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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission file number 0-22317
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MELITA INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
GEORGIA 58-1378534
(State or other Jurisdiction of Incorporation (I.R.S. Employer Identification
or Organization) Number)
5051 PEACHTREE CORNERS CIRCLE
NORCROSS, GEORGIA 30092-2500
(770) 239-4330
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common stock, no par value,
outstanding as of August 11, 1997: 15,168,395 shares.
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PART 1 - FINANCIAL INFORMATION
Page
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Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (Unaudited) 3
and December 31, 1996.
Unaudited Consolidated Statements of Income for the three months ended June 30, 4
1997 and 1996 and for the six months ended June 30, 1997 and 1996.
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 5
1997 and 1996
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Page 2 of 13
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MELITA INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE DATA)
June 30, December 31,
1997 1996
----------- ------------
Current assets: (Unaudited)
Cash and cash equivalents $ 29,984 $ 9,849
Accounts receivable, net of allowance for doubtful 12,315 11,860
accounts of $318 at June 30, 1997 and $487 at December 31, 1996
Inventories 1,355 2,442
Deferred taxes 1,473 --
Prepaid expenses and other 398 170
----------- -----------
Total current assets 45,525 24,321
Property and equipment, net of accumulated depreciation 3,458 2,724
Other assets 35 24
----------- -----------
$ 49,018 $ 27,069
=========== ===========
Current liabilities:
Accounts payable $ 2,826 $ 2,429
Accrued liabilities 6,193 4,210
Deferred revenue 3,803 3,065
Customer deposits 2,110 3,849
Current maturities of notes payable to shareholder -- 2,625
Current maturities of capital lease obligations -- 19
----------- -----------
Total current liabilities 14,932 16,197
Commitments and contingencies
Shareholders' equity
Preferred Stock:
Melita International Corporation, no par value; 20,000 shares authorized,
no shares issued and outstanding at December 31, 1996 and June 30, 1997 -- --
Common Stock:
Melita International Corporation, no par value; 100,000 shares
authorized, 8,000 shares issued and outstanding December 31, 1996 and
15,168 shares issued and outstanding June 30, 1997 69 2
Melita Europe Limited, L1 par value; 50 shares authorized, 31 shares
issued and outstanding December 31, 1996 and no shares issued and
outstanding at June 30, 1997 -- 46
Inventions, Inc., $5 par value; .1 shares authorized, .1 shares issued
and outstanding December 31, 1996 and no shares issued and outstanding
at June 30, 1997 -- 1
Additional paid-in capital 36,102 20
Cumulative foreign currency translation adjustment 8 35
Retained earnings (deficit) (2,093) 10,768
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Total shareholders' equity (deficit) 34,086 10,872
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$ 49,018 $ 27,069
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The accompanying notes are an integral part of these consolidated balance
sheets.
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MELITA INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
For the three months ended For the six months ended
June 30, June 30,
1997 1996 1997 1996
-------------- ------------- ------------ ------------
Net revenues:
Product $ 10,714 $ 8,108 $ 20,979 $ 15,799
Service 4,816 3,778 9,220 7,108
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Total revenues 15,530 11,886 30,199 22,907
Cost of revenues:
Product 3,565 2,990 7,401 5,439
Service 2,433 1,733 4,364 3,172
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Total cost of revenues 5,998 4,723 11,765 8,611
Gross margin 9,532 7,163 18,434 14,296
Operating expenses:
Research and development 1,644 1,151 3,025 2,096
Selling, general and administrative 5,231 3,992 10,365 8,129
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Total operating expenses 6,875 5,143 13,390 10,225
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Income from operations 2,657 2,020 5,044 4,071
Other income (expense), net (9) 54 (60) 43
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Income before income taxes 2,648 2,074 4,984 4,114
Income tax provision (benefit):
Tax provision as 'C' Corporation 393 -- 409 --
Deferred tax adjustment (1,473) -- (1,473) --
------------- ------------- ----------- ------------
Net income after income tax $ 3,728 $ 2,074 $ 6,048 $ 4,114
============= ============= =========== ============
Income before income taxes 2,648 2,074 4,984 4,114
Pro forma income tax provision (Note 6) 983 775 1,894 1,537
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Pro forma net income $ 1,665 $ 1,299 $ 3,090 $ 2,577
============= ============= =========== ============
Primary earnings per share $ 0.29 $ 0.17 $ 0.47 $ 0.33
============= ============= =========== ============
Weighted average common and common
equivalent shares 12,868 12,360 12,758 12,360
Pro forma earnings per share $ 0.13 $ 0.11 $ 0.24 $ 0.21
============= ============= =========== ============
The accompanying notes are an integral part of these consolidated statements.
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MELITA INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six months ended
June 30,
1997 1996
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Cash flows from operating activities:
Net income $ 6,048 $ 4,114
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 655 504
Deferred taxes (1,473) --
Changes in assets and liabilities:
Accounts receivable (455) (1,955)
Inventories 1,087 (494)
Prepaid expenses and other assets (228) 47
Accounts payable 397 (264)
Accrued liabilities 1,982 67
Deferred revenue 740 1,329
Customer deposits (1,739) (237)
Other, net (38) (1)
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Total adjustments 928 (1,004)
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Net cash provided by operating activities 6,976 3,110
Cash flows from investing activities:
Purchases of property and equipment (1,389) (741)
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Net cash used in investing activities (1,389) (741)
Cash flows from financing activities:
Repayment of capital lease obligations (19) (28)
Net proceeds from issuance of common stock 36,102 --
Repayment of note payable to shareholder (15,525) --
Distributions to shareholders (6,010) (3,181)
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Net cash provided by financing activities 14,548 (3,209)
Net change in cash and cash equivalents 20,135 (840)
Cash and cash equivalents, beginning of period 9,849 5,959
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Cash and cash equivalents, end of period $ 29,984 $ 5,119
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Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 360 $ 139
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Income taxes paid $ 32 $ --
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MELITA INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
1. Basis of Presentation
The unaudited consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial statements. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of the Company's management,
these consolidated financial statements contain all adjustments (which comprise
only normal and recurring accruals) necessary to present fairly the financial
position as of June 30, 1997, the results of operations and changes in cash
flows for the six months ended June 30, 1997 and 1996. The interim results for
the three months and six months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the full year. These statements
should be read in conjunction with the Company's combined financial statements
for the year ended December 31, 1996, as filed in its Prospectus dated June 4,
1997.
2. Principles of Consolidation
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.
3. Completion of Initial Public Offering and Combination
On June 4, 1997, the Company completed its initial public offering ("IPO") of
common stock. The Company sold 4,025 shares of common stock, including the
underwriters' over-allotment of 525 shares, for $40,250 less issuance costs of
$4,148. Concurrently with the IPO, the Company issued 3,143 shares in
connection with the combination of Melita International, Melita Europe Limited
and Inventions, Inc.
4. Inventories
Inventories consist of the following at:
June 30, 1997 December 31, 1996
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Raw Materials 631 1,059
Work in process 242 337
Finished goods 482 1,046
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Total inventories 1,355 2,442
5. Earnings Per Share
Earnings per share are computed using the weighted-average number of common
stock and dilutive common stock equivalents ("CSE") shares from stock options
and warrants (using the treasury stock method) outstanding during each period.
Also included are (1) common stock and CSE's issued at a price below the
initial public offering price during the 12 month period prior to June 4, 1997,
and (2) CSE's in an amount necessary to pay the shareholder distributions.
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6. Income Taxes
In connection with the IPO the Company converted from an S corporation to a
C corporation and, accordingly, is subject to federal and state income
taxes. Upon the conversion, the Company recognized a one-time benefit by
recording the asset related to the future reduction of income tax payments due
to timing differences between the recognition of income for financial
statements and income tax regulations. Pro forma income tax provisions
reflect the Company's anticipated effective tax rate of 38.0% for 1997 and
37.2% in 1996.
7. Accounting Pronouncements
During the first quarter of 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, Earnings Per Share.
This standard is effective for fiscal years ending after December 15, 1997 and
early adoption is not permitted. The Company will adopt this statement for its
year ended December 31, 1997.
Pro forma calculations of basic and diluted earnings per share, in conformance
with SFA's No. 128, are as follows:
For the three months For the six months
ended ended
June 30, June 30,
1997 1996 1997 1996
-------- --------- -------- --------
Basic EPS .31 .17 .49 .34
Basic pro forma EPS .14 .11 .25 .21
Diluted EPS .29 .17 .47 .33
Diluted pro forma EPS .13 .11 .24 .21
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Total revenues of $15.5 million in the second quarter of 1997 increased 30.7%
from $11.9 million in the second quarter of 1996. Total revenues increased to
$30.2 million in the first six months of 1997 as compared to $22.9 million in
the corresponding period of 1996, representing growth of 31.8%.
Product revenues increased 32.1% to $10.7 million and 32.8% to $21.0 million
for the quarter and six month periods ended June 30, 1997 as compared to the
same periods in 1996, respectively. Service revenues increased 27.5% to $4.8
million in the second quarter and 29.7% to $9.2 million for the six months ended
June 30, 1997. The growth in product revenues was due to continued increasing
demand for the Company's products, increased marketing and sales efforts and
the introduction of a new product feature, Magellan CS, which increased sales
of the Company's systems. Service revenues increased during the quarter and
six month period due to the continued expansion of the Company's installed
customer base and the increased volume of installations during the period.
Cost of product revenue, as a percentage of product revenue, was 33.3% and
35.3% in the second quarter and first six months of fiscal 1997, respectively,
compared to 36.9% and 34.4% for the comparable 1996 periods. Product cost as a
percentage of product revenue decreased during the second quarter principally
due to the continuing efforts to cost reduce the product, and due to changes in
the product mix. The slight increase in product costs for the first six months
is due primarily to lower per unit sales prices.
Research and development cost was $1.6 million in the second quarter of fiscal
1997, a $493,000 increase over the second quarter of 1996. For the first six
months of 1997, research and development cost increased to $3.0 million, an
increase of $929,000 over the comparable 1996 period. Research and development
cost increased as a percentage of revenue to 10.6% from 9.7% and to 10.0% from
9.2% for the three month and six month comparable periods ended June 30, 1997
and 1996, respectively. The overall cost increase during the three and six
month periods ended June 30, 1997 resulted primarily from the addition of
developers to support the Company's new product development efforts and the
subcontracting of certain feature development efforts during 1997.
Selling, general and administrative expenses were $5.2 million for the second
quarter of 1997 as compared to $4.0 million in the comparable 1996 period.
Selling, general and administrative expense for the first six months of fiscal
1997 increased to $10.4 million, an increase of $2.2 million (27.5%) over the
comparable 1996 period. This increase was the result of an increase in sales
commissions corresponding to the increase in revenues and the additional staff
required to support the larger sales levels in 1997. Selling, general and
administrative expense increased slightly as a percentage of revenue to 33.7%
from 33.6% for the second quarter of fiscal 1997, and decreased as a percentage
of revenue to 34.3% from 35.5% for the first six months of fiscal 1997.
Income from operations was $2.7 million in the second quarter of 1997,
representing a 31.5% increase over income from operations of $2.0 million in
the first quarter of 1996. Income from operations was $5.0 million in the first
six months of 1997, representing a 23.9% increase over income from operations
of $4.1 million in the corresponding period in 1996. These increases were the
result of the foregoing factors.
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Other income (expense), net was a net expense of $9,000 in the second quarter
of 1997 compared to net income of $54,000 in the second quarter of 1996. Other
income (expense), net was a net expense of $60,000 for the first six months of
1997 compared to net income of $43,000 in the first six months of 1996.
Interest expense, which is included in other income (expense), net increased
from 1996 levels in both periods during 1997 due to increased debt.
Income tax provisions have been recorded for the period subsequent to the IPO.
The Company, prior to the IPO was not subject to federal or state income taxes.
As a result of its election to be treated as an S Corporation for income tax
purposes prior to the IPO, pro forma net income amounts include additional
provisions for income taxes determined by applying the Company's anticipated
statutory tax rate to income before income taxes, adjusted for permanent tax
differences. The Company's S Corporation status was terminated in conjunction
with the completion of its initial public offering in June 1997. Upon the
termination of its S Corporation election, the Company recorded certain
deferred tax assets in the amount of $1.5 million.
Pro forma net income increased to $1.7 million in the second quarter of 1997
from $1.3 million in the second quarter of 1996. Pro forma net income rose to
$3.1 million in the first six months of 1997 compared to $2.6 million in the
first six months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
In June 1997, the Company completed its initial public offering, in which the
Company received net proceeds of approximately $36.1 million after deducting
underwriting discounts and offering expenses. The Company applied a portion of
the net proceeds to (1) repay outstanding shareholder notes of $15.2 million,
(2) payment of $245,000 in accrued interest on the shareholder notes, and (3)
pay undistributed S Corporation earnings of $ 2.4 million. Prior to the IPO
date, the company made payments of $375,000 to repay shareholder notes, and
$3.6 million in distributions to shareholders. The balance of the net proceeds
of the offering (approximately $18.3 million) will be utilized for general
corporate purposes. Such purposes may also include possible acquisitions of, or
investments in, businesses and technologies that are complementary to those of
the Company.
As of June 30, 1997, the Company had $30.0 million in cash and cash
equivalents, compared to $9.8 million as of December 31, 1996. The Company's
working capital increased to $30.6 million from $8.1 million over the same
period. Operating activities provided $7.0 million during the first six months
of fiscal 1997. Cash used in investing activities totaled $1.4 million during
the first six months of fiscal 1997. Such investing activities consisted of
purchases of property and equipment. Cash provided by financing activities
totaled $14.5 million during the first six months of fiscal 1997, due to the
issuance of common stock in the initial public offering offset by repayment of
the Company's outstanding indebtedness noted above. The Company anticipates
that existing cash and cash equivalents will be adequate to meet its cash
requirements for the next twelve months.
FORWARD LOOKING STATEMENTS
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including but not limited to statements related to plans for future business
development activities, anticipated costs of revenues, product mix and service
revenues, research and development and selling, general and administrative
activities, and liquidity and capital needs and resources. Such
forward-looking statements are subject to risks, uncertainties and other
factors which could cause actual results to differ materially from future
results expressed or implied by such forward-looking statements. For further
information about these and other factors that could affect the Company's
future results, please see Exhibit 99.1 to this report. Investors are
cautioned that any forward looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those contemplated by such forward looking statements.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3 Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 11 Statement re Computation of per share earnings.
Exhibit 27 Financial Data Schedule (for SEC use only).
Exhibit 99.1 Certain risk factors related to the Company.
(b) Reports on Form 8-K. No Report on Form 8-K was filed during the
quarter ended June 30, 1997.
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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 hereunto duly authorized.
MELITA INTERNATIONAL CORPORATION
Date: August 14, 1997 By: /s/ J. Neil Smith
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J. Neil Smith
President and Chief Operating
Officer
Date: August 14, 1997 By: /s/ Mark B. Adams
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Mark B. Adams
Chief Financial Officer
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