998
and 1997, respectively 5,818 4,050
Prepaid and other current assets
354 494
------------ ----------
Total current assets 32,262 11,757
PROPERTY AND EQUIPMENT -- net 2,069 1,507
OTHER ASSETS:
Intangible assets, net of accumulated
amortization of $1,534 and $1,127 in 1998
and 1997, respectively 5,508 1,267
Deposits and other long-term assets 186 150
------------ ----------
Total other assets 5,694 1,417
------------ ----------
TOTAL ASSETS $ 40,025 $ 14,681
============ ==========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
3
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
SQL FINANCIALS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNT)
JUNE 30, DECEMBER 31,
1998 1997
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Note payable, net of discount of $131 in 1998 $ 969 $ -0-
Accounts payable and accrued liabilities 5,062 4,598
Accounts payable-related party -0- 54
Deferred revenue 5,878 5,717
Current maturities of long-term debt 264 1,841
-------------- -------------
Total current liabilities 12,173 12,210
NONCURRENT LIABILITIES:
Deferred revenue 3,355 4,480
Long-term debt, net of current maturities 375 497
Other non-current liabilities 65 49
-------------- -------------
Total liabilities 15,968 17,236
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY -0- 243
-------------- -------------
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series A, 262,500 shares issued and outstanding
in 1997 -0- 1,050
Series B, 454,888 shares issued and outstanding
in 1997 -0- 3,025
Series C, 428,572 shares issued and outstanding
in 1997 -0- 3,000
Series D, 701,755 shares issued and outstanding
in 1997 -0- 6,000
Series E, 697,675 shares issued and outstanding
in 1997 -0- 6,000
Series F, 628,809 shares issued and outstanding
in 1997 -0- 6,037
-------------- -------------
Total redeemable convertible preferred stock -0- 25,112
STOCKHOLDERS' EQUITY (DEFICIT) (Note 3):
Common Stock, $.0001 par value;
25,000,000 and 9,000,000 shares authorized in
1998 and 1997, respectively; 9,061,304 and
1,467,160 shares outstanding in 1998 and 1997,
respectively 1 0
Additional paid in capital 51,354 489
Accumulated deficit (28,058) (28,019)
Warrants 1,440 652
Treasury stock, at cost (2) (2)
Note from stockholder 0 (612)
Deferred compensation (678) (418)
-------------- -------------
Total stockholders' equity (deficit) 24,057 (27,910)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY $ 40,025 $ 14,681
============== =============
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
SQL FINANCIALS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- -----------------------
1998 1997 1998 1997
REVENUES:
License fees $ 4,814 $ 2,790 $ 8,443 $ 4,728
Services fees 3,838 1,665 6,890 3,276
Maintenance fees 1,814 1,020 3,414 1,917
---------- ---------- ---------- ----------
Total revenues 10,466 5,475 18,747 9,921
COST OF REVENUES:
License fees 305 200 565 378
Services fees 2,376 1,195 4,507 2,322
Maintenance fees 835 422 1,516 850
---------- ---------- ---------- ----------
Total cost of revenues 3,516 1,817 6,588 3,550
OPERATING EXPENSES:
Research and development 1,386 2,022 2,529 3,824
Sales and marketing 2,904 2,362 5,391 4,604
General and administrative 1,191 699 2,548 1,349
Depreciation and
amortization 525 353 929 698
Non-cash compensation 749 13 803 23
---------- ---------- ---------- ----------
Total operating expenses 6,755 5,449 12,200 10,498
OPERATING INCOME (LOSS) 195 (1,791) (41) (4,127)
INTEREST INCOME 129 3 159 27
INTEREST EXPENSE 61 94 121 118
MINORITY INTEREST -0- 91 36 189
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 263 $ (1,973) $ (39) $ (4,407)
========== ========== ========== ==========
Income (loss) per
common share:
Basic $ 0.06 $ (1.42) $ (0.01) $ (3.19)
Diluted $ 0.03 $ (1.42) $ (0.01) $ (3.19)
Weighted average shares
outstanding
Basic 4,496 1,388 3,026 1,382
Diluted 8,758 1,388 3,026 1,382
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
5
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
SQL FINANCIALS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30
---------------------------
1998 1997
----------- -------------
OPERATING ACTIVITIES
Net loss $ (39) $ (4,407)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 929 698
Minority interest in subsidiary 36 189
Amortization of debt discount 34 -0-
Deferred compensation 803 23
Changes in operating assets and liabilities:
Accounts receivable (1,768) (2,201)
Prepaid and other current assets 140 (62)
Deposits and other long-term assets (32) (286)
Accounts payable and accrued liabilities 335 1,052
Deferred revenue (961) 1,281
Other noncurrent liabilities 16 31
----------- ----------
NET CASH USED IN OPERATING ACTIVITIES (507) (3,682)
INVESTING ACTIVITIES
Purchase of intangible assets (150) -0-
Purchase of minority interest in subsidiary (326) -0-
Additions to property and equipment (1,089) (247)
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (1,565) (247)
FINANCING ACTIVITIES:
Dividends paid to holder of minority interest (241) (160)
Proceeds from notes payable and short term
borrowings 1,645 12,414
Repayments of notes payable and short term
borrowings (3,343) (9,712)
Proceeds from the exercise of warrants 612 9
Proceeds from issuance of common stock, net 22,126 -0-
Proceeds from issuance of preferred stock 150 -0-
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 20,949 2,551
----------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18,877 (1,378)
CASH AND CASH EQUIVALENTS, beginning of period 7,213 3,278
----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 26,090 $ 1,900
=========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 93 $ 106
=========== ==========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
6
SQL FINANCIALS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of SQL
Financials International, Inc. (the "Company") have been prepared in accordance
with Generally Accepted Accounting Principles for interim financial information
and instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information in notes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the unaudited financial statements for this
interim period have been included. The results of the interim periods are not
necessarily indicative of the results to be obtained for the year ended December
31, 1998. These interim financial statements should be read in conjunction with
the Company's audited consolidated financial statements and footnotes thereto
included in the Company's Prospectus dated May 26, 1998, filed under Form
S-1 with the Securities and Exchange Commission.
NOTE 2. EARNINGS PER SHARE
Basic and diluted net income (loss) per share was computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share," using
the weighted average number of common shares outstanding. Diluted net losses per
share for the six months ended June 30, 1998 and 1997, and the quarter ended
June 30, 1997, do not include the effect of common stock equivalents, including
redeemable convertible preferred stock, as their effect would be antidilutive.
Diluted net income per share for the quarter ended June 30, 1998, includes the
effect of common stock equivalents.
NOTE 3. STOCKHOLDERS' EQUITY
On May 26, 1998, the Company completed its initial public offering of 2.5
million shares of its common stock at an offering price of $10.00 per share (the
"Offering"). The proceeds, net of expenses, from this public offering of
approximately $22.1 million were placed in investment grade cash equivalents.
Immediately prior to the effective date of the Company's Registration Statement
the redeemable convertible preferred stock was converted to common stock.
NOTE 4. ACQUISITION OF MINORITY INTEREST IN THE SERVICES SUBSIDIARY
On February 5, 1998, the Company purchased the 20% interest in SQL Financial
Services, LLC (the "Services Subsidiary") from Technology Ventures, LLC
("Technology Ventures") a related party controlled by Joseph S. McCall, a
director of the Company. In exchange for the 20% interest in the Services
Subsidiary, the Company issued 225,000 shares of common stock to Technology
Ventures and granted Technology Ventures a warrant to purchase an additional
300,000 shares of common stock at a purchase price of $3.67 per share. The
warrant expires on February 5, 2000. In addition, the Company agreed to pay
Technology Ventures the sum of $1.1 million due February 5, 2000, pursuant to a
non-negotiable, non-interest-bearing subordinated promissory note. Technology
Ventures has agreed not to sell any of its shares for a period of 180 days after
the effective date of the Offering. The Company also agreed to pay Technology
Ventures a monthly sum equal to 20% of the net profits of the Services
Subsidiary until the the completion of the Company's Initial Public Offering.
The Company as additional purchase price recorded payments made to Technology
Ventures for this 20% of net profits of the Services Subsidiary at the time of
payment.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company was formed in November 1991 to develop, market, license and support
financial applications. In 1997, the Company introduced a series of additional
modules and product enhancements. Specifically, in the first quarter of 1997,
the Company introduced its human resource applications, which included the
Personnel, Benefits and Payroll modules. In 1997, the Company introduced its
Financial Statement Accelerator module, a distributed management reporting
solution, and a 32-bit version of its financial applications (the "Denver
Release"), which included two new modules, Purchasing Control and
SOLUTION/GRAPHICAL ARCHITECT. Total license revenues from these new products in
1997 were $5.7 million. The Company intends to release a 32-bit version of its
human resources applications by the end of 1998. The Company currently markets
its products in the United States and Canada through its direct sales force and
has licensed its client/server applications to more than 225 customers in a
variety of industry segments, including insurance, financial services,
communications, retail, printing and publishing, transportation and
manufacturing. The Company also offers fee-based implementation, training and
upgrade services and ongoing maintenance and support of its products for a
12-month renewable term.
On May 26, 1998, the Company completed an initial public offering of its common
stock in which it sold 2.5 million shares for approximately $22.1 million after
deducting offering expenses and underwriting discounts.
Through 1997 the Company recognized revenue in compliance with Statement of
Position ("SOP") 91-1 "Software Revenue Recognition." Effective January 1, 1998,
the Company adopted SOP 97-2 "Software Revenue Recognition." The adoption of
this SOP has not had a significant impact on the Company's consolidated
financial statements. Revenues from software licenses have been recognized upon
delivery of the product if there are no significant obligations on the part of
the Company following delivery and collection of the related receivable, if any,
is deemed probable by management. Revenues from service fees relate to
implementation, training and upgrade services performed by the Company and have
been recognized as the services are performed. Maintenance fees relate to
customer maintenance and support and have been recognized ratably over the term
of the software support agreement, which is typically 12 months. A majority of
the Company's customers renew the maintenance and support agreements after the
initial term. Revenues that have been prepaid or invoiced, but that do not yet
qualify for recognition under the Company's policies are reflected as deferred
revenue.
Cost of license fees includes royalties and software duplication and
distribution costs. The Company recognizes these costs as the applications are
shipped. Cost of services fees include personnel and related costs incurred to
provide implementation, training and upgrade services to customers. These costs
are recognized as the services are performed. Cost of maintenance fees includes
personnel and related costs incurred to provide the ongoing support and
maintenance of the Company's products. These costs are recognized as incurred.
Research and development expenses consist primarily of personnel costs . The
Company accounts for software development costs under Statement of Financial
Accounting Standards ("SFAS") No. 86 "Accounting For the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed." Research and development
expenses are charged to expense as incurred until technological feasibility is
established, after which remaining costs are capitalized. The Company defines
technological feasibility as the point in time at which the Company has a
working model of the related product. Historically, the costs incurred during
the period between the achievement of technological feasibility and the point at
which the product is available for general release to customers have not been
material. Accordingly, the Company charges all internal software development
costs to expense as incurred.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OVERVIEW (CONTINUED)
Sales and marketing expenses consist primarily of salaries, commissions and
benefits to sales and marketing personnel, travel, trade-show participation,
public relations and other promotional expenses. General and administrative
expenses consist primarily of salaries for financial, administrative and
management personnel and related travel expenses, as well as occupancy,
equipment and other administrative costs.
The Company has net operating loss carryforwards ("NOLs") of approximately $25.6
million at June 30, 1998, which begin expiring in 2007. The Company established
a valuation allowance equal to the NOLs and all other deferred tax assets. The
benefits from these deferred tax assets will be recorded when realized which
will reduce the Company's effective tax rate for future taxable income, if any.
Due to changes in the Company's ownership structure, the Company's use of its
NOLs as of May 26, 1998 of approximately $26.0 million will be limited to
approximately $3.8 million in any given year to offset future taxes. If the
Company does not realize taxable income in excess of the limitation in future
years, certain NOLs will be unrealizable.
AFFILIATE RELATIONSHIPS
In March 1995 the Company and Technology Ventures, which is controlled by Joseph
S. McCall, formed the Services Subsidiary to provide implementation, training,
and upgrade services exclusively for the Company's customers. On February 5,
1998, Technology Ventures sold its 20% interest in the Services Subsidiary to
the Company. The consideration for the 20% interest was 225,000 shares of the
Company's Common Stock, a warrant to purchase an additional 300,000 shares of
Common Stock at a price of $3.67 per share, and a non-interest bearing
promissory note in the principal amount of $1.1 million. The purchase of the
remaining 20% of the Services Subsidiary was accounted for using the purchase
method of accounting and will result in goodwill in the amount of $4.2 million,
which is being amortized over 15 years. The Company assigned a 15-year
amortization period to the goodwill acquired in the purchase of the 20% interest
in the Services Subsidiary.
In the second quarter of 1998, the Company accelerated the vesting of certain
employee stock options issued in the first quarter of 1998, for approximately
283,000 shares of Common Stock, at an exercise price of between $3.67 per share
and $8.00 per share. As a result of this accelerated vesting, the Company
recognized a non-cash, non-recurring charge of approximately $705,000 during the
quarter ended June 30, 1998, representing the previously remaining unamortized
deferred compensation recorded on these options.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth certain statement of
operations data as a percentage of total revenues for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -------------------------
1998 1997 1998 1997
Revenues:
License fees 46.0% 51.0% 45.0% 47.7%
Services fees 36.7 30.4 36.8 33.0
Maintenance fees 17.3 18.6 18.2 19.3
----------------------- -------------------------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
License fees 2.9 3.7 3.0 3.8
Services fees 22.7 21.8 24.0 23.4
Maintenance fees 8.0 7.7 8.1 8.6
----------------------- -------------------------
Total cost of revenues 33.6 33.2 35.1 35.8
Operating expenses:
Research and development 13.2 36.9 13.5 38.6
Sales and marketing 27.7 43.1 28.7 46.4
General and
administrative 11.4 12.8 13.6 13.6
Depreciation and
amortization 5.0 6.5 5.0 7.0
Non-cash compensation 7.2 0.2 4.3 0.2
----------------------- -------------------------
Total expenses 64.5 99.5 65.1 105.8
Operating income (loss) 1.9 (32.7) (0.2) (41.6)
Interest income 1.2 0.1 0.8 0.3
Interest expense 0.6 1.7 0.6 1.2
Minority interest 0.0 1.7 0.2 1.9
----------------------- -------------------------
Net income (loss) 2.5 (36.0) (0.2) (44.4)
======================= =========================
Gross margin on license fees 93.7 92.8 93.3 92.0
Gross margin on services fees 38.1 28.2 34.6 29.1
Gross margin on maintenance fees 54.0 58.6 55.6 55.7
QUARTER AND SIX MONTHS ENDED JUNE 30, 1998, COMPARED TO QUARTER AND SIX
MONTHS ENDED JUNE 30, 1997
REVENUES
TOTAL REVENUES. For the quarter ended June 30, 1998, total revenues increased
91.2% to $10.5 million from $5.5 million in the comparable period in 1997. For
the six months ended June 30, 1998, total revenues increased 89.0% to $18.7
million from $9.9 million in the comparable period in 1997. These increases are
attributable to substantial increases in license fees, services fees and
maintenance fees.
LICENSE FEES. License fees increased 72.5% to $4.8 million, or 46.0% of total
revenues, in the quarter ended June 30, 1998, from $2.8 million, or 51.0% of
total revenues, in the comparable period in 1997. License fees increased 78.6%
to $8.4 million, or 45.0% of total revenues, in the six months ended June 30,
1998, from $4.7 million, or 47.7%, in the comparable period in 1997. These
increases in license fees resulted primarily from increases in
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
REVENUES (CONTINUED).
LICENSE FEES (CONTINUED).
the number of licenses sold, reflecting a continuing increase in the demand for
the Company's existing and new applications, and to a lesser extent, to an
increase in the average customer transaction size.
SERVICES FEES. Services fees increased 130.5% to $3.8 million, or 36.7% of total
revenues, in the quarter ended June 30, 1998, from $1.7 million, or 30.4% of
total revenues, in the comparable period in 1997. Services fees increased 110.3%
to $6.9 million, or 36.8% of total revenues, in the six months ended June 30,
1998, from $3.3 million, or 33.0% of total revenues, in the comparable period in
1997. These increases in services fees are primarily due to increased demand for
professional services associated with the increase in number of licenses sold.
MAINTENANCE FEES. Maintenance fees increased 77.8% to $1.8 million, or 17.3% of
total revenues, in the quarter ended June 30, 1998, from $1.0 million, or 18.6%
of total revenues, in the comparable period in 1997. Maintenance fees increased
78.1% to $3.4 million, or 18.2% of total revenues, in the six months ended June
30, 1998, from $1.9 million, or 19.3% of total revenues, in the comparable
period in 1997. These increases in maintenance fees were primarily due to the
signing of license agreements with new customers and the renewal of maintenance
with existing customers during the respective periods.
COST OF REVENUES
TOTAL COST OF REVENUES. Cost of revenues increased 93.5% to $3.5 million, or
33.6% of total revenues, in the quarter ended June 30, 1998, from $1.8 million,
or 33.2% of total revenues, in the comparable period in 1997. Cost of revenues
increased 85.6% to $6.6 million, or 35.1% of total revenues, in the six months
ended June 30, 1998, from $3.5 million, or 35.8% of total revenues, in the
comparable period in 1997. The increases in cost of revenues were primarily due
to an increase in personnel and related expenses and increased royalty expenses
for the respective periods.
COST OF LICENSE FEES. Cost of license fees increased 52.5% to $305,000, or 6.3%
of total license fees, in the quarter ended June 30, 1998, compared to $200,000,
or 7.2% of total license fees, in the comparable period in 1997. Cost of license
fees increased 49.5% to $565,000, or 6.7% of total license fees, in the six
months ended June 30, 1998, compared to $378,000, or 8.0% of total license fees,
in the comparable period in 1997. The increases in the cost of license fees were
primarily attributable to increases in the sale of third-party software products
distributed by the Company resulting from increased sales volumes. The decreases
as a percentage of total license fees is primarily attributable to the
expiration of certain obligations under royalty agreements for third party
software.
COST OF SERVICES FEES. Cost of services fees increased 98.8% to $2.4 million, or
61.9% of total services fees, in the quarter ended June 30, 1998, compared to
$1.2 million, or 71.8% of total services fees, in the comparable period in 1997.
Cost of services fees increased 94.1% to $4.5 million, or 65.4% of total
services fees, in the six months ended June 30, 1998, compared to $2.3 million,
or 70.9% of total services fees, in the comparable period in 1997. These
increases in the cost of service fees are primarily attributable to an increase
in the personnel and related costs to provide implementation, training and
upgrade services. The decreases in cost of service fees as a percentage of
revenue for the quarter and six month ended June 30, 1998, are primarily due to
increased hourly rates charges combined with increased utilization of services
personnel.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
COST OF REVENUES (CONTINUED)
COST OF MAINTENANCE FEES. Cost of maintenance fees increased 97.9% to $835,000,
or 46.0% of total maintenance fees, in the quarter ended June 30, 1998, compared
to $422,000, or 41.4% of total maintenance fees, in the comparable period in
1997. Cost of maintenance fees increased 78.4% to $1.5 million, or 44.4% of
total maintenance fees, in the six months ended June 30, 1998, compared to
$850,000, or 44.3% of total maintenance fees, in the comparable period in 1997.
These increases in the cost of maintenance fees were primarily attributable to
an increase in the personnel and related costs required to provide support and
maintenance. Cost of maintenance fees as a percentage of total maintenance fees
decreased during the respective periods primarily due to more productive use of
personnel to support the maintenance customer base.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 31.5% to $1.4 million, or 13.2% of
total revenues, in the quarter ended June 30, 1998, from $2.0 million, or 36.9%
of total revenues, in the comparable period in 1997. Research and development
expenses decreased 33.9% to $2.5 million, or 13.5% of total revenues, in the six
months ended June 30, 1998, from $3.8 million, or 38.6% of total revenues, in
the comparable period in 1997. Research and development expenses decreased
primarily due to decreased personnel and contractor fees related to the effort
required in 1997 to develop the Denver Release, which was substantially
completed by September 1997. The decreases in research and development as a
percentage of revenue for the periods ended June 30, 1998, compared to the
periods ended June 30, 1997, are primarily due to the completion of the Denver
Release, coupled with the economies of scale realized through the growth in the
Company's revenue. The Company intends to continue to devote substantial
resources toward research and development efforts.
SALES AND MARKETING
Sales and marketing expenses increased 22.9% to $2.9 million, or 27.7% of total
revenues, in the quarter ended June 30, 1998, from $2.4 million, or 43.1% of
total revenues, in the comparable period in 1997. Sales and marketing expenses
increased 17.1% to $5.4 million, or 28.7% of total revenues, in the six months
ended June 30, 1998, from $4.6 million, or 46.4% of total revenues, in the
comparable period in 1997. The increases in sales and marketing expenses were
primarily attributable to the costs associated with additional sales and
marketing personnel and promotional activities. The decreases in sales and
marketing as a percentage of revenues for the respective periods reflects the
higher productivity of the Company's sales force.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 70.4% to $1.2 million, or 11.4% of
total revenues, in the quarter ended June 30, 1998, from $699,000, or 12.8% of
total revenues, in the comparable period in 1997. General and administrative
expenses increased 88.9% to $2.5 million, or 13.6% of total revenues, in the six
months ended June 30, 1998, from $1.3 million, or 13.6% of total revenues, in
the comparable period in expenses were primarily attributable to increases in
personnel and related costs. The Company believes that its general and
administrative expenses will continue to increase in future periods to
accommodate anticipated growth and expenses associated with its responsibilities
as a public company.
DEPRECIATION AND AMORTIZATION
Depreciation of tangible equipment and amortization of intangible assets
increased 48.7% to $525,000, or 5.0% of total revenues, in the quarter ended
June 30, 1998, from $353,000, or 6.5% of total revenues, in the comparable
period in 1997. Depreciation of tangible equipment and amortization of
intangible assets increased 33.0% to $929,000, or 5.0% of total revenues, in the
six months ended June 30, 1998, from $698,000, or 7.0% of total
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
DEPRECIATION AND AMORTIZATION (CONTINUED)
revenues, in the comparable period in 1997. The increases in depreciation and
amortization expense are due to increases in capital expenditures resulting from
the significant growth of the Company combined with increased goodwill resulting
from the acquisition of the minority interest in the Services Subsidiary.
NON-CASH COMPENSATION
Non-cash compensation expense increased to $749,000, or 7.2% of total revenues,
in the quarter ended June 30, 1998, from $13,000, or 0.2% of total revenues, in
the comparable period in 1997. Non-cash compensation expense increased to
$803,000, or 4.3% of total revenues, in the six months ended June 30, 1998, from
$23,000, or 0.2% of total revenues in the comparable period in 1997. In the
second quarter of 1998, the Company accelerated the vesting of certain employee
stock options issued in the first quarter of 1998, for approximately 283,000
shares of Common Stock, at an exercise price of between $3.67 per share and
$8.00 per share. As a result of this accelerated vesting, the Company recognized
a non-cash, non-recurring charge of approximately $705,000 during the quarter
ended June 30, 1998, representing the previously remaining unamortized deferred
compensation recorded on these options. The recognition of the non-cash,
non-recurring charge provided for the increases in the non-cash compensation
expense in the current year periods when compared to the same periods of the
prior year.
OTHER INCOME
Interest income increased to $129,000 in the quarter ended June 30, 1998, from
$3,000, in the comparable period in 1997. Interest income increased to $159,000
in the six months ended June 30, 1998, from $27,000, in the comparable period in
1997. On May 26, 1998, the Company completed an initial public offering of its
common stock in which it sold 2.5 million shares, which resulted in net proceeds
of approximately $22.1 million. The increases in interest income were primarily
due to the results of the investment of the funds from the initial public
offering.
INTEREST EXPENSE
Interest expense decreased 35.1% to $61,000 in the quarter ended June 30, 1998,
from $94,000 in the comparable period in 1997. This decrease is primarily due to
lower average levels of debt in the quarter ended June 30, 1998, as compared to
the quarter ended June 30, 1997. Interest expense increased 2.5% to $121,000 in
the six months ended June 30, 1998, from $118,000 in the comparable period in
1997. This increase is primarily due to higher average interest rates
experienced by the Company in the six months ended June 30, 1998, when compared
to the six months ended June 30, 1997.
MINORITY INTEREST
Minority interest decreased 100.0% in the quarter ended June 30, 1998, from
$91,000 in the comparable period in 1997. Minority interest decreased 81.0% to
$36,000 in the six months ended June 30, 1998, from $189,000 in the comparable
period in 1997. These decreases in minority interest are related to the purchase
of the remaining 20% of the Services Subsidiary on February 5, 1998, which
eliminated the minority interest related to the Services Subsidiary.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
INCOME TAXES
As a result of the operating losses incurred since the Company's inception, the
Company has not recorded any provision or benefit for income taxes in the
quarters and six month periods ended June 30, 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
On May 26, 1998, the Company completed its initial public offering of 2.5
million shares of its Common Stock at an offering price of $10.00 per share. The
proceeds, net of expenses, from this public offering of approximately $22.1
million were placed in investment grade cash equivalents. The Company's working
capital position (deficit) was $20.1million and $(453,000) at June 30, 1998 and
December 31, 1997, respectively. Management believes that current cash balances
and cash flows from operations will be adequate to provide for the Company's
capital expenditures and working capital requirements for the forseeable future.
Although operating activities may provide cash in certain periods, to the extent
the Company experiences growth in the future its operating and investing
activities may use significant cash.
Cash used in operating activities was approximately $507,000 and $3.7 million
during the six months ended June 30, 1998 and 1997, respectively. Cash used by
operations during the six months ended June 30, 1998, was primarily attributable
to an increase in accounts receivable and a decrease in deferred revenue,
partially offset by increases in accounts payable and accrued liabilities. Cash
used by operations during the six months ended June 30, 1997, was primarily
attributable to an increase in accounts receivable, partially offset by
increases in deferred revenues and accounts payable and accrued liabilities.
Cash used in investing activities was approximately $1.6 million and $247,000
during the six months ended June 30, 1998 and 1997, respectively. The cash used
in investing activities during the six months ended June 30, 1998, was primarily
attributable to purchases of computer equipment and software and the purchase of
the minority interest in the Services Subsidiary. The cash used in investing
activities during the six months ended June 30, 1997, was primarily attributable
to purchases of computer equipment and software.
Cash provided by financing activities was approximately $20.9 million and $2.6
million during the six months ended June 30, 1998 and 1997, respectively. The
cash provided by financing activities during the six months ended June 30, 1998,
was primarily attributable to the Company's initial public offering effective
May 26, 1998, for net proceeds of approximately $22.1 million. The cash provided
by financing activities during the six months ended June 30, 1997, was primarily
attributable to proceeds from notes payable and short term borrowings of
approximately $12.4 million, offset by payments on notes payable and short term
borrowings of approximately $9.7 million.
In March 1997, the Company entered into a loan agreement and a master leasing
agreement for an equipment line of credit in the amount of $1.0 million (the
"Equipment Line") with a leasing company. The Equipment Line bears interest at
rates negotiated with each loan or lease schedule (generally 22.0% to 22.5%) and
is collateralized by all of the equipment purchased with the proceeds thereof.
As of June 30, 1998, the principal balance on the Equipment Line payable was
$565,000.
The Company has a revolving working capital line of credit and equipment
facility with Silicon Valley Bank. Borrowings outstanding under the line are
limited to the lesser of $3.0 million or 80% of accounts receivable. Interest on
the revolving credit facility is at prime rate and on the equipment facility at
prime plus 0.5% and is collateralized by all of the assets of the Company. The
line of credit and equipment term facility with Silicon Valley Bank will expire
on April 29, 1999. As of June 30, 1998, the Company had no outstanding balance
and had $3.5 million available for future borrowings under this agreement.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company had available NOL's of approximately $25.6 million as of June 30,
1998, to reduce future income tax liabilities. These NOL's expire from 2007
through 2012 and are subject to review and possible adjustment by the
appropriate taxing authorities. Pursuant to the Tax Reform Act of 1986, the
utilization of NOL's for tax purposes may be subject to an annual limitation if
a cumulative change of ownership of more than 50% occurs over a three-year
period. As a result of this limitation, the Company will be limited to the use
of its NOL's in any given year. The Company had net deferred tax assets of
approximately $9.8 million at June 30, 1998, comprised primarily, of net
operating loss carryforwards. The Company has fully reserved for these deferred
tax assets.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT
This quarterly report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. When used
in this report, the words "believes," "expects," "anticipates," "estimates" and
similar words and expressions are generally intended to identify forward-looking
statements. Statements that describe the Company's future strategic plans,
goals, or objectives are also forward-looking statements. Readers of this Report
are cautioned that any forward-looking statements, including those regarding the
intent, belief or current expectations of the Company or management, are not
guarantees of future performance, results or events and involve risks and
uncertainties, and that actual results and events may differ materially from
those in the forward-looking statements as a result of various factors
including, but not limited to, (i) general economic conditions in the markets in
which the Company operates, (ii) competitive pressures in the markets in which
the Company operates, (iii) the effect of future legislation or regulatory
changes on the Company's operations and (iv) other factors described from time
to time in the Company's filings with the Securities and Exchange Commission.
The forward-looking statements included in this report are made only as of the
date hereof. The Company undertakes no obligation to update such forward-looking
statements to reflect subsequent events or circumstances.
IMPACT OF YEAR 2000
The Company has designed and tested the most current versions of its products to
be Year 2000 compliant. There can be no assurances that the Company's current
products do not contain undetected errors or defects associated with Year 2000
date functions that may result in material costs to the Company. Some
commentators have stated that a significant amount of litigation will arise out
of Year 2000 compliance issues, and the Company is aware of a growing number of
lawsuits against other software vendors. Because of the unprecedented nature of
such litigation, it is uncertain whether or to what extent the Company may be
affected by it.
The Company is in the process of determining the extent to which third-party
licensed software distributed by the Company is Year 2000 compliant, as well as
the impact of any non-compliance on the Company and its customers. Additionally,
in the event relational database management systems used with the Company's
software are not Year 2000 compliant, there can be no assurance that Company's
customers will be able to continue to use the Company's products. The Company
does not currently believe that the effects of any Year 2000 non-compliance in
the Company's installed base of software will result in a material adverse
impact on the Company's business or financial condition. However, the Company's
investigation with respect to third-party software is in its preliminary stages,
and no assurance can be given that the Company will not be exposed to potential
claims resulting from system problems associated with the century change or that
such claims would not have a material adverse effect on the Company's business,
financial condition or results of operations.
With respect to its internal systems, the Company is taking steps to prepare its
systems for the Year 2000 date change. The Company expects to substantially
complete inventory efforts at the end of calendar year 1998, with
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
IMPACT OF YEAR 2000 (CONTINUED)
remediation and testing to continue through 1999. Although the Company does not
believe that it will incur any material costs or experience material disruptions
in its business associated with preparing its internal systems for the Year
2000, there can be no assurances that the Company will not experience
unanticipated negative consequences and/or material costs caused by undetected
errors or defects in the technology used in its internal systems. The Company is
currently unable to estimate the most reasonably likely worst case effects of
the year 2000 and does not currently have a contingency plan in place for any
such unanticipated negative effects.
The Company is currently unable to estimate whether it is exposed to significant
risk of being adversely affected by Year 2000 noncompliance by third parties.
During the third quarter of 1998, the Company intends to begin contacting third
parties with which it has material relationships, including its material
customers, to attempt to determine their preparedness with respect to Year 2000
issues and to analyze the risks to the Company in the event any such third
parties experience significant business interruptions as result of Year 2000
noncompliance. The Company expects to complete this review and analysis and to
determine the need for contingency planning in this regard by March 31, 1999.
16
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company filed a Registration Statement on Form S-1 (File No. 333-46685) for
an initial public offering of its $.0001 par value Common Stock. The
Registration Statement was effective on May 26, 1998. The Offering was
underwritten by NationsBanc Montgomery Securities LLC, Piper Jaffray Inc., and
UBS Securities. The Offering closed on June 1, 1998, and the Company sold 2.5
million shares of its Common Stock at a price of $10.00 per share. The Company
received approximately $23.2 million in net proceeds from the Offering.
The Company also registered for resale 629,625 shares for certain selling
stockholders. The selling stockholders entered into lockup agreements with the
underwriters and such shares of Common Stock will be available for resale in
November 1998. The Company will not receive any proceeds from sale of Common
Stock by the selling stockholders.
The Company incurred the following expenses in connection with the issuance and
distribution of its Common Stock in connection with the Registration Statement:
$1,750,000 in underwriting discounts and related expenses of the underwriters,
and $1.1 million in other offering expenses including printing, legal and
accounting fees. Such payments were directly paid by the Company to such service
providers, none of whom were (i) officers or directors of the Company or their
associates, (ii) persons owning 10% or more of any class of equity securities of
the Company, or (iii) affiliates of the Company.
From May 26, 1998 to June 30, 1998, the net proceeds of the Offering were
invested in investment grade securities. The foregoing amounts are a reasonable
estimate of the amount of net proceeds of the Offering. Such payments, uses
and/or investments were not made to directors or officers of the Company or
their associates or to persons owning 10% or more of any class of equity
securities of the Company or to any affiliates of the Company.
The use of proceeds by the Company reported herein does not represent a material
change from the use of proceeds described by the Company in the prospectus
contained in the Registration Statement.
17
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
18
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.
SQL FINANCIALS INTERNATIONAL, INC.
(Registrant)
Date: August 12, 1998 By: /s/ William A. Fielder,III
--------------- -------------------------------------
William A. Fielder, III
Chief Financial Officer and Treasurer
19